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 deposits 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. (Para 3)
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. (Para 5)
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: (Para 7)
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? (Para 9)
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. (Para 32)
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.
(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. (Para 43)
SUPREME COURT OF INDIA
2023 STPL(Web) 183 SC = 2023INSC736
Secundrabad Club Etc. Vs. C.I.T.-V ETC.
Decided on 17-8-2023
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