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AUGUST 27, 2011 Section 4 of the Income-tax Act, 1961 - Mutual concern - Assessable as - Assessment year 1996-97 - Principle of mutuality ends moment assessee-club deposited surplus amount with sole aim of earning interest on deposits [In favour of revenue] The assessee was a social and recreational club. It was not registered either as an association or a society. It received monthly subscriptions, admission/entrance fee and payments made by its members for use of club facilities. During the relevant assessment year, the assessee earned interest on the fixed deposits kept by it with some banks and companies and such interest was claimed as exempt citing the principle of mutuality. The Tribunal allowed the claim of the assessee holding that the interest accrued to the assessee-club from its deposits with banks and financial institutions, which were its corporate members, were not tainted with commerciality; and that such interest income was not taxable on the principle of mutuality. Held that the object of the assessee was to take up social activities including sports and recreation. The rules nowhere required the club to deposit its surplus with banks. The principle of mutuality as invoked in Styles[1889] 2 TC 460 requires repayment to the members the amount in excess than what is needed. The principle of mutuality ended the moment the club deposited the amount with the sole aim of earning interest on the deposits. Further, by depositing its funds with its corporate member banks, the assessee would certainly help increase the business of the bank. In that view of the matter, the corporate member bank was being shown a favour, and was not being provided a facility. Even the bank had not applied any special rules to govern the clubs' deposits. Therefore, it was difficult to accept the assessee's contention that interest income was non-taxable. Therefore, the impugned orders of the Tribunal were liable to be set aside. CASE REVIEW CIT v. Natraj Finance Corpn. [1988] 169 ITR 732/[1987] 35 Taxman 280 (AP)followed. CIT v. Delhi Gymkhana Club Ltd. [2011] 339 ITR 525/10 taxmann.com 114 (Delhi)dissented from. CASES REFERRED TO CIT v. Cawnpore Club Ltd. [2004] 140…

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