Principle of Mutuality not Applicable on interest income earned by club on its deposits in banks which are its corporate members, therefore taxable : Supreme Court
The Hon’ble Supreme Court has ruled that interest income generated from fixed deposits (FDs) by Clubs in banks, regardless of whether the banks are corporate members of the Club or not, must be treated as regular income under Section 2(24) of the Income Tax Act, 1961. The principle of mutuality does not apply to this interest income earned on FDs. This judgment overturns the argument that a prior decision of the Supreme Court in Bangalore Club vs. Commissioner of Income Tax (2013) had set a different precedent.
In the earlier Bangalore Club case, it was established that surplus contributions from members were tax-exempt due to the principle of mutuality. However, interest earned by Clubs on surplus funds invested in FDs with banks was deemed not to fall under mutuality, making it subject to income tax.
The Karnataka High Court's Division Bench decision in Canara Bank Golden Jubilee Staff Welfare Fund vs. Deputy Commissioner of Income Tax (2009) was ruled not applicable as a precedent for later cases. The Court's decision stemmed from a batch of Special Leave Petitions (SLPs) originating from the Andhra Pradesh and Madras High Courts. Those courts had concluded that interest income on bank deposits made by the Clubs was taxable and the principle of mutuality didn't apply.
Senior Advocate Arvind Datar, representing the Clubs, argued that the Supreme Court's prior decision in Cawnpore Club Ltd. (2004) demonstrated the application of the mutuality principle. However, the Court found that the Cawnpore Club decision lacked clear reasoning and deduction, making it non-binding as a precedent. The Court noted that such brief orders, meant to resolve specific cases, aren't binding for future cases beyond the involved parties.
The Court upheld the judgment in Bangalore Club (2013), concluding that the mutuality principle ceases to apply once funds are deposited as fixed deposits in banks, disrupting the triple test for applying mutuality. Consequently, interest income earned from these deposits is taxable. The Court affirmed that the reasoning in Bangalore Club stands as a binding precedent for the present cases.