2023INSC736

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVL APPEAL NO(S). 5195-5201 OF 2012

SECUNDRABAD CLUB ETC. APPELLANT(S)

VS.

C.I.T.-V ETC. RESPONDENT(S)

WITH

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 19976 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 1119 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 16817 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 16819 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 16818 OF 2011)

CIVIL APPEAL NOS.________ OF 2023

(@ SLP (C) NO(S). 5109-5116 OF 2010)

CIVIL APPEAL NO(S).________ OF 2023

(@ SLP (C) NO(S). 6263-6266 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 4347 OF 2010)

2

CIVIL APPEAL NO(S).____ ____ OF 2023

(@ SLP (C) NO(S). 12897-12900 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 30957 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 30958 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO.13806 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 1368 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 1941 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 1256 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 1346 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 13986 OF 2011)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 34130 OF 2009)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 30960 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 30959 OF 2010)

CIVIL APPEAL NO.________ OF 2023

(@ SLP (C) NO. 13810 OF 2011)

3

J U D G M E N T

NAGARATHNA, J .

Since leave has been granted in Special Leave Petition Nos.

035895-035901 of 2011, in the connected matters also leave is granted.

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 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

4

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., K anpur

(“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.

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:

5

(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

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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 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 p lea 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)

7

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

Appellants: Commissioner of Income Tax

Vs.

Respondent: Cawnpore Club Ltd.

In the Supreme Court of India B.K K irpal & 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.

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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

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 fixed 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.

9

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. 3

rd 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 winding up the surplus will be transferred to

a similar association or used for some charitable

objects.”

(emphasis supplied)

XXX

10

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. 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

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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. 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

12

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 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.

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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 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

14

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), (“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

15

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

16

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 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

17

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-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

18

not with any profit motive and therefore, w ere 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

19

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.

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.

20

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

21

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 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.

22

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 not earn 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 Act which

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 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

23

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

24

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 Andhyarujina with 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 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

25

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

26

in the case of Bangalore Club. That the three-judge Bench in Calcutta

Club has categorically 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

27

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 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

28

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,

29

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 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

30

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 Cawnpore Club attracts the doctrine of merger and the said

judgment would also be binding.

31

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 u nder the principle of

mutuality and therefore be exempt from payment of tax?

c) What Order?

32

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 parti cipants.

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 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

33

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

34

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 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.

35

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:

“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.

36

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.

37

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 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.

38

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 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.

39

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).

40

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 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

41

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, it was observed that the

42

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

43

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.

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

44

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.

45

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 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.

46

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 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

47

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

48

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 ha d 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 Club

was 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 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 a n

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

49

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

50

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, 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 the ratio 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.

51

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 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

52

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

53

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

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

54

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 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

55

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 Unio n, 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

56

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 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.

57

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

58

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 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 b e 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

59

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, wha t 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 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.

60

(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 46

th 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, 4

th 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.

61

That a members’ club is assessable in respect of profits derived

from affording its facilities to non-members. That where 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

62

continues to be applicable to incorporated and unincorporated

members’ clubs even after the 46

th 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:

“17. In order to underta ke 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

63

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 members, and yet participates either

64

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.

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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 deposit s 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 f rom the

Memorandum or 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

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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

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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 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

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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 a lower rate of interest

on the fixed deposit made by the club. Thus, identicality between 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.

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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

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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.”

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

71

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 unanimit y 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 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.”

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Conclusion:

43. In view of the above discussion, we arriv e 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.

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(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.

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Consequently, the appeals are dismissed.

Parties to bear their respective costs.

Pending applications, if any, stand disposed of.

……………………………………J.

(B.V. NAGARATHNA)

…….………………………………J.

(PRASHANT KUMAR MISHRA)

NEW DELHI;

AUGUST 17th, 2023.