Supreme Court: In a batch of Special Leave Petitions arising against Andhra Pradesh and Madras High Court pertaining to Secunderabad Club, Madras Gymkhana Club, Madras Cricket Club, The Coimbatore Cosmopolitan Club, Madras Club, Wellington Gymkhana Club and Coonoor Club, wherein, the High Courts 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, restricting the principle of mutuality, the Division Bench of B.V. Nagarathna and Prashant Kumar Mishra, JJ. held that the decision in Bangalore Club v. CIT, (2013) 5 SCC 509 was to be construed as a precedent and therefore, income earned on fixed deposits by the said Clubs fell within the meaning of Section 2(24) of Income Tax Act, 1961.
Question of Law – Taxation of Clubs
Whether deposit of surplus funds by the Clubs by way of bank deposits in various banks is liable to be taxed in the hands of Clubs?
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?
While considering the instant controversy, the Court held Bangalore Club v. CIT, (2013) 5 SCC 509 did not call for reconsideration and the appeals could be disposed of in terms of the same judgment.
The Court first proceeded with trilogy of cases in CIT v. Bankipur Club Ltd., (1997) 5 SCC 394; Commissioner of Income Tax v. M/s Cawnpore Club Ltd., Kanpur, (2004) 140 Taxman 378 (SC) and Bangalore Club (supra).
The Court explained that in Bankipur Club (supra), there were 23 cases including 7 appeals which were de-linked and classified into 5 groups based on the question of taxability involved. In Cawnpore Club (supra), the Court pointed towards order dated 5-02-1998 passed by Division Bench of the Court regarding application of doctrine of mutuality for the particular assessee and dismissal of appeals. In Bangalore Club (supra), tax exemption of interest from surplus funds based on doctrine of mutuality was decided to be exigible to income tax in the hands of the assessee Club.
The Court also discussed Canara Bank Golden Jubilee Staff Welfare Fund v. Deputy Commissioner of Income Tax, 2008 SCC OnLine Kar 671 wherein it was held that “interest on investment and dividend on shares is governed by the principle of mutuality and therefore, not taxable” based on the source of fund of the assessee during 2 relevant years with the observation that source of fund was wholly contributed by the members of Club and therefore, income on the said two heads was held to be non-taxable. However, the Madras and Bombay High Courts expressed reservations against the said decision in Commissioner of Income-Tax v. Common Effluent Treatment Plant, (Thane-Belapur) Association, 2010 SCC OnLine Bom 2042 and Madras Gymkhana Club v. Deputy Commissioner of Income-Tax, 2009 SCC OnLine Mad 2965.
Principle of Mutuality and Income Tax Law
The Court hinted towards its roots in common sense and explained that “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 participants.” It further pointed out that any surplus in the common fund would not constitute income but become an increase in common fund meant for meeting sudden eventualities with reference to THE NEW YORK LIFE INSURANCE COMPANY APPELLANTS, AND STYLES (SURVEYOR OF TAXES) RESPONDENT., [L.R.] 14 App. Cas. 381.
Evolution of Principle of Mutuality in India
The Court cited Royal Calcutta Turf Club v. Secretary of State for India in Council, 1921 SCC OnLine Cal 5 for making a notable contribution to the evolution of the common law on mutuality, English and Scottish Joint Co-op. Wholesale Society, Ltd. v. Commr. of Agricultural Income-Tax, Assam, 1948 SCC OnLine PC 41 for the triple test for application of the principle of mutuality, CIT v. Royal Western India Turf Club Ltd., (1953) 2 SCC 415 which held that an exemption founded on the doctrine of mutuality could not be granted. The Court also referred to certain English and American cases in this regard.
The Court brought clarity that “It must be remembered that the appeals in the case of Cawnpore Club (supra) 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 assessee and against the Revenue.” and viewed that the said order was only binding upon the parties and could not be taken as a precedent for subsequent cases. The Court particularly referred to Patna Golf Club Limited v. Commissioner of Income Tax-I, 2016 SCC OnLine Pat 2067.
Court’s Elucidation of Precedent – Ratio Decidendi
Following B. Shama Rao v. Union Territory of Pondicherry, (1967) 2 SCR 650, the Court reiterated that ratio decidendi of a judgment was binding as a precedent. Reliance was placed on Dalbir Singh v. State of Punjab, (1979) 3 SCC 745 for a binding precedent. The Court listed 3 basic ingredients in every decision:
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;
statements of the principles of law applicable to the legal problems disclosed by the facts; and
judgment based on the combined effect of (i) and (ii) above.
The Court explained that the second pointer was vital element for doctrine of precedent in a decision, being the ratio decidendi, not constituted by everything said by the judge in a judgment, emphasizing upon the importance of analyzing a decision. It further said that “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.” The Court further explained the law declared as per Article 141 through State of U.P. v. Synthetics and Chemicals Ltd., (1991) 4 SCC 139.
The Court further elaborated that “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.”
Back to Facts
After a detailed analysis of what constitutes a precedent/ratio decidendi, the Court explained that in Cawnpore Club (supra), in the absence of any deduction/reasoning/analysis and a discernable ratio decidendi, the order could not carry precedential value, and the assessee in the said case could not be taxed on principle of mutuality. The Court did not find any fault in the decision in Bangalore Club (supra) while dealing in detail the taxability of income earned from interest on fixed deposits made by the Club in banks. Therefore, the Court also refused to refer the decision in Bangalore Club (supra) to a larger bench. Regarding Karnataka High Court’s decision in Canara Bank (supra), the Court found merit in the observations of Bombay and Madras High Courts for restricting the same to its own facts and not to be considered as a precedent.
The Court also significantly pointed out that “the judgment of Karnataka High Court in Bangalore Club (supra) was not brought to the notice of the Division Bench of the said Court which decided Canara Bank (supra). Had the Division Bench known about the judgment passed by a Coordinate Bench of that Court in Bangalore Club (supra) 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 (supra) may have been different.” Therefore, the Court also held that judgment in Canara Bank (supra) was restricted to facts and could not be construed as a precedent.
The Court further referred to the Court’s observations in State of W.B. v. Calcutta Club Ltd., (2019) 19 SCC 107 which was referred to in Bangalore Club (supra). Reference was also made to Yum! Restaurants (Mktg.) (P) Ltd. v. CIT, (2021) 7 SCC 678 regarding common identity. The Court observed that it was not normal for Clubs to deposit funds in a bank, and that happened only when a surplus was generated through various activities to earn an interest. It noted that only profit generated from the payments made by the members of the clubs would not be taxable and said that “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.”
The Court explained that “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 participants would end. The 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.”
The Court held the judgment in Bangalore Club (supra) to be a binding precedent justifiably and squarely applicable to the facts of the instant case. It further clarified that principle of mutuality would not apply to interest income earned on fixed deposits made by the Clubs in banks irrespective of banks being corporate members.
It was also settled by the Court that interest income earned by the Clubs on fixed deposits in banks were to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961. Also, if any income was earned through its assets and resources from non-members of the Clubs, such income was not covered under the principle of mutuality and taxable under the provisions of Income Tax Act.
[Secundrabad Club v. CIT, 2023 SCC OnLine SC 1004, decided on 17-08-2023]
Judgment authored by: Justice B.V. Nagarathna
Advocates who appeared in this case :
For Appellants: Advocate Pratap Venugopal, Advocate Surekha Raman, Advocate Rahul Unnikrishnan, Advocate Prashant Kumar Nair, Advocate Abhishek Anand, Advocate Shreyash Kumar, Advocate on Record K J John And Co, Advocate on Record K. K. Mani, Advocate T. Archana, Advocate Rajeev Gupta, Advocate Vinay Rajput, Senior Advocate Pritesh Kapur, Advocate on Record Radha Rangaswamy, Advocate Ranjeeta Rohatgi, Advocate Shrika Gautam, Advocate V. Prabhakar, Advocate M. P. Senthil, Advocate on Record R. Chandrachud, Advocate Jyothi Parashar, Advocate on Record A. Radhakrishnan, Senior Advocate Firoze B. Andhyarujina, Advocate on Record D. Abhinav Rao, Advocate Maneck Andhyarujina;
For Respondents: Additional Solicitor General Balbir Singh, Senior Advocate Arijit Prasad, Advocate on Record Raj Bahadur Yadav, Advocate Alka Agarwal, Advocate Monica Benjamin, Advocate Gargi Khanna, Advocate Santosh Kumar, Advocate Prashant Singh Ii, Advocate Shyam Gopal, Advocate A K Kaul, Advocate Prahlad Singh, Advocate on Record Anil Katiyar.