2023 (8) TMI 925 - SC - Income Tax

Doctrine of mutuality - Interest earned on the bank deposits by clubs - Deposit of surplus funds by the appellant Clubs by way of bank deposits in various banks - 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? - High Courts in the impugned judgments have uniformly held that the interest earned on the bank deposits made by the clubs is liable to be taxed in the hands of the clubs and that the principle of mutuality would not apply - Whether the Order of this Court in Cawnpore Club 1998 (2) TMI 591 - SC ORDER 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 2013 (1) TMI 343 - SUPREME COURT ? - HELD THAT - 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. The judgment of this Court in Bangalore Club 2013 (1) TMI 343 - SUPREME COURT 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. Thus 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. We also hold that the judgment of the Division Bench of the Karnataka High Court in Canara Bank 2008 (7) TMI 239 - KARNATAKA HIGH COURT 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. 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. 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. 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.

Summary

Issues Involved:
1. Whether the judgment of this Court in Bangalore Club requires reconsideration in light of the "Order" of this Court in Cawnpore Club.
2. Whether the interest on income earned by Clubs is covered under the principle of mutuality and therefore exempt from payment of tax.

Summary:

Issue 1: Reconsideration of Bangalore Club Judgment
The Supreme Court analyzed whether the judgment in Bangalore Club needs reconsideration due to the earlier Cawnpore Club order. The Court clarified that the Cawnpore Club order did not provide a detailed reasoning or ratio decidendi and thus cannot be considered a binding precedent. The Bangalore Club judgment, which provided a detailed reasoning on the taxability of interest earned from fixed deposits, stands as a valid precedent. The Court emphasized that only the ratio decidendi of a judgment is binding, and the Cawnpore Club order lacked such a detailed analysis. Therefore, the Bangalore Club judgment does not call for reconsideration.

Issue 2: Application of the Principle of Mutuality to Interest Income
The Supreme Court reaffirmed the principle of mutuality, which requires a complete identity between contributors and participators, actions in furtherance of the association's mandate, and no scope for profiteering. The Court held that when clubs deposit surplus funds in banks, these funds are exposed to commercial banking operations, breaking the privity of mutuality. The interest earned from such deposits is therefore taxable as it involves commercial transactions with third parties, disrupting the mutuality principle. The Court cited various judgments, including Royal Western India Turf Club and Municipal Mutual Insurance Limited vs. Hills, to support this view.

Conclusion:
1. Cawnpore Club order is not a binding precedent and does not affect the Bangalore Club judgment.
2. Bangalore Club judgment does not require reconsideration; it correctly holds that interest income from fixed deposits is taxable and not covered by the principle of mutuality.
3. Interest income earned by clubs from fixed deposits in banks is taxable as income from other sources.
4. Income earned by clubs from non-members is also taxable and not covered under the principle of mutuality.

The appeals were dismissed, and the parties were directed to bear their respective costs.