CASE DETAILS SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.

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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. 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.

25Copy pinpoint25. 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.

26Copy pinpoint26. 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 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

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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.

27Copy pinpoint27. 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 be 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 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.

28Copy pinpoint28. 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

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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.

29Copy pinpoint29. It would be useful to refer to certain other judgments of this Court having relevance to the points under consideration. (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 46th 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, 4th 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. That a members’ club is assessable in respect of profits derived from affording its facilities to non-members. That where

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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 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 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:

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“17. In order to undertake 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 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

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[B. V. NAGARATHNA, J.]

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 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.

30Copy pinpoint30. 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 deposits made in banks/financial institutions by the appellant Clubs, in the backdrop of the dictum of this Court in the case of Bangalore Club.

31Copy pinpoint31. 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

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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.

32Copy pinpoint32. 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 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.

33Copy pinpoint33. 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 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

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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.

34Copy pinpoint34. 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 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.

35Copy pinpoint35. 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 alower rate of interest on the fixed deposit made by the club. Thus, identicality between

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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.

36Copy pinpoint36. 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.

37Copy pinpoint37. 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.

38Copy pinpoint38. 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 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.”

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39Copy pinpoint39. 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.

40Copy pinpoint40. 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.

41Copy pinpoint41. 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.

42Copy pinpoint42. 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. … [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 unanimity 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

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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.” Conclusion:

43Copy pinpoint43. 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.

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(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. Consequently, the appeals are dismissed. Parties to bear their respective costs. Pending applications, if any, stand disposed of.

Headnotes prepared by: Appeals dismissed. Nidhi Jain