[2023] 153 taxmann.

com 518 (Article)

[2023] 153 taxmann.com 518 (Article)

Date of Publishing: August 22, 2023

Supreme Court sets at rest controversy surrounding the phrase “mutuality”

S. KRISHNAN
FCA

Introductory Remarks

1 .The Supreme Court in the case of Secundrabad Club v. CIT [2023] 153 taxmann.com 441 through a
detailed and illuminating judgment has ruled that the interest income earned on fixed deposits (FDs) made
by Clubs in the banks which are members of those Clubs has to be treated like any other income from other
sources within the meaning of Section 2(24) of the Income-tax Act,1961 (the Act). In other words, it was held
that "Mutuality does not exempt from tax, interest income earned by clubs from FDs in banks, irrespective
of whether the banks are corporate members of the club or not."

The Supreme Court also ruled that its earlier decision in the case of CIT v. Cawnpore Club Ltd. [2004] 140
Taxman 378 (SC) " cannot be treated as a precedent within the meaning of Article 141 of the Constitution of
India as the said order does not declare any law and the appeals filed by the revenue as against Cawnpore
Club were disposed of without going into the larger question as to whether Cawnpore Club could be taxed
on the interest income earned on fixed deposits made by it in the banks, or whether the principle of
mutuality would apply to the said income."

At this juncture it is to be noted that the issue before the Supreme Court in Secundrabad Club's case (supra)
was whether principles of mutuality would be applicable in case of income earned by the clubs through its
assets and resources from persons who are not members of the club.

Let us understand the term "mutuality" before analysing few decisions rendered by the Supreme Court and
High Courts.

Doctrine of Mutuality

2. Where a number of persons combine together and contribute to common fund for financing of some
venture or subject and in this respect have no dealing or relation with any outside body, then any surplus
returned to those persons cannot be regarded in any sense as profit. There must be complete identity
between the contributors and the participants. Trading between persons associating together in this way
does not give rise to profits which are chargeable to tax. The trade or activity is mutual [CIT v. Bankipur Club
Ltd. [1997] 92 Taxman 278 (SC)].

The concept of mutuality has been succinctly stated by the Judicial Committee of the privy council in
Fletcher v. ITC [1971] 3 A11 ER 1185, thus:

"is the activity on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or it
is, on the other, a natural arrangement which, at most, gives rise to a surplus..."

The doctrine of mutuality postulates that all contributors to the common fund must be entitled to
participate in the surplus and that all the participants in the surplus must be contributors to the common
fund; in other words, there is complete identify between the contributors and the participators [CIT v. Indian
Paper Mills Association [1994] 74 Taxman 188/209 ITR 28 (Cal.)]. In the case of English Scottish Joint Co-
operative Wholesale Society Ltd. v. CAIT [1948] AC 405, three conditions have been stipulated the existence of
which would establish the doctrine of mutuality.

These are:

(1) The identity of the contributors to the fund and the recipient of the fund;
(2) The treatment of the company, though incorporated as a mere entity for the
convenience of member and policy holder: In other words, as an instrument obedient to
their mandate; and
(3) The impossibility that contributors should derive profits from contributions made by
themselves to a fund which could be expended or returned to themselves.
The law recognises the principle of mutuality and has excluded all businesses involving such principle from
the purview of the income tax Act, 1961, except those mentioned in clause (vii) of section 2(24) of the Act.
[Chelmsford Club v. CIT [2000] 109 Taxman 215 (SC)]

The principle of mutuality is satisfied even when it is shown that the members had a right to contribute, and
that the members had, as participators, the right to receive the benefit accruing to the common fund. [CIT v.
Cement Allocation & Coordinating Organization [1999] 103 Taxman 403/236 ITR 553 (Bom.)]

The identity between the contributors and the participators need not necessarily be of individuals, because
it is an identity of status or capacity that matters. The individual members of an association may be
different at different times, but so long as the contributors and participators are both holding the
membership status in the association, their identity would be clearly established and the principle of
mutuality would be available to them. The contributors to the common fund and the participators in the
surplus must be an identical body; but that does not mean that each member should participate in the
surplus and get back the surplus over what he had paid [Indian paper Mills Association's case (supra)]

Mutual Trading Operations

3. "For this doctrine to apply it is essential that all the contributors to the common fund are entitled to
participate in the surplus and all the participators in the surplus are contributors, so that there is complete
identity between contributors and participators. This means identity as a class, so that at any moment of
time the persons who are contributing are identical with the persons entitled to participate; it does not
matter that the class may be diminished by persons going out of the scheme or increased by others coming
in." [British Tax Encyclopaedia (1),1962 Edn. (edited by G.S.A..Wheatcroft) page 120)]

[ Source- Page 1267-P. Ramanatha Aiyar's The Law Lexicon, Fifth Edition]
Decision of the Supreme Court in the case of Cawnpore Club Ltd. (supra)

4. The Supreme Court in the case of Cawnpore Club Ltd. (supra) through a brief order dismissed the appeal
of the Revenue by holding as under-

"One of the questions which the High Court had decided in other cases relating to the same assessee
was that the doctrine of mutuality applied and, therefore, the income earned by the assessee from the
rooms let out to its members could not be subjected to tax. No appeal had been filed against the said
decision and the matters stood concluded as far as the assessee was concerned. This being so, no
useful purpose would be served in proceeding with the appeals on the other questions when the
respondent cannot be taxed because of the principle of mutuality."

Decision of the Andhra Pradesh High in the case of CIT v. Secunderabad Club Picket [2012] 21
taxmann.com 54

5. The Andhra Pradesh High Court in the case of Secunderabad Club Picket (supra) held that "An unregistered
association, like the Secunderabad club, parking their surplus funds with corporate member banks to earn
interest is altogether different from an association of persons lending money only to its members. Further,
as held by the Supreme Court in Bankipur Club Ltd.'s case (supra) "a host of factors need to be considered to
arrive at a conclusion as to at what point does the relationship of mutuality end and that of trading begin".
Furthermore, the nature of the transaction between the assessee and the bank/banks would disqualify
application of the principle of mutuality. We are, therefore, of the considered opinion that the impugned
orders of the Income-tax Appellate Tribunal are liable to be set aside."

Extracts from the decision of the Madras High Court in the case of Madras Gymkhana Club v. Dy. CIT
[2009] 183 Taxman 333

6. "In the decision in Chelmsford Club's case (supra), the Supreme Court extracted the conditions stipulated
by the Judicial Committee in the case of English Scottish Joint Co-operative Wholesale Society Ltd.'s case (supra)
the existence of which establishes the doctrine of mutuality. The said conditions as extracted in the decision
of the Supreme Court were the same as printed in bold letters in para (2) above.

The Supreme Court made it clear that section 2(24) of the Act recognises the principle of mutuality and is
exclusive of businesses involving such business, except those mentioned under clause (vii) of that section.
Section 2(24) (vii) of the Act, which is a part of the definition of income, includes the profits and gains of any
business of insurance carried on by a mutual insurance company or by a co-operative society, computed in
accordance with section 44 or any surplus taken to such profits and gains by virtue of provisions contained
in the First Schedule.

In the instant case, the assessee would not fall within section 2(24)(vii) of the Act. Therefore, if the well-laid
down conditions as extracted in the decision of the Supreme Court in Chelmsford Club's case (supra ) were
satisfied by virtue of the fact that the object of the assessee was to provide various facilities and provisions
exclusively for the benefit of the members of the club, which would satisfy the fundamental doctrine that
no person can earn for himself as its activities were otherwise governed by the principles of mutuality, the
assessee-club was entitled to claim the benefit of exemption under the said doctrine.

When the activities of the club vis-a-vis its members and the involvement of the funds generated from and
out of the contributions made by the members for conducting the regular business of the club were
considered, they would satisfy the conditions referred to above.
The question for consideration was that apart from its regular activities as a club, when the surplus income
derived in the course of its business of operating club activities was not utilised for the benefit of such
activities but was invested in the form of fixed deposits with the member-banks and out of such deposits
when interest was earned, such interest income could still be held to satisfy the main conditions of identity
of contributors to the fund and the recipients from the fund. The assessees would contend that such
surplus income derived from the contributions of its members having regard to the fact that it ran to
several lakhs, the same could not be retained in the club premises and had to be necessarily kept in some
secured manner till such funds could be utilised for the benefit of the club and, therefore, they were kept
either in the fixed deposits with the member-banks or with the other corporate members in the form of
fixed deposits or securities.

The provisions contained in the rules of the assessee-club, no doubt, enabled the club to invest its surplus
funds in the manner provided therein with the financial institutions who were members of the club, but
when the object of the club and the provisions made under the rules for making the investments were read
together, the position that emerged was that the investment of surplus funds had nothing to do with the
objects of the club. It was true that such investments could be made in the Government securities or its
banking institution-members or in the form of securities which could be only with its corporate members.
The contention of the assessee was that when an enormous surplus amount was generated, such amount
could not be kept as cash or even in the regular account which was being operated for the day-to-day
administration and, therefore, such amounts had to be necessarily kept in fixed deposits or in the form of
securities of longer duration, which funds ultimately were meant to be utilised for the improvement of the
facilities of the club.

It was further contended that since such investments in the form of fixed deposits or securities had been
made with the member institutions, no outsider was benefited by such investments and, therefore, the
identities of the contributor and the participant were maintained.

Though in the first place such an argument looked attractive, yet such investments and the earning of
interest had absolutely no nexus to the objects enumerated under the rules of the club. Even though
existence of the club and its activities and facilities were for the mutual interest of its members and such
mutual interest in respect of its regular activities vis-a-vis its members continued to remain, yet, based on
that alone, it could not be held that its other activities such as its financial management of depositing the
surplus funds in various banking institutions and thereby earning substantial amount by way of interest
should also be held to have nexus with the regular and normal activities of the club vis-a-vis its members.

It was not the case of the assessee-club that the funds, which were invested in the form of fixed deposits or
securities, were kept in such deposits with a definite idea of using the same in any specific projects for the
further development of the infrastructural facilities of the club in the form of buildings or other facilities. On
the other hand, while the assessee-club was able to generate substantial amount by way of contribution,
donation, etc., it had no corresponding plans or schemes to improve its infrastructure facilities nor such
surplus funds were earmarked for any particular developmental activity in the interest of all the members
of the assessee-clubs. Further it was not assessee's case that since incurring of the expenses for such
activities could be made in a phased manner, the amounts were being kept in such a way that it could be
drawn for spending as and when the requirement for such spending was necessitated.

On the other hand, the simple stand of the assessee was that collection of the contributions, donations, etc.,
resulted in generation of surplus funds; and that there was no requirement of spending such amounts in
the near future and these had to be necessarily kept in safe deposit or securities with their corporate
members. Based on such a claim of the assessee-club, it could not be straightaway held that such
investments with corporate members should be equated or brought within the concept of mutuality and
the benefit of tax exemption should be extended even in respect of such deposits in respect of the surplus
income.

Therefore, what was relevant was to see as to how the funds generated by way of contributions, donations,
etc., from the members as well as the outsiders were expended and that utilisation of such funds was with
a view to fulfil the object of providing various recreational and other facilities to the members and then
alone it could be held that the principle of identity between the contributor and the participator was
fulfilled, which is the basic requirement in the concept of mutuality of the enterprise.

Investment of surplus funds with some of the member banks and other institutions in the form of fixed
deposits and securities which, in turn, resulted in earning of huge surplus amounts by way of interest could
not be held to satisfy the mutuality concept. As held in the decision of the Karnataka High Court in CIT v.
I.T.I. Employees Death & Superannuation Relief Fund [1998] 234 ITR 308 /101 Taxman 315, the principle of
mutuality could be confined in respect of the income earned by the club out of the contributions received
by the club from its members, but it would have no application in respect of the interest earned from the
deposits of surplus funds in the banks by way of income.

Having regard to above conclusion, the Tribunal was right in holding that the interest income of the
assessee received from its corporate members on the investment of surplus funds in fixed deposits with
them, was not exempted from tax on the concept of mutuality."

Decision of the Bombay High Court in the case of CIT v. Common Effluent Treatment Plant (Thane
Belapur) Association [2010] 192 Taxman 238

7. The assessee in this case was an association formed with the object of setting up an effluent treatment
plant for its members who ran industrial units in certain areas. The income of the assessee consisted of
contributions by members made for the purpose of setting up the effluent treatment facility. It used to
collect contributions in excess of what was required to be expended, so as to ensure that funds were
available to meet a part of the capital cost and to meet sudden eventualities such as major repairs and
replacement expenses. For the relevant assessment year, it filed a return of income declaring nil income on
the principle of mutuality. The Assessing Officer rejected the claim of the assessee. On appeal, the
Commissioner of Income-tax (Appeals) held that the treatment cost was recovered only from the user
members of the assessee; and that the principle of mutuality was established since there was a complete
identity between contributors; and participators. He, therefore, directed that the excess of income over
expenditure was not exigible to tax in the hands of the assessee. However, he held that interest earned by
the assessee on fixed deposits and other deposits and on income-tax refunds was taxable under the head
'Income from other sources'. On cross appeals, the Tribunal confirmed the decision of the Commissioner of
Income-tax (Appeals) insofar as it applied the principle of mutuality to the excess of income over
expenditure. However, as regards the interest income, the Tribunal held that since the principle of mutuality
was applicable, interest on bank fixed deposits, other deposits and income-tax refunds were also not
chargeable to tax.

On revenue's appeal the High Court held as under-

There could be no manner of doubt that the surplus generated by the assessee representing the excess of
its income over expenditure would fall within the purview of the doctrine of mutuality. For the purposes of
the first issue, it must be noted that said income was exclusive of interest which was earned on fixed and
other deposits and on refund of income-tax which would be dealt with separately. The income of the
assessee was contributed by its members. The assessee had been formed specifically with the object of
providing a common effluent facility to its members. The income was not generated out of dealings with
any third party. The entire contribution originated from its members and was expended only in furtherance
of the objects of the association for the benefit of the members. On those facts, both, the Commissioner of
Income-tax (Appeals) and the Tribunal, were justified in coming to the conclusion that the surplus so
generated fell within the purview of the doctrine of mutuality and was not exigible to tax.

In order to fulfil the requirement of mutuality, a mutual association has to establish, as an essential
requirement, the identity between participators and contributors to the fund. However, the fact that an
association satisfies the norm of mutuality in respect of the receipts of contributions from its members
does not necessarily lead to the conclusion that every activity of the association satisfies the test of
mutuality. An association may be engaged in activities which can be described as mutual and in other
activities which are not mutual. The Gujarat High Court recognized this fact in its decision in Sports Club of
Gujarat Ltd. v. CIT [1988] 37 Taxman 38. Adverting to the decision in CIT v. Madras Race Club [1976] 105 ITR
433 (Mad.), the Court noted that the application of the principle of mutuality is not destroyed by the
presence of transactions which are non-mutual in character. However, in such a case, the principle of
mutuality has to be confined to transactions with members possessing the essential character of mutuality.
The two activities can in appropriate cases be separated and the profits derived from transactions, which do
not fulfil the requirements of mutuality, can be brought to tax.

The assessee in the instant case utilized its surplus funds for investment in fixed deposits with banks. The
interest that was generated on the investment of such funds was not income which was received from the
members of the assessee but from third parties such as the banks with whom the funds were invested.
Where moneys are invested in fixed deposits of banks, the interest that is received on such deposit does
not possess the same character of mutuality as the surplus funds derived by the assessee from the
contributions of its members. The principle of mutuality applied to surplus funds generated from the
contribution of the members for the reason that the funds were contributed by the members of the society
and there was an identity between the contributors and the participators in the fund. The decision to invest
the funds of the association in bank fixed deposits was a prudent commercial decision motivated by the
desire to earn interest that would not be available on moneys maintained in ordinary, current or savings
accounts. Such interest did not fulfil the requirement of mutuality. While investing the funds with a bank or
a financial institution, the assessee assumes the character of a customer of the bank or institution and the
relationship, that is engendered, is that between a banker and its customer. The fact that the funds which
were invested had their source in the contributions by the members of the assessee could not be
dispositive of the nature of the receipt obtained by the assessee on account of the interest payment on the
deposits made. In determining the eligibility to tax of receipts on account of interest, it is the character of
the receipt as interest that must play a determinative role. A payment on account of interest by the bank or
a party with whom the deposit is placed is an arm's length transaction with a third party. The recompense
which is received by the assessee by and as a result of the transaction does not fulfil the condition of
mutuality to which the contributions received from the members of the assessee are subject to.

Such a deposit implicates a relationship between a banker and a customer, to which the principle of
mutuality would not apply. The mere fact that an association exists for the mutual interest of its members
would not result in the conclusion that all its activities, including those which involve financial transactions
of the deposit of surplus funds for earning interest, also partake of the same character and nature.

Therefore, interest on bank fixed deposits, other deposits and income-tax refunds were chargeable to tax.

With regard to non-applicability of the decision of the Supreme Court in the case of Cawnpore Club Ltd.'s
case (supra) this is what the Bombay High Court observed at para.24 of its judgment-
 "A decision of the Supreme Court becomes a precedent under Article 141 of the Constitution, when a
question is directly raised and considered. The decision becomes a law declared where the question is
actually adjudicated upon—Tika Ram v. State of U.P. [2009] 12 SCALE 349. The decision in Cawnpore
Club Ltd.'s case (supra) does not actually decide upon the issue as regards the exigibility to tax of the
interest received on surplus income invested in fixed deposits."

Decision of the Supreme Court in the case of Bangalore Club v. CIT [2013] 29 taxmann.com 29/212
Taxman 566/350 ITR 509

8. The Supreme Court of India in this case held that interest earned by the assessee-club on fixed deposits
from its member banks would not be exempt from tax on basis of doctrine of mutuality.

In this case the assessee-club sought exemption from payment of tax on interest earned on fixed deposits
kept with certain banks, which were corporate members of the assessee, on the basis of doctrine of
mutuality and its claim was rejected on the ground that there was a lack of identity between the
contributors and the participators to the fund and, thus, the interest income was taxable as business
income. On appeal to the Supreme Court, it was noted that in course of banking business, member banks
used such deposits to advance loans to their clients and thereby violated one to one identity between
contributors and participators. It was also found that surplus funds were not used for any specific service,
infrastructure, maintenance or for any other direct benefit for members of club. It was therefore held by the
Supreme Court that loaning out of funds of club by member banks to outsiders for commercial reasons,
snapped link of mutuality and the amount of interest earned by assessee from member banks would not
fall within ambit of mutuality principle and would therefore, be exigible to tax.

With regard to the three basic principles this is what the Supreme Court observed-

"Firstly, the arrangement lacks a complete identity between the contributors and participators. Till the
stage of generation of surplus funds, the set-up resembled that of a mutuality; the flow of money, to
and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent,
nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as
these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and
the club suffered from deflections due to exposure to commercial banking operations. During the
course of their banking business, the member banks used such deposits to advance loans to their
clients

Hence, in the instant case, with the funds of the mutuality, member banks engaged in commercial
operations with third parties outside of the mutuality, rupturing the 'privity of mutuality', and,
consequently, violating the one-to-one identity between the contributors and participators as
mandated by the first condition. Thus, in the instant case, the first condition for a claim of mutuality is
not satisfied.

As aforesaid, the second condition demands that to claim an exemption from tax on the principle of
mutuality, treatment of the excess funds must be in furtherance of the object of the club, which is not
the case here. In the instant case, the surplus funds were not used for any specific service,
infrastructure, maintenance or for any other direct benefit for the member of the club. These were
taken out of mutuality when the member banks placed the same at the disposal of third parties, thus,
initiating an independent contract between the bank and the clients of the bank, a third party, not privy
to the mutuality.

This contract lacked the degree of proximity between the club and its member, which may in a distant
and indirect way benefit the club, nonetheless, it cannot be categorized as an activity of the club in
 pursuit of its objectives. It needs little emphasis that the second condition postulates a direct step with
direct benefits to the functioning of the club. For the sake of argument, one may draw remote
connections with the most brazen commercial activities to a club's functioning. However, such is not
the design of the second condition. Therefore, it stands violated.

The facts at hand also fail to satisfy the third condition of the mutuality principle i.e., the impossibility
that contributors should derive profits from contributions made by themselves to a fund which could
only be expended or returned to themselves. This principle requires that the funds must be returned to
the contributors as well as expended solely on the contributors.

True, that in the instant case, the funds do return to the club. However, before that, they are expended
on non-members i.e., the clients of the bank. Banks generate revenue by paying a lower rate of interest
to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher
rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for
commercial reasons, snapped the link of mutuality and thus, breaches the third condition.

There is nothing on record which shows that the banks made separate and special provisions for the
funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not
give, or get, the treatment a club gets from its members; the interaction between them clearly reflected
one between a bank and its client. This directly contravenes the third condition.

In the present case, the interest accrues on the surplus deposited by the club like in the case of any
other deposit made by an account holder with the bank.

It may be added that the assessee is already availing the benefit of the doctrine of mutuality in respect
of the surplus amount received as contributions or price for some of the facilities availed by its
members, before it is deposited with the bank. This surplus amount was not treated as income; since it
was the residue of the collections left behind with the club. A façade of a club cannot be constructed
over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double
benefit of mutuality

[Façade means a deceptive outward appearance]

Unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality,
the amount of interest earned by the assessee from the member banks will not fall within the ambit of
the mutuality principle and would therefore, be exigible to tax in the hands of the assessee-club."

The Supreme Court at para.34 of the judgment held as under-

"In light of the afore-going, assessee's appeal is bereft of any merit and is thus, liable to be dismissed."

Decision of the Supreme Court in the case of Yum! Restaurants Marketing (P.) Ltd. v. CIT [2020] 116
taxmann.com 374/271 Taxman 217/424 ITR 430

9. The Supreme Court in the case of Yum! Restaurants Marketing (P.) Ltd. (supra) held that where assessee
was incorporated for purpose of economisation of cost of advertising and promotion of member
companies, to be operated on a non-profit basis on principles of mutuality but it accepted contributions
both from members and non-members and one member was vested with powers to control functioning
and interests of other members, such an assimilation could not be termed as a social intercourse devoid of
commerciality; assessee, being not a mutual concern, could not be entitled to tax exemption.

With regard to Interpretation of statutes- Rule of strict construction of exemptions this is what the Supreme
Court observed at para.34 of its judgment-
The doctrine of mutuality bestows a special status to qualify for exemption from tax liability. It is a settled
proposition of law that exemptions are to be put to strict interpretation. The appellant having failed to fulfil
the stipulations and to prove the existence of mutuality, the question of extending exemption from tax
liability to the appellant, that too at the cost of public exchequer, does not arise. Taking any other view
would entail in stretching the limits of construction. In The Law of Taxation by Thomas M. Cooley Thomas M.
Cooley, The Law of Taxation, 4th Edition, Volume 2, Pg. 671, the rule regarding strict construction of
exemptions is succinctly summarised thus:

"672. Strict construction-Rule stated. An intention on the part of the legislature to grant an exemption
from the taxing power of the state will never be implied from language which will admit of any other
reasonable construction. Such an intention must be expressed in clear and unmistakable terms, or
must appear by necessary implication from the language used, for it is a well-settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to
be construed strictly against the property owner and in favour of the public. This principle applies with
peculiar force to a claim of exemption from taxation. Exemptions are never presumed, the burden is
on a claimant to establish clearly his right to exemption, and an alleged grant of exemption will be
strictly construed and cannot be made out by inference or implication but must be beyond reasonable
doubt. . ............ Moreover, if an exemption is found to exist, it must not be enlarged by construction,
since the reasonable presumption is that the state has granted in express terms all it intended to grant
at all, and that unless the privilege is limited to the very terms of the statute the favour would be
extended beyond what was meant…"

Concluding Remarks

10. The Supreme Court in the case of Secundrabad Club (supra) identified the controversy as "whether, the
judgment of this Court in the case of Bangalore Club v. CIT [2013] 29 taxmann.com 29 ("Bangalore Club")
calls for reconsideration in view of the earlier order of this Court in Commissioner of Income Tax v. Cawnpore
Club Ltd., Kanpur ("Cawnpore Club") disposed of by this Court on 05.02.1998 reported in [2004] 140
Taxman 378 (SC).?"

The Supreme Court after detailed analysis of various decisions of Supreme Court and High Court put an end
to this controversy by answering in categorical terms that "Mutuality does not exempt from tax interest
income earned by clubs from FDs in banks, irrespective of whether the banks are corporate members of
the club or not."

The decision of the Andhra Pradesh High Court in the case of Secunderabad Club Picket (supra) was affirmed
and the decisions of the Madras High Court in the case of Madras Gymkhana Club (supra) that of the
Bombay High Court in Common Effluent Treatment Plant (Thane Belapur) Association's case (supra) were
approved.

The Supreme Court also held that "Bangalore Club decision (supra) does not call for reconsideration and that
the said judgment which holds the field would squarely apply to these appeals also." and that "the
judgment in Bangalore Club (supra) is not per incuriam although, the earlier Order passed by a Coordinate
Bench of this Court in the case of Cawnpore Club (supra) is not noticed in Bangalore Club."

The principles that emanate from this decision can be summed up as under-

Principle of mutuality would not apply to interest income earned on fixed deposits made by
(a) the appellant Clubs in the banks irrespective whether the banks are corporate members of
the club or not.
 If there is an entry of a third party or non-member to deal with the contributions of or funds
of the club or to utilize the funds of the club and return the same with interest, then, the
relationship of the parties is not on the basis of a privity of mutuality. The essential condition
(b) of mutuality, i.e., identity between the contributors and participators would end. The
relationship would then be like any other commercial relationship such as that between a
customer and a bank where the fixed deposit is made by the customer for the purpose of
earning an interest income.
If the principle of mutuality is to apply, then, where a number of people contribute to a fund
are ultimately paid the surplus from the fund, it is a mere repayment of the contributors'
own money. However, if the very same surplus fund is not applied for the common purpose
(c) of the club or towards the benefit of the members of the club directly but is invested with a
third party who has the right to utilize the said funds, subject to payment of interest on it
and repayment of the principal when desired by the club, then, in such an event, the club
loses its control over the said funds.
Further, the interest generated on the fixed deposits or investment made is a commercial
activity, thereby permitting the bank to utilize the fixed deposit amount for its banking
business and derive profits from the said banking business by way of lending the amount for
(d) a higher rate of interest while paying a lower rate of interest on the fixed deposit made by
the club. Thus, identicality between the contributors to the common fund and the
participators in it which is a sine qua non for the application of the principle of mutuality
would get ruptured.
When surplus funds of a club are invested as fixed deposits in a bank and the bank has a
(e) right to utilize the said fixed deposit amounts for its banking business subject to repayment
of the principal along with interest, then, the identity is lost.
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