LexM/S BANGALORE CLUB versus COMMISSIONER OF INCOME TAX & ANR.
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[2013] 1 S.C.R. 267 M/S BANGALORE CLUB v. COMMISSIONER OF INCOME TAX & ANR. (Civil Appeal No. 124 of 2007) JANUARY 14, 2013 [D.K. JAIN AND JAGDISH SINGH KHEHAR, JJ.] INCOME TAX ACT, 1961: A B s. 2 (24) (vii) - Interest earned by assessee-Club on c surplus funds invested in fixed deposits with corporate member-Banks - Exemption from income tax claimed on the basis of doctrine of mutuality - Held: The amount of interest earned by assessee from member banks will not fall within the ambit of mutuality principle and will, therefore, be exigible 0 to Income-Tax in the hands of assessee-Club. Doctrines/principles - 'Mutuality principle' in the context -of s.2(24)(vii) of Income Tax Act - Explained. The assessee appellant Club, an unincorporated E Association of Persons (AOP), sought e'Xemption from payment of income tax on the interest earned by it on the fixed deposits kept with certain banks, which were corporate members of the assessee, on the basis of doctrine of mutuality. The claim was rejected by the F assessing officer, but allowed by the Commissioner of Income Tax as also by the Income Tax Appellate Tribunal. However, the High Court upheld the view of the assessing officer. In the instant appeal, filed by the assessee-Club, the G question for consideration before the Court was: whether or not the interest earned by the assessee on the surplus funds invested in fixed deposits with the corporate member banks was exempt from levy of Income Tax, 267 H 268 SUPREME COURT REPORTS (2013] 1 S.C.R. A based on the doctrine of mutuality? Dismissing the appeals, the Court HELD: 1.1. Doctrine of mutuality relates to the notion that a person cannot make a profit from himself. An B amount received from oneself is not regarded as income and is, therefore, not subject to tax; only the income which comes within the definition of s. 2(24) of the Income Tax Act, 1961 is subject to tax (income from business involving the doctrine of mutuality is denied exemption C only in special cases covered under clause (vii) of s. 2 (24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the o common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. [Para 7) [277-F-H; 278-A] 1.2. Mutuality is not a form of organization, even if the participants are often called members. Any organization E can have mutual activities. A common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be F members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, G additional contributions. It is these kinds of prices and/ or additional contributions which constitute mutual income. [Para 7) [278-B-0] 1.3. The doctrine of mutuality finds its origin in H common law. In Styles' case, three features were found BANGALORE CLUB v. COMMISSIONER OF INCOME269 TAX & ANR. essential to attract the doctrine. The first condition A requires that there must be a complete identity between the contributors and participators; the particular label or form by which the mutual association is known is of no consequence. The second feature demands that the actions of the participators and contributors must be in B furtherance of the mandate of the association. In the case of a club, it would be necessary to show that steps are taken in furtherance of activities that benefit the club, and in turn its members. The mandate of the club is a question of fact and can be determined from the c memorandum or articles of association, rules of membership, rules of the organization, etc. However, the mandate must not be construed myopically. While in some situations, the benefits may be evident directly in the short-run, in others, they may be accruable to an. 0 organization indirectly, in the long-run. Space must be made for both such forms of interactions between the organization and its members. Thirdl./fthere must b
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