Interest Income Earned On Deposits By Clubs In Banks Which Are Corporate Members Taxable; Principle Of Mutuality Not Applicable: Supreme Court

The Supreme Court has ruled that the interest income earned on fixed deposits (FDs) made by Clubs in the banks which are members of those Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961. The bench of Justices B.V. Nagarathna and Prashant Kumar Mishra said that the principle of mutuality would not apply to interest income earned on FDs made by Clubs in the banks irrespective of whether the banks are corporate members of the Club or not.

The court further rejected the argument that the two-judge bench judgement of the top court in Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509 is not a binding precedent and therefore, the same calls for reconsideration.

The Apex Court in Bangalore Club (2013) had ruled that the surplus amount which is received as contribution from the members is exempt from tax under the doctrine of mutuality. However, the interest earned by the assessee Clubs on the surplus funds invested in FDs with the corporate member banks will not fall within the ambit of the mutuality principle. Therefore, the same shall be exigible to income tax in the hands of the Clubs, the court in Bangalore Club had ruled.

The Court further said that the decision of the Division Bench of the Karnataka High Court in Canara Bank Golden Jubilee Staff Welfare Fund vs. Deputy Commissioner of Income Tax, (2009) 308 ITR 202 (Kar), where it was held that interest on investment and dividend on shares is governed by the principle of mutuality and therefore, not taxable, cannot be a precedent for subsequent cases and that it must be restricted to apply to the facts of the said case alone.

The bench also dismissed the reliance placed on top court’s order in Commissioner of Income Tax vs. M/s Cawnpore Club Ltd., Kanpur, (2004) 140 Taxman 378 (SC). The court noted that there is no indication in the order as to what “the other questions” were in respect of which the Supreme Court had ruled that the principle of mutuality applied. The court said that the disposal of Revenue’s appeals in Cawnpore Club by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent within the meaning of Article 141 of the Constitution of India as the said order does not declare any law.

The Supreme Court was dealing with a batch of SLPs arising from the decision of the Andhra Pradesh and Madras High Court, pertaining to the Secunderabad Club, Madras Gymkhana Club, Madras Cricket Club, and the M/s Wellington Gymkhana Club, amongst others. The High Courts in the impugned decision had held that the interest earned on the bank deposits made by the assessee Clubs is liable to be taxed in their hands and that the principle of mutuality would not apply.

Senior Advocate Arvind Datar, appearing on behalf of the assessee Clubs, placed reliance on the Supreme Court’s earlier decision in M/s Cawnpore Club Ltd. (2004) where the court was dealing with the application of the doctrine of mutuality. In Cawnpore Club, the Supreme Court, while dealing with the Revenue’s appeal against the decision of the Allahabad High Court, had observed that with respect to the “other questions” which arose in the appeal, the assessee club could not be taxed because of the principle of mutuality.

Mr. Datar submitted before the court that the “other questions” which arose in the appeals before the top court in Cawnpore Club (2004), also included the question of interest earned on the FDs etc. invested in banks by the assessee club. Therefore, he claimed that in view of the same, the interest earned on FDs invested in banks is not taxable in the hands of the Club on the principle of mutuality.

He further submitted that there was a direct conflict between the view taken in the case of Cawnpore Club (2004) and the judgment in Bangalore Club (2013), which are both two-judge Bench decisions of the Supreme Court. The decision in Bangalore Club being contrary to the earlier order passed in Cawnpore Club, was not a binding precedent and was per incurium, and therefore, it ought to be reconsidered and the matter may be referred to a larger Bench, Datar argued. Senior Advocate Firoze Andhyarujina and Pritesh Kapur also appeared for the appellants. Additional Solicitor General of India Balbir Singh appeared for the Union.

Court's analysis

Perusing the order passed in Cawnpore Club, the bench said that the Supreme 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.

“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,” the court said.

“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,” said the court.

Elaborating on the concept of ratio decidendi, the court said that the order in Cawnpore Club (2004) was not passed on the basis of any reasoning or a deduction made on the issue. Thus, there was no discernible ratio decidendi in the said order, the court said. It emphasised that in the absence of any deduction or reasoning or analysis, the order cannot carry precedential value so as to be binding on the Supreme Court in a subsequent case. However, the said order would bind the parties to the case, the court added.

The court was further of the view that if an order of the Supreme 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, such an order is binding only on the parties to the said order and it cannot act as a precedent for subsequent cases.

“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,” the judgment authored by Justice Nagarathna concluded.

Dealing with the judgment of the Karnataka High Court in Canara Bank (2009), the court agreed with the observations made by the Bombay High Court and Madras High Court in CIT vs. Common Effluent Treatment Plant, (Thane-Belapur) Association, (2010) 328 ITR 362 and Madras Gymkhana Club vs. DCIT (2010) 328 ITR 348 (MAD), respectively, that the said judgment must be restricted to its own facts and it cannot be considered as a precedent. Interestingly, the judgment in Canara Bank was also written by Justice Nagarathna when she was a judge of the Karnataka High Court.

The bench concluded that the decision in Canara Bank (2009) cannot be a precedent for subsequent cases. This is because the decision of another Division Bench of the Karnataka High Court that was subsequently upheld by the Supreme Court in Bangalore Club (2013) by a detailed reasoning, was not brought to the notice of the Division Bench which rendered the judgment in Canara Bank.

The bench referred to the decision in Bangalore Club, where it was observed that the principle of mutuality applies only till the stage of deposit and that once the funds are deposited as fixed deposit in the banks, the principle of mutuality would lose its application. It was observed 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 test for applying the principle of mutuality.

While ruling that the reasoning given in Bangalore Club is just and proper and would not call for reconsideration, the court said that when the reasoning is considered in light of the judgments of overseas jurisdictions on the aspect of mutuality, the proposition would squarely apply even to fixed deposits made in banks which are members of the clubs.

Elaborating on the issue, the Supreme Court said that once the 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 element of complete identity between the contributors to the common fund and the participators in the surplus would be lost, which is a sine qua non for the application of the principle of mutuality.

The bench added: “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,”.

Concurring with the reasoning in Bangalore Club (2013), the court concluded that Bangalore Club is a binding precedent and was squarely applicable to the cases at hand.

The bench thus dismissed the appeals.

Case Title: SECUNDRABAD CLUB ETC. vs C.I.T.-V ETC.

Citation : 2023 LiveLaw (SC) 660

Income Tax Act, 1961: Section 2(24)- The Supreme Court has ruled that the interest income earned on fixed deposits made in the banks by Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961. The bench said that the principle of mutuality would not apply to interest income earned on fixed deposits made by Clubs in the banks irrespective of whether the banks are corporate members of the club or not. The court further dismissed the plea that the two-judge Bench judgement of the top court in Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509 is not a binding precedent and therefore the same calls for reconsideration.

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