M/s Bangalore Club vs. CIT (Supreme Court)

DATE: (Date of pronouncement)
DATE: January 15, 2013 (Date of publication)

Click here to download the judgement (bangalore_club_mutuality_interest_deposits.pdf)

Interest earned by a mutual association from deposits placed with member banks is not exempt on the ground of “mutuality”

The assessee, a mutual association, claimed that the interest earned by it on fixed deposits kept with the bank (which was a corporate member) was not taxable on the basis of mutuality. The AO rejected the claim though the CIT(A) and Tribunal upheld the claim. The High Court reversed the Tribunal and upheld the stand of the AO. On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:

For a receipt to be exempt on the principles of Mutuality, three conditions have to be satisfied. The first is that there must be a complete identity between the contributors and participators. The second is that the actions of the participators and contributors must be in furtherance of the mandate of the association. The third is that there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. On facts, though the interest was earned from banks which were corporate members of the club, it was not exempt on the ground of mutuality because (i) the arrangement lacks a complete identity between the contributors and participators. With the funds of the club, 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, (ii) the surplus funds were not used in furtherance of the object of the club but 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 & (iii) The Banks generated revenue by paying a lower rate of interest to the assessee-club and loaning the funds to third parties. The interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank. 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.

Note: This impliedly approves Common Effluent Treatment Plant 328 ITR 362 (Bom) & Wellington Gymkhana Club 46 DTR 22 (Mad) while impliedly reversing Delhi Gymkhana Club 339 ITR 525 (Del)

9 comments on “M/s Bangalore Club vs. CIT (Supreme Court)
  1. vswami says:

    On the facts of the case, as undetrstood. the SC ruling ipso facto / on all fours, would apply, provided –

    (A) the assessee is a members’ club;

    (B) the source of income, the deposits with bank, which itself is a member (corporate member) of the assessee club; and

    (C) the interest income is that earned on ‘fixed deposits ‘ placed with the bank.

    The moot points which arise, but obviously left open, for an incolclsive debate and dispute, are these:

    Could the apex court ruling be straightaway applied to every other legal entity, not being a members’ club and is distinguishabe also on the other abovestated facts?

    For instance, to interest or other like income incidental to the existence and relatable to its activities in relation to its members, in a case such as, – a co-operative society or a company or an association constituted and formed by the co-owners of units i.e. flats or apartments in a residential or commercial building. In one’s view, relying on the presently obtaining judicial opiuon, the answer can only be an emphatic “NO’.

    In a manner of speaking, the SC ruling can be regarded to have opened the ‘pandora’s box’ yet again; and it is for the CBDT to, with a view to avoiding / obviating further litigation, soon come ourt with favourable clarifications, for the benefit of the concerned people, in line with the present legal position, as enunciated in decided court cases.

  2. vswami says:


    Refer the last para of comment.

    As feared, the tax gatherer is heard to have already overtaken and gone ahead, by acting without proper application of mind. See the last comment posted by an affected taxpayer @ http://apartmentadda.com/blog/2013/01/17/is-income-tax-applicable-for-society-fds/ All the more reason why taxpayers should fast approach the CBDT , and if so advised, pursue further appropriately.

  3. vswami says:

    INSTANT (soliciting experts’ views ON)

    Following is an Extract from an ongoing discussion on Linkedin /Facebook :


    I personally agree with the judgment, and would definitely like to see GST being waived off for Societies. However a judgement is not a law unless passed as one.
    The current law, specifically the Circular of January 2014 clearly states Service Tax has to be collected.
    So if a Society is going by a Court Judgement and not following the law, they must do so with the acknowledgement and vote of the General Body


    To clarify, the context is the controversy, persistently being floated around in certain close-minded circles, on liability to pay ‘service tax’ on collections from members of a housing complex (Apartments)towards common maintenance of the complex; and,requiring to be examined and a firm but well-considered opinion offered by law experts/practitioners in the field of ‘service tax’, in clients’ and their own interests as well; hence being shared with the altruistic aim of serving the common good; certainly not to press for acceptance of any individual’s ‘opinion’.

  4. vswami says:

    To be precise:

    The basic proposition calling for clarity in thinking, is this-

    Should, for all practical purposes, anyone, going by ‘common sense’,-

    volunteer and pay service tax, because of the ‘departmental circular’, the propriety of which itself is contestable; OR

    instead,as a matter of / influenced by diktats prudence, better go by the case law – the judicial view taken by courts in favor of taxpayers- on its interpretation of the law ?

  5. vswami says:

    Refer the previous 2 Posts, to which await a reply, just in brief.
    The points, albeit quite so simple as to elicit a quick answer,have still been raised, only to have a second opinion from any member of the CAs/
    lawyers fraternity,who are in service tax practice and hence may have an updated field exposure.

  6. vswami says:

    More Feed:

    Posted comments on above are of direct relevance to the Previous Posts wrt the ‘live’ controversy and the ongoing discussions, in concerned quarters; that is, on the subject of levy of SERVICE TAX on collections by a ‘RWA’ from members, for common maintenance of their building complex.

    Cross Refer : A Reader’s Query and Answers given by a learned CA @ https://lnkd.in/fQ744vC

  7. m v r prasad says:

    The Supreme Court judgment in Bangalore club seems to be, with great respect, wrong. Even if it is right, the reasoning given or the ratio is wrong. What the bank does with the funds deposited with it by a mutual club is irrelevant. What has to be seen is what the club does with the funds obtained from its members.It may be argued that the interest is obtained not from a member in its capacity as a member but from a bank,though a member,in its capacity as a bank. That may justify levy of tax on interest income received by a club from a bank,but to go by what the bank does with its funds seems to be irrelevant.

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