9911796707
TMI Blog2023 (8) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NO. 30959 OF 2010) CIVIL APPEAL NO.________ OF 2023 (@ SLP (C) NO. 13810 OF 2011) B. V. NAGARATHNA And PRASHANT KUMAR MISHRA , JJ. For the Appellant : Mr. Pratap Venugopal, Adv. Ms. Surekha Raman, Adv. Mr. Rahul Unnikrishnan, Adv. Mr. Prashant Kumar Nair, Adv. Mr. Abhishek Anand, Adv. Mr. Shreyash Kumar, Adv. M/S. K J John And Co, AOR Mr. K. K. Mani, AOR Ms. T.Archana, Adv. Mr. Rajeev Gupta, Adv. Mr. Vinay Rajput, Adv. Mr. Pritesh Kapur, Sr. Adv. Ms. Radha Rangaswamy, AOR Mrs. Ranjeeta Rohatgi, Adv. Ms. Shrika Gautam, Adv. Mr. V. Prabhakar, Adv. Mr. M. P. Senthil, Adv. Mr. R. Chandrachud, AOR Ms. Jyothi Parashar, Adv. Mr. A. Radhakrishnan, AOR Mr. Firoze B. Andhyarujina, Sr. Adv. Mr. D. Abhinav Rao, AOR Mr. Maneck Andhyarujina, Adv. For the Respondent : Mr. Balbir Singh, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mrs. Alka Agarwal, Adv. Ms. Monica Benjamin, Adv. Mrs. Gargi Khanna, Adv. Mr. Santosh Kumar, Adv. Mr. Prashant Singh Ii, Adv. Mr. Shyam Gopal, Adv. Mr. A K Kaul, Adv. Mr. Prahlad Singh, Adv. Mrs. Anil Katiyar, AOR JUDGMENT NAGARATHNA, J. Since leave has been granted in Special Leave Petition Nos. 035895-035901 of 2011, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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. 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 fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... radesh 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 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 organisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was drawn to the order of another two-Judge Bench of this Court in the case of Cawnpore Club 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curium. 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- -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. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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. 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 scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t apply with reference to transactions entered into by the appellant therein with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. 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 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 square ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said judgment would also be binding. 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 under the principle of mutuality and therefore be exempt from payment of tax? c) What Order? Principle of mutuality: 8. At the outset it would be useful to understand and discuss the principle of mutuality in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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. 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 ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontroversy 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons 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 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 fortyeight 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. Analysis : 9. While considering the questions that arise in these appeals, we have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied 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 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 had 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme 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 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 born ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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, what 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 continues to be applicable to incorporated and unincorporated members clubs even after the 46th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 settled by judgments of this Court. In the said case, it was observed as follows: 23. In 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
