Clubs to be taxed on interest income earned on FDs with banks; principle of mutuality does not apply: SC

economictimes.indiatimes.com:

Supreme Court held that social and recreational clubs are liable to pay taxes on the interest income earned by them on their fixed deposits (FDs) with the banks, which may also be their corporate members. A bench comprising justices BV Nagarathna and Prashant Kumar Mishra said the principle of mutuality would not apply to interest income earned on FDs made by clubs in banks, irrespective of whether the banks are corporate members or not.

The interest income earned has to be treated like any other income from other sources within the meaning of Section 2(24) of the Income Tax Act, 1961, it held. The principle of mutuality states for the transactions carried out between people in mutual associations, such as when someone contributes to a common fund and generates returns, the returns are not taxable.

The apex court was hearing a batch of appeals from the Andhra Pradesh High Court related to the Secunderabad Club and the Madras High Court related to various clubs like Madras Gymkhana Club, Madras Cricket Club, the Coimbatore Cosmopolitan Club, Madras Club, Wellington Gymkhana Club and Coonoor Club. While the clubs had sought an exemption from payment of income tax on such interest on the basis of the doctrine of mutuality, they had paid tax on the interest earned on FDs kept with non-member banks.

The apex court held that the judgment in the 2013 Bangalore Club case does not need reconsideration. “We hold that the said judgment which holds the field would squarely apply to these appeals also,” it said while agreeing with the 2013 judgment that had ruled that the surplus amount which is received as a contribution from the members is exempt from tax under the doctrine of mutuality.