Supreme Court of India
SECUNDRABAD CLUB ETC.versusC.I.T.-V ETC.
- Citation
- 2023 INSC 736
- Decided
- 17 August 2023
- Disposal
- Dismissed
- Bench
- B V NAGARATHNA
Holding
Interest earned on fixed deposits by clubs is taxable as income from other sources because the principle of mutuality does not apply, and the Bangalore Club judgment remains binding and is not per incuriam.
Summary
The appellants, a group of social clubs including Secunderabad Club, deposited surplus funds in various banks, some of which were corporate members of the clubs, and earned interest on those fixed deposits. The central issue was whether such interest income fell within the ambit of the principle of mutuality and therefore should be exempt from tax under the Income Tax Act, 1961, or whether it should be taxed as income from other sources. The Supreme Court applied the three‑pronged test for mutuality and held that the deposits, once placed with banks, were exposed to commercial banking operations, breaking the identity between contributors and participants and thus disqualifying the income from the mutuality exemption. The Court also clarified that the earlier order in Cawnpore Club does not constitute a binding precedent and therefore does not compel reconsideration of the Bangalore Club judgment. Consequently, the interest earned on the fixed deposits is taxable, and the Bangalore Club decision remains the correct law. The appeals were dismissed.
Issues considered
- Whether interest earned by clubs on fixed deposits in banks is taxable or exempt under the principle of mutuality.
- Whether the principle of mutuality applies when the banks are corporate members of the clubs.
- Whether the judgment in Bangalore Club should be reconsidered in light of the order in Cawnpore Club.
- Whether the order in Cawnpore Club constitutes a binding precedent under Article 141 of the Constitution.
- Whether the Karnataka High Court's decision in Canara Bank is a binding precedent for subsequent cases.
Legislation cited
- Income Tax Act, 1961s. 2(24)
Subjects
principle of mutualityincome taxfixed depositsinterest incomeclubsprecedentArticle 141taxabilityBangalore ClubCawnpore ClubSupreme Court
Judgment
[2023] 12 S.C.R. 979 : 2023 INSC 736
CASE DETAILS
SECUNDRABAD CLUB ETC.
v.
C.I.T.-V ETC.
(Civil Appeal Nos. 5195-5201 of 2012)
AUGUST 17, 2023
[B. V. NAGARATHNA AND
PRASHANT KUMAR MISHRA, JJ.]
HEADNOTES
Issues for consideration: Whether the deposit of surplus funds by the
assessee Clubs by way of bank deposits in various banks is liable to be taxed
in the hands of the Clubs or, whether, the principle of mutuality would apply
and the interest earned from the deposits would not be subject to tax under
the provisions of the Income Tax Act, 1961; and whether the judgment of
this Court in *Bangalore Club’s case would call for reconsideration in light
of the order of this Court in **Cawnpore Club’s case.
Income Tax Act, 1961 – s. 2(24) – Deposit of surplus funds by the
Clubs by way of bank deposits in various banks – Interest earned on
the fixed deposits, if liable to be taxed in the hands of the clubs:
Held: Interest income earned on fixed deposits made in the banks
by the assessee Clubs has to be treated like any other income from other
sources within the meaning of s. 2(24) and the principle of mutuality would
not apply – Conversely, if any income is earned by the Clubs through its
assets and resources, from persons who are not members of the Clubs, such
income would also not be covered under the principle of mutuality and
would be liable to be taxed under the provisions of the Income Tax Act.
[Para 43 (ii), (v), (vi)]
Income Tax Act, 1961 – *Bangalore Club vs. Commissioner of
Income Tax’s case wherein it was held that the amount of interest
earned by the assessee club from the banks would not fall within the
ambit of the mutuality principle and would be exigible to income tax
979
980 SUPREME COURT REPORTS [2023] 12 S.C.R.
in the hands of the assessee – Reconsideration of, in view of the earlier
order of this Court in **Cawnpore Club’s case:
Held: Reasoning given by the Coordinate Bench of this Court
in *Bangalore Club’s case is just and proper – It would not call for
reconsideration even when viewed in light of the previous Order of this
Court in **Cawnpore Club’s case – Judgment in *Bangalore Club is not
per incuriam although, the earlier Order passed by a Coordinate Bench of
this Court in the case of **Cawnpore Club was not noticed in *Bangalore
Club – Principle of mutuality would not apply to interest income earned
on fixed deposits made by the appellant Clubs in the banks irrespective
whether the banks are corporate members of the club or not – Said judgment
in *Bangalore Club’s case holds the field. [Para 5, 26-28, 39, 41 and 43
(ii), (iii), (vii)]
Constitution of India – Art. 141 – Declaration of law – Binding
effect of – **Commissioner of Income Tax vs. M/s Cawnpore Club Ltd.’s
case, if a binding precedent:
Held: Order of this Court in **Cawnpore Club’s case cannot be
treated as a precedent within the meaning of Art. 141 as the said order does
not declare any law – Appeals filed by the revenue as against **Cawnpore
Club were disposed of without going into the larger question as to whether
**Cawnpore Club could be taxed on the interest income earned on fixed
deposits made by it in the banks, or whether the principle of mutuality
would apply to the said income – There is no ratio decidendi emanating
from the said order which would be a binding precedent for subsequent
cases – **Cawnpore Club’s case ought not to have been taken note of and
considered by a Co-ordinate Bench of this Court while deciding the case of
*Bangalore Club – Order passed in **Cawnpore Club binds only the parties
in those appeals and cannot be understood as a precedent for subsequent
cases. [Para 11, 26, 27 and 43 (i)]
Constitution of India – Art. 141 – Declaration of law – Binding
effect of – Judgment of the Karnataka High Court in ***Canara Bank’s
case, if a binding precedent –
Held: Judgment of the Division Bench of the Karnataka High Court
in ***Canara Bank must be restricted to apply to the facts of the said case
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 981
alone though the special leave petition filed against the said judgment was
dismissed by this Court – It cannot be a precedent for subsequent cases –
Judgment of another Division Bench of the said High Court in the case of
*Bangalore Club was not brought to the notice of the Division Bench, which
rendered the judgment in the case of ***Canara Bank – It is the judgment
of the Division Bench of the said High Court in *Bangalore Club that has
been sustained by a Coordinate Bench of this Court by a detailed reasoning.
[Para 28 and 43 (iv)]
Doctrines/ Principles – Principle of mutuality in the context of
Income Tax Laws:
Held: Principle of mutuality is rooted in common sense – A person
cannot make a profit from herself – This implies that a person cannot earn
profit from an association that he shares a common identity with – Essence of
the principle lies in the commonality of the contributors and the participants
who are also beneficiaries – There has to be a complete identity between
the contributors and the participants – Thus, it follows, that any surplus in
the common fund shall not constitute income but will only be an increase
in the common fund meant to meet sudden eventualities. [Para 8.1]
Doctrines/ Principles – Principle of mutuality – Evolution of, in
India – Discussed. [Paras 8.5 to 8.9.11]
Doctrines/Principles – Principle of mutuality – Applicability of,
with regard to the interest income earned on fixed deposits made in
banks/financial institutions by the appellant Clubs, in the backdrop of
the dictum of this Court in the case of Bangalore Club – Triple test for
applying the principle of mutuality – Explained and reiterated. [Paras
31-37]
Ratio decidendi – Importance and explanation of:
Held: Ratio decidendi of a judgment is the reason assigned in support
of the conclusion – It can be discerned only upon reading of a judgment in
its entirety and the same has to be culled out thereafter – Ratio of the case
has to be deduced from the facts of the case and the particular provision of
law interpreted or applied by the court and the decision has to be read in the
context of the particular statutory provisions involved in the matter – Ratio
or the basis of reasons and principles underlying a decision is distinct from
982 SUPREME COURT REPORTS [2023] 12 S.C.R.
the ultimate relief granted or manner of disposal adopted in a given case –
Thus, the ratio decidendi of a judgment is binding as a precedent and not
the final order in the judgment. [Para 13, 17 and 18]
Constitution of India – Art. 141 – Binding precedent – Principle
and purpose:
Held: In terms of Art. 141, the ratio of the judgment is the binding
precedent – Ratio decidendi of a judgment is the reason assigned in support
of the conclusion – Legal principle underlying the decision would be binding
as a precedent for a subsequent case – Thus, while applying a decision to a
later case, the court dealing with it has to carefully ascertain the principle
laid down in the previous decision – Decision in a case takes its flavour
from the facts of the case and the question of law involved and decided –
However, a decision which is not express and is neither founded on any
reason nor proceeds on a consideration of the issue cannot be deemed to be
law declared, so as to have a binding effect as is contemplated u/Art. 141 –
Decision applicable only to the facts of the case cannot be treated as a binding
precedent – An order made merely to dispose of the case cannot have the
value or effect of a binding precedent – Doctrine of binding precedent helps
in promoting certainty and consistency in judicial decisions and enables an
organic development of the law besides providing assurance to individuals
as to the consequences of transactions forming part of daily affairs.
[Para 16, 18, 19 and 22]
Judicial discipline – Facet of:
Held: Art. 141 states that all the courts in India, are bound to follow
the decisions of the Supreme Court – This principle is an aspect of judicial
discipline – Constitution of India – Art. 141. [Para 16]
Obiter dictum – Meaning and purpose:
Held: Obiter dictum is an observation by a court on a legal question
which may not be necessary for the decision pronounced by the court –
However, the obiter dictum of the Supreme Court is binding u/Art. 141 to
the extent of the observations on points raised and decided by the Court in
a case – Though the obiter dictum of the Supreme Court is binding on all
courts, it has only persuasive authority as far as the Supreme Court itself
is concerned. [Para 20]
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 983
Judgment/order – Interpretation of:
Held: Words used in a judgment are not to be interpreted as those of
a statute – Words used in a judgment should be rendered and understood
contextually and are not intended to be taken literally – Decision is not
an authority for what can be read into it by implication or by assigning
an assumed intention of the judges and inferring from it a proposition of
law which the judges have not specifically or expressly laid down in the
pronouncement – Decision is an authority for what is specifically decided
and not what can logically be deduced therefrom. [Para 21]
LIST OF CITATIONS AND OTHER REFERENCES
*Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC
509:[2013] 1 SCR 267 – held a good law and relied on.
**Commissioner of Income Tax vs. M/s Cawnpore Club Ltd.,
Kanpur (2004) 140 Taxman 378 (SC); Commissioner of Income Tax,
Bihar vs. Bankipur Club Ltd., (1997) 5 SCC 394:[1997] 1 Suppl. SCR
263; ***Canara Bank Golden Jubilee Staff Welfare Fund vs. Deputy
Commissioner of Income Tax, (2009) 308 ITR 202; Natraj Finance
Corporation, (1988) 169 ITR 732; Chelmsford Club (2000) 243 ITR 89;
I.T.I. Employees Death and Superannuation Relief Fund, (1998) 234 ITR
308 (Kar); Commissioner of Income Tax vs. Common Effluent Treatment
Plant, (Thane-Belapur) Association, (2010) 328 ITR 362; Madras
Gymkhana Club Vs. Deputy Commissioner of Income Tax (2010) 328
ITR 348 (MAD); State of West Bengal vs. Calcutta Club Ltd., (2019) 19
SCC 107; Kunhayammed vs. State of Kerala, (2000) 6 SCC 359:[2000]
1 Suppl. SCR 538; Fateh Maidan Club vs. Assistant Commissioner of
Income Tax ITA Nos.937, 939, 947and 952/Hyd/1995 and 716 to 720/
Hyd/2000, Asst. yrs. 1983-84 to 1997-98 dated 13.08.2023; Jubilee Hills
International Centre vs. Income Tax Officer 2023 SCC OnLine TS 41; CIT
vs. Venkatesh Premises Coop. Society Ltd., (2018) 15 SCC 37:[2018] 3 SCR
214; Royal Calcutta Turf Club vs. Secretary of State, (1921) ILR 48 Cal
844 : AIR (1921) Cal 633 : (1921) 1 ITC 108; English and Scottish Joint
Co-Operative Wholesale Society, Ltd. vs. Commissioner of Agricultural
984 SUPREME COURT REPORTS [2023] 12 S.C.R.
Income- Tax, 1948 SCC OnLine PC 41; CIT vs. Royal Western India Turf
Club Ltd., AIR 1954 SC 85:[1954] SCR 289; Kunhayammed vs. State
of Kerala, AIR (2000) SC 2587:[2000] 1 Suppl. SCR 538; Patna Golf
Club vs. CIT, 2016 SCC OnLine Patna 2067 (Misc. Appeal No. 541 of
2007); Sports Club of Gujarat Ltd. vs. CIT, 171 ITR 504; B. Shama Rao
vs. Union Territory of Pondicherry, AIR 1967 SC 1480:[1967] SCR 650;
Dalbir Singh vs. State of Punjab, (1979) 3 SCC 745:[1979] 3 SCR 1059;
State of Uttar Pradesh vs. Synthetics and Chemicals Ltd. (1991) 4 SCC
139:[1991] 3 SCR 64; Sanjay Singh vs. Uttar Pradesh Public Service
Commission, Allahabad; (2007) 3 SCC 720:[2007] 1 SCR 235; DTC vs.
DTC Mazdoor Congress Union, AIR 1991 SC 101:[1990] 1 Suppl. SCR
142; Yum! Restaurants (Marketing) Pvt. Ltd. vs. Commissioner of Income
Tax, Delhi, (2021) 7 SCC 678; Keshav Mills Co. Ltd. vs. CIT, (1965) 2
SCR 908 – referred to.
New York Life Insurance Co. vs. Styles (Surveyor of Taxes), (1886-90)
All ER Rep Ext 1362; Last vs. London Assurance Corporation, 10 App.
Cas. 438; Walter Fletcher on his own behalf and on behalf of Trustees and
Committee of Doctor’s Cave Bathing Club vs. the Commissioner of Income
Tax (1971) UKPC 30; The Carlisle & Silloth Golf Club vs. Smith, (1912) 6
TC 48; Revesby Credit Union Cooperative Ltd. vs. Federal Commissioner
of Taxation, (1965) 112 CLR 564; Bohemians Club vs. Acting Federal
Commissioner of Taxation, (1918) 24 CLR 334; Equitable Life Assurance
Society of the United States vs. Bishop, (1900) 1 QB 177; Re: Commissioner
of Taxation And: Australian Music Traders Association, (1990) FCA 261;
Jones vs. South-West Lancashire Coal Owners’ Association Limited, (1927)
AC 827; Municipal Mutual Insurance Limited vs. Hills, (1932) 16 TC
430; Social Credit Savings and Loans Society Limited vs. Commissioner
of Taxation, (1971) 125 CLR 560; Sydney Water Board Employees’ Credit
Union Limited vs. Commissioner of Taxation, (1973) 129 CLR 446;
Quinn vs. Leathem, 1901 AC 495 (HL); Qualcast (Wolverhampton) Ltd.
vs. Haynes, 1959 AC 743; Mersey Docks vs. Lucas, 8 App. Cas. 891 –
referred to.
Halsbury’s Laws of England, 4th Edn., Reissue, Vol.23, Paras 224
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 985
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
Civil Appellate Jurisdiction: Civil Appeal Nos. 5195-5201 of 2012.
From The Judgment And Order Dated 27.08.2011 Of The High Court
Of Andhra Pradesh, Hyderabad In I.T.T.A. Nos.422, 529, 530, 531, 532,
533 Of 2006 And 244 Of 2010.
With
CIVIL APPEAL NOS.5233, 5235-5237 OF 2023, SLP (C) NOS.16817,
16819, 16818 OF 2011, CIVIL APPEAL NOS.5202-5209, 5210-5217,
5218-5219, 5220-5227, 5229, 5231, 5232, 5238-5240, 5241-5243, 5244-
5246, 5247-5249 OF 2023, SLP (C) NO.13986 OF 2011, CIVIL APPEAL
NOS.5201, 5228, 5230, 5234 OF 2023
Appearances:
Arvind P. Datar, Firoze B. Andhyarujina, Pritesh Kapur, Sr. Advs.,
D. Abhinav Rao, Maneck Andhyarujina, Rahul Jajoo, Ms. Prerna Robin,
Devadipta Das, Ms. Radha Rangaswamy, Ms. Ranjeeta Rohatgi, Ms.
Shrika Gautam, M. P. Senthil Kumar, V. Prabakar, N. J. Ramchandar, Ms.
Jyoti Parashar, R. Chandrachud, A. Radhakrishnan, Pratap Venugopal, Ms.
Surekha Raman, Rahul Unnikrishnan, Prashant Kumar Nair, Abhishek
Anand, Shreyash Kumar, M/s. K J John and Co, K. K. Mani, Ms. T. Archana,
Rajeev Gupta, Vinay Rajput, Advs. for the Appellants.
Balbir Singh, A.S.G., Arijit Prasad, Mrs. Gargi Khanna, Mrs. Alka
Agarwal, A. K. Kaul, Prashant Singh Ii, Shyam Gopal, Santosh Kumar,
Prahlad Singh, Vijaynand Tripathi, Indrajit Prasad, Raj Bahadur Yadav,
Mrs. Anil Katiyar, Advs. for the Respondents.
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
NAGARATHNA, J.
Since leave has been granted in Special Leave Petition Nos. 035895-
035901 of 2011, in the connected matters also leave is granted.
986 SUPREME COURT REPORTS [2023] 12 S.C.R.
2. In these cases, since common questions of law and facts arise, they
have been clubbed together and are heard and disposed of by this common
judgment. These appeals arise from the High Courts of Andhra Pradesh
at Hyderabad pertaining to Secunderabad Club and the Madras High
Court pertaining to Madras Gymkhana Club, Madras Cricket Club, The
Coimbatore Cosmopolitan Club, Madras Club, M/s Wellington Gymkhana
Club and M/s the Coonoor Club.
Bird’s eye view of the controversy:
3. A short but interesting question of law arises in these cases, which
is, whether the deposit of surplus funds by the appellant Clubs by way
of bank deposits in various banks is liable to be taxed in the hands of the
Clubs or, whether, the principle of mutuality would apply and the interest
earned from the 1deposits would not be subject to tax under the provisions
of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for the
sake of convenience). The High Courts in the impugned judgments have
uniformly held that the interest earned on the bank deposits made by the
clubs is liable to be taxed in the hands of the clubs and that the principle of
mutuality would not apply.
4. In the above context, the pertinent controversy is whether, the
judgment of this Court in the case of Bangalore Club vs. Commissioner
of Income Tax, (2013) 5 SCC 509 (“Bangalore Club”) calls for
reconsideration in view of the earlier order of this Court in Commissioner
of Income Tax vs. M/s Cawnpore Club Ltd., Kanpur (“Cawnpore Club”)
disposed of by this Court on 05.02.1998 reported in (2004) 140 Taxman
378 (SC).
5. While considering the above controversy, we dispose of these
appeals by holding that the judgment in Bangalore Club does not call for
reconsideration and these appeals could be disposed of in terms of the said
judgment. We proceed to delineate on the subject and support our conclusion
by first discussing the cases concerning Commissioner of Income Tax, Bihar
vs. Bankipur Club Ltd., (1997) 5 SCC 394 (“Bankipur Club”); Cawnpore
Club and Bangalore Club.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 987
[B. V. NAGARATHNA, J.]
Triology of cases:
a) Bankipur Club
In this case, twenty-three cases including seven appeals which were
de-linked were classified into five groups which are as under:
(i) Group A concerned the question with regard to profits arising
from the sales made to regular members of a club, being
entitled to exemption on the doctrine of mutuality.
(ii) Group B was with regard to the question, whether, the income
derived by a club from its house property let to its members
and their guests was not chargeable to income tax and whether
income derived by a club from the sale of liquor to its members
and their guests was not taxable in its hands.
(iii) Group C cases pertained to the question, whether, chambers in
the building of a club let out to members, annual value of a club
house and pavilions and income earned from such properties
owned by a club was liable to be taxed.
(iv) Group D cases were with regard to the question as to whether,
an association consisting of film distributors and exhibitors
incorporated as a company under Section 25 of the Companies
Act, 1956 was liable to be taxed in respect of (a) admission fees,
readmission fees, periodical subscriptions from the members
etc., under the head “others” and (b) service charges from the
members for rendering specific services to the members under
the head “service to the members”, or the same would not be
taxable on the principle of mutuality.
(v) Group E concerned cases where the assessee clubs had derived
income from property let out and also interest received from
Fixed Deposit Receipt (FDR), National Savings Certificate
(NSC), etc. by the clubs.
Paragraphs 4 and 19 of the Bankipur Club are relevant and they read
as under:
4. …. the appeals coming within Group E — CIT v. Cawnpore
Club Ltd. (seven appeals) are de-linked and they will be posted
988 SUPREME COURT REPORTS [2023] 12 S.C.R.
separately to be heard on merits. We shall indicate the reason for
this a little later.
XXX
19. The above four sets of cases falling in Groups A to D shall
alone be covered by this judgment. With regard to 7 cases/appeals
falling in Group E, the assessee is Cawnpore Club Ltd. It is seen that
the income that was sought to be assessed in the case of the assessee,
was one derived from property let out and also interest received from
FDR, NSC etc. In these cases, the Court held that income should be
assessed as one from “other sources” and not income from property.
It does not appear that the larger plea that the income is totally
exempt on the principle of mutuality, was decided in favour of the
assessee. In the appeals filed by the Revenue, the only question that
may probably arise is, whether income received from the property
let out and interest by way of FDRs, NSC etc. can be brought to tax
under the head “income from property”. Since the issue raised in this
batch of seven cases is not similar to or same as the one involved in
the other cases coming under Groups A to D, we do not propose to deal
either with the facts or the decisions rendered by the authorities in this
batch of cases (Group E). All that we propose to do is to de-link the
cases coming under Group E and direct them to be posted separately
for hearing and disposal before an appropriate Bench.
(emphasis by us)
b) Cawnpore Club:
Subsequent to de-linking of Group E cases in respect of Cawnpore
Club, the order dated 05.02.1998 passed in those batch of appeals which
formed Group E cases reads as under:
“IN THE SUPREME COURT OF INDIA
Civil Appeal Nos. 4777-78 of 1989,4534 of 1991,1773 of
1992,4303 of 1995, 3840 of 1996 and 8046 of 1995
5 February 1998
Decided On: 05.02.1998
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 989
[B. V. NAGARATHNA, J.]
Appellants: Commissioner of Income Tax
Vs.
Respondent: Cawnpore Club Ltd.
In the Supreme Court of India B.K Kirpal & S.P. Kurdukar, JJ.
ORDER
1. One of the questions which the High Court had decided in
other cases relating to the same assessee was that the doctrine of
mutuality applied and, therefore, the income earned by the assessee
from the rooms let out to its members could not be subjected to tax.
No appeal had been filed against the said decision and the matters
stood concluded as far as the assessee was concerned. This being so,
no useful purpose would be served in proceeding with the appeals on
the other questions when the respondent cannot be taxed because of
the principle of mutuality.
2. The appeals were accordingly dismissed. No order as to costs.”
(emphasis by us)
The aforesaid order was passed by a two-Judge Bench of this Court
on 05.02.1998.
c) Bangalore Club:
Thereafter, the decision in the case of Bangalore Club was rendered
by another two Judge Bench on 14.01.2013.
In Bangalore Club, the question was, whether, for the relevant
assessment years, the said Club rightly sought an exemption from
payment of income tax on the interest earned on the fixed deposits kept
with certain banks, which were corporate members of the said club, on
the basis of doctrine of mutuality. However, tax was paid on the interest
earned on fixed deposits kept with non-member banks. In the said case,
surplus amounts of the said Club were deposited in four banks which
were members of the said Club. The question that arose was, whether,
the principle of mutuality would apply to the funds deposited in the said
four banks. Having regard to the fact that the said funds were raised
from contribution of several members including the four banks which
990 SUPREME COURT REPORTS [2023] 12 S.C.R.
were corporate members of the said Club and the interest derived from
it was utilised by several members of the assessee Club, in the said case,
the High Court nevertheless held that the principle of “no man can trade
with himself” would not be available in respect of a nationalised banks
holding a fi xed deposit on behalf of its customer. That the relationship is
one of a banker and a customer. Consequently, the High Court reversed
the decision of the Tribunal and restored the order of the assessing officer.
Hence, an appeal was filed by the assessee Bangalore Club before this
Court.
The question for determination before this Court was, whether, or not
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. After appreciating the general understanding
of the doctrine of mutuality in the context of the provision of the Act and by
referring to New York Life Insurance Co. vs. Styles (Surveyor of Taxes),
(1886-90) All ER Rep Ext 1362 (“Styles”) and other judgments of the House
of Lords and the High Court of Australia and by referring to the Simon’s
Taxes Vol. B. 3rd Edn., Paras B1.218 and B1.222 (pp.159 and 167) it was
observed as under:
“18. In short, there has to be a complete identity between 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 and Palkhivala explain this concept in The Law and Practice
of Income Tax (8th Edn., Vol. I, 1990) at p. 113 as follows:
“1. Complete identity between contributors and
participators.- ‘… 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 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 amongst
themselves: it is enough if they have a right of disposal over
the surplus, and in exercise of that right they may agree that on
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 991
[B. V. NAGARATHNA, J.]
winding up the surplus will be transferred to a similar association
or used for some charitable objects.”
(emphasis supplied)
XXX
22. The second feature demands that the actions of the
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, since the
appellant 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.
23. 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 organisation, 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 organisation indirectly, in the long run. Space must
be made for both such forms of interactions between the organisation
and its members. Therefore, as Finlay, J. observed in National Assn. of
Local Govt. Officers v. Watkins (Inspector of Taxes), where member
of a club orders dinner and consumes it, there is no sale to him. At
the same time, as in CIT v. Bankipur Club Ltd., 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 eventually be
used in furtherance of the services of the club must be considered as
a furtherance of the mandate of the club.
24. 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 (Inspector of Taxes) v.
992 SUPREME COURT REPORTS [2023] 12 S.C.R.
Richard Evans & Co. Ltd. wherein, while interpreting Styles case,
he held that if profits are distributed to shareholders as shareholders,
the principle of mutuality is not satisfied. He observed thus: (Richard
Evans case, KB pp. 46-47)
“… 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 is 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 Styles 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 of those
who have paid it. That, as I understand [it], is the effect of the
decision in Styles case .”
(emphasis supplied)
XXX
28. This brings us to the facts of the present case. As aforesaid,
the assessee 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.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 993
[B. V. NAGARATHNA, J.]
Therefore, we are required to examine the case of the assessee, in
relation to the interest earned on fixed deposits with the member banks,
on the touchstone of the three cumulative conditions, enumerated
above.
29. Firstly, the arrangement lacks a complete identity between the
contributors and participators. Till the stage of generation of surplus
funds, the set-up resembled that of a mutuality; the flow of money,
to and fro, was maintained 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 commercial banking operations. During the course
of their banking business, the member banks used such deposits to
advance loans to their clients. Hence, in the present case, with the
funds of the mutuality, the member banks engaged in commercial
operations with third parties outside of the mutuality, rupturing the
“privity of mutuality”, and consequently, violating the one-to-one
identity between the contributors and participators as mandated by
the first condition. Thus, in the case before us the first condition for a
claim of mutuality is not satisfied.
30. As aforesaid, the second condition demands that to claim
an exemption from tax on the principle of mutuality, treatment of the
excess funds must be in furtherance of the object of the club, which is
not the case here. In the instant case, the surplus funds were not used
for any specific service, infrastructure, maintenance or for any other
direct benefit for the member of the Club. These were taken out of
mutuality when the member banks placed the same at the disposal of
third parties, thus, initiating an independent contract between the bank
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 categorised as an activity of the Club in pursuit
of its objectives. It needs little emphasis that the second condition
postulates a direct step with direct benefits to the functioning of the
Club. For the sake of argument, one may draw remote connections
994 SUPREME COURT REPORTS [2023] 12 S.C.R.
with the most brazen commercial activities to a Club’s functioning.
However, such is not the design of the second condition. Therefore,
it stands violated.
31. The facts at hand also fail to satisfy the third condition of the
mutuality principle i.e. the impossibility that contributors should derive
profits from contributions made by themselves to a fund which could
only be expended or returned to themselves. This principle requires
that the funds must be returned to the contributors as well as expended
solely on the contributors. True, that in the present case, the funds do
return to the Club. However, before that, they are expended on non-
members i.e. the clients of the bank. The banks generate revenue by
paying a lower rate of interest to assessee Club, 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 the
banks to the outsiders for commercial reasons, in our opinion, snaps
the link of mutuality and thus, breaches the third condition.
32. There is nothing on record which shows that the banks made
separate and special provisions for the funds that 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 as elucidated in Styles and
Kumbakonam Mutual Benefit Fund Ltd. cases.”
XXX
34. In the present case, the interest accrues on the surplus
deposited by the Club like in the case of any other deposit made by
an account-holder with the bank.
XXX
37. We may add that 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 of by its
members, before it is deposited with the bank. This surplus amount
was not treated as income; since it was the residue of the collections
left behind with the Club. A façade of a club cannot be constructed
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 995
[B. V. NAGARATHNA, J.]
over commercial transactions to avoid liability to tax. Such set-ups
cannot be permitted to claim double benefit of mutuality. We feel that
the present case is a clear instance of what this Court had cautioned
against in Bankipur Club, when it said: (SCC p. 22, para 22)
“22. … 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 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 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 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 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 of fact. (Wilcock case, TC
p. 132 : KB at pp. 44 and 45.)”
(emphasis supplied)
38. In our opinion, unlike the aforesaid surplus amount itself,
which is exempt from tax under the doctrine of mutuality, the amount
of interest earned by the assessee from the aforenoted four 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.
Canara Bank:
Before proceeding to consider the submissions advanced at the Bar,
it would be useful to discuss Canara Bank Golden Jubilee Staff Welfare
Fund vs. Deputy Commissioner of Income Tax, (2009) 308 ITR 202 (Kar),
996 SUPREME COURT REPORTS [2023] 12 S.C.R.
(“Canara Bank”) as learned senior counsel, Sri Datar, has relied upon
the said judgment of the Division Bench of the High Court of Karnataka
authored by one of us, Nagarathna J. In the said case, it was held that
interest on investment and dividend on shares is governed by the principle
of mutuality and therefore, not taxable, by relying on the decisions in
Natraj Finance Corporation, (1988) 169 ITR 732 and Chelmsford Club
(2000) 243 ITR 89 and by distinguishing the decision in I.T.I. Employees
Death and Superannuation Relief Fund, (1998) 234 ITR 308 (Kar). The
aforesaid conclusion was based on the source of fund of the assessee during
the two relevant years. It was further observed therein that the source of
fund was wholly contributed by the members of the assessee during the
relevant assessment years and therefore, the income on the aforesaid two
heads was held to be not taxable. The Special Leave Petition filed against
the said judgment was dismissed by this Court by order dated 28.07.2009.
However, two other High Courts namely, the Bombay High Court
and the Madras High Court expressed reservations with respect to the
observations in Canara Bank. Speaking through Dr. D.Y. Chandrachud J.
(as the learned Chief Justice then was), the Bombay High Court observed
in Commissioner of Income Tax vs. Common Effluent Treatment Plant,
(Thane-Belapur) Association, (2010) 328 ITR 362 that the judgment in
Canara Bank had struck a divergent note and therefore, the said judgment
must be confined to the special facts as they occur in that case. The Karnataka
High Court, while dealing with the issue in Canara Bank placed a great
deal of emphasis on the source of funds of the assessee. The Karnataka High
Court clarified that it was making it clear that its conclusion “is based on
the source of funds of the assessee during the two relevant years”. It was
pointed out that the mere fact that the funds which were invested in fixed
deposits with the banks were funds which originated from the contributions
made by the members of the assessee cannot conclude the question as
regards the taxability of the receipts on account of interest obtained from
the investment of these funds. According to the Bombay High Court these
receipts must partake the character of income from other sources and would
be exigible to tax.
In Madras Gymkhana Club Vs. Deputy Commissioner of Income
Tax (2010) 328 ITR 348 (MAD) a Division Bench of the Madras High
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 997
[B. V. NAGARATHNA, J.]
Court observed that whatever was stated in Canara Bank will have to be
construed in the special facts and circumstances of that case and it cannot
have universal application. It was further observed that investment of surplus
fund with some of the member banks and other institutions in the form of
fixed deposits and security which in turn result in earning interest cannot
be held to satisfy the mutuality concept.
Submissions:
6. In the above backdrop of decisions of this Court as well as High
Courts on the point of controversy, we shall now consider the rival
submissions.
Submissions of Appellants:
6.1 The central theme of the submissions advanced by Sri Arvind
Datar, learned senior counsel appearing for some of the appellant Clubs is
that the two judge Bench Judgement of this Court in Bangalore club is not
a binding precedent and therefore the same calls for reconsideration. In this
regard, our attention was drawn to the order of another two-Judge Bench
of this Court in the case of Cawnpore Club to contend that the judgment
in Bangalore Club does not notice the order passed in Cawnpore Club,
the latter being in favour of appellant – assessees herein, and therefore,
the judgment in Bangalore Club calls for reconsideration. In this regard,
the judgment of the Karnataka High Court in Canara Bank was referred
to and relied upon to contend that the principle of mutuality would apply
even to interest earned from fixed deposits, National Savings Certificates
etc. invested by the appellant-Clubs in various banks who may or may not
be corporate members of these Clubs.
6.2 Elaborating on the said contentions, Sri Datar, submitted that
income by way of receipts by several clubs for supply of food and beverages,
admission fees, making available sporting and other facilities, or by way
of renting rooms, halls etc. are exempted from payment of income tax on
the basis of the principle of mutuality. That in Bankipur Club, this Court
had divided the cases into five groups (referred to above) and Group ‘E’
cases, which pertained to income earned from renting of rooms and interest
earned from Fixed Deposits, National Savings Certificates etc. were de-
998 SUPREME COURT REPORTS [2023] 12 S.C.R.
linked. There were seven cases in Group “E’ which were not decided in
Bankipur Club, but in the remaining cases, this Court upheld the principle
of mutuality as being applicable to the income earned by the Club and held
such income to be exempt from payment of income tax. In this regard, it was
highlighted that the services offered by a social club to its members are not
with any profit motive and therefore, were not tainted with commerciality.
Sri Datar submitted that subsequent to the delinking of the group “E” cases,
this Court in Cawnpore Club held that the Revenue had not appealed with
regard to the earnings from renting of rooms and that the other questions
which arose in those appeals also included the question of interest earned
on Fixed Deposit etc. invested in banks and it was held that such interest
was also not taxable on the principle of mutuality. Therefore, the investment
of surplus income made by the Clubs in the form of Fixed Deposits, Post
Office Deposits etc. were exempt from payment of income tax on the basis
of the mutuality principle.
6.3 It was next submitted that there is a direct conflict between the
view taken in the case of Cawnpore Club and the judgment of this Court in
Bangalore Club which are both two Judge Bench decisions. That from the
year 2004 onwards till 2013, when the judgment in Bangalore Club was
rendered by this Court, all interest earned from Fixed Deposits, Post Office
Deposits, by the clubs, was entitled to exemption from payment of income
tax since it was the surplus income of the clubs which was earned without
any profit motive which was invested in the Banks and Post Offices and the
interest income earned thereon was used exclusively for the benefit of the
clubs and its members. However, the judgment in Bangalore Club reversed
the entire prevalent view and denied exemption which was earlier available
to the clubs. Thereafter, various High Courts have followed the judgment of
this Court in Bangalore Club and have disregarded the earlier order passed
by this Court in Cawnpore Club, which is not proper.
6.4 Learned senior counsel Sri Datar contended that there are glaring
flaws in the reasoning of this Court in Bangalore Club and hence, the said
judgment also being contrary to the order passed in Cawnpore Club, is
not a binding precedent and is per incurium. Therefore, the judgment in
Bangalore Club ought to be reconsidered and the matter may be referred
to a larger Bench.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 999
[B. V. NAGARATHNA, J.]
6.5 In this context, Sri Datar submitted that the decision in the
Bangalore Club fails to note that when there is no profit motive in the
activities of a club and despite the fact that surplus income is generated, its
activities and income cannot be tainted with commerciality. That in the said
decision it was observed that the interest earned from fixed deposits made in
Banks, Post Offices etc. were held to be commercial in nature as the Banks
have used them for commercial operations by lending the said amounts to
third parties and earning a higher interest. Therefore, the essential ingredients
for the application of the principle of mutuality being ruptured, exemption
was not available to the banks, vis-à-vis, the interest income earned from
the fixed deposits was the reasoning, which is contrary to the order passed
in the case of Cawnpore Club.
6.6 In this context, it was further sought to be contended that when the
triple test for the applicability of the principle of mutuality is satisfied, the
notion of rupture of mutuality or one to one identity could not have been the
basis for denying the exemption from payment of income tax on the interest
income generated by the clubs. In this context, our attention was drawn to
another two-judge bench judgment of this Court in State of West Bengal vs.
Calcutta Club Ltd., (2019) 19 SCC 107 wherein this Court observed that
the principle of mutuality would apply to transactions covered within the
scope of Article 366 (29-A) (e) of the Constitution (that is on sale of food
and beverages and services rendered to the members of the club).
6.7 While placing heavy reliance on the order passed by this Court in
the case of Cawnpore Club which has not been noticed in the subsequent
judgment in Bangalore Club, it was contended by Sri Datar that the order
in Cawnpore Club attracts the doctrine of merger inasmuch as the judgment
of the Allahabad High Court had merged with the order of this Court and
consequently, the order of this Court became a binding precedent under
Article 141 of the Constitution. Therefore, for not referring to the said
precedent, the judgment in Bangalore Club is liable to be reconsidered.
In this context, reliance was placed on decision of this Court in the case of
Kunhayammed vs. State of Kerala, (2000) 6 SCC 359 (“Kunhayammed”)
to contend that when a special leave petition is converted into a Civil Appeal,
and a judgment is rendered in the Civil Appeal, the same is a binding
precedent to be followed subsequently by all courts unless this Court finds
that the said decision requires reconsideration, in which event, the matter
1000 SUPREME COURT REPORTS [2023] 12 S.C.R.
will have to be referred to a larger Bench. The same not having been done,
there are now two decisions which have taken diametrically opposite views,
namely, in the case of Cawnpore Club and in the case of Bangalore Club
and hence, this batch of cases may be referred to a larger Bench for laying
down the correct law on the point.
6.8 It was also submitted that the ITAT, Hyderabad Bench, in Fateh
Maidan Club vs. Assistant Commissioner of Income Tax in ITA Nos.937,
939, 947and 952/Hyd/1995 and 716 to 720/Hyd/2000, Asst. yrs. 1983-84
to 1997-98 dated 13.08.2023, has categorically noticed that this Court
had affirmed the judgment of the High Court in Cawnpore Club and had
held in favour of assessee on all issues including the issue as to whether
interest income earned by the clubs from fixed deposits made in the banks,
post offices etc. would be exempt from tax on the basis of the principle
of mutuality. Therefore, there was a consistency in the understanding of
the order passed by this Court in Cawnpore Club and the same has now
been diluted by the subsequent judgment of this Court in Bangalore Club.
Therefore, the matter requires reconsideration and it is necessary to revisit
and consider the correctness of the judgment of this Court in Bangalore
Club and hence, these appeals could be referred to a larger Bench.
6.9 Sri Andhyarjuna, learned senior counsel at the outset referred
to Sub-Section 24 of Section 2 of the Act which defines Income Tax and
particularly clause (vii) which speaks about the profits and gains of any
business of insurance carried on by a mutual insurance company or by
a co-operative society, computed in accordance with Section 44 or any
surplus taken to be profits and gains by virtue of provisions contained in
the First Schedule of the Act. That there is an express inclusion under the
said provision income earned by any business of insurance carried on by a
mutual insurance company or by a cooperative society but all other entities
such as social clubs do not come within the scope of the said provision.
The reason being that such entities do notearn any profits as such so as to
be included within the definition of income. In this regard, reference was
also made to Section 56 of the Actwhich speaks about income from other
sources. The said provision states that income of every kind which is not
to be excluded from the total income under the Act is chargeable to income
tax under the head, “Income from other sources” if it is not chargeable
to income tax under any of the heads specified under items (a) to (e) of
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1001
[B. V. NAGARATHNA, J.]
Section 14. Such income from other sources is in the nature of a revenue
receipt. In so far as social clubs and mutual associations are concerned
the character and nature of the receipt is immaterial. What is important is
utilisation of the income earned by a club, which is only for the benefit
of its members. Therefore, interest earned on fixed deposits made by the
clubs being a source of income, it would not matter as to whether it is a
capital or a revenue receipt.
6.10 It was next submitted that although the principle of mutuality is
not defined under the Act, the judicial precedent has been that income from
interest earned on fixed deposits is not taxable. But the judgment of this
Court in Bangalore Club has not taken into consideration the definition
of income, the facts as to utilisation of such income for the benefit of its
members of a club and the nuances of the principle of mutuality. Therefore,
the said judgment is not correct and is contrary to the previous of judgment
of this Court in Cawnpore Club.
6.11 It was next contended that although the decision in Cawnpore
Club is termed as an “Order” it is nevertheless a reaffirmation of the judgment
of the High Court, and therefore, the said “Order” would be a precedent for
subsequent cases. But in Bangalore Club, a coordinate Bench of this Court
has not considered the Order passed in Cawnpore Club and hence, there
are now two judgments which are diametrically opposite on the question
of the application of the principle of mutuality to interest income earned
by clubs. In this regard, our attention was also drawn to a judgment of the
Telengana High Court in Jubilee Hills International Centre vs. Income
Tax Officer reported in 2023 SCC OnLine TS 41, wherein it was observed
that the Tribunal was not justified in taking a view that the principle of
mutuality would not apply with reference to transactions entered into by
the appellant therein with regard to non-permanent or non-life members.
Learned senior counsel therefore, also contended that the judgment of this
Court in Bangalore Club requires reconsideration.
6.12 Learned senior counsel Sri Andhyarujinawith reference to the facts
in the case of Secunderabad Club submitted that it is an association of persons
which is a mutual association and the Club is a social or recreational Club
existing solely for the benefit of its members. The main object of the Club
is for promoting social activities including sports and recreation amongst
1002 SUPREME COURT REPORTS [2023] 12 S.C.R.
its members and various services can be availed by its members. That the
surplus income generated by the Club consists of payments made by the
members for use of the Club. The surplus income of the Club is deposited in
banks by way of fixed deposits, post offices, national savings certificates etc.,
which are the only modes in which the surplus income could be deposited
having regard to the provisions of the Act. Therefore, the said deposits
being surplus income generated by the Club from the members, through the
activities of the Club, the interest earned on the said deposits is also exempt
from payment of income tax on the principle of mutuality. It was submitted
that irrespective of whether the banks are corporate members of the club or
not, there is complete identity between the source of deposits made by the
Club in banks, post offices etc. and the beneficiaries of the interest earned,
as the interest earned on the said deposits are being used for the benefit of
the members of the Club. It was further submitted that the members of the
Club, as a class, contribute towards earning the surplus income and if the
same is deposited in a bank, which is a corporate member and interest is
earned which is ultimately used for the benefit of the members, the said
transaction would attract the principle of mutuality.
6.13 In this regard, it was pointed out that it was not right to reason that
when fixed deposits are made in banks by the clubs such as Secunderabad
club and such funds are utilised by the banks for their lending and other
business, there would be a rupture or diversion in the application of the
principle of mutuality. It was highlighted that when the surplus income of
the clubs is deposited in fixed deposit and interest earned on the said deposits
is ultimately accounted for in the kitty of the clubs to be utilised for the
benefit of the members of the clubs, there is no diversion of funds by the
clubs to any member or to non-members. Just like any prudent individual
who would invest surplus income in fixed deposits until the said amounts
are needed for use, in the same way the clubs, instead of keeping the surplus
income idle, are depositing the same in fixed deposits and when interest is
generated on the said deposits, the same would ultimately flow towards the
use and expenditure for the benefit of the members of the clubs. Therefore,
there is complete identity which is one of the essentials for application of
the principle of mutuality and the same has been explained in the case of
Calcutta Club with reference to the judgment in the case of Bangalore
Club. That the three-judge Bench in Calcutta Club has categorically
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1003
[B. V. NAGARATHNA, J.]
observed that the principle of mutuality is applicable to incorporated or
unincorporated clubs even after the 46th Amendment to Article 366 (29-A)
of the Constitution of India and therefore, by the said reasoning of the three-
Judge Bench, the judgment in Bangalore club would call for reconsideration.
6.14 Sri Kapur, learned senior counsel only highlighted with regard to
the income earned from fixed deposits made by the clubs in member banks
only. That in Bangalore Club, this Court had failed to distinguish between
the two kinds of transactions, namely, one between the club and the banks
and the other, between the banks and its borrowers which are totally disjunct
and therefore, the reasoning in the judgment of this Court in Bangalore
Club would call for a reconsideration. Our attention was also drawn to the
judgment of this Court in CIT vs. Venkatesh Premises Coop. Society Ltd.,
(2018) 15 SCC 37, particularly, paragraph 19 thereof.
Submissions of respondents:
6.15 Sri Balbir Singh, learned senior counsel and Additional Solicitor
General appearing for the respondent - Revenue at the outset submitted that
the judgments impugned in these appeals would not call for any interference
as they have proceeded on a correct analysis of the nature of transaction
involved when the clubs invest their surplus income in Banks, Post Offices,
or other similar deposits so as to earn interest thereon. It was contended
that the judgment of this Court in Bangalore Club squarely covers the facts
and issues involved in these cases and the said judgment does not call for
reconsideration. In this regard, it was submitted at the outset that the three-
Judge Bench decision in the case of Calcutta Club does not cover the issues
involved in the present case and therefore, the same has to be distinguished.
6.16 While dealing with the facts and the reasoning of this Court in
Bangalore Club, it was contended by the learned ASG that as regards the
generation of surplus funds, the principle of mutuality would apply but as
soon as the funds are invested in the form of fixed deposits in the banks
(whether corporate members of the club or not), in post offices or through
national savings certificates etc., the funds suffer a deflection as a result
of being exposed to commercial banking operations or operations of the
post offices, which utilise the said funds deposited by the said clubs for
advancing loans to their customers and thus, generating a higher income
by lending it a higher rate to the third party customers and paying a lower
1004 SUPREME COURT REPORTS [2023] 12 S.C.R.
rate of interest on the fixed deposits made by the clubs. That this activity
of the banks of utilising the funds of the clubs which are in the form of
fixed deposits towards its banking activities with third parties who are
outside the net of mutuality, is purely a commercial operation. Therefore,
there is a rupture of the principle of mutuality,resulting in a breach of one
of the conditions of the principle of mutuality, namely, identity between
contributors and participators. That the surplus funds are not used directly
by the clubs towards any specific service, maintenance or any other direct
benefit for the members of the club, but are deposited in the form of fixed
deposits in banks to be at the disposal of the said banks for its operations
vis-a-vis third parties, namely, customers of the banks. Therefore, there is no
identity vis-a-vis the third parties being the customers of the banks and the
members of the Clubs. Hence, the principle of mutuality would not apply.
According to the learned ASG, this is so irrespective of whether the fixed
deposits are made in banks which are corporate members of the clubs or in
any other bank or post offices. That the interest accrued on the fixed deposits
made by the clubs is similar in nature to any other banks’ deposit earning
an interest made by any other customer of the bank during the course of
banking operations and hence, it has a taint of commerciality which is fatal
to the principle of mutuality.
6.17 It was next contended that for the application of principle of
mutuality, there has to be a no-profit motive in the activities of the club,
exclusively for the benefit of the members of the Clubs. Therefore, there
cannot be avoidance of the liability to pay tax on such income earned by the
clubs on the principle of mutuality. It was emphasised by the learned ASG
that the relationship between the club with a bank as a customer of the banks
is a business relationship just as any other customer of the bank would have
a relationship with a bank and hence, the protection of mutuality cannot
be invoked to such transactions which are purely commercial in nature. In
this regard, our attention was drawn to various paragraphs of the judgment
of this Court in the case of Bangalore Club to contend that the reasoning
therein is just and proper which would not call for reconsideration by a
reference to a larger Bench.
6.18 Learned ASG also drew our attention to the fact that the Bombay
High Court as well as the Madras High Court had not concurred with the
judgment of the Karnataka High Court in Canara Bank and they observed
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1005
[B. V. NAGARATHNA, J.]
that the said judgment may be restricted to the facts of that case alone and
cannot act as a precedent particularly in view of the judgment of this Court
in Bangalore Club. It was sought to be contended that the judgment in
Bangalore Club, had impliedly overruled the decision of the Karnataka
High Court in Canara Bank.
Learned ASG submitted that these appeals lack merit and therefore,
the same may be dismissed.
Reply Arguments:
6.19 By way of reply, learned senior counsel, Sri Datar, while briefly
reiterating his submissions drew our attention to the fact that the special
leave petition filed against the judgment of the Karnataka High Court in
Canara Bank was dismissed and therefore, this Court having affirmed
the said judgment of the High Court, which is in line with the judgment
of this Court in Cawnpore Club, the subsequent judgment in Bangalore
Club taking a totally contrary view as held by this Court earlier, requires
reconsideration. Therefore, the observations of the Bombay High Court as
well as the Madras High Court on Canara Bank are not binding and are in
the nature of obiter.
6.20 It was submitted that till the judgment of this Court in Bangalore
Club was delivered, all the social clubs could claim exemption from payment
of income tax on the interest income earned on the fixed deposits in banks,
post offices etc., however,since 2013, the interest income is subject to tax
which may be 30% or above which will greatly affect the exchequer of the
clubs and reduce the surplus income at the hands of the club which would
be prejudicial to the very existence of the social clubs which ultimately
are non-profit entities. Learned senior counsel Sri Datar therefore, urged
that there may be a reference to a larger Bench, for reconsideration of the
decision in Bangalore Club, so as to benefit the assessee clubs.
6.21 It was also reiterated that the Order in Cawnpore Club is a
declaration of law and the same ought to have been considered by a
Coordinate Bench of this Court in Bangalore Club. That the decision in
Cawnpore Club is a fall out of the judgment in Bankipur Club and the
same is of binding nature. While referring to the judgment of this Court
in the case of Kunhayammed, Sri Datar submitted that the decision in
1006 SUPREME COURT REPORTS [2023] 12 S.C.R.
Cawnpore Club attracts the doctrine of merger and the said judgment
would also be binding.
6.22 It was reiterated that the aspect of profit motive cannot be
attributed to clubs as the only intention behind depositing surplus funds of
the clubs in a bank is a matter of prudence and the interest earned thereon
along with the principal amount deposited would only be used for the benefit
of the members of a club. Therefore, he urged that at the outset, this Bench
may consider as to whether the judgment in Bangalore Club would call for
reconsideration, while closing his arguments.
Points for Consideration:
7. Having heard learned senior counsel and counsel for the respective
parties, we find that the following points would arise for our consideration:
a) Whether the judgment of this Court in Bangalore Club would
call for reconsideration in light of the “Order” of this Court in
Cawnpore Club?
b) Whether the interest on income earned by Clubs such as the
appellants herein would be covered under the principle of
mutuality and therefore be exempt from payment of tax?
c) What Order?
Principle of mutuality:
8. At the outset it would be useful to understand and discuss the
principle of mutuality in the context of income tax law.
8.1 The principle of mutuality is rooted in common sense. A person
cannot make a profit from herself. This implies that a person cannot earn
profit from an association that he shares a common identity with. The
essence of the principle lies in the commonality of the contributors and the
participants who are also beneficiaries. There has to be a complete identity
between the contributors and the participants. Therefore, it follows, that any
surplus in the common fund shall not constitute income but will only be an
increase in the common fund meant to meet sudden eventualities.
8.2 The landmark House of Lords precedent on the application of the
doctrine of mutuality to the taxability of the surplus made by mutual benefit
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1007
[B. V. NAGARATHNA, J.]
associations is the Styles case. The members of New York Life Insurance
Company comprised its policyholders. The Company calculated insurance
premium based on the estimated death rate in its membership. The surplus
of premium collected after deducting the expenditure incurred towards
insurance claims was returned to the members in the form of credit to their
account. The question was whether the surplus returned to the members –
being earned from and by holders of the participating policies - was liable
to be assessed to income tax as profits or gains. The insurance company
sought to distinguish its case from Last vs. London Assurance Corporation,
10 App. Cas. 438 (“London Assurance Corporation”), wherein surplus
premiums credited to members of the insurance company were held to
be exigible to tax. The Company argued that its premium income was not
profit, and hence not amenable to income tax. The Queen’s Bench Division
being of the opinion that the case could not be distinguished from London
Assurance Corporation, held that the premium income of the Company
received under participating policies was liable to be assessed to income
tax and reversed the determination of the Commissioners. This decision
was affirmed by the Court of Appeal.
8.3 Against these decisions, the company brought an appeal before the
House of Lords. The House of Lords was divided in the ratio 4:2 in the matter,
with the majority holding that that no part of the premium income received
under participating policies was liable to be assessed to income tax as
profits or gains. That London Assurance Corporation was distinguishable,
the income in that case being derived from transactions with persons who
were not members and not from mutual insurances between members only.
8.4 The majority concluded that for income to be taxable, its source
must be external to the Assessee. The fact that the Fund is a legal entity
(for certain purposes) does not matter for, in the language of Lord Watson,
it represented “the aggregate of its members and the members are the
participators of its profits.”Lord Halsbury and Lord Fitzgerald dissented.
Lord Halsbury reasoned that the nature of business would be more relevant
than the relationship between the parties. Lord Fitzgerald, in his dissenting
opinion, concluded that the premiums earned by the insurance company, so
transferred to its headquarters in New York, ‘for the purpose of investment
there by the corporation, formed part of the profit of the concern, and
1008 SUPREME COURT REPORTS [2023] 12 S.C.R.
became liable here to income tax.’ He adjudicated the dispute independently,
without placing any reliance on London Assurance Corporation, which
was sought to be distinguished by the Assessee. While acknowledging the
difference between the facts of both cases, to the extent that policyholders
were members of the New York Life Insurance Company, but outsiders as
regards London Assurance Corporation, it was concluded that ‘distinction
creates no real difference.’
Evolution of the principle of mutuality in India:
8.5 The Calcutta High Court also made a notable contribution to
the evolution of the common law on mutuality. In Royal Calcutta Turf
Club vs. Secretary of State, (1921) ILR 48 Cal 844 : AIR (1921) Cal
633 : (1921) 1 ITC 108, the Calcutta High Court considered the case
of an unincorporated club that carried on business within the meaning
of the Excess Profits Duty Act (10 of 1919). The Calcutta High Court
reasoned that the proceeds generated by way of entrance fees charged
from the public and the license fees credited by the book makers, would
be assessable to income tax.
8.6 The Privy Council’s decision in an appeal emerging from the
Madras High Court, in English and Scottish Joint Co-Operative Wholesale
Society, Ltd. vs. Commissioner of Agricultural Income-Tax, 1948 SCC
OnLine PC 41, crystallized the triple test for applying the principle of
mutuality:
(1) the identity of the contributors with and recipients of the common
fund;
(2) the status of the association or company, as an instrument obedient
to the mandate of its members; and
(3) the absence of possibility for contributors of the fund to derive
profits from contributions made by them.
8.7 Substantial emphasis was placed on the pricing of the services
offered and the profit motive behind the same. It was noted that the English
and Scottish Joint Co-operative Wholesale Society, Ltd. is not bound by
its rules to sell its tea only to its members, but it could make no difference
if it were. The pertinent observations in this regard, are extracted as under:
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1009
[B. V. NAGARATHNA, J.]
“No matter who the purchasers may be, if the society sells the
tea grown and manufactured by it at a price which exceeds the cost
of producing it and rendering it fit for sale, it has earned profits which
are, subject to the provisions of the taxing Act, taxable profits.”
Given the deep-rooted common law tradition, Indian jurisprudence
has had a rich engagement with the principle of mutuality, especially in the
context of taxation.
8.8 A Constitution Bench of this Court in CIT vs. Royal Western India
Turf Club Ltd., AIR 1954 SC 85 rendered a significant judgment on this
subject. Royal Western India Turf Club realised money from both members
and non-members, in lieu of the same services rendered in the course of
the same business. The Supreme Court held, as extracted below, that an
exemption founded on the doctrine of mutuality could not be granted:
“23. 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
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 of the company with non-members take place in the
ordinary course of business carried on with a view to earning profits
as in any other commercial concern.”
This Court further reasoned that the principles of Styles case had no
application to the case before it. This Court noted that ‘there is no mutual
dealing between the members inter se in the nature of mutual insurance, no
contribution to a common fund put up for payment of liabilities undertaken
by each contributor to the other contributors and no refund of surplus to
the contributors.
8.9 At this stage, it would be apposite to consider some English and
American cases on the aspect of mutuality.
8.9.1 In Walter Fletcher on his own behalf and on behalf of Trustees
and Committee of Doctor’s Cave Bathing Club vs. the Commissioner of
Income Tax (“Walter Fletcher”) reported in (1971) UKPC 30, the Privy
1010 SUPREME COURT REPORTS [2023] 12 S.C.R.
Council considered the question whether, the Doctor’s Cave Bathing Club
at Montego Bay, Jamaica (appellant therein) was assessable to income
tax on the profit element contained in receipts from certain hotels, whose
guests had the right to use the said Club. It was observed therein that
the expression “the mutuality principle” has been devised to express the
basis for exemption of groups of persons making contribution towards the
common purpose or any surplus over expenditure. That it is a convenient
expression, but the situations it covers are not in all respects alike. In some
cases, the essence of the matter is that the group of persons in question is
not in any sense trading, so the starting point for an assessment for income
tax in respect of trading profits does not exist. In other cases, there may
be in some sense a trading activity, but the objective or the outcome, is
not profits, it is merely to cover expenditure and to return any surplus,
directly or indirectly, sooner or later, to the members of the group. These
two criteria often, perhaps generally, overlap since one of the criteria of
a trade is the intention to make profits and a surplus comes to be called
a profit if it derives from a trade. So, the issue is better framed as one
question, rather than two: is the activity, on the one hand, a trade, or an
adventure in the nature of trade, producing a profit, or is it on the other, a
mutual arrangement which, at most, gives rise to a surplus.
8.9.2 On the facts of the said case, it was observed that the disparity
between the member of the club and the guest of the hotel (hotel members)
was substantial. In other words, the members of the club were trading,
earning profits from the hotel which used to send their guests for using
the club facilities, commensurate with their subscription. Therefore, any
surplus income derived by the said Club from the hotel members was in the
nature of profits and therefore the nature of the transaction being a trading
transaction, the income thus generated was liable for tax.
8.9.3 Reference was made to the case of The Carlisle & Silloth Golf
Club vs. Smith, (1912) 6 TC 48, which brings out the distinction between
members, contributing on a mutual basis in order to secure an amenity, and
outsiders admitted to participate in amenities on payment, with whom the
club is trading. At what point, does the relationship of mutuality end and that
of trading begin? That is the critical and difficult question and the relevance
of facts is to ascertain the nature of the activity. It was observed that it is
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1011
[B. V. NAGARATHNA, J.]
not an essential condition of mutuality that contributions to the fund and
rights in it should be equal; but if mutuality is to have any meaning, there
must be a reasonable relationship, contemplated or in result, between what
a member contributes and what with due allowance for interim benefits of
enjoyment, he may expect or be entitled to draw from the fund i.e., there
ought to be a relationship between his liabilities and his rights.
8.9.4 In Revesby Credit Union Cooperative Ltd. vs. Federal
Commissioner of Taxation, (1965) 112 CLR 564, the High Court of Australia
considered the question, whether, principle of mutuality applies to deprive
the dividend of the character of income. It was observed that the principle of
mutuality seems to be settled in cases where a number of people contribute
to a fund created and controlled by them for a common purpose. In such
cases, any surplus paid to the contributors after the use of the fund for the
common purpose is not income but is to be regarded as a mere repayment
of the contributor’s own money vide Bohemians Club vs. Acting Federal
Commissioner of Taxation, (1918) 24 CLR 334. Incorporation of the fund
is not relevant vide Styles. What is required is that the fund must have
been created for the common purpose and owned or controlled wholly by
the contributors. If it is owned or controlled by anyone else the principle
cannot apply vide Equitable Life Assurance Society of the United States
vs. Bishop, (1900) 1 QB 177. Furthermore, any contributions to the fund
derived from sources other than the contributors’ payments, such as interest
from the investment of part of the fund, or income from a business activity
conducted by the members, cannot be taken into account in computing the
surplus vide Carlisle and Silloth Golf Club vs. Smith (supra). Also, the
cases establish that the principle cannot apply unless at any given point in
time the contributors to the fund are identical with the beneficiaries of the
distribution of the surplus vide Styles (supra).
8.9.5 While applying the aforesaid dicta to the facts of the said case, it
was held that the principle of mutuality cannot apply to deprive the dividend
of the character of income. The dividend in question therein was the surplus
of revenue over expenditure. The greater part of the revenue was drawn
from two sources namely, interest on loans to members and interest on
investments in associated credit societies. The contributors to the revenue
are those members who had current loans and the societies in which money
1012 SUPREME COURT REPORTS [2023] 12 S.C.R.
was invested. However, the beneficiaries of the payment of the dividend
were all the members. It was observed that the revenue earned was by virtue
of the society’s business dealings with a number of its members and should
be classed as income.
8.9.6 In Re: Commissioner of Taxation And: Australian Music
Traders Association, (1990) FCA 261, the case pertained to the Australian
Music Traders Association, a mutual association. The controversy was
whether such a mutual association or organization which received income
from an activity would fall within the mutuality principle. In the said case,
reference was made to Walter Fletcher (supra) and the test enunciated
therein by Lord Wilberforce with regard to the nature of an activity
undertaken by a mutual association or a club namely, whether, the activity
is a trade or an adventure in the nature of trade, producing a profit, or is
it, a mutual arrangement which, wholly gives rise to a surplus. In the said
case, the activity in question was the holding of a music traders’ trade fair.
In the years prior to the subject year of income, the Association itself had
organised the trade fairs and let out stalls to music traders. Although the
rental income received by the Association from such stall holders who were
members of the Association was accepted to be mutual, nevertheless, as the
individual traders displayed and sold their wares to members of the public,
it was doubted whether the fairs had a mutual character. Traders, many of
whom were not members of the Association, carried on their individual
businesses. The rental paid was calculated according to the space occupied
or leased by the stall holder for the purposes of his own business activity. In
the year of income in question, the Association had arranged for a separate
organisation, namely, Exhibition and Trade Fair Pvt. Ltd., to organise the
fair. The fee which the Association received from the organiser was fixed
by their agreement, though referrable in part to the total space sublet by
the organiser to members of the Association and non-members alike. It was
observed that no strand of mutuality remained as no contribution was made
by any member of the Association to the Association in respect of the fair.
That the amount paid by the organiser of the fair to the Association was not
a fee payable by the members of the Association into a common fund and
the fair, though it benefitted members of the Association, was not a mutual,
non-profit activity. Its essence was that of trading for profit by individual
traders, though through the medium of a common activity, the fair. Therefore,
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1013
[B. V. NAGARATHNA, J.]
it was observed that the Association’s receipts from the organiser of the fair
were not receipts which had a mutual character. The receipts were income
assessable to tax.
8.9.7 Discussing the early formulations of the mutuality principle
which was generally associated with insurance, reference was also made
to Styles (supra) which was followed in Jones vs. South-West Lancashire
Coal Owners’ Association Limited, (1927) AC 827 (Jones). Five years
later, in Municipal Mutual Insurance Limited vs. Hills, (1932) 16 TC
430, the House of Lords distinguished Styles and Jones. The facts in the
latter case were that the appellant therein was formed by various local
authorities primarily for the purpose of enabling them to insure against
fire, on favourable terms. The effective control of the said Company was
held by fire policy holders, who alone were entitled to the surplus assets
of the Company on winding up of the Company. However, in the course
of time, the Company also undertook an extensive business in employers’
liability and other insurances, both with existing fire policy holders and
others. The revenue conceded that the fire insurance business is a business
of mutual insurance which did not attract liability to income tax. The
appellant company therein agreed that it was liable for tax on its profits
from employers’ liability and other insurances undertaken on behalf of
persons who were not fire policy holders. However, there was an issue
between the parties as to whether the appellant company was liable to pay
tax on the profits which it earned on such other insurances, with fire policy
holders. At first instance, Justice Rowlatt dealt with the critical question
and analysed that in the said case there was no distinction between what
is made out of a member in respect of non-fire business and what is made
out of a stranger in respect of non-fire business; the member is a stranger.
He is not, as a miscellaneous policy holder, getting any share in the
miscellaneous policy business. The miscellaneous policy business is done
for the benefit of the body of fire policy holders. Therefore, revenue earned
out of fire insurance business of the company by the members who were
all fire policy holders was a business of mutual insurance which did not
attract liability to income tax but the revenue earned from miscellaneous
policy business was taxable. The position was compared to a shareholder
of a railway company who buys a ticket to travel by train; for this purpose,
he is merely an outsider.
1014 SUPREME COURT REPORTS [2023] 12 S.C.R.
8.9.8 The aforesaid analysis of Rowlatt J. was affirmed by the Court
of Appeal as well as by the House of Lords. The House of Lords clarified
that insofar as surplus income arising from a fire policy, they are really
entitled to the money as being those who contributed it and, accordingly,
it has been admitted that any profit made on the fire policies is governed
by the Styles case (supra). But as regards employers’ liability business and
miscellaneous business the surplus it did not go to the contributors for, as
fire policy holders in a body, they had not contributed and therefore this
business was in the same position as business with complete outsiders, the
surpluses in which are admitted to be profit.
8.9.9 Reference was also made to another Australian decision in the
case of Social Credit Savings and Loans Society Limited vs. Commissioner
of Taxation, (1971) 125 CLR 560, wherein the necessity for identicality
between the contributors to the common fund and the participators in it,
was emphasised.
8.9.10 Reference was also made to Sydney Water Board Employees’
Credit Union Limited vs. Commissioner of Taxation, (1973) 129 CLR 446
which is a decision of the Full High Court of Australia. In the said case,
the facts are interesting. The taxpayer was a credit union which borrowed
money from its members. It also borrowed money, to a smaller amount,
from non-members, on fixed deposit. The money borrowed was re-lent by
it to members, but the class of borrowing members was not identical with
the class of lending members; some borrowing members did not lend money
to the taxpayer, and some lending members did not borrow. The taxpayer
received interest on the money lent by it, and obtained surpluses over its
expenditure. The issue was whether the interest received by the credit union
from its members was taxable under the Australian Income Tax Act. The
Court unanimously held that the interest was taxable.
8.9.11 While considering the application of the mutuality principle
in the said case, it was held that there were two impediments: that precise
identicality between the individuals contributing to a fund and the
participants in that fund was no longer required. However, there ought be
a “reasonable relationship” between contributions and benefits and that no
such relationship existed, as all members of the Association had not taken
space at the 1984 Australian Music Exhibition. Secondly, it was observed
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1015
[B. V. NAGARATHNA, J.]
that the money received by the Association in respect of the exhibition was
not the money held on behalf of individual members. The money became
part of the general funds of the Association, to be dealt with as the members
of the Association might see fit from time to time, but without any obligation
to those members who had taken space at the 1984 exhibition. Till 1984,
the Association used to organise the fair itself using voluntary members’
labour but in 1985, the fair was organised by a professional organiser i.e.,
through the Company (Exhibition and Trade Fairs Pty Limited). There
were forty-eight exhibitors out of which only twenty-nine were members
of the Association. The claim was initially rejected by the Commissioner
of Income Tax on the basis that the receipt must be treated as an ordinary
trading receipt received in the course of the Association’s business. It was
held that the principle of mutuality did not apply. Ultimately, the High Court
of Australia by a majority of 2:1 held that the Commissioner was right and
affirmed his decision and set aside the decision of the Tribunal.
Analysis:
9. While considering the questions that arise in these appeals, we have
to take into account the following aspects:
a) Whether the Order of this Court in Cawnpore Club is a binding
precedent which ought to have been taken note of and considered
by a Co-ordinate Bench of this Court while deciding the case of
Bangalore Club?
b) Whether the judgment of the Karnataka High Court in Canara
Bank has to be restricted to the facts of the said case although
the special leave petition filed against the said judgment was
dismissed by this Court?
c) Whether a Coordinate Bench of this Court has rightly decided
the case of Bangalore Club?
10. Learned senior counsel, Sri Datar, placed heavy reliance on the
judgment of this Court in Kunhayammed vs. State of Kerala, AIR (2000)
SC 2587, to contend that once an appeal has been preferred or a petition
seeking leave to appeal has been converted into an appeal before the Supreme
Court, that is, once leave has been granted in a Special Leave Petition, the
appellate jurisdiction of the Supreme Court is invoked and the judgment or
1016 SUPREME COURT REPORTS [2023] 12 S.C.R.
order passed in appeal would attract the doctrine of merger. The order may
be of reversal, modification or merely of affirmation. That in the case of
Cawnpore Club, the order of this Court clearly attracts the doctrine of merger
inasmuch as this Court gave its imprimatur to the judgment of the Allahabad
High Court impugned in those civil appeals by categorically stating that the
doctrine of mutuality would apply in the context of the interest earned on
fixed deposits made in a bank by Cawnpore Club. If that be so, then the law
declared by the Supreme Court in the case of Cawnpore Club would be a
binding precedent and ignoring the said judgment in a subsequent case, a
Coordinate Bench of this Court had passed a contradictory judgment, i.e.,
in the case Bangalore Club. Therefore, it was contended that the judgment
of this Court in Bangalore Club being per incuriam, cannot have any
precedential value and if this Bench is to accept the said position, then
the earlier order passed by this Court in Cawnpore Club must be applied
in the instant case, or in the alternative, the matter could be referred to a
larger Bench for considering the correctness or otherwise of the judgment
in Bangalore Club.
11. While considering the said submission, it is noted that in Bankipur
Club, in so far as the Group A and D cases were concerned, it was held that
the principle of mutuality applied and therefore, income earned from such
activities was exempt from taxation. As already noted above in Bankipur
Club, Group “E” cases in which the assessee clubs earned income from
interest received from fixed deposits receipts (FDR) and National Savings
certificates (NSC etc.) were de-linked, to be posted separately to be heard
on merits. In paragraph 19 of the judgment in Bankipur Club, the reasons
for segregation or delinking of the cases falling under Group “E” has been
specifically stated, the reason being that in those appeals, the question was
with regard to income earned from letting out property only. Thereafter in
Cawnpore Club, another Coordinate Bench noted that the High Court had
decided that “the income earned from the assessee from the rooms let out to
its members could not be subjected to tax”. No appeal had been filed against
the said decision by the Revenue on that point and therefore, the matter stood
concluded in so far as the assessee therein, namely, Cawnpore Clubwas
concerned. Having said that, it was further observed that no useful purpose
would be served in proceeding with the appeals on the other questions when
the respondent cannot be taxed by virtue of the principle of mutuality. This
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1017
[B. V. NAGARATHNA, J.]
Court did not spell out what “the other questions” were in respect of which
the respondent Cawnpore Club could not be taxed owing to the principle
of mutuality. It must be remembered that the appeal had been filed by the
Revenue against Cawnpore Club and not vice-versa. In the absence of there
being even an indication as to “the other questions” in respect of which, this
Court found that the proceedings in the appeals filed by the Revenue could
not be continued because of the principle of mutuality, such an observation
would not imply that the order passed in the said case is a binding precedent
within the scope and meaning of Article 141 of the Constitution. It must be
remembered that the appeals in the case of Cawnpore Club were filed by
the Revenue and merely because the Revenue did not press its appeal in
respect of the other aspects of the case and this Court found that the income
earned by the assessee from the rooms let out to its members could not be
subjected to tax on the principle of mutuality, it would not mean that the
other questions which were not pressed by the Revenue in the said appeal
stood answered in favour of the asseesse and against the Revenue. On the
other hand, in the absence of there being any indication in the order as to
what “the other questions” were in respect of which the principle of mutuality
applied, in our view, there is no ratio decidendi emanating from the said
order which would be a binding precedent for subsequent cases. In view of
the disposal of Revenue’s appeals in the case of Cawnpore Club by a brief
order sans any reasoning and dehors any ratio, cannot be considered to be
a binding precedent which has been ignored by another Coordinate Bench
of this Court while deciding Bangalore Club. In our view, the Order passed
in Cawnpore Club binds only the parties in those appeals and cannot be
understood as a precedent for subsequent cases.
12. In this regard, it would be useful to refer to the judgment of the
Division Bench of the Patna High Court in Patna Golf Club vs. CIT, 2016
SCC OnLine Patna 2067 (Misc. Appeal No. 541 of 2007) wherein after
referring to Bankipur Club and the order passed subsequently in Cawnpore
Club, it was observed that on a reading of the order of this Court in Cawnpore
Club, no inference could be drawn to the effect that the principle of mutuality
would apply to interest income earned on fixed deposits made in the banks.
It was further observed that interest earned on income cannot be part of
income from house property and consequently, it is income from other
sources. Reference was also made to Sports Club of Gujarat Ltd. vs. CIT,
1018 SUPREME COURT REPORTS [2023] 12 S.C.R.
171 ITR 504 to observe that when income is derived from investments in
fixed deposits in Banks, it is derived from a third party and is not by way
of contributions of the members of the club and therefore, such interest
earned on income is taxable and the principle of mutuality would not apply.
Ratio decidendi:
13. It is a settled position of law that only theratio decidendi of a
judgment is binding as a precedent. In B. Shama Rao vs. Union Territory
of Pondicherry, AIR 1967 SC 1480, it has been observed that a decision
is binding not because of its conclusion but with regard to its ratio and the
principle laid down therein. In this context, reference could also be made
to Quinn vs. Leathem, 1901 AC 495 (HL), wherein it was observed that
every judgment must be read as applicable to the particular facts proved,
or assumed to be proved, since the generality of the expressions which
may be found there are not intended to be expositions of the whole law,
but governed and qualified by the particular facts of the case in which such
expressions are found. In other words, a case is only an authority for what
it actually decides.
14. Reliance could also be placed on the dissenting judgment of A.P.
Sen, J. in Dalbir Singh vs. State of Punjab, (1979) 3 SCC 745, wherein his
Lordship observed that a decision on a question of sentence depending upon
the facts and circumstances of a particular case, can never be regarded as a
binding precedent, much less “law declared” within the meaning of Article
141 of the Constitution so as to bind all courts within the territory of India.
According to the well-settled theory of precedents, every decision contains
three basic ingredients:
(i) findings of material facts, direct and inferential. An inferential
finding of fact is the inference which the Judge draws from the
direct or perceptible facts;
(ii) statements of the principles of law applicable to the legal
problems disclosed by the facts; and
(iii) judgment based on the combined effect of (i) and (ii) above.
For the purposes of the parties themselves and their privies, ingredient
(iii) is the material element in the decision, for, it determines finally their
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1019
[B. V. NAGARATHNA, J.]
rights and liabilities in relation to the subject-matter of the action. It is the
judgment that estops the parties from reopening the dispute. However, for
the purpose of the doctrine of precedent, ingredient (ii) is the vital element
in the decision. This is the ratio decidendi. It is not everything said by a
judge when giving a judgment that constitutes a precedent. The only thing
in a judge’s decision binding a party is the principle upon which the case is
decided and for this reason it is important to analyse a decision and isolate
from it the ratio decidendi.
15. In the leading case of Qualcast (Wolverhampton) Ltd. vs. Haynes,
1959 AC 743, it was laid down that the ratio decidendi may be defined as a
statement of law applied to the legal problems raised by the facts as found,
upon which the decision is based. The other two elements in the decision
are not precedents. A judgment is not binding (except directly on the parties
to the lis themselves), nor are the findings of fact. This means that even
where the direct facts of an earlier case appear to be identical to those of
the case before the court, the judge is not bound to draw the same inference
as drawn in the earlier case.
16. The legal principles guiding the decision in a case is the basis for a
binding precedent for a subsequent case, apart from being a decision which
binds the parties to the case. Thus, the principle underlying the decision
would be binding as a precedent for a subsequent case. Therefore, while
applying a decision to a later case, the court dealing with it has to carefully
ascertain the principle laid down in the previous decision. A decision in
a case takes its flavour from the facts of the case and the question of law
involved and decided. However, a decision which is not express and is
neither founded on any reason nor proceeds on a consideration of the issue
cannot be deemed to be law declared, so as to have a binding effect as is
contemplated under Article 141, vide State of Uttar Pradesh vs. Synthetics
and Chemicals Ltd. (1991) 4 SCC 139. Article 141 of the Constitution
states that the law declared by the Supreme Court shall be binding on all
the courts within the territory of India. All courts in India, therefore, are
bound to follow the decisions of Supreme Court. This principle is an aspect
of judicial discipline.
17. If a decision is on the basis of reasons stated in the decision or
judgment, only the ratio decidendi is binding. The ratio or the basis of
1020 SUPREME COURT REPORTS [2023] 12 S.C.R.
reasons and principles underlying a decision is distinct from the ultimate
relief granted or manner of disposal adopted in a given case. It is the ratio
decidendi which forms a precedent and not the final order in the judgment,
vide Sanjay Singh vs. Uttar Pradesh Public Service Commission,
Allahabad; (2007) 3 SCC 720. Therefore, the decision applicable only to
the facts of the case cannot be treated as a binding precedent.
18. The doctrine of binding precedent helps in promoting certainty and
consistency in judicial decisions and enables an organic development of the
law besides providing assurance to individuals as to the consequences of
transactions forming part of daily affairs. Thus, what is binding in terms of
Article 141 of the Constitution is the ratio of the judgment and as already
noted, the ratio decidendi of a judgment is the reason assigned in support
of the conclusion. The reasoning of a judgment can be discerned only
upon reading of a judgment in its entirety and the same has to be culled out
thereafter. The ratio of the case has to be deduced from the facts involved in
the case and the particular provision(s) of law which the court has applied
or interpreted and the decision has to be read in the context of the particular
statutory provisions involved in the matter. Thus, an order made merely to
dispose of the case cannot have the value or effect of a binding precedent.
19. What is binding, therefore, is the principle underlying a decision
which must be discerned in the context of the question(s) involved in
that case from which the decision takes its colour. In a subsequent case, a
decision cannot be relied upon in support of a proposition that it did not
decide. Therefore, the context or the question, while considering which, a
judgment has been rendered assumes significance.
20. As against the ratio decidendi of a judgment, an obiter dictum is
an observation by a court on a legal question which may not be necessary
for the decision pronounced by the court. However, the obiter dictum of the
Supreme Court is binding under Article 141 to the extent of the observations
on points raised and decided by the Court in a case. Although the obiter
dictum of the Supreme Court is binding on all courts, it has only persuasive
authority as far as the Supreme Court itself is concerned.
21. In the context of understanding a judgment, it is well settled that
the words used in a judgment are not to be interpreted as those of a statute.
This is because the words used in a judgment should be rendered and
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1021
[B. V. NAGARATHNA, J.]
understood contextually and are not intended to be taken literally. Further,
a decision is not an authority for what can be read into it by implication
or by assigning an assumed intention of the judges and inferring from it a
proposition of law which the judges have not specifically or expressly laid
down in the pronouncement. In other words, the decision is an authority for
what is specifically decides and not what can logically be deduced therefrom.
22. Further, the precedential value of an order of the Supreme Court
which is not preceded by a detailed judgment would be lacking inasmuch
as an issue would not have been categorically dealt with. What is of essence
in a decision is its ratio and not every observation found therein, nor what
logically follows from the various observations made therein.
23. Another important principle to be borne in mind is that declaration
of the law by the Supreme Court can be said to have been made only when it
is contained in a speaking order, either expressly or by necessary implication
and not by dismissal in limine. In the words of Mukherji, CJ, in DTC vs. DTC
Mazdoor Congress Union, AIR 1991 SC 101, the expression ‘declared’ is
wider than the words ‘found or made’. The latter expression involves the
process, while the former expresses the result.
24. In view of the aforesaid discussion, we think that we cannot
accept the argument advanced by learned Sr. Counsel, Sri Datar, for the
following reasons: firstly, the Order in Cawnpore Club is not on the basis
of any reasoning or a deduction made as to whether on the interest earned
on fixed deposits made by a club in a bank, income tax would be attracted
or not. In the absence of any deduction or reasoning or analysis, the said
order cannot carry precedential value so as to be binding on this Court in a
subsequent case. This is because there is no discernable ratio decidendi in
the said Order. Of course, the said Order would bind the parties to the case.
While carefully reading the Order passed by this Court in Cawnpore Club,
it can be discerned that the High Court had clearly spelt out that in the case
of income earned from letting out of rooms/property to its members, the
same would not be subjected to tax. On the aforesaid aspect, the revenue
had not filed any appeal before this Court, and therefore, on that aspect the
matter should conclude in favour of the assessee therein i.e. Cawnpore Club.
Secondly, without going into the other aspects of the case, this Court simply
noted that the assessee therein (Cawnpore Club) could not be taxed on the
1022 SUPREME COURT REPORTS [2023] 12 S.C.R.
principle of mutuality, therefore, it would not serve any purpose to proceed
with the appeals on the other questions. What those other questions were
has not been spelt out in the order nor have reasons been assigned as to on
what aspect or activities of the said Club and its transactions the principle
of mutuality would apply. In the absence of there being any clear indication
in the discussion or analysis and there being a simple closure of a case, it
would clearly imply that the doctrine of mutuality would apply only to those
activities to which it would normally apply. That is different from saying
that even in the case of income earned by a club from non-members or
income earned from investment made by a club in fixed deposits in a bank
would attract the principle of mutuality and therefore, no tax is payable.
Thirdly, if an order of this Court is brief and meant only for the purpose of
closure of the controversy involved in a particular case and with a view to
conclude the case, undoubtedly, such an order is binding on the parties to
the said order, but in our view, it cannot act as a precedent for subsequent
cases such as the present one with which we are dealing.
25. In fact, in paragraph 19 of Bankipur Club, while considering the
interest income received on fixed deposits, this Court observed that such
income could be considered as income from other sources and not income
from property. It was further observed by this Court, “It does not appear
that the larger plea that the income is totally exempt on the principle of
mutuality, was decided in favour of the assessee.”. It was in the above context
that the Group “E” cases were segregated as this Court was of the view that
the income earned from the property let out and also interest received on
the fixed deposits could be considered separately.
26. When the appeals were considered thereafter in the case of
Cawnpore Club this Court simply applied the principle of mutuality to the
income earned by the club from rooms rented out to its members as not being
subject to tax. As far as the other questions were concerned, this Court only
observed that “no useful purpose would be served in proceeding with the
appeals on the other questions when the respondent cannot be taxed because
of the principle of mutuality.” This observation in Cawnpore Club must
be juxtaposed with the observations expressed above in Bankipur Club.
When the aforesaid observations made in Cawnpore Club are considered in
light of the larger plea, we find that the same was not answered in Bankipur
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1023
[B. V. NAGARATHNA, J.]
Club nor in Cawnpore Club. But, the subsequent decision in Bangalore
Club ultimately answered the said larger plea through a detailed reasoning.
Therefore, it cannot be held that the short order passed in Cawnpore Club
is a precedent which was ignored by a Coordinate Bench of two judges in
Bangalore Club, so as to make the latter decision per incuriam. On the other
hand, we are of the view that the larger plea which was neither considered
in Bankipur Club nor in Cawnpore Club was ultimately considered and
answered in Bangalore Club by a detailed judgment.
27. Therefore, we do not find any fault in a subsequent Coordinate
Bench of this Court in Bangalore Club in not noticing the Order passed
in the case of Cawnpore Club while dealing, in a detailed manner, on the
taxability of the income earned from the interest on fixed deposits made by
the said Club in banks, whether the banks are members of the clubs or not.
Thus, not much can be read into the Order dated 05.02.1988 passed in the
case of Cawnpore Club so as to hold that the same was law declared by
this Court within the meaning of Article 141 of the Constitution and hence,
is a binding precedent which ought to have been followed by a subsequent
Coordinate Bench of this Court in Bangalore Club and the same not having
been done, renders the judgment in Bangalore Club vulnerable or vitiated.
In the circumstances, we do not find it necessary and justified to refer the
judgment of this Court in Bangalore Club to a Larger Bench on this ground.
Further, we also think that the order dated 05.02.1998 passed by this Court
in the Civil Appeals concerning Cawnpore Club is not a binding precedent
which had to be followed in subsequent cases, as the said Order did not
declare any law.
28. As far as the judgment of the Karnataka High Court in Canara
Bank is concerned, although the Special Leave Petition challenging the same
was dismissed by this Court, we find merit in the observations of the Bombay
High Court and the Madras High Court to the effect that the said judgment
must be restricted to its own facts and the same cannot be considered as a
precedent. In this regard, what is of significance to note is that the judgment
of Karnataka High Court in Bangalore Club was not brought to the notice
of the Division Bench of the said Court which decided Canara Bank. Had
the Division Bench known about the judgment passed by a Coordinate
Bench of that Court in Bangalore Club holding that interest earned on fixed
1024 SUPREME COURT REPORTS [2023] 12 S.C.R.
deposits in banks is liable to be taxed and that the principle of mutuality
would not apply, possibly, the judgment in Canara Bank may have been
different. Therefore, we hold that the judgment in Canara Bank is restricted
to the facts of that case and cannot be construed to be a precedent as such.
29. It would be useful to refer to certain other judgments of this Court
having relevance to the points under consideration.
(a) In a three-Judge Bench decision in State of West Bengal vs.
Calcutta Club Ltd., (2019) 19 SCC 107, this Court considered the following
questions:
30.1. (i) Whether the doctrine of mutuality is still applicable to
incorporated clubs or any club after the 46th Amendment to Article
366(29-A) of the Constitution of India?
30.2. (ii) Whether the judgment of this Court in Young Men’s
Indian Assn. still holds the field even after the 46th Amendment of
the Constitution of India; and whether the decisions in Cosmopolitan
Club and Fateh Maidan Club which remitted the matter applying the
doctrine of mutuality after the constitutional amendment can be treated
to be stating the correct principle of law?
30.3. (iii) Whether the 46th Amendment to the Constitution, by
deeming fiction provides that provision of food and beverages by the
incorporated clubs to its permanent members constitute sale thereby
holding the same to be liable to sales tax?”
The aforesaid questions arose in the context of Article 366(29-A)
which is a provision inserted to the Constitution of India by virtue of the
46th Amendment to the Constitution and in the context of the West Bengal
Sales Tax Act, regarding tax on sale or purchase of goods.
This Court referred to the judgment in the case of Bangalore Club
and observed that the doctrine of mutuality as applied to clubs envisages
a complete identity between contributors and participators. Referring to
Halsbury’s Laws of England, 4th Edn., Reissue, Vol.23, Paras 224 it was
observed that members’ clubs are an example of mutual undertaking; but,
where a club extends facilities to non-members, to that extent, the element
of mutuality is wanting. That a members’ club is assessable in respect of
profits derived from affording its facilities to non-members. That where
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1025
[B. V. NAGARATHNA, J.]
non-members are offered facilities on the payment of fees, then, the club
was carrying on a business which could be isolated and the profit from
which was assessable to income tax. But there is no liability in respect of
profits made from members who avail themselves of the facilities provided
for members. In short, there has to be a complete identity between the class
of participators and the class of contributors of funds; the particular label
or form by which the mutual association is formed is of no consequence.
It was further observed that if persons carry on a certain activity
in such a way that there is a commonality between contributors of funds
and participators in the activity, a complete identity between the two is
then established. Since the members perform the activities of the club for
themselves, the fact that they incorporate a legal entity to do it for them
makes no difference. Reference was also made to Section 2(24)(vii) of the
Act which defines taxable income. The doctrine of mutuality, based on
common law principles, is premised on the theory that a person cannot make
a profit for himself. Therefore, amount received from oneself cannot be
regarded as income and be held to be taxable. It was observed that income
of a cooperative society from business is taxable under Section 2(24)(vii)
and will stand excluded from the principle of mutuality. It was concluded
that the doctrine of mutuality continues to be applicable to incorporated and
unincorporated members’ clubs even after the 46th Amendment introducing
Article 366(29-A) into the Constitution of India and that sub-clause (f) of
the said Article has no application to member’s clubs in the context of the
Finance Act, 1994 which, inter alia, deals with tax on services.
After discussing elaborately on the definition of club or association;
taxable service in the context of payment of service tax; and in the context
of the definition of ‘service’ under the Finance Act, 1994, it was observed
that from 2005 onwards, the Finance Act, 1994 does not purport to levy
service tax on members’ clubs in the incorporated form. That the judgment
in Young Men’s Indian Assn. made no distinction between a club in the
corporate form and a club by way of a registered society or incorporated
by a deed of trust.
(b) In Yum! Restaurants (Marketing) Pvt. Ltd. vs. Commissioner
of Income Tax, Delhi, (2021) 7 SCC 678, this Court speaking through
Khanwilkar, J. in paragraph 17 observed as under:
1026 SUPREME COURT REPORTS [2023] 12 S.C.R.
“17. In order to undertake the examination of mutuality, we
gainfully advert to English & Scottish Joint Coop. Wholesale Society
Ltd. v. CAT, which has been quoted with approval by this Court in
CIT v. Royal Western India Turf Club Ltd. and Bangalore Club.
The aforestated stream of judicial pronouncements expound three
conditions/tests to prove the existence of mutuality:
(i) Identity of the contributors to the fund and the recipients
from the fund;
(ii) Treatment of the company, though incorporated as a
mere entity for the convenience of the members and policy-
holders, in other words, as an instrument obedient to their
mandate, and;
(iii) Impossibility that contributors should derive profits
from contributions made by themselves to a fund which could
only be expended or returned to themselves.
Whereas the legal position on what amounts to a mutual concern
stands fairly settled, the factual determination of the same on a case-
to-case basis poses a complex issue that requires deeper examination.
Such examination ought to be conducted in the light of the tests
enunciated above.”
While discussing the element which involves the test of commonality
of identity between the members or participators in the mutual concern
and the beneficiaries thereof, and applying the three-pronged test extracted
hereinabove, it was observed that common identity signifies that the class of
members should stay intact as the transaction progresses from the stage of
contributions to that of returns/surplus. Therefore, there must be uniformity
in the class of participants in the transaction. It was further observed that
“the moment such a transaction opens itself to non-members, either in the
contribution or the surplus, the uniformity of identity is impaired and the
transaction assumes the tint of a commercial transaction. The emphasis on
the words member and non-member is of import because the doctrine of
mutuality does not prohibit the inclusion or exclusion of new members. It was
observed, what is prohibited is the infusion of a participant in the transaction
who does not become a “member” of the common fund, at par with other
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1027
[B. V. NAGARATHNA, J.]
members, and yet participates either in the contribution or surplus without
subjecting himself/herself to mutual rights and obligations. The principle
of common identity prohibits any one-dimensional alteration in the nature
of participation in the mutual fund as the transaction fructifies. Any such
alteration would lead to the non-uniform participation of an external element
or entity in the transaction, thereby opening the scope for a manifest or latent
profit-based dealing in the transaction, with parties outside the closed circuit
of members. Such profit-oriented activity would be amenable to income tax
as per Section 2(24) of the Act.
Moving further, this Court observed that coterminous with the
requirement of common identity, is the requirement of completeness of
identity between the contributors and participators which is contemplated
under the doctrine. In order to determine whether there is completeness of
identity or breach of mutuality, the court is well within its powers to go
beyond the periphery of the concern and undertake an examination, akin
to the lifting of the veil, in order to discern the real nature thereof. It was
also observed that mutuality and non-profiteering character of a concern are
to be determined in light of its actual working structure and the factum of
corporation or incorporation or the form in which it is clothed is immaterial.
In the said case, the questions were answered against the assessee company
and in favour of the revenue.
30. We have considered the arguments advanced at the Bar on behalf
of the respective parties;and considered the nuances of the principle of
mutuality in the context of the applicability of the said principle with regard
to the interest income earned on fixed deposits made in banks/financial
institutions by the appellant Clubs, in the backdrop of the dictum of this
Court in the case of Bangalore Club.
31. While considering the triple test for applying the principle of
mutuality, we find that in the case of Bangalore Club, the aforesaid triple
test was applied. It was reiterated that the principle of mutuality envisages:
(i) Complete identity between the contributors and participators;
(ii) Action of the participators and contributors must be in furtherance
of the mandate of the associations or the Clubs. The mandate of the Club
is a question of fact which has to be determined from the Memorandum or
1028 SUPREME COURT REPORTS [2023] 12 S.C.R.
Articles of Associations, Rules of Membership, Rules of the Organisation,
etc., which must be construed broadly.
(iii) There must be no scope for profiteering by the contributors from a
fund made by them which could only be expended or returned to themselves.
32. Applying the aforesaid principles to the facts of the case, it was
observed in Bangalore Club, that in relation to transactions, namely, deposit
of surplus funds earned by the clubs, in banks which are members of the
club, the principle of mutuality applies till the stage of deposit of funds and
would lose its application, once the funds are deposited as fixed deposit in the
banks. This is because the funds would be exposed to commercial banking
operations which means that the deposits could be used for lending to third
parties and earning a higher interest thereon and by paying a lower rate of
interest on the fixed deposits to the clubs. That the bank’s utilizing the funds
of the clubs deposited in fixed deposit receipts, for their banking business
would completely rupture the “privity of mutuality” and as a result,the
element of complete identity between the contributors and participators
would be lost. Consequently, the first condition for the claim of mutuality
is not satisfied.
33. That, it is not a normal activity of the appellants-clubs to deposit
funds in a bank. It is only when a surplus is generated. These appellant
Clubs just like Bangalore Club are social clubs, and it is the surplus funds
earned through various activities of the Clubs which are deposited as
fixed deposit in the banks so as to earn an interest owing to the business
of banking. In the absence of the said fixed deposits being utilized by the
banks for their transactions with their customers, no interest can be payable
on the fixed deposits. This is so in respect of any customer of a bank who
would deposit surplus funds in a bank. It may be that the interest income
would be ultimately used for the benefit of the members of the Clubs but
that is not a consideration which would have an impact on satisfying the
triple test of mutuality. It was observed in Bangalore Club that even if
ultimately the interest income and surplus funds in the fixed deposit are
utilized for the benefit of the members of the clubs,the fact remains that
when the fixed deposits were made by the clubs in the banks,they were
exposed to transactions with third parties,i.e., between the banks and its
customers and this would snap the principle of mutuality breaching the triple
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1029
[B. V. NAGARATHNA, J.]
test. When the reasoning of this Court in Bangalore Club is considered
in light of the judgments of overseas jurisdictions, it is noted that this
proposition would squarely apply even to fixed deposits made in banks
which are members of the clubs. In other words, it is only profit generated
from the payments made by the members of the clubs, which would not
be taxable. This was also the reasoning in the case of Royal Western India
Club (supra), wherein it was observed that where services are rendered by
the club to both members and non-members,the dealings of the Club with
non-members is in the ordinary course of the business carried on with a
view to earn the profits, as in any other commercial concern and hence,
subjected to tax. This is on the principle that complete identity between
the contributors and the recipients is absent.
34. The question asked therefore is - at what point does the relationship
of mutuality end and that of trading begin. If there is an entry of a third
party or non-member to deal with the contributions of or funds of the club
or to utilize the funds of the club and return the same with interest, then,
the relationship of the parties is not on the basis of a privity of mutuality.
The essential condition of mutuality, i.e., identity between the contributors
and participators would end. The relationship would then be like any other
commercial relationship such as that between a customer and a bank where
the fixed deposit is made by the customer for the purpose of earning an
interest income.
35. If the principle of mutuality is to apply, then, where a number of
people contribute to a fund are ultimately paid the surplus from the fund, it
is a mere repayment of the contributors’ own money. However, if the very
same surplus fund is not applied for the common purpose of the club or
towards the benefit of the members of the club directly but is invested with
a third party who has the right to utilize the said funds,subject to payment of
interest on it and repayment of the principal when desired by the club,then,in
such an event, the club loses its control over the said funds. Further,the
interest generated on the fixed deposits or investment made is a commercial
activity, thereby permitting the bank to utilize the fixed deposit amount for its
banking business and derive profits from the said banking business by way
of lending the amount for a higher rate of interest while paying alower rate
of interest on the fixed deposit made by the club. Thus, identicality between
1030 SUPREME COURT REPORTS [2023] 12 S.C.R.
the contributors to the common fund and the participators in it which is a
sine qua non for the application of the principle of mutuality would get
ruptured. When surplus funds of a club are invested as fixed deposits in a
bank and the bank has a right to utilize the said fixed deposit amounts for its
banking business subject to repayment of the principal along with interest,
then, the identity is lost.
36. Conversely, when the facilities of the club are offered to members
as well as to non-members for a price, there is a vital distinction between
the transactions, i.e., between the club and its members vis-a-vis club and
non-members. When the facilities of a club are extended to the members of
the club who contribute towards the income generated by the club, there is
an identity between the contributors and the recipients and, therefore, the
principle of mutuality would apply. However, if the same facilities of the
club are offered to non-members or to the public for the purpose of earning
an additional income, then, it is in the nature of a commercial transaction
and thus becomes a profitable venture. In such a case, the principle of
mutuality would not apply.
37. In order for the triple test to apply to the different and varied
transactions of the clubs,it is necessary to lift the veil and discern the nature
of each transaction: whether there is third party intervention which is the
reason for earning the income; or it is an income generated between the
members and the club, as such,i.e., only between the members of the club.
When the transactions of the club are viewed in the aforesaid prism then,
in each of the transactions whether the principle of mutuality would apply,
has to be discerned.
38. The attractive argument advanced by Sri Datar and Sri Andhyarjuna
regarding the utilisation of the interest income towards the benefit of the
members of the club is repelled by a fundamental principle of income tax.
The said principle is propounded by the House of Lords in Mersey Docks
vs. Lucas, 8 App. Cas. 891 (“Mersey Docks”). In the said case it is held that
the mode of application of the surplus generated out of a trading activity has
no bearing on its taxability. To borrow from the conclusion in that case, the
Revenue’s “right to be paid the tax out of it in the least degree depends on
what they do with it afterwards.”
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1031
[B. V. NAGARATHNA, J.]
39. In the circumstances, we find that the reasoning given by the
Coordinate Bench of this Court in Bangalore Club is just and proper and
would not call for reconsideration.
40. The reasoning in Bangalore Club is also fortified by judgments
from overseas jurisdictions, discussed above,such as Municipal Mutual
Insurance Limited vs. Hills; Walter Fletcher; Re: Commissioner of
Taxation And: Australian Music Traders Association.
41. In the circumstance, we do not find that the judgment in Bangalore
Club is not a binding precedent for the reason that it does not refer to the
earlier judgment of this Court in Cawnpore Club. Secondly, on a close
reading of reasons assigned by this Court in Bangalore Club we find that
they are justified and squarely apply to the cases at hand.
42. In this context, the sagacious dictum of seven learned Judges of
this Court in Keshav Mills Co. Ltd. vs. CIT, (1965) 2 SCR 908 ought to
guide the exercise of jurisdiction on questions that have been duly settled
by judgments of this Court. In the said case, it was observed as follows:
“23. … [I]n reviewing and revising its earlier decision, this Court
should ask itself whether in the interests of the public good or for any
other valid and compulsive reasons, it is necessary that the earlier
decision should be revised. When this Court decides questions of
law, its decisions are, under Article 141, binding on all courts within
the territory of India, and so, it must be the constant endeavour and
concern of this Court to introduce and maintain an element of certainty
and continuity in the interpretation of law in the country. Frequent
exercise by this Court of its power to review its earlier decisions on
the ground that the view pressed before it later appears to the Court
to be more reasonable, may incidentally tend to make law uncertain
and introduce confusion which must be consistently avoided. That
is not to say that if on a subsequent occasion, the Court is satisfied
that its earlier decision was clearly erroneous, it should hesitate to
correct the error; but before a previous decision is pronounced to be
plainly erroneous, the Court must be satisfied with a fair amount of
unanimity amongst its members that a revision of the said view is
fully justified. It is not possible or desirable, and in any case it would
be inexpedient to lay down any principles which should govern the
1032 SUPREME COURT REPORTS [2023] 12 S.C.R.
approach of the Court in dealing with the question of reviewing and
revising its earlier decisions. It would always depend upon several
relevant considerations:— What is the nature of the infirmity or error
on which a plea for a review and revision of the earlier view is based?
On the earlier occasion, did some patent aspects of the question remain
unnoticed, or was the attention of the Court not drawn to any relevant
and material statutory provision, or was any previous decision of this
Court bearing on the point not noticed? Is the Court hearing such
plea fairly unanimous that there is such an error in the earlier view?
What would be the impact of the error on the general administration
of law or on public good? Has the earlier decision been followed on
subsequent occasions either by this Court or by the High Courts? And,
would the reversal of the earlier decision lead to public inconvenience,
hardship or mischief? These and other relevant considerations must be
carefully borne in mind whenever this Court is called upon to exercise
its jurisdiction to review and revise its earlier decisions.”
Conclusion:
43. In view of the above discussion, we arrive at the following
conclusions:
(i) The Order of this Court in Cawnpore Club cannot be treated
as a precedent within the meaning of Article 141 of the
Constitution of India as the said order does not declare any
law and the appeals filed by the revenue as against Cawnpore
Club were disposed of without going into the larger question
as to whether Cawnpore Club could be taxed on the interest
income earned on fixed deposits made by it in the banks, or
whether the principle of mutuality would apply to the said
income.
(ii) The judgment of this Court in Bangalore Club does not call
for reconsideration even when viewed in light of the previous
Order of this Court in Cawnpore Club. Consequently, we
hold that the principle of mutuality would not apply to interest
income earned on fixed deposits made by the appellant Clubs
in the banks irrespective whether the banks are corporate
members of the club or not.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC. 1033
[B. V. NAGARATHNA, J.]
(iii) In view of the above, we hold that the judgment in Bangalore
Club is not per incuriam although, the earlier Order passed
by a Coordinate Bench of this Court in the case of Cawnpore
Club is not noticed in Bangalore Club.
(iv) We also hold that the judgment of the Division Bench of the
Karnataka High Court in Canara Bank must be restricted
to apply to the facts of the said case alone and cannot be a
precedent for subsequent cases. This is because the judgment
of another Division Bench of the said High Court in the case of
Bangalore Club was not brought to the notice of the Division
Bench, which rendered the judgment in the case of Canara
Bank. Further, it is the judgment of the Division Bench of the
said High Court in Bangalore Club that has been sustained
by a Coordinate Bench of this Court by a detailed reasoning.
(v) Thus, the interest income earned on fixed deposits made in the
banks by the appellant Clubs has to be treated like any other
income from other sources within the meaning of Section 2(24)
of Income Tax Act, 1961.
(vi) Conversely, if any income is earned by the Clubs through its
assets and resources, from persons who are not members of
the Clubs, such income would also not be covered under the
principle of mutuality and would be liable to be taxed under
the provisions of the Income Tax Act.
(vii) In view of the above conclusions and having found that
Bangalore Club does not call for reconsideration, we hold
that the said judgment which holds the field would squarely
apply to these appeals also.
Consequently, the appeals are dismissed.
Parties to bear their respective costs.
Pending applications, if any, stand disposed of.
Headnotes prepared by: Appeals dismissed.
Nidhi Jain
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