Case Law (SC) -- Interest income earned on fixed deposits made in the banks by the Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act and such income would also not be covered under the principle of mutuality.

 

Question of Law --  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

Triple test of Principle of Mutuality

"31. While considering the triple test for applying the principle of mutuality, we find that in the case of Bangalore Club, the aforesaid triple test was applied. It was reiterated that the principle of mutuality envisages:

(i) Complete identity between the contributors and participators;

(ii) Action of the participators and contributors must be in furtherance of the mandate of the associations or the Clubs. The mandate of the Club is a question of fact which has to be determined from the Memorandum or 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 66 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."

Conclusion:

"43. In view of the above discussion, we arrive at the following conclusions:

(i) The Order of this Court in Cawnpore Club cannot be treated as a precedent within the meaning of Article 141 of the Constitution of India as the said order does not declare any law and the appeals filed by the revenue as against Cawnpore Club were disposed of without going into the larger question as to whether Cawnpore Club could be taxed on the interest income earned on fixed deposits made by it in the banks, or whether the principle of mutuality would apply to the said income.

(ii) The judgment of this Court in Bangalore Club does not call for reconsideration even when viewed in light of the previous Order of this Court in Cawnpore Club. Consequently, we hold that the principle of mutuality would not apply to interest income earned on fixed deposits made by the appellant Clubs in the banks irrespective whether the banks are corporate members of the club or not.

(iii) In view of the above, we hold that the judgment in Bangalore Club is not per incuriam although, the earlier Order passed by a Coordinate Bench of this Court in the case of Cawnpore Club is not noticed in Bangalore Club.

(iv) We also hold that the judgment of the Division Bench of the Karnataka High Court in Canara Bank must be restricted to apply to the facts of the said case alone and cannot be a precedent for subsequent cases. This is because the judgment of another Division Bench of the said High Court in the case of Bangalore Club was not brought to the notice of the Division Bench, which rendered the judgment in the case of Canara Bank. Further, it is the judgment of the Division Bench of the said High Court in Bangalore Club that has been sustained by a Coordinate Bench of this Court by a detailed reasoning.

(v) Thus, the interest income earned on fixed deposits made in the banks by the appellant Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961.

(vi) Conversely, if any income is earned by the Clubs through its assets and resources, from persons who are not members of the Clubs, such income would also not be covered under the principle of mutuality and would be liable to be taxed under the provisions of the Income Tax Act.

(vii) In view of the above conclusions and having found that Bangalore Club does not call for reconsideration, we hold that the said judgment which holds the field would squarely apply to these appeals also.”

SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC., CA Nos.5195-5201 OF 2012 [2023INSC736]