Mutuality vs Interest Taxation of Welfare Societies

The case before the Delhi ITAT concerned an employees’ welfare society that received subscriptions from members and earned interest income from bank deposits. The society claimed that member subscriptions were exempt under the doctrine of mutuality and that even the interest receipts should effectively be neutralized by payments made to members in the form of welfare benefits. The Assessing Officer held that interest earned on fixed deposits and savings accounts with banks was taxable because it arose from transactions with third parties. The Tribunal observed that the society’s primary objective was to build and maintain a welfare corpus for employees and their families. Since substantial payments such as death claims, retirement benefits, and pension payments had been made during the year, these payments could legitimately be appropriated against the interest receipts before determining taxable income. Therefore, the Tribunal held that the tax authorities had erred in refusing such set-off and directed the Assessing Officer to recompute the income after adjusting the payments made to members.