TaxTMI 
TaxTMI 
2023 (8) TMI 925
X X X X Extracts X X X X
X X X X Extracts X X X X
....IVIL APPEAL NO. 5244 OF 2023 (@ SLP (C) NO. 1256 OF 2011) CIVIL APPEAL NO. 5247 OF 2023 (@ SLP (C) NO. 1346 OF 2011) CIVIL APPEAL NO. 5753 OF 2023 (@ SLP (C) NO. 13986 OF 2011) CIVIL APPEAL NO. 10660 OF 2023 (@ SLP (C) NO. 34130 OF 2009) CIVIL APPEAL NO. 5228 OF 2023 (@ SLP (C) NO. 30960 OF 2010) CIVIL APPEAL NO. 5230 OF 2023 (@ SLP (C) NO. 30959 OF 2010) CIVIL APPEAL NO. 5234 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 Ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re Club and Bangalore Club. Triology of cases: a) Bankipur Club In this case, twenty-three cases including seven appeals which were de-linked were classified into five groups which are as under: (i) Group A concerned the question with regard to profits 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 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 fee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eal 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 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: "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 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 re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ey 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 benefit 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 profit. If the people were to do the thing for themselves, there would be no profit, and the fact 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 exami....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tivities 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 profits 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....act. (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), ("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, (199....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereafter, various High Courts have followed the judgment of this Court in Bangalore Club and have disregarded the earlier order passed by this Court in Cawnpore Club, which is not proper. 6.4 Learned senior counsel Sri Datar contended that there are glaring flaws in the reasoning of this Court in Bangalore Club and hence, the said judgment also being contrary to the order passed in Cawnpore Club, is not a binding precedent and is per incurium. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ench, in Fateh Maidan Club vs. Assistant Commissioner of Income Tax in 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, has categorically noticed that this Court had affirmed the judgment of the High Court in Cawnpore Club and had held in favour of assessee on all issues including the issue as to whether interest income earned by the clubs from fixed deposits made in the banks, post offices 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ow two judgments which are diametrically opposite on the question of the application of the principle of mutuality to interest income earned by clubs. In this regard, our attention was also drawn to a judgment of the Telengana High Court in Jubilee Hills International Centre vs. Income Tax Officer reported in 2023 SCC OnLine TS 41, wherein it was observed that the Tribunal was not justified in taking a view that the principle of mutuality would not 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 cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... explained in the case of Calcutta Club with reference to the judgment in the case of Bangalore Club. That the three-judge Bench in Calcutta Club has categorically observed that the principle of mutuality is applicable to incorporated or unincorporated clubs even after the 46th Amendment to Article 366 (29-A) of the Constitution of India and therefore, by the said reasoning of the three-Judge Bench, the judgment in Bangalore club would call for reconsideration. 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 Add....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e customers of the banks and the members of the Clubs. Hence, the principle of mutuality would not apply. According to the learned ASG, this is so irrespective of whether the fixed deposits are made in banks which are corporate members of the clubs or in any other bank or post offices. That the interest accrued on the fixed deposits made by the clubs is similar in nature to any other banks' deposit earning an interest made by any other customer of 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 invoke....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reiterated that the Order in Cawnpore Club is a declaration of law and the same ought to have been considered by a Coordinate Bench of this Court in Bangalore Club. That the decision in Cawnpore Club is a fall out of the judgment in Bankipur Club and the same is of binding nature. While referring to the judgment of this Court in the case of Kunhayammed, Sri Datar submitted that the decision in Cawnpore Club attracts the doctrine of merger and the 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Commissioners. This decision was affirmed by the Court of Appeal. 8.3 Against these decisions, the company brought an appeal before the House of Lords. The House of Lords was divided in the ratio 4:2 in the matter, with the majority holding that that no part of the premium income received under participating policies was liable to be assessed to income tax as profits or gains. That London Assurance Corporation was distinguishable, the income 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sale, it has earned profits which are, subject to the provisions of the taxing Act, taxable profits." Given the deep-rooted common law tradition, Indian jurisprudence has had a rich engagement with the principle of mutuality, especially in the context of taxation. 8.8 A Constitution Bench of this Court in CIT vs. Royal Western India Turf Club Ltd., AIR 1954 SC 85 rendered a significant judgment on this subject. Royal Western India Turf Club realised money from 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case, it was observed that the disparity between the member of the club and the guest of the hotel (hotel members) was substantial. In other words, the members of the club were trading, earning profits from the hotel which used to send their guests for using the club facilities, commensurate with their subscription. Therefore, any surplus income derived by the said Club from the hotel members was in the nature of profits and therefore the nature of the transaction being 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns and the societies in which money was invested. However, the beneficiaries of the payment of the dividend were all the members. It was observed that the revenue earned was by virtue of the society's business dealings with a number of its members and should be classed as income. 8.9.6 In Re: Commissioner of Taxation And: Australian Music Traders Association, (1990) FCA 261, the case pertained to the Australian Music Traders Association, a mutual association. The controversy 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 st....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wever, in the course of time, the Company also undertook an extensive business in employers' liability and other insurances, both with existing fire policy holders and others. The revenue conceded that the fire insurance business is a business of mutual insurance which did not attract liability to income tax. The appellant company therein agreed that it was liable for tax on its profits from employers' liability and other insurances undertaken on behalf of persons 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, rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the mutuality principle in the said case, it was held that there were two impediments: that precise identicality between the individuals contributing to a fund and the participants in that fund was no longer required. However, there ought be a "reasonable relationship" between contributions and benefits and that no such relationship existed, as all members of the Association had not taken space at the 1984 Australian Music Exhibition. Secondly, it was observed that the 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... value and if this Bench is to accept the said position, then the earlier order passed by this Court in Cawnpore Club must be applied in the instant case, or in the alternative, the matter could be referred to a larger Bench for considering the correctness or otherwise of the judgment in Bangalore Club. 11. While considering the said submission, it is noted that in Bankipur Club, in so far as the Group A and D cases were concerned, it was held that the principle of mutuality applied 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... precedent for subsequent cases. 12. In this regard, it would be useful to refer to the judgment of the Division Bench of the Patna High Court in Patna Golf Club vs. CIT, 2016 SCC OnLine Patna 2067 (Misc. Appeal No. 541 of 2007) wherein after referring to Bankipur Club and the order passed subsequently in Cawnpore Club, it was observed that on a reading of the order of this Court in Cawnpore Club, no inference could be drawn to the effect that the principle of mutuality would apply 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erhampton) Ltd. vs. Haynes, 1959 AC 743, it was laid down that the ratio decidendi may be defined as a statement of law applied to the legal problems raised by the facts as found, upon which the decision is based. The other two elements in the decision are not precedents. A judgment is not binding (except directly on the parties to the lis themselves), nor are the findings of fact. This means that even where the direct facts of an earlier case appear to be identical to those of the case before the 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 fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore, the context or the question, while considering which, a judgment has been rendered assumes significance. 20. As against the ratio decidendi of a judgment, an 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 under Article 141 to the extent of the observations on points raised and decided by the Court in a case. Although 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. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 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 inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing 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 threepronged 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 members, and yet participates either in the contribution or surplus without subjecting himself/herself to mutual rights and obligations. The principle of common identit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t be no scope for profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. 32. 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. 33. That, it is not a normal activity of the appellants-clu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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. 35. 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 len....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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." 39. 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. 40. 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. 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 fol....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to review and revise its earlier decisions." Conclusion: 43. 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. (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 ....