# M/S BANGALORE CLUB v. COMMISSIONER OF INCOME TAX & ANR

- **Citation:** [2013] 1 S.C.R. 267
- **Court:** Supreme Court of India
- **Decided:** 2013-01-14
- **Case number:** Civil Appeal No. 124 of 2007
- **Bench:** D.K. Jain, Jagdish Singh Khehar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-bangalore-club-v-commissioner-of-income-tax-anr-28770
- **Pages:** 28

## Headnote

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 e

## Text

_Characters 0–39,991 of 52,383. This is a partial read: ask again with offset=39991 for what follows._

[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 be no
scope of profiteering by the contritfutors from a fund
made by them which could only be expended or returned
to themselves. [Para 8, 12 ,15 and 19-21] [278-E; 281-DE
E; 283-C; 285-B-C-D-F; 286-A]
Commissioner of Income-Tax, Bombay City Vs. Royal
Western India Turf Club Ltd 1954 SCR 289 =AIR 1954 SC
85; CIT v. Firozepur Ice Manufacturers' Association 84 ITR
F
607; Chelmsford Club Vs. Commissioner of Income Tax,
Delhi (2000) 3 SCC 214; Thomas Vs. Richard Evans & Co.
Ltd. (1927) 11 TC 790; Commissioner of Income Tax, Madras
Vs. Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96
-refu~d~
G
Styles (Surveyor of Taxes) Vs. New York Life Insurance
Co. 1889 2 TC 460; The Commissioners of Inland Revenue
Vs. The Comish Mutual Assurance Co. Ltd. 1926 12 T.C. 841
(H.L.); The Bohemians Club Vs. The Acting Federal
Commissioner of Taxation (1918) 24 CLR 334; Municipal
H
270
SUPREME COURT REPORTS
[2013] 1 S.C.R.
A Mutual Insurance Ltd. Vs. Hills (1932) 16 TC 430, 448 (HL);
Carlisle and Sil/oth Golf Club v. Smith, (1913) 3 K.B. 75 ;
Jones Vs. South-West Lancashire Coal Owners' Association
Ltd. 1927 AC 827; The English & Scottish Joint Co-operative
Wholesale Society Ltd. Vs. The Commissioner of Agricultural
B Income Tax, Assam AIR 1948 PC 142 (E); National
Association of Local Government Officers Vs. Watkins (1934)
18 TC 499; 503, 506; Commissioner of Income Tax, Bihar
Vs. Bankipur Club Ltd. (1997) 5 SCC 394 - referred to.
C
Halsbury's Laws of England, 4th Edition; Simon's Taxes,
Vol. B, 3rd Edn., Kanga & Palkhivala on "The Law and
Practice of Income Tax" (8th Edn. Vol. I, 1990); British Tax
Encyclopedia m. 1962 Edn. (edited by G.S.A. Wheatcroft)
at pp. 1201 - referred to
o
1.4. In the instant case, the assessee-Club is an AOP.
The banks concerned are all corporate members of the
Club. The interest earned from fixed deposits kept with
non-member banks was offered for taxation and the tax
due was paid. As regards the interest earned by assessee
E on fixed deposits kept with member banks, firstly, the
arrangement lacks a complete identity between the
contributors and participators. Till the stage of generation
of surplus funds, the setup resembled that of a
mutuality; the flow of money, to and fro, was maintained
F 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
G commercial banking operations. During the course of
their banking business, the member banks used such
deposits to advance loans to their clients. Therefore, in
the instant case, with the funds of the mutuality, memberbanks engaged in commercial operations with third
H parties outside of the mutuality, rupturing the 'privity of
BANGALORE CLUB v. COMMISSIONER OF INCOME 271
TAX & ANR.
mutuality' and, consequently, violating the one to one
A
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.
[Para 25-26] [289-C-H]
1.5. Secondly, the surplus funds were not used for
B
any specific service, infrastructure, maintenance or for
any other direct benefit for the members of the club.
These were taken out of mutuality when the memberbanks placed the same at the disposal of third parties,
thus, initiating an independent contract between the bank
C
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
D
objectives. It needs little emphasis that the second
condition postulates a direct step with direct benefits to
the functioning of the club, stands violated. [Para 27] [290B-E]
1.6. Thirdly, though the funds do return to the club,
however, before that, they are expended on nonmembers i.e. the clients of the bank. The banks generate
revenue by paying a lower rate of interest to clubassessee, 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 snaps the link
E
F
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
G
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. If H
272
SUPREME COURT REPORTS
[20131 1 S.C.R.
A profits are distributed to shareholders as shareholders,
the principle of mutuality is not satisfied. [Para 28- 29]
[290-F-H; 291-A-C]
Styles (Surveyor of Taxes) Vs. New York Life Insurance
Co. 1889 2 TC 460; (. ;mmissioner of Income Tax, Madras
B Vs. Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96;
Thomas Vs. Richard Evans & Co. Ltd. (1927) 11 TC 790 -
referred to Para 29
1.7. Thus, the interest accrues on the surplus
c deposited by the club like in the case of any other deposit
made by an account holder with the bank. The interest
earned by the assessee even from the member banks on
the surplus funds deposited with them had the taint of
commerciality, fatal to the principle of mutuality. [Para 29
D and 31] [292-B; 293-B]
Commissioner
of
Income
Tax,
Madras
Vs.
Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96 -
relied on
E
1.8. Besides, 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
F treated as income; since it was the residue of the
collections left behind with the club. A fa~ade 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. [Para 32) [293-C-E]
G
Commissioner of Income Tax, Bihar Vs. Bankipur Club
Ltd. (1997) 5 sec 394 - referred to
1.9. The amount of interest earned by the assessee
from the four banks will not fall within the ambit of the
H mutuality principle and will therefore, be exigible to
BANGALORE CLUB v. COMMISSIONER OF INCOME 273
TAX & ANR.
Income-Tax in the hands of the assessee-club. [Para 33]
[294-D]
Case Law Reference:
1889 2 TC 460
referred to
Para 8, 29
1926 12 T.C. 841 (H.L.)
referred to
Para 9
(1918) 24 CLR 334
referred to
Para 10
1954 SCR 289
referred to
Para 11
(1932) 16 TC 430, 448 (HL) referred to
Para 12
1927 AC 827
referred to
Para 17
(1934) 18 TC 499; 503, 506 referred to
para 20
(1997) 5 sec 394
referred to
para 20
(1997) 5 sec 394
referred to
para 32
(1927) 11 TC 790
referred to
Para 21
(1927) 11 TC 790
referred to
Para 29
AIR 1965 SC 96
referred to
para 22
AIR 1965 SC 96
referred to
Para 29
AIR 1965 SC 96
relied on
para 30
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 124
of 2007.
From the Judgment & Order dated 21.07.2006 of the High
Court of Karnataka at Bangalore in l.T.A. No. 70 of 2000.
WITH
C.A. Nos. 125 of 2007, 272, 273, 274, 275, 276-277 & 278 of
2013.
A
B
c
D
E
F
G
Joseph Vellapally, Dayan Krishnan, Gautam Naryana (for
H
274
SUPREME COURT REPORTS
[2013] 1 S.C.R.
A Nikhil Nayyar), Asmita Singh, Shivendra Singh for the Appellant.
B
A.S. Chandhiok, ASG, Gurpreet S. Parwanda, Monika
Tyagi, Reena Singh, Yatinder Chaudhary, R. Nedumaran, Anil
Katiyar (for B.V, Balaram Das) for the Respondents.
The Judgment of the Court was delivered by
D.K. JAIN, J. 1. Leave granted in Special Leave Petitions.
2. This batch of appeals arises from a common judgment
C and order pronounced by the High Court of Karnataka, in
Income Tax Appeals No. 115 of 1999 along with 70 of 2000,
3095 of 2005, 1547 of 2005, 1548 of 2005, 3091 of 2005,
3089 of 2005 along with 3093 of 2005, and 3088 of 2005.
Since these appeals entail the same issue, they are being
0 disposed of by this common judgment.
3. The facts necessary for the purpose of appreciating the
controversy involved in the appeal are as follows:
The Bangalore Club (hereinafter referred to as the
E "assessee"), the appellant herein, is an unincorporated
Association of Persons, (AOP). In relation to the assessment
years 1989-90, 1990-91, 1993-94, 1994-95, 1995-96, 199697, 1997-98, 1998-99 and 1999-2000, the assessee sought
an exemption from payment of income tax on the interest
F earned on the fixed deposits kept with certain banks, which were
corporate members of the assessee, on the basis of doctrine
of mutuality. However, tax was paid on the interest earned on
fixed deposits kept with non-member banks.
The assessing officer rejected the assessee's claim,
G holding that there was a lack of identity between the
contributors and the 'participators to the fund, and hence treated
the amount received by it as interest as taxable business
income. On appeal by the assessee, the Commissioner of
Income Tax (Appeals)-11, Bangalore ("CIT (A)" for short) reversed
H the view taken by the assessing officer, and held that the
BANGALORE CLUB v. COMMISSIONER OF INCOME 275
TAX & ANR. [D.K. JAIN, J.]
doctrine of mutuality clearly applied to the assessee's case. On
A
appeal by the revenue the Income-Tax Appellate Tribunal (for
short "the Tribunal"), affirmed the view taken by the CIT (A),
observing thus (ITA No. 2440/Banf1991):
"7. In the instant case, the funds of the club are given in
B
the form of deposits for earning income from the corporate
members, namely, the banks here and, therefore, the
earning of interest is clearly had risen out of the concept
of mutuality only. The decisions relied upon by the DR
have nowhere touch (sic) upon the fact as to whether it was
with corporate members or n9t. Apparently, they had dealt
C
with the situation where the transactions of interest are from
persons who are not the members of the club. During the
argument, the DR had admitted that the assessee had
shown interest from certain other banks as its income
which also goes to show that wherever the concept of D
mutuality was absent, the assessee had offered the same
as income."
On an application by the Commissioner of Income Tax,
Bangalore under Section 260A of the Income Tax Act, 1961 (for
E
short "the Act"), the High Court entertained the appeal and
framed the following two substantial questions of law for its
adjudication :-
"(1) Whether, a sum of Rs. 7,87,648/- received by the
assessee as interest from fixed deposit made by the
assessee in four banks who.are members in the assessee
club amounted to its income and constituted a revenue
receipt as per the provision of Income Tax Act.
F
(2) Whether, the principle of mutuality can be made
G
applicable to the fund deposited in tile four banks who are
also members of assessee club, especially when the fund
is raised from contribution of several members including
the four banks and the interest derived from it is utilized
by several members of the assessee club?"
H
276
SUPREME COURT REPORTS
[2013] 1 S.C.R.
A
Answering both the questions in favour of the revenue, the
High Court held:-
"12. On the facts of this case and in the light of the legal
principles it is clear to us that what has been done by the
club is nothing but what could have been done by a
customer of a Bank. The principle of 'no man can trade
with himself is not available in respect of a nationalised
bank holding a fixed deposit on behalf of its customer. The
relationship is one of a banker and a customer."
c
Consequently, the High Court reversed the decision of the
Tribunal and restored the order of the assessing officer. Hence,
this appeal by the assessee.
4. Thus, the short question for determination is whether or
0 not the interest earned by the assessee on the surplus funds
invested in fixed deposits with the corporate member banks is
exempt from levy of Income Tax, based on the doctrine of
mutuality?
5. Mr. Joseph Vellapally, learned senior counsel appearing
E for the assessee strenuously urged that the assessee meets
all the requirements, as laid down in The English & Scottish
Joint Co-operative Wholesale Society Ltd. Vs. The
Commissioner of Agricultural Income Tax, Assam1, as
affirmed by this Court in Chelmsford Club Vs. Commissioner
F of Income Tax, Delhi2 in order to fall within the ambit of the
principle of mutuality. According to the learned counsel, there
is a complete identity between the contributors to the fund and
the assessee and the recipients from the funds, in as much as
the interest earned by the assessee from the surplus fund
G invested in fixed deposits with member banks are always
available and are used for the benefit of members alike. It was
asserted that there is no commercial motive involved in the
1.
AIR 1948 PC 142 (E).
H 2.
(2000) 3 sec 214.
BANGALORE CLUB v. COMMISSIONER OF INCOME 277
TAX & ANR. [D.K. JAIN, J.]
dealings of the assessee with its members, including the banks
A
concerned. It was also argued that the interest earned on such
deposits with the member banks was always available for use
and benefit of the members of the assessee, in as much as
the said interest merged with the common fund of the club.
6. Mr. A.S. Chandhiok, learned Additional Solicitor
General of India, on the other hand, contended that the
fundamental principle for applicability of the doctrine of mutuality
B
is a complete identity between the contributors and the
participators, which is missing in this case. It was submitted
C
that in the present case, the surplus funds in the hands of the
assessee were placed at the disposal of the corporate
members viz. the banks, with the sole motive to earn interest,
which brings in the commerciality element and thus, the interest
so earned by the assessee has to be treated as a revenue
receipt, exigible to tax. It was pleaded that transaction between
D
the assessee and the member banks concerned was in the
nature of parking of funds by the assessee with a corporate
member and was nothing but what could have been done by a
customer of a bank and therefore, the principle that "no man
could trade with himself' is not applicable.
E
7. Before we evaluate the rival stands, it would be
necessary to appreciate the general understanding of doctrine
of mutuality. The principle relates to the notion that a person
cannot make a profit from himself. An amount received from
F ·
oneself is not regarded as income and is therefore not subject
to tax; only the income which comes within the definition of
Section 2(24) of the Act is subject to tax (income from business
involving the doctrine of mutuality is denied exemption only in
special cases covered under clause (vii) of Section 2 (24) of G
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 common purpose is said to be simply
an increase of the common fund and as such neither
H
278
SUPREME COURT REPORTS
[2013J 1 S.C.R.
A considered income nor taxable. over time, groups which have
been considered to have mutual income have included
corporate bodies, clubs, friendly societies, credit unions,
automobile associations, Insurance companies and finance
organizations. Mutuality is not a form of organization, even if
8 the partic"1pants are often called members. Any organization 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 se!I their share. And
c when they cease to be 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 seNices are greater than their cost, additional
0
contributions. II is these kinds of prices and/or additional
contributions which constitute mutual income.
8. The doctrine of mutuality finds its origin in common law.
One of the earliest modem judicial statements of the mutuality
principle is by lord Watson in the House of lords, in 188g, in
E Styles (Surveyor of Taxes) Vs. New Yori< Life Insurance Cd'.
{hereinafter referred to as the "Styles case"). The appellant in
that case was an incorporated company. The company issued
life policies of two kinds, namely, participating and nonparticipating. The members of the mutual life insurance
F company were confined to the holders of the participating
policies, and each year, the surplus of receipts over expenses
and estimated r1ab"11ities was divided among them, either in the
form of a reduction of future premiums or of a reversionary
addition to the policies. There were no shares or shareholders
G in the ordinary sense of the term but each and every holder of
a participating policy became ipso facto a member of the
company and as such became entitled to a share in the assets
and liable for a share in the losses. The company conducted a
calculation of the probable death rate amongst the members
H
3.
[1889] 2 TC 460.
BANGALORE CLUB v. COMMISSIONER OF
279
INCOME TAX & ANR. [D.K. JAIN, J.]
and the probable expenses and liabilities; calls in the shape
A
of premiums were made on the members accordingly. Anaccount used to be taken annually and the greater part of the
surplus of such premiums, over the expenditure referable to
such policies, was returned to the members i.e. (holders of
participating policies) and the balance was carried forward as
B
a fund in hand to the credit of the general body of members.
The question was whether the surplus returned to the members
was liable to be assessed to income tax as profits or gains.
The majority of the Law Lords answered the question in the
negative. It may be noticed that in that case the members had c
associated themselves together for the purpose of insuring each
other's life on the principle of mutual assurance,'that is to say,
they contributed annually to a common fund out of which
payments were to be made, in the event of death, to the
representatives of the deceased members. Those persons
0
were alone the owners of the common fund and they alone were
entitled to participate in the surplus. This surplus was obtained
partly from the profits arising from non-participating policies and
other business. It was held that that portion of the surplus which
arose from the excess contributions of the holders of
participating policies was not an assessable profit. It was
E
therefore, held to be a case of mutual assurance. The individuals
insured and those associated for the purpose of receiving their
dividends and meeting other stipulated requisites under the
policies were identical. It was held that that identity was not
destroyed by the incorporation of the company. Lord Watson
even went to the extent of saying that the company in that case
F
did not carry on any business at all, which perhaps was stating
the position a little too widely as pointed out by Viscount Cave
in a later case; but, be that as it may, all the Noble Lords, who
formed the majority, were of the view that what the members
G
received were not profits but their respective shares of the
excess amount contributed by themselves. They held thus:
" ... when a number of individuals agree to contribute funds
for a common purpose ... and stipulate that their
H
280
SUPREME COURT REPORTS
[2013] 1 S.C.R.
A
contributions, so far as not required for that purpose, shall
be repaid to them. I cannot conceive why they should be
regarded as traders, or why contributions returned to them
should be regarded as profits."
8
9. Lord Watson's statement was explained by the House
of Lords in The Commissioners Of Inland Revenue Vs. The
Comish Mutual Assurance Co. Ltd. 4 wherein it was held that
a mutual concern may be held to carry on a business or trade
with its members, though the surplus arising from such trade
is not taxable income or profit.
c
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10. The High Court of Australia first considered the
mutuality principle in The Bohemians Club Vs. The Acting
Federal Commissioner of Taxation5 in 1918:
"A man is not the source of his own income ... A man's
income consists of moneys derived from sources outside
of himself. Contributions made by a person for expenditure
in his business or otherwise for his own benefit cannot be
regarded as his income ... The contributions are, in
substance, advances of capital for a common purpose,
which are expected to be exhausted during the year for
which they are paid. They are not income of the collective
body of members any more than the calls paid by
members of a company upon their shares are income of
the company. If anything is left unexpended it is not income
or profits, but savings. which the members may claim to
have returned to them."
(Emphasis added)
G
11. One of the first Indian cases that dealt with the principle
was Commissioner of Income-Tax, Bombay City Vs. Royal
Western India Turf Club Ltd. 6• It quoted with approval three
4.
(1926) 12 T.C. 841 (H .L.)
5.
(1918) 24 CLR 334.
H 6.
AIR 1954 SC 85.
BANGALORE CLUB v. COMMISSIONER OF
281
INCOME TAX & ANR. [D.K. JAIN, J.]
. conditions stipulated in The English & Scottish Joint CoA
operative Wholesale Society Ltd. (supra), which were
propounded after referring to various passages from the
speeches of the different law Lords in Styles case (supra). Lord
Normand, who delivered the judgment of the Board summarized
the grounds of the decision in Styles case (supra) as follows:
B
"From these quotations it appears that the exemption was
based on (1) the identity of the contributors to the fund and
the recipients from the fund; (2) the treatment of the
company, though incorporated, as a mere entity for the
C
convenience of the members and policy holders, 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
only be expended or returned to themselves."
12. We will consider each of these conditions in detail
before proceeding to the facts of the case. The first condition
requires that there must be a complete identity between the
contributors and participators. This was first laid down by Lord
Macmillan in Municipal Mutual Insurance Ltd. Vs. Hills7
wherein he observed:
"The cardinal requirement is that all the contributors to the
common fund must be entitled to participate in the surplus
and that all the participators in the surplus must be
contributors to the common fund; in other words, there must
be complete identity between the contributors and the
participators." .
13. On this aspect of the doctrine, especially with regard
D
E
F
to the non-members, Halsbury's Laws of England, 4th Edition,
G
Reissue, Vol. 23, paras 161 and 162 (pp. 130 and 132) states:
"Where the trade or activity is mutual, the fact that, as
7.
(1932) 16 TC 430, 448 (HL); CIT v. Firozepur Ice Manufacturers' Association
M~~
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regards certain activities, certain members only of the
association take advantage of the facilities which it offers
does not affect the mutuality of the enterprise.
8
* * *
Members' clubs are an example of a mutual undertaking;
but, where a club extends facilities to non-members, to that
extent the element of mutuality is wanting ... ."
14. Simon's Taxes, Vol. 8, 3rd Edn., paras 81 .218 and
c 81. 222 (pp. 159 and 167) formulate the law on the point, thus:
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" .. it is settled law that if the persons carrying on a trade
do so in such a way that they and the customers are the
same persons, no profits or gains are yielded by the trade
for tax purposes and therefore no assessment in respect
of the trade can be made. Any surplus resulting from this
form of trading represents only the extent to which the
contributions of the participators have proved to be in
excess of requirements. Such a surplus is regarded as their
own money and returnable to them. In order that this
exempting element of mutuality should exist it is essential
that the profits should be capable of coming back at some
time and in some form to the persons to whom the goods
were sold or the services rendered ....
*
*
*
It has been held that a company conducting a members'
(and not a proprietary) club, the members of the company
and of the club being identical, was not carrying on a trade
or business or undertaking of a similar character for
purposes of the former corporation profits tax.
*
*
*
A members' club is assessable. however. in respect of
H
profits derived from affording its facilities to non-members.
BANGALORE CLUB v. COMMISSIONER OF INCOME 283
TAX & ANR. [D.K. JAIN, J.]
Thus, in CarHsle and Sil/oth Golf Club v. Smith, (1913) 3 A
K.B. 75, where a members' golf club admitted nonmembers to play on payment of green fees it was held that
it was carrying on a business which could be isolated and
defined, and the profit of which was assessable to income
tax. But there is no liability in respect of profits made from
B
members who avail themselves of the facilities provided
for members."
{Emphasis supplied)
15. In short, there has to be a complete identity between
C
the class of participators and class of contributors; the particular
label or form by which the mutual association is known is of no
consequence. Kanga & Palkhivala explain this concept in "The
Law and Practice of Income Tax" {8th Edn. Vol. I, 1990) at p.
113 as follows:
D
" ... The contributors to the common fund and the
participators in the surplus must be an identical body. That
does not mean that each member should contribute to the
common fund or that each member should participate in
E
the surplus or get back from the surplus precisely what he
has paid." The Madras, Andhra Pradesh and Kerala High
Courts have held that the test of mutuality does not require
that the contributors to the common fund should willy-nilly
distribute the surplus among!?t themselves : it is enough if
F
they have a right of disposal over the surplus, and in
exercise of that right they may agree that on winding up
the surplus will be transferred to a similar association or
used for some charitable objects .... "
{Emphasis supplied)
G
16. British Tax Encyclopedia (/), 1962 Edn. (edited by
G.S.A. Wheatcroft) at pp. 1201, dealing with "mutual trading
operations", the law is stated as under:
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"For this doctrine to apply it is essential that all the
contributors to the common fund are entitled to participate
in the surplus and that all the participators in the surplus
are contributors, so that there is complete identity between
contributors and participators. This means identity as a
B
class. so that at any given 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 ... ."
c
(Emphasis supplied)
17. In Jones Vs. South-West Lancashire Coal Owners'
Association Ltd. 8, Viscount Cave LC held that "sooner or later,
in meal or in malt, the whole of the associations" receipts must
D go back to the policy holders as a class, though not precisely
in the proportions in which they have contributed to them and
the association does not in any true sense make any profit out
of their contributions.
E
18. Therefore, in the case of Royal Western India Turf
Club Ltd. (supra), since the club realized money from both
members and non- members, in lieu. of the same services
rendered in the course of the same business, the exemption
of mutuality could not be granted. This Court held thus:
F
"As already stated, in the instant case there is no mutual
dealing between the members inter se and no putting up
of a common fund for discharging the -common obligations
to each other undertaken by the contributors for their
mutual benefit. On the contrary, we have here an
G
incorporated company authorised to carry on an ordinary
business of a race course company and that of licensed
victuallers and refreshment purveyors and in fact carrying
on such a business. There is no dispute that the dealings
H 8.
1927 AC 827.
BANGALORE CLUB v. COMMISSIONER OF
285
INCOME TAX & ANR. [D.K. JAIN, J.]
of the company with non-members take place in the
A
ordinary course of business carried on with a view to
earning profits as in any other commercial concern."
(Emphasis supplied}
19. The ·second feature demands that the actions of the
B
participators and contributors must be in 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.
Therefore, in Chelmsford Club (supra}, since the appellant C
provided recreational facilities exclusively to its members and
their guests on "no-profit-no-loss" basis and surplus, if any, was
used solely for maintenance and development of the club, the
Court allowed the exception of mutuality.
20. The mandate of the club is a question of fact and can
be determined from the memorandum or articles of association,
rules of membership, rules of the organization, etc. However,
D
the mandate must not be construed myopically. While in some
situations, the benefits may be evident directly in the short-run,
E
in others, they may be accruable to an organization indirectly,
in the long-run. Space must be made for both such forms of
interactions between the organization and its members.
Therefore, as Finlay J. observed in National Association of
Local Govemme'nt Officers Vs. Watkins9, where member of a
club orders dinner and consumes it, there is no sale to him. At
F
the same time, as in case of Commissioner of Income Tax,
Bihar Vs. Bankipur Club Ltd. 10, where a club makes 'surplus
receipts' from the subscriptions and charges for the various
conveniences paid by members, even though there is no direct
benefit of the receipts to the customers, the fact that they will G
eventually be used in furtherance of the services of the club must
be considered as a furtherance of the mandate of the club.
9.
(1934) 18 TC 499; 503, 506.
10. (1997) 5 sec 394.
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21. Thirdly, 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. The locus classicus
pronouncement comes from Rowlatt, J's observations in
Thomas Vs. Richard Evans & Co. Ud. 11 wherein, while
B interpreting Styles case (supra), he held that if profits are
distributed to shareholders as shareholders, the principle of
mutuality is not satisfied. He observed thus:
c
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"But a company can make a profit out of its members as
customers, although its range of customers is limited to its
shareholders. If a railway company makes a profit by
carrying its shareholders, or if a trading company, by
trading with the shareholders - even if it limited to trading
with them - makes a profit, that profit belongs to the
shareholders. in a sense. but it belongs to them qua
shareholders. It does not come back to them as purchasers
or customers. It comes back to them as shareholders.
upon their shares. Where all that a company does is to
collect money from a certain number of people - it does
not matter whether they are called members of the
company, or participating policy holders - and apply it for
the benefit of those same people, not as shareholders in
the company, but as the people who subscribed it, then,
as I understand the New York case, there is no profit. If the
people were to do the thing for themselves, there would
be no profit, and the fact that they incorporate a legal entity
to do it for them makes no difference, there is still no profit.
This is not because the entity of the company is to be
disregarded, it is because there is no profit, the money
being simply collected from those people and handed
back to them, not in the character of shareholders, but in
the character o,f those who have paid it. That, as I
understand it, is the effect of the decision in the New York
case."
H 11. (1927) 11 TC 790
(Emphasis supplied)
BANGALORE CLUB v. COMMISSIONER OF INCOME 287
TAX & ANR. [D.K. JAIN, J.]
22. In Commissioner of Income Tax, Madr~s Vs.
A
Kumbakonam Mutual Benefit Fund Ltd., 12 this Court
differentiated the facts of the case before it from those of Styles
case (supra) and denied the exemption of mutuality because
of the taint of commerciality. It was observed thus:
"It seems to us that it is difficult to hold that Style's case
B
applies to the facts of the case. A shareholder in the
assessee company is entitled to participate in the profits
without contributing to the funds of the company by taking
loans. He is entitled to receive his dividend as long as he
holds a share. He has not to fulfil any other condition. His C
position is In no way different from a shareholder in a
banking company, limited by shares. Indeed, the position
of the assessee is no different from an ordinary bank
except that it lends money to and receives deposits from
its shareholders. This does not by itself make its income
D
any the less income from business within S. 10 of the Indian
Income Tax Act."
,
23. However, at what point mutuality ends and
con:imerciality begins is a difficult question of fact. It is best
E
summarized in Bankipur Club (supra) wherein this Court
echoed the following views:
" ... if the object of the assessee company claiming to be a
"mutual concern" or "club'', is to carry on a particular
business and money is realised both from the members
F
and from non-members, for the same consideration by
giving the same or similar facilities to all alike in respect
of the one and the same business carried on by it, the
dealings as a whole disclose the same profit earning
motive and are alike tainted with commerciality. In other G
words, the activity carried on by the assessee in such
cases, claiming to be a "mutual concern" or
"members' club" is a trade or an adventure in the nature
12. AIR 1965 SC 96.
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of trade and the transactions entered into with the
members or non-members alike is a trade/business/
transaction and the resultant surplus is certainly profit -
income liable to tax. We should also state, that "at what
point, does the relationship of mutuality end and that of
B
trading begin" is a difficult and vexed question. A host of
factors may have to be considered to arrive at a
conclusion. "Whether or not the persons dealing with each
other, is a 'mutual club' or carrying on a trading activity or
an adventure in the nature of trade", is largely a question
c
of fact [Wilcock's case - 9 Tax Cases 111, (p.132);
C.A. (1925) (1) KB 30 at p. 44 and 45]."
24. In Royal Western India Turf Club Ltd. (supra), this
Court made similar observations, holding that it is not always
the case that a legal entity cannot make profits out of its
D members. It held as follows :
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H
"14 ... The principle that no one can make a profit out of
himself is true enough but may in its application easily lead
to confusion.