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

- **Citation:** 2023 INSC 736
- **Court:** Supreme Court of India
- **Decided:** 2023-08-17
- **Case number:** Civil Appeal Nos. 5195-5201 of 2012
- **Bench:** B. V. Nagarathna, Prashant Kumar Mishra
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/case-details-secundrabad-club-etc-v-c-i-t-v-etc-36605
- **Pages:** 55

## Headnote

Issues for consideration: Whether the deposit of surplus funds by the
assessee 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; and whether the judgment of
this Court in *Bangalore Club's case would call for reconsideration in light
of the order of this Court in **Cawnpore Club's case.
Income Tax Act, 1961 - s. 2(24) - Deposit of surplus funds by the
Clubs by way of bank deposits in various banks - Interest earned on
the fi xed deposits, if liable to be taxed in the hands of the clubs:
Held: Interest income earned on fi xed deposits made in the banks
by the assessee Clubs has to be treated like any other income from other
sources within the meaning of s. 2(24) and the principle of mutuality would
not apply - 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.
[Para 43 (ii), (v), (vi)]
Income Tax Act, 1961 - *Bangalore Club vs. Commissioner of
Income Tax's case wherein it was held that the amount of interest
earned by the assessee club from the banks would not fall within the
ambit of the mutuality principle and would be exigible to income tax
980
SUPREME COURT REPORTS
[2023] 12 S.C.R.
in the hands of the assessee - Reconsideration of, in view of the earlier
order of this Court in **Cawnpore Club's case:
Held: Reasoning given by the Coordinate Bench of this Court
in *Bangalore Club's case is just and proper - It would not call for
reconsideration even when viewed in light of the previous Order of this
Court in **Cawnpore Club's case - 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 was not noticed in *Bangalore
Club - Principle of mutuality would not apply to interest income earned
on fi xed deposits made by the appellant Clubs in the banks irrespective
whether the banks are corporate members of the club or not - Said judgment
in *Bangalore Club's case holds the fi eld. [Para 5, 26-28, 39, 41 and 43
(ii), (iii), (vii)]
Constitution of India - Art. 141 - Declaration of law - Binding
eff ect of - **Commissioner of Income Tax vs. M/s Cawnpore Club Ltd.'s
case, if a binding precedent:
Held: Order of this Court in **Cawnpore Club's case cannot be
treated as a precedent within the meaning of Art. 141 as the said order does
not declare any law - Appeals fi led 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 fi xed
deposits made by it in the banks, or whether the principle of mutuality
would apply to the said income - There is no ratio decidendi emanating
from the said order which would be a binding precedent for subsequent
cases - **Cawnpore Club's case ought not to have been taken note of and
considered by a Co-ordinate Bench of this Court while deciding the case of
*Bangalore Club - Order passed in **Cawnpore Club binds only the parties
in those appeals and cannot be understood as a precedent for subsequent
cases. [Para 11, 26, 27 and 43 (i)]
Constitution of India - Art. 141 - Declaration of law - Binding
eff ect of - Judgment of the Karnataka High Court in ***Canara Bank's
case, if a binding precedent -
Held: 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
981
alone though the special leave petition fi led against the said judgment was
dismissed by this Court - It cannot be a precedent for subsequent cases -
Judgment of another Division Bench of the said High Court in the case of
*Bang

## Text

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[2023] 12 S.C.R. 979 : 2023 INSC 736
979
CASE DETAILS
SECUNDRABAD CLUB ETC.
v.
C.I.T.-V ETC.
(Civil Appeal Nos. 5195-5201 of 2012)
AUGUST 17, 2023
[B. V. NAGARATHNA AND
PRASHANT KUMAR MISHRA, JJ.]
HEADNOTES
Issues for consideration: Whether the deposit of surplus funds by the
assessee 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; and whether the judgment of
this Court in *Bangalore Club's case would call for reconsideration in light
of the order of this Court in **Cawnpore Club's case.
Income Tax Act, 1961 - s. 2(24) - Deposit of surplus funds by the
Clubs by way of bank deposits in various banks - Interest earned on
the fi xed deposits, if liable to be taxed in the hands of the clubs:
Held: Interest income earned on fi xed deposits made in the banks
by the assessee Clubs has to be treated like any other income from other
sources within the meaning of s. 2(24) and the principle of mutuality would
not apply - 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.
[Para 43 (ii), (v), (vi)]
Income Tax Act, 1961 - *Bangalore Club vs. Commissioner of
Income Tax's case wherein it was held that the amount of interest
earned by the assessee club from the banks would not fall within the
ambit of the mutuality principle and would be exigible to income tax
980
SUPREME COURT REPORTS
[2023] 12 S.C.R.
in the hands of the assessee - Reconsideration of, in view of the earlier
order of this Court in **Cawnpore Club's case:
Held: Reasoning given by the Coordinate Bench of this Court
in *Bangalore Club's case is just and proper - It would not call for
reconsideration even when viewed in light of the previous Order of this
Court in **Cawnpore Club's case - 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 was not noticed in *Bangalore
Club - Principle of mutuality would not apply to interest income earned
on fi xed deposits made by the appellant Clubs in the banks irrespective
whether the banks are corporate members of the club or not - Said judgment
in *Bangalore Club's case holds the fi eld. [Para 5, 26-28, 39, 41 and 43
(ii), (iii), (vii)]
Constitution of India - Art. 141 - Declaration of law - Binding
eff ect of - **Commissioner of Income Tax vs. M/s Cawnpore Club Ltd.'s
case, if a binding precedent:
Held: Order of this Court in **Cawnpore Club's case cannot be
treated as a precedent within the meaning of Art. 141 as the said order does
not declare any law - Appeals fi led 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 fi xed
deposits made by it in the banks, or whether the principle of mutuality
would apply to the said income - There is no ratio decidendi emanating
from the said order which would be a binding precedent for subsequent
cases - **Cawnpore Club's case ought not to have been taken note of and
considered by a Co-ordinate Bench of this Court while deciding the case of
*Bangalore Club - Order passed in **Cawnpore Club binds only the parties
in those appeals and cannot be understood as a precedent for subsequent
cases. [Para 11, 26, 27 and 43 (i)]
Constitution of India - Art. 141 - Declaration of law - Binding
eff ect of - Judgment of the Karnataka High Court in ***Canara Bank's
case, if a binding precedent -
Held: 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
981
alone though the special leave petition fi led against the said judgment was
dismissed by this Court - It cannot be a precedent for subsequent cases -
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 - 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.
[Para 28 and 43 (iv)]
Doctrines/ Principles - Principle of mutuality in the context of
Income Tax Laws:
Held: Principle of mutuality is rooted in common sense - A person
cannot make a profi t from herself - This implies that a person cannot earn
profi t from an association that he shares a common identity with - Essence of
the principle lies in the commonality of the contributors and the participants
who are also benefi ciaries - There has to be a complete identity between
the contributors and the participants - Thus, it follows, that any surplus in
the common fund shall not constitute income but will only be an increase
in the common fund meant to meet sudden eventualities. [Para 8.1]
Doctrines/ Principles - Principle of mutuality - Evolution of, in
India - Discussed. [Paras 8.5 to 8.9.11]
Doctrines/Principles - Principle of mutuality - Applicability of,
with regard to the interest income earned on fi xed deposits made in
banks/fi nancial institutions by the appellant Clubs, in the backdrop of
the dictum of this Court in the case of Bangalore Club - Triple test for
applying the principle of mutuality - Explained and reiterated. [Paras
31-37]
Ratio decidendi - Importance and explanation of:
Held: Ratio decidendi of a judgment is the reason assigned in support
of the conclusion - It can be discerned only upon reading of a judgment in
its entirety and the same has to be culled out thereafter - Ratio of the case
has to be deduced from the facts of the case and the particular provision of
law interpreted or applied by the court and the decision has to be read in the
context of the particular statutory provisions involved in the matter - Ratio
or the basis of reasons and principles underlying a decision is distinct from
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
982
SUPREME COURT REPORTS
[2023] 12 S.C.R.
the ultimate relief granted or manner of disposal adopted in a given case -
Thus, the ratio decidendi of a judgment is binding as a precedent and not
the fi nal order in the judgment. [Para 13, 17 and 18]
Constitution of India - Art. 141 - Binding precedent - Principle
and purpose:
Held: In terms of Art. 141, the ratio of the judgment is the binding
precedent - Ratio decidendi of a judgment is the reason assigned in support
of the conclusion - Legal principle underlying the decision would be binding
as a precedent for a subsequent case - Thus, 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 - Decision in a case takes its fl avour
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 eff ect as is contemplated u/Art. 141 -
Decision applicable only to the facts of the case cannot be treated as a binding
precedent - An order made merely to dispose of the case cannot have the
value or eff ect of a binding precedent - Doctrine of binding precedent helps
in promoting certainty and consistency in judicial decisions and enables an
organic development of the law besides providing assurance to individuals
as to the consequences of transactions forming part of daily affairs.
[Para 16, 18, 19 and 22]
Judicial discipline - Facet of:
Held: Art. 141 states that all the courts in India, are bound to follow
the decisions of the Supreme Court - This principle is an aspect of judicial
discipline - Constitution of India - Art. 141. [Para 16]
Obiter dictum - Meaning and purpose:
Held: Obiter dictum is an observation by a court on a legal question
which may not be necessary for the decision pronounced by the court -
However, the obiter dictum of the Supreme Court is binding u/Art. 141 to
the extent of the observations on points raised and decided by the Court in
a case - Though the obiter dictum of the Supreme Court is binding on all
courts, it has only persuasive authority as far as the Supreme Court itself
is concerned. [Para 20]
983
Judgment/order - Interpretation of:
Held: Words used in a judgment are not to be interpreted as those of
a statute - Words used in a judgment should be rendered and understood
contextually and are not intended to be taken literally - 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 specifi cally or expressly laid down in the
pronouncement - Decision is an authority for what is specifi cally decided
and not what can logically be deduced therefrom. [Para 21]
LIST OF CITATIONS AND OTHER REFERENCES
*Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC
509:[2013] 1 SCR 267 - held a good law and relied on.
**Commissioner of Income Tax vs. M/s Cawnpore Club Ltd.,
Kanpur (2004) 140 Taxman 378 (SC); Commissioner of Income Tax,
Bihar vs. Bankipur Club Ltd., (1997) 5 SCC 394:[1997] 1 Suppl. SCR
263; ***Canara Bank Golden Jubilee Staff Welfare Fund vs. Deputy
Commissioner of Income Tax, (2009) 308 ITR 202; Natraj Finance
Corporation, (1988) 169 ITR 732; Chelmsford Club (2000) 243 ITR 89;
I.T.I. Employees Death and Superannuation Relief Fund, (1998) 234 ITR
308 (Kar); Commissioner of Income Tax vs. Common Effl uent Treatment
Plant, (Thane-Belapur) Association, (2010) 328 ITR 362; Madras
Gymkhana Club Vs. Deputy Commissioner of Income Tax (2010) 328
ITR 348 (MAD); State of West Bengal vs. Calcutta Club Ltd., (2019) 19
SCC 107; Kunhayammed vs. State of Kerala, (2000) 6 SCC 359:[2000]
1 Suppl. SCR 538; Fateh Maidan Club vs. Assistant Commissioner of
Income Tax ITA Nos.937, 939, 947and 952/Hyd/1995 and 716 to 720/
Hyd/2000, Asst. yrs. 1983-84 to 1997-98 dated 13.08.2023; Jubilee Hills
International Centre vs. Income Tax Offi cer 2023 SCC OnLine TS 41; CIT
vs. Venkatesh Premises Coop. Society Ltd., (2018) 15 SCC 37:[2018] 3 SCR
214; Royal Calcutta Turf Club vs. Secretary of State, (1921) ILR 48 Cal
844 : AIR (1921) Cal 633 : (1921) 1 ITC 108; English and Scottish Joint
Co-Operative Wholesale Society, Ltd. vs. Commissioner of Agricultural
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
984
SUPREME COURT REPORTS
[2023] 12 S.C.R.
Income- Tax, 1948 SCC OnLine PC 41; CIT vs. Royal Western India Turf
Club Ltd., AIR 1954 SC 85:[1954] SCR 289; Kunhayammed vs. State
of Kerala, AIR (2000) SC 2587:[2000] 1 Suppl. SCR 538; Patna Golf
Club vs. CIT, 2016 SCC OnLine Patna 2067 (Misc. Appeal No. 541 of
2007); Sports Club of Gujarat Ltd. vs. CIT, 171 ITR 504; B. Shama Rao
vs. Union Territory of Pondicherry, AIR 1967 SC 1480:[1967] SCR 650;
Dalbir Singh vs. State of Punjab, (1979) 3 SCC 745:[1979] 3 SCR 1059;
State of Uttar Pradesh vs. Synthetics and Chemicals Ltd. (1991) 4 SCC
139:[1991] 3 SCR 64; Sanjay Singh vs. Uttar Pradesh Public Service
Commission, Allahabad; (2007) 3 SCC 720:[2007] 1 SCR 235; DTC vs.
DTC Mazdoor Congress Union, AIR 1991 SC 101:[1990] 1 Suppl. SCR
142; Yum! Restaurants (Marketing) Pvt. Ltd. vs. Commissioner of Income
Tax, Delhi, (2021) 7 SCC 678; Keshav Mills Co. Ltd. vs. CIT, (1965) 2
SCR 908 - referred to.
New York Life Insurance Co. vs. Styles (Surveyor of Taxes), (1886-90)
All ER Rep Ext 1362; Last vs. London Assurance Corporation, 10 App.
Cas. 438; Walter Fletcher on his own behalf and on behalf of Trustees and
Committee of Doctor's Cave Bathing Club vs. the Commissioner of Income
Tax (1971) UKPC 30; The Carlisle & Silloth Golf Club vs. Smith, (1912) 6
TC 48; Revesby Credit Union Cooperative Ltd. vs. Federal Commissioner
of Taxation, (1965) 112 CLR 564; Bohemians Club vs. Acting Federal
Commissioner of Taxation, (1918) 24 CLR 334; Equitable Life Assurance
Society of the United States vs. Bishop, (1900) 1 QB 177; Re: Commissioner
of Taxation And: Australian Music Traders Association, (1990) FCA 261;
Jones vs. South-West Lancashire Coal Owners' Association Limited, (1927)
AC 827; Municipal Mutual Insurance Limited vs. Hills, (1932) 16 TC
430; Social Credit Savings and Loans Society Limited vs. Commissioner
of Taxation, (1971) 125 CLR 560; Sydney Water Board Employees' Credit
Union Limited vs. Commissioner of Taxation, (1973) 129 CLR 446;
Quinn vs. Leathem, 1901 AC 495 (HL); Qualcast (Wolverhampton) Ltd.
vs. Haynes, 1959 AC 743; Mersey Docks vs. Lucas, 8 App. Cas. 891 -
referred to.
Halsbury's Laws of England, 4th Edn., Reissue, Vol.23, Paras 224
985
OTHER CASE DETAILS INCLUDING IMPUGNED
ORDER AND APPEARANCES
Civil Appellate Jurisdiction: Civil Appeal Nos. 5195-5201 of 2012.
From The Judgment And Order Dated 27.08.2011 Of The High Court
Of Andhra Pradesh, Hyderabad In I.T.T.A. Nos.422, 529, 530, 531, 532,
533 Of 2006 And 244 Of 2010.
With
CIVIL APPEAL NOS.5233, 5235-5237 OF 2023, SLP (C) NOS.16817,
16819, 16818 OF 2011, CIVIL APPEAL NOS.5202-5209, 5210-5217,
5218-5219, 5220-5227, 5229, 5231, 5232, 5238-5240, 5241-5243, 52445246, 5247-5249 OF 2023, SLP (C) NO.13986 OF 2011, CIVIL APPEAL
NOS.5201, 5228, 5230, 5234 OF 2023
Appearances:
Arvind P. Datar, Firoze B. Andhyarujina, Pritesh Kapur, Sr. Advs.,
D. Abhinav Rao, Maneck Andhyarujina, Rahul Jajoo, Ms. Prerna Robin,
Devadipta Das, Ms. Radha Rangaswamy, Ms. Ranjeeta Rohatgi, Ms.
Shrika Gautam, M. P. Senthil Kumar, V. Prabakar, N. J. Ramchandar, Ms.
Jyoti Parashar, R. Chandrachud, A. Radhakrishnan, Pratap Venugopal, Ms.
Surekha Raman, Rahul Unnikrishnan, Prashant Kumar Nair, Abhishek
Anand, Shreyash Kumar, M/s. K J John and Co, K. K. Mani, Ms. T. Archana,
Rajeev Gupta, Vinay Rajput, Advs. for the Appellants.
Balbir Singh, A.S.G., Arijit Prasad, Mrs. Gargi Khanna, Mrs. Alka
Agarwal, A. K. Kaul, Prashant Singh Ii, Shyam Gopal, Santosh Kumar,
Prahlad Singh, Vijaynand Tripathi, Indrajit Prasad, Raj Bahadur Yadav,
Mrs. Anil Katiyar, Advs. for the Respondents.
JUDGMENT / ORDER OF THE SUPREME COURT
JUDGMENT
NAGARATHNA, J.
Since leave has been granted in Special Leave Petition Nos. 035895035901 of 2011, in the connected matters also leave is granted.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
986
SUPREME COURT REPORTS
[2023] 12 S.C.R.
2. In these cases, since common questions of law and facts arise, they
have been clubbed together and are heard and disposed of by this common
judgment. These appeals arise from the High Courts of Andhra Pradesh
at Hyderabad pertaining to Secunderabad Club and the Madras High
Court pertaining to Madras Gymkhana Club, Madras Cricket Club, The
Coimbatore Cosmopolitan Club, Madras Club, M/s Wellington Gymkhana
Club and M/s the Coonoor Club.
Bird's eye view of the controversy:
3. A short but interesting question of law arises in these cases, which
is, 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 1deposits would not be subject to tax under the provisions
of the Income Tax Act, 1961 (hereinafter referred to as "the Act" for the
sake of convenience). The 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.
4. In the above context, the pertinent controversy is whether, the
judgment of this Court in the case of Bangalore Club vs. Commissioner
of Income Tax, (2013) 5 SCC 509 ("Bangalore Club") calls for
reconsideration in view of the earlier order of this Court in Commissioner
of Income Tax vs. M/s Cawnpore Club Ltd., Kanpur ("Cawnpore Club")
disposed of by this Court on 05.02.1998 reported in (2004) 140 Taxman
378 (SC).
5. While considering the above controversy, we dispose of these
appeals by holding that the judgment in Bangalore Club does not call for
reconsideration and these appeals could be disposed of in terms of the said
judgment. We proceed to delineate on the subject and support our conclusion
by fi rst discussing the cases concerning Commissioner of Income Tax, Bihar
vs. Bankipur Club Ltd., (1997) 5 SCC 394 ("Bankipur Club"); Cawnpore
Club and Bangalore Club.
987
Triology of cases:
a) Bankipur Club
In this case, twenty-three cases including seven appeals which were
de-linked were classifi ed into fi ve groups which are as under:
(i)
Group A concerned the question with regard to profi ts arising
from the sales made to regular members 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 fi lm 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 specifi c 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 assessee clubs had derived
income from property let out and also interest received from
Fixed Deposit Receipt (FDR), National Savings Certifi cate
(NSC), etc. by the clubs.
Paragraphs 4 and 19 of the Bankipur Club are relevant and they read
as under:
4. .... the appeals coming within Group E - CIT v. Cawnpore
Club Ltd. (seven appeals) are de-linked and they will be posted
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
[B. V. NAGARATHNA, J.]
988
SUPREME COURT REPORTS
[2023] 12 S.C.R.
separately to be heard on merits. We shall indicate the reason for
this a little later.
XXX
19. The above four sets of cases falling in Groups A to D shall
alone be covered by this judgment. With regard to 7 cases/appeals
falling in Group E, the assessee is Cawnpore Club Ltd. It is seen that
the income that was sought to be assessed in the case of the assessee,
was one derived from property let out and also interest received from
FDR, NSC etc. In these cases, the Court held that income should be
assessed as one from "other sources" and not income from property.
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. In the appeals fi led by the Revenue, the only question that
may probably arise is, whether income received from the property
let out and interest by way of FDRs, NSC etc. can be brought to tax
under the head "income from property". Since the issue raised in this
batch of seven cases is not similar to or same as the one involved in
the other cases coming under Groups A to D, we do not propose to deal
either with the facts or the decisions rendered by the authorities in this
batch of cases (Group E). All that we propose to do is to de-link the
cases coming under Group E and direct them to be posted separately
for hearing and disposal before an appropriate Bench.
(emphasis by us)
b) Cawnpore Club:
 Subsequent to de-linking of Group E cases in respect of Cawnpore
Club, the order dated 05.02.1998 passed in those batch of appeals which
formed Group E cases reads as under:
"IN THE SUPREME COURT OF INDIA
Civil Appeal Nos. 4777-78 of 1989,4534 of 1991,1773 of
1992,4303 of 1995, 3840 of 1996 and 8046 of 1995
5 February 1998
Decided On: 05.02.1998
989
Appellants: Commissioner of Income Tax
Vs.
Respondent: Cawnpore Club Ltd.
In the Supreme Court of India B.K Kirpal & S.P. Kurdukar, JJ.
ORDER
1. One of the questions which the High Court 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 fi led 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 fi xed 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 fi xed deposits kept with non-member banks. In the said case,
surplus amounts of the said Club were deposited in four banks which
were members of the said Club. The question that arose was, whether,
the principle of mutuality would apply to the funds deposited in the said
four banks. Having regard to the fact that the said funds were raised
from contribution of several members including the four banks which
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
[B. V. NAGARATHNA, J.]
990
SUPREME COURT REPORTS
[2023] 12 S.C.R.
were corporate members of the said Club and the interest derived from
it was utilised by several members of the assessee Club, in the said case,
the High Court nevertheless held that the principle of "no man can trade
with himself" would not be available in respect of a nationalised banks
holding a fi xed deposit on behalf of its customer. That the relationship is
one of a banker and a customer. Consequently, the High Court reversed
the decision of the Tribunal and restored the order of the assessing offi cer.
Hence, an appeal was fi led by the assessee Bangalore Club before this
Court.
The question for determination before this Court was, whether, or not
interest earned by the assessee on the surplus funds invested in fi xed deposits
with the corporate member banks is exempt from levy of income tax, based
on the doctrine of mutuality. After appreciating the general understanding
of the doctrine of mutuality in the context of the provision of the Act and by
referring to New York Life Insurance Co. vs. Styles (Surveyor of Taxes),
(1886-90) All ER Rep Ext 1362 ("Styles") and other judgments of the House
of Lords and the High Court of Australia and by referring to the Simon's
Taxes Vol. B. 3rd Edn., Paras B1.218 and B1.222 (pp.159 and 167) it was
observed as under:
"18. In short, there has to be a complete identity between the
class of participators and class of contributors; the particular label or
form by which the mutual association is known is of no consequence.
Kanga and Palkhivala explain this concept in The Law and Practice
of Income Tax (8th Edn., Vol. I, 1990) at p. 113 as follows:
"1. Complete identity between contributors and
participators.- '... The contributors to the common fund and
the participators in the surplus must be an identical body. That
does not mean that each member should contribute to the common
fund or that each member should participate in the surplus
or get back from the surplus precisely what he has paid.' The
Madras, Andhra Pradesh 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
991
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 benefi t 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-profi t-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 organisation, etc. However, the mandate
must not be construed myopically. While in some situations, the
benefi ts may be evident directly in the short run, in others, they may
be accruable to an organisation indirectly, in the long run. Space must
be made for both such forms of interactions between the organisation
and its members. Therefore, as Finlay, J. observed in National Assn. of
Local Govt. Offi cers v. Watkins (Inspector of Taxes), where member
of a club orders dinner and consumes it, there is no sale to him. At
the same time, as in CIT v. Bankipur Club Ltd., where a club makes
"surplus receipts" from the subscriptions and charges for the various
conveniences paid by members, even though there is no direct benefi t
of the receipts to the customers, the fact that they will eventually be
used in furtherance of the services of the club must be considered as
a furtherance of the mandate of the club.
24. Thirdly, there must be no scope of profiteering by the
contributors from a fund made by them which could only be expended
or returned to themselves. The locus classicus pronouncement comes
from Rowlatt, J.'s observations in Thomas (Inspector of Taxes) v.
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
[B. V. NAGARATHNA, J.]
992
SUPREME COURT REPORTS
[2023] 12 S.C.R.
Richard Evans & Co. Ltd. wherein, while interpreting Styles case,
he held that if profi ts are distributed to shareholders as shareholders,
the principle of mutuality is not satisfi ed. He observed thus: (Richard
Evans case, KB pp. 46-47)
"... But a company can make a profi t out of its members
as customers, although its range of customers is limited to its
shareholders. If a railway company makes a profi t by carrying
its shareholders, or if a trading company, by trading with the
shareholders even if it is limited to trading with them, makes
a profi t, that profi t belongs to the shareholders in a sense, but
it belongs to them qua shareholders. It does not come back to
them as purchasers or customers; it comes back to them as
shareholders upon their shares. Where all that a company does
is to collect money from a certain number of people-it [does
not matter] whether they are called members of the company
or participating policy-holders-and apply it for the benefi t of
those same people, not as shareholders in the company, but as the
people who subscribed it, then, as I understand Styles case, there
is no profi t. If the people were to do the thing for themselves,
there would be no profi t, and the fact that they incorporate a
legal entity to do it for them makes no diff erence; there is still
no profi t. This is not because the entity of the company is to be
disregarded; it is because there is no profi t, 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 eff ect 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 fi xed deposits kept with nonmember banks was off ered for taxation and the tax due was paid.
993
Therefore, we are required to examine the case of the assessee, in
relation to the interest earned on fi xed 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 fl ow of money,
to and fro, was maintained within the closed circuit formed by the
banks and the Club, and to that extent, nobody who was not privy to
this mutuality, benefi ted from the arrangement. However, as soon as
these funds were placed in fi xed deposits with banks, the closed fl ow
of funds between the banks and the Club suff ered from defl ections
due to exposure to commercial banking operations. During the course
of their banking business, the member banks used such deposits to
advance loans to their clients. Hence, in the present case, with the
funds of the mutuality, the member banks engaged in commercial
operations with third parties outside of the mutuality, rupturing the
"privity of mutuality", and consequently, violating the one-to-one
identity between the contributors and participators as mandated by
the fi rst condition. Thus, in the case before us the fi rst condition for a
claim of mutuality is not satisfi ed.
30. As aforesaid, the second condition demands that to claim
an exemption from tax on the principle of mutuality, treatment of the
excess funds must be in furtherance of the object of the club, which is
not the case here. In the instant case, the surplus funds were not used
for any specifi c service, infrastructure, maintenance or for any other
direct benefi t for the member of the Club. These were taken out of
mutuality when the member banks placed the same at the disposal of
third parties, thus, initiating an independent contract between the bank
and the clients of the bank, a third party, not privy to the mutuality.
This contract lacked the degree of proximity between the Club and
its member, which may in a distant and indirect way benefi t the Club,
nonetheless, it cannot be categorised as an activity of the Club in pursuit
of its objectives. It needs little emphasis that the second condition
postulates a direct step with direct benefi ts to the functioning of the
Club. For the sake of argument, one may draw remote connections
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
[B. V. NAGARATHNA, J.]
994
SUPREME COURT REPORTS
[2023] 12 S.C.R.
with the most brazen commercial activities to a Club's functioning.
However, such is not the design of the second condition. Therefore,
it stands violated.
31. The facts at hand also fail to satisfy the third condition of the
mutuality principle i.e. the impossibility that contributors should derive
profi ts from contributions made by themselves to a fund which could
only be expended or returned to themselves. This principle requires
that the 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 nonmembers 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 refl ected one between a bank and its client. This
directly contravenes the third condition as elucidated in Styles and
Kumbakonam Mutual Benefi t Fund Ltd. cases."
XXX
34. In the present case, the interest accrues on the surplus
deposited by the Club like in the case of any other deposit made by
an account-holder with the bank.
XXX
37. We may add that the assessee is already availing the benefi t
of the doctrine of mutuality in respect of the surplus amount received
as contributions or price for some of the facilities availed of by its
members, before it is deposited with the bank. This surplus amount
was not treated as income; since it was the residue of the collections
left behind with the Club. A façade of a club cannot be constructed
995
over commercial transactions to avoid liability to tax. Such set-ups
cannot be permitted to claim double benefi t of mutuality. We feel that
the present case is a clear instance of what this Court had cautioned
against in Bankipur Club, when it said: (SCC p. 22, para 22)
"22. ... if the object of the assessee Company claiming
to be a 'mutual concern' or 'club', is to carry on a particular
business and money is realised both from the members and
from non-members, for the same consideration by giving the
same or similar facilities to all alike in respect of the one and
the same business carried on by it, the dealings as a whole
disclose the same profi t-earning motive and are alike tainted
with commerciality. In other words, the activity carried on by
the assessee in such cases, claiming to be a 'mutual concern'
or 'members' club' is a trade or an adventure in the nature of
trade and the transactions entered into with the members or nonmembers alike is a trade/business/transaction and the resultant
surplus is certainly profi t-income liable to tax. We should also
state, that 'at what point, does the relationship of mutuality end
and that of trading begin' is a diffi cult and vexed question. A host
of factors may have to be considered to arrive at a conclusion.
'Whether or not the persons dealing with each other, is a "mutual
club" or carrying on a trading activity or an adventure in the
nature of trade' is largely a question of fact. (Wilcock case, TC
p. 132 : KB at pp. 44 and 45.)"
(emphasis supplied)
38. In our opinion, unlike the aforesaid surplus amount itself,
which is exempt from tax under the doctrine of mutuality, the amount
of interest earned by the assessee from the aforenoted four banks will
not fall within the ambit of the mutuality principle and will therefore,
be exigible to income tax in the hands of the assessee Club.
Canara Bank:
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),
SECUNDRABAD CLUB ETC. v. C.I.T.-V ETC.
[B. V. NAGARATHNA, J.]
996
SUPREME COURT REPORTS
[2023] 12 S.C.R.
("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 fi led against
the said judgment was dismissed by this Court by order dated 28.07.2009.
However, two other High Courts namely, the Bombay High Court
and the Madras High Court expressed reservations with respect to the
observations in Canara Bank. Speaking through Dr. D.Y. Chandrachud J.
(as the learned Chief Justice then was), the Bombay High Court observed
in Commissioner of Income Tax vs. Common Effl uent Treatment Plant,
(Thane-Belapur) Association, (2010) 328 ITR 362 that the judgment in
Canara Bank had struck a divergent note and therefore, the said judgment
must be confi ned to the special facts as they occur in that case. The Karnataka
High Court, while dealing with the issue in Canara Bank placed a great
deal of emphasis on the source of funds of the assessee. The Karnataka High
Court clarifi ed that it was making it clear that its conclusion "is based on
the source of funds of the assessee during the two relevant years". It was
pointed out that the mere fact that the funds which were invested in fi xed
deposits with the banks were funds which originated from the contributions
made by the members of the assessee cannot conclude the question as
regards the taxability of the receipts on account of interest obtained from
the investment of these funds. According to the Bombay High Court these
receipts must partake the character of income from other sources and would
be exigible to tax.
In Madras Gymkhana Club Vs. Deputy Commissioner of Income
Tax (2010) 328 ITR 348 (MAD) a Division Bench of the Madras High
997
Court observed that whatever was stated in Canara Bank will have to be
construed in the special facts and circumstances of that case and it cannot
have universal application. It was further observed that investment of surplus
fund with some of the member banks and other institutions in the form of
fi xed deposits and security which in turn result in earning interest cannot
be held to satisfy the mutuality concept.
Submissions:
6. In the above backdrop of decisions of this Court as well as High
Courts on the point of controversy, we shall now consider the rival
submissions.
Submissions of Appellants:
6.1 The central theme of the submissions advanced by Sri Arvind
Datar, learned senior counsel appearing for some of the appellant Clubs is
that the two judge Bench Judgement of this Court in Bangalore club is not
a binding precedent and therefore the same calls for reconsideration. In this
regard, our attention 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 fi xed deposits, National Savings Certifi cates
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.