Interest income earned on fixed deposits of Clubs are taxable under Section 2(24) of the Income Tax Act and principle of mutuality does not apply to them – SC
ABCAUS Case Law Citation:
ABCAUS 3793 (2023) (08) SC
Important Case Laws relied upon:
Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509
Commissioner of Income Tax vs. M/s Cawnpore Club Ltd
Commissioner of Income Tax, Bihar vs. Bankipur Club Ltd., (1997) 5 SCC 394
In the instant case, several clubs had challenged the judgments passed by the Hon’ble High Courts where it has been 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.
The question before the Hon’ble Supreme Court was 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 deposits would not be subject to tax under the provisions of the Income Tax Act, 1961 (the Act)?
The Hon’ble Supreme Court explained that the principle of mutuality is rooted in common sense. A person cannot make a profit from herself. This implies that a person cannot earn profit from an association that he shares a common identity with. The essence of the principle lies in the commonality of the contributors and the participants who are also beneficiaries. There has to be a complete identity between the contributors and the participants. Therefore, 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.
The Hon’ble Supreme Court pointed out that the triple test for 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 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.
The Hon’ble Supreme Court refused to accept the reliance placed by the appellants on its one of the judgment and order pronounced in 1998 where it had dismissed the appeal of the Revenue against a club by a non speaking order. The Hon’ble Supreme Court pointed out that an important principle to be borne in mind is that declaration of the law by the Supreme Court can be said to have been made only when it is contained in a speaking order, either expressly or by necessary implication and not by dismissal in limine. In the words, the expression ‘declared’ is wider than the words ‘found or made’. The latter expression involves the process, while the former expresses the result.
The Hon’ble Supreme Court stated that in view of the disposal of Revenue’s appeals in the 1998 by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent which has been ignored by another Coordinate Bench of this Court while deciding. The order of 1998 binds only the parties in those appeals and cannot be understood as a precedent for subsequent cases.
The Hon’ble Supreme Court noted that the subsequent decision of 2013 given by two Judge Bench ultimately answered the larger plea through a detailed reasoning. It was held that amount of interest earned by the club from the deposits 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.
Therefore, the Hon’ble Supreme Court opined that it cannot be held that the short order passed in in 1998 is a precedent which was ignored by a Coordinate Bench of two judges, so as to make the latter decision per incuriam. On the other hand, the larger plea which was not considered in 1998 decision was ultimately considered and answered in 2013 decision by a detailed judgment.
As a result it was held as under:
(1) The Order of 1998 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 were disposed of without going into the larger question as to whether the 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 2013 does not call for reconsideration even when viewed in light of the 1998 Order of the Court. Consequently, 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) The judgment of 2013 is not per incuriam although, the earlier Order passed by a Coordinate Bench of this Court in 1998 was not noticed in 2013.
Thus it was held that 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 the Act.
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