The interest earned by association will be taxable in the hands of association.
In this regards, please find the judgement below:
A Landmark Judgement passed by Supreme Court on 14-January-2013, gives great clarity on “Principles of Mutuality”, under which the Tax Exemption of Societies is also justified.
M/s Bangalore Club vs. Commissioner of Income Tax (CIT)
The Bangalore Club (an Association of People, AOP) created Fixed Deposits with Banks which are also Members of the Club. It claimed that the Interest earned on these Fixed Deposits should be exempt from Income Tax, as the Income is subject to the Principle of Mutuality. Commissioner of Income Tax claimed to the contrary.
“In our opinion, unlike the surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee (Bangalore Club) from the member banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club.
The surplus funds in the hands of the assessee (Bangalore Club) 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 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.” – D.K. JAIN AND JAGDISH SINGH KHEHAR, JJ
Feel free to revert in case of any further queries.
Thanks and Regards,
CA Abhishek Dugar