Interest Earned On Bank Deposits Of Clubs Liable To Be Taxed Under Income Tax Act; Principle Of Mutuality Would Not Apply: Apex Court
The Supreme Court while dealing with a batch of various appeals has held that the interest earned on bank deposits made by the Clubs is liable to be taxed under the Income Tax Act, 1961 (ITA) and that the principle of mutuality would not apply.
A short but interesting question of law arose in these appeals, which 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 ITA.
The two-Judge Bench comprising Justice B.V. Nagarathna and Justice Prashant Kumar Mishra said, “… the interest income earned on fixed deposits made in the banks by the appellant Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961. … 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.”
The Bench clarified that when the facilities of a club are extended to the members of the club who contribute towards the income generated by the club, there is an identity between the contributors and the recipients and, therefore, the principle of mutuality would apply, however, if the same facilities of the club are offered to non-members or to the public for the purpose of earning an additional income, then, it is in the nature of a commercial transaction and thus becomes a profitable venture and hence, in such a case, the principle of mutuality would not apply.
Senior Advocate Arvind Datar appeared for the appellant clubs while Senior Advocate Balbir Singh appeared for the respondent-Revenue.
Numerous appeals arose from the Andhra Pradesh High Court 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. The High Courts via judgments uniformly held that the interest earned on the bank deposits made by the clubs was liable to be taxed in the hands of the clubs and that the principle of mutuality would not apply. Being aggrieved and dissatisfied with these judgments, the appellant clubs approached the Apex Court.
The question that arose before the court for consideration was whether the interest on income earned by Clubs such as the appellants herein would be covered under the principle of mutuality and therefore be exempt from payment of tax. The Supreme Court with regard to this question noted -
“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 Court referred to the judgment in the case of Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509 wherein it was held that the doctrine of mutuality as applied to clubs envisages a complete identity between contributors and participators and that the members’ clubs are an example of mutual undertaking; but, where a club extends facilities to non-members, to that extent, the element of mutuality is wanting.
“… 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 is not a normal activity of the appellants-clubs to deposit funds in a bank. It is only when a surplus is generated. These appellant Clubs just like Bangalore Club are social clubs, and it is the surplus funds earned through various activities of the Clubs which are deposited as fixed deposit in the banks so as to earn an interest owing to the business of banking”, observed the Court.
The Court said that in the absence of the fixed deposits being utilized by the banks for their transactions with their customers, no interest can be payable on the fixed deposits. It further said that when surplus funds of a club are invested as fixed deposits in a bank and the bank has a right to utilize the said fixed deposit amounts for its banking business subject to repayment of the principal along with interest, then, the identity is lost.
“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. … 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”, held the Court.
The Court also held that the principle of mutuality would not apply to interest income earned on fixed deposits made by the appellant Clubs in the banks irrespective of whether the banks are corporate members of the club or not.
Accordingly, the Court dismissed the appeals.
Cause Title- Secundrabad Club etc. v. C.I.T.-V etc. (Neutral Citation: 2023 INSC 736)