Socialising clubs serving memberships to organisations including banks on a fee kept as fixed deposit by the new entrants are liable to pay tax on the interest accrued on the deposits.

A Supreme Court ruling says tax is not exempted in case the arrangement between a club and member- banks lacks a complete identity between the contributors and participators.

Dismissing suits filed Bangalore Club and other private clubs which are open for the members exclusively, the SC said with the funds of the club, member-banks are engaged in commercial operations with third parties outside of the mutuality, rupture the ‘privity of mutuality’, and consequently violate the one to one identity between the contributors and participators. In the instant case, 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 party, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality.

The banks generated revenue by paying a lower rate of interest to the assessee-club and loaning the funds to third party. 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,” a bench of justices DK Jain and Jagdish Singh Khehar ruled. “Such setups cannot be permittedto claim double benefit of mutuality,” judges said.