Our club's surplus sits in fixed deposits with a bank that is itself a corporate member. Is the interest covered by mutuality?
No. The Supreme Court held that the principle of mutuality does not apply to interest earned on fixed deposits made by a club with a bank, whether or not the bank is a corporate member of the club. The interest is ordinary income under s.2(24) and is taxed like any other income. The Court dealt in the same batch with income the clubs earned through their assets and resources from persons who are not members, and held that too is taxable.
Decided by the Supreme Court (Supreme Court of India; B. V. Nagarathna and Prashant Kumar Mishra JJ) on 2023-08-17, reported as [2023] 153 taxmann.com 441 (SC) / [2023] 295 Taxman 123 (SC) / [2023] 457 ITR 263 (SC) / 2023 LiveLaw (SC) 660 - Civil Appeal Nos. 5195-5201 of 2012. It bears on section 2(24), section 4, section 56 of the Income Tax Act 1961, in Co-operative Societies, Capital Gains Exemptions and How Tax Law Is Read matters.
Every club and every society with a reserve fund faces this. The receipts side of a mutual association divides into two, and only one half is defensible: what members pay in, and what the money earns once it leaves the mutual circle. Arguing mutuality over the whole of the income statement invites the officer to reject the mutuality claim wholesale rather than confine the addition to the interest. This decision also disposes of the argument that Cawnpore Club had left the point open.
Binding on every court and authority in India.
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A batch of seven appeals by clubs. Para 2 of the judgment records that they came from the Andhra Pradesh High Court, in the matter of Secunderabad Club, and from the Madras High Court, in the matters of Madras Gymkhana Club, Madras Cricket Club, The Coimbatore Cosmopolitan Club, Madras Club, Wellington Gymkhana Club and The Coonoor Club. The clubs had deposited surplus funds in fixed deposits with banks, in some instances banks that were corporate members of the club, and claimed that the interest was exempt on the principle of mutuality. The High Courts had uniformly held the interest taxable. The question put in para 3 is whether the deposit of surplus funds by the clubs by way of bank deposits is liable to be taxed in the hands of the clubs, and the argument pressed was that the Court's judgment in Bangalore Club (2013) called for reconsideration in the light of its earlier order in Cawnpore Club, disposed of on 5 February 1998.
The appeals were dismissed. The principle of mutuality does not apply to interest income earned on fixed deposits made by the clubs with banks, irrespective of whether the banks are corporate members of the club; that interest is to be treated like any other income from other sources within the meaning of s.2(24). Conversely, income the clubs earn through their assets and resources from persons who are not members is likewise outside mutuality and taxable. The Court also held that its earlier order in Cawnpore Club is not a precedent under Article 141 because it declares no law, that Bangalore Club is neither per incuriam nor in need of reconsideration, and that the Karnataka High Court's decision in Canara Bank is confined to its own facts. Parties were left to bear their own costs.
The Court applied the triple test restated in Bangalore Club: complete identity between contributors and participators; action of both in furtherance of the mandate of the club; and no scope for profiteering by the contributors out of a fund that can only be expended on or returned to themselves (para 31). Mutuality holds up to the point of deposit and is lost once the money is placed on fixed deposit, because the bank is then free to use it in commercial banking operations, lending it on at a higher rate while paying the club a lower one; that ruptures the privity of mutuality and the first condition fails (paras 32 and 35). It is not a normal activity of a club to deposit funds in a bank; it does so only when a surplus is generated, and the fact that the interest is ultimately spent on members does not bear on the triple test (para 33). The Court put the question as at what point the relationship of mutuality ends and that of trading begins, and answered that once a third party is let in to use the club's funds and return them with interest, the relationship is a commercial one like that between a customer and a bank (para 34). Where a club's facilities are offered to non-members for a price the transaction is commercial and mutuality does not apply (para 36); each transaction must be examined separately for third-party intervention (para 37). The argument that the interest was applied for the members' benefit was answered by Mersey Docks v. Lucas: the mode of application of a surplus generated out of a trading activity has no bearing on its taxability (para 38). On the alleged conflict, the Court held that the Cawnpore Club order disposed of the appeals without going into the larger question whether mutuality applied to interest on fixed deposits, so it declares no law and is not a precedent under Article 141, and that Bangalore Club is therefore not per incuriam for failing to notice it (paras 41 and 43). Keshav Mills was invoked on the restraint required before revisiting a settled decision (para 42).
Consequently, we hold that the principle of mutuality would not apply to interest income earned on fixed deposits made by the appellant Clubs in the banks irrespective whether the banks are corporate members of the club or not.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the principle of mutuality does not apply to interest earned on fixed deposits made by a club with a bank, whether or not the bank is a corporate member of the club. The interest is ordinary income under s.2(24) and is taxed like any other income. The Court dealt in the same batch with income the clubs earned through their assets and resources from persons who are not members, and held that too is taxable. This was decided by the Supreme Court (Supreme Court of India; B. V. Nagarathna and Prashant Kumar Mishra JJ) and bears on section 2(24), section 4, section 56 of the Income Tax Act 1961. It is reported as [2023] 153 taxmann.com 441 (SC) / [2023] 295 Taxman 123 (SC) / [2023] 457 ITR 263 (SC) / 2023 LiveLaw (SC) 660 - Civil Appeal Nos. 5195-5201 of 2012. Every club and every society with a reserve fund faces this. The receipts side of a mutual association divides into two, and only one half is defensible: what members pay in, and what the money earns once it leaves the mutual circle. Arguing mutuality over the whole of the income statement invites the officer to reject the mutuality claim wholesale rather than confine the addition to the interest. This decision also disposes of the argument that Cawnpore Club had left the point open. If it applies to you, the first step is this: Offer the fixed deposit interest to tax and argue mutuality only on the member receipts; the two are now decided the opposite way by the same Court.
A batch of seven appeals by clubs. Para 2 of the judgment records that they came from the Andhra Pradesh High Court, in the matter of Secunderabad Club, and from the Madras High Court, in the matters of Madras Gymkhana Club, Madras Cricket Club, The Coimbatore Cosmopolitan Club, Madras Club, Wellington Gymkhana Club and The Coonoor Club. The clubs had deposited surplus funds in fixed deposits with banks, in some instances banks that were corporate members of the club, and claimed that the interest was exempt on the principle of mutuality. The High Courts had uniformly held the interest taxable. The question put in para 3 is whether the deposit of surplus funds by the clubs by way of bank deposits is liable to be taxed in the hands of the clubs, and the argument pressed was that the Court's judgment in Bangalore Club (2013) called for reconsideration in the light of its earlier order in Cawnpore Club, disposed of on 5 February 1998. The matter was decided on 2023-08-17 by the Supreme Court (Supreme Court of India; B. V. Nagarathna and Prashant Kumar Mishra JJ). On those facts the Supreme Court held as follows. The appeals were dismissed. The principle of mutuality does not apply to interest income earned on fixed deposits made by the clubs with banks, irrespective of whether the banks are corporate members of the club; that interest is to be treated like any other income from other sources within the meaning of s.2(24). Conversely, income the clubs earn through their assets and resources from persons who are not members is likewise outside mutuality and taxable. The Court also held that its earlier order in Cawnpore Club is not a precedent under Article 141 because it declares no law, that Bangalore Club is neither per incuriam nor in need of reconsideration, and that the Karnataka High Court's decision in Canara Bank is confined to its own facts. Parties were left to bear their own costs.
The Court applied the triple test restated in Bangalore Club: complete identity between contributors and participators; action of both in furtherance of the mandate of the club; and no scope for profiteering by the contributors out of a fund that can only be expended on or returned to themselves (para 31). Mutuality holds up to the point of deposit and is lost once the money is placed on fixed deposit, because the bank is then free to use it in commercial banking operations, lending it on at a higher rate while paying the club a lower one; that ruptures the privity of mutuality and the first condition fails (paras 32 and 35). It is not a normal activity of a club to deposit funds in a bank; it does so only when a surplus is generated, and the fact that the interest is ultimately spent on members does not bear on the triple test (para 33). The Court put the question as at what point the relationship of mutuality ends and that of trading begins, and answered that once a third party is let in to use the club's funds and return them with interest, the relationship is a commercial one like that between a customer and a bank (para 34). Where a club's facilities are offered to non-members for a price the transaction is commercial and mutuality does not apply (para 36); each transaction must be examined separately for third-party intervention (para 37). The argument that the interest was applied for the members' benefit was answered by Mersey Docks v. Lucas: the mode of application of a surplus generated out of a trading activity has no bearing on its taxability (para 38). On the alleged conflict, the Court held that the Cawnpore Club order disposed of the appeals without going into the larger question whether mutuality applied to interest on fixed deposits, so it declares no law and is not a precedent under Article 141, and that Bangalore Club is therefore not per incuriam for failing to notice it (paras 41 and 43). Keshav Mills was invoked on the restraint required before revisiting a settled decision (para 42). In the words reproduced by the source cited on this page: "Consequently, we hold that the principle of mutuality would not apply to interest income earned on fixed deposits made by the appellant Clubs in the banks irrespective whether the banks are corporate members of the club or not." The decision followed or applied Bangalore Club v. CIT [2013] 29 taxmann.com 29 / 212 Taxman 566 / 350 ITR 509 (SC) - followed, and held not to call for reconsideration (para 43).
It was decided by the Supreme Court on 2023-08-17 and is reported as [2023] 153 taxmann.com 441 (SC) / [2023] 295 Taxman 123 (SC) / [2023] 457 ITR 263 (SC) / 2023 LiveLaw (SC) 660 - Civil Appeal Nos. 5195-5201 of 2012. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(24), section 4, section 56, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed. The principle of mutuality does not apply to interest income earned on fixed deposits made by the clubs with banks, irrespective of whether the banks are corporate members of the club; that interest is to be treated like any other income from other sources within the meaning of s.2(24). Conversely, income the clubs earn through their assets and resources from persons who are not members is likewise outside mutuality and taxable. The Court also held that its earlier order in Cawnpore Club is not a precedent under Article 141 because it declares no law, that Bangalore Club is neither per incuriam nor in need of reconsideration, and that the Karnataka High Court's decision in Canara Bank is confined to its own facts. Parties were left to bear their own costs. It arises in Co-operative Societies, Capital Gains Exemptions and How Tax Law Is Read matters, on section 2(24), section 4, section 56 of the Income Tax Act 1961, and was decided by Supreme Court of India; B. V. Nagarathna and Prashant Kumar Mishra JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not rely on the bank being a corporate member of the club — the Court held that makes no difference. Identify separately any receipt earned through the club's own assets from a non-member, such as a hire charge or a guest facility, because that is also taxable on this decision. Stop citing Cawnpore Club Ltd, which the Court held could not operate as a precedent because the order gave no indication of what the other questions before it were.
Still good law. Followed by the Gujarat High Court in CIT v. Vapi Waste and Effluent Management Co. Ltd. [2024] 168 taxmann.com 518 (Gujarat), decided 14 October 2024 (Bhargav D. Karia and D.N. Ray, JJ.), whose case review records this decision as followed at para 27. Read the follower with care: the Gujarat High Court applied the members/non-members distinction drawn here and upheld mutuality in favour of the assessee on members' contributions, so it follows this decision on the wider principle rather than on the fixed-deposit interest holding. Within this judgment itself, Bangalore Club (2013) is followed, Bankipur Club, Cawnpore Club and Canara Bank are distinguished, and the Andhra Pradesh and Madras High Court decisions under appeal are affirmed. No citator banner appeared on the document. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read from the numbered paragraphs of the judgment. Two points on the citation. The cause title as printed in the law report is 'Secundrabad Club etc. v. Commissioner of Income-tax' - the first word is spelt without the second 'e', which appears to be a slip carried into the report rather than the club's own spelling; the club itself is the Secunderabad Club, and the Andhra Pradesh decision affirmed here is reported as CIT v. Secunderabad Club Picket. Second, s.56 is listed in this entry for findability but is not cited anywhere in the judgment: the Court's language in conclusion (v) of para 43 is that the interest 'has to be treated like any other income from other sources within the meaning of section 2(24) of Income-tax Act, 1961'. The judgment is indexed by the reporter against s.4. The Court decided the mutuality question only; it did not deal with any deduction against the interest. The reports do not say whether the clubs were allowed a deduction under s.57 for the cost of holding the funds, which is the obvious next question once the interest is treated as other-sources income. They do not deal with interest on a deposit with a co-operative bank, or with a society rather than a club. Nothing in the sources tells you how the Court would treat a deposit made under a statutory or regulatory compulsion rather than as an investment of surplus. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed. The principle of mutuality does not apply to interest income earned on fixed deposits made by the clubs with banks, irrespective of whether the banks are corporate members of the club; that interest is to be treated like any other income from other sources within the meaning of s.2(24). Conversely, income the clubs earn through their assets and resources from persons who are not members is likewise outside mutuality and taxable. The Court also held that its earlier order in Cawnpore Club is not a precedent under Article 141 because it declares no law, that Bangalore Club is neither per incuriam nor in need of reconsideration, and that the Karnataka High Court's decision in Canara Bank is confined to its own facts. Parties were left to bear their own costs.
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