Interest Income Earned On Deposits By Clubs In Banks Which Are Corporate Members Taxable; Principle Of Mutuality Not Applicable: Supreme Court

The Supreme Court has ruled that the interest income earned on fixed deposits (FDs) made by Clubs in the banks which are members of those Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961. The bench of Justices B.V. Nagarathna and Prashant Kumar Mishra said that the principle of mutuality would not apply to interest income earned on FDs made by Clubs in the banks irrespective of whether the banks are corporate members of the Club or not.The court further rejected the argument that the two-judge bench judgement of the top court in Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509 is not a binding precedent and therefore, the same calls for reconsideration.The Apex Court in Bangalore Club (2013) had ruled that the surplus amount which is received as contribution from the members is exempt from tax under the doctrine of mutuality. However, the interest earned by the assessee Clubs on the surplus funds invested in FDs with the corporate member banks will not fall within the ambit of the mutuality principle. Therefore, the same shall be exigible to income tax in the hands of the Clubs, the court in Bangalore Club had ruled. The Court further said that the decision of the Division Bench of the Karnataka High Court in Canara Bank Golden Jubilee Staff Welfare Fund vs. Deputy Commissioner of Income Tax, (2009) 308 ITR 202 (Kar), where it was held that interest on investment and dividend on shares is governed by the principle of mutuality and therefore, not taxable, cannot be a precedent for subsequent cases and that it must be restricted to apply to the facts of the said case alone.The bench also dismissed the reliance placed on top court’s order in Commissioner of Income Tax vs. M/s Cawnpore Club Ltd., Kanpur, (2004) 140 Taxman 378 (SC). The court noted that there is no indication in the order as to what “the other questions” were in respect of which the Supreme Court had ruled that the principle of mutuality applied. The court said that the disposal of Revenue’s appeals in Cawnpore Club by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent within the meaning of Article 141 of the Constitution of India as the said order does not declare any law.The Supreme Court was dealing with a batch of SLPs arising from the decision of the Andhra Pradesh and Madras High Court, pertaining to the Secunderabad Club, Madras Gymkhana Club, Madras Cricket Club, and the M/s Wellington Gymkhana Club, amongst others. The High Courts in the impugned decision had held that the interest earned on the bank deposits made by the assessee Clubs is liable to be taxed in their hands and that the principle of mutuality would not apply.Senior Advocate Arvind Datar, appearing on behalf of the assessee Clubs, placed reliance on the Supreme Court’s earlier decision in M/s Cawnpore Club Ltd. (2004) where the court was dealing with the application of the doctrine of mutuality. In Cawnpore Club, the Supreme Court, while dealing with the Revenue’s appeal against the decision of the Allahabad High Court, had observed that with respect to the “other questions” which arose in the appeal, the assessee club could not be taxed because of the principle of mutuality.Mr. Datar submitted before the court that the “other questions” which arose in the appeals before the top court in Cawnpore Club (2004), also included the question of interest earned on the FDs etc. invested in banks by the assessee club. Therefore, he claimed that in view of the same, the interest earned on FDs invested in banks is not taxable in the hands of the Club on the principle of mutuality.He further submitted that there was a direct conflict between the view taken in the case of Cawnpore Club (2004) and the judgment in Bangalore Club (2013), which are both two-judge Bench decisions of the Supreme Court. The decision in Bangalore Club being contrary to the earlier order passed in Cawnpore Club, was not a binding precedent and was per incurium, and therefore, it ought to be reconsidered and the matter may be referred to a larger Bench, Datar argued. Senior Advocate Firoze Andhyarujina and Pritesh Kapur also appeared for the appellants. Additional Solicitor General of India Balbir Singh appeared for the Union.Court's analysisPerusing the order passed in Cawnpore Club, the bench said that the Supreme Court did not spell out what “the other questions” were in respect of which the respondent Cawnpore Club could not be taxed owing to the principle of mutuality. “In the absence of there being any indication in the order as to what “the other questions” were in respect of which the principle of mutuality applied, in our view, there is no ratio decidendi emanating from the said order which would be a binding precedent for subsequent cases,” the court said.“In view of the disposal of Revenue’s appeals in the case of Cawnpore Club by a brief order sans any...

Interest Income Earned On Deposits By Clubs In Banks Which Are Corporate Members Taxable; Principle Of Mutuality Not Applicable: Supreme Court

Parina Katyal

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