IMPORTANT POINT
Doctrine of mutuality.

JUDGMENT

D.K. Jain, J.:-Leave granted in Special Leave Petitions.

2. This batch of appeals arises from a common judgment and order pronounced by the High Court of Karnataka, in Income Tax Appeals No. 115 of 1999 along with 70 of 2000, 3095 of 2005, 1547 of 2005, 1548 of 2005, 3091 of 2005, 3089 of 2005 along with 3093 of 2005, and 3088 of 2005. Since these appeals entail the same issue, they are being disposed of by this common judgment.

3. The facts necessary for the purpose of appreciating the controversy involved in the appeal are as follows:

The Bangalore Club (hereinafter referred to as the “assessee”), the appellant herein, is an unincorporated Association of Persons, (AOP). In relation to the assessment years 1989-90, 199091, 1993-94, 1994-95, 1995- 96, 1996-97, 1997-98, 1998-99 and 1999-2000, the assessee sought an exemption from payment of income tax on the interest earned on the fixed deposits kept with certain banks, which were corporate members of the assessee, on the basis of doctrine of mutuality. However, tax was paid on the interest earned on fixed deposits kept with non-member banks.

The assessing officer rejected the assessee’s claim, holding that there was a lack of identity between the contributors and the participators to the fund, and hence treated the amount received by it as interest as taxable business income. On appeal by the assessee, the Commissioner of Income Tax (Appeals)-II, Bangalore (“CIT (A)” for short) reversed the view taken by the assessing officer, and held that the doctrine of mutuality clearly applied to the assessee’s case. On appeal by the revenue the Income- Tax Appellate Tribunal (for short “the Tribunal”), affirmed the view taken by the CIT (A), observing thus (ITA No. 2440/Ban/1991):

“7. In the instant case, the funds of the club are given in the form of deposits for earning income from the corporate members, namely, the banks here and, therefore, the earning of interest is clearly had risen out of the concept of mutuality only. The decisions relied upon by the DR have nowhere touch (sic) upon the fact as to whether it was with corporate members or not. Apparently, they had dealt with the situation where the transactions of interest are from persons who are not the members of the club. During the argument, the DR had admitted that the assessee had shown interest from certain other banks as its income which also goes to show that wherever the concept of mutuality was absent, the assessee had offered the same as income.”

On an application by the Commissioner of Income Tax, Bangalore under Section 260A of the Income Tax Act, 1961 (for short “the Act”), the High Court entertained the appeal and framed the following two substantial questions of law for its adjudication :-

“(1) Whether, a sum of Rs. 7,87,648/- received by the assessee as interest from fixed deposit made by the assessee in four banks who are members in the assessee club amounted to its income and constituted a revenue receipt as per the provision of Income Tax Act.

(2) Whether, the principle of mutuality can be made applicable to the fund deposited in the four banks who are also members of assessee club, especially when the fund is raised from contribution of several members including the four banks and the interest derived from it is utilized by several members of the assessee club?”

Answering both the questions in favour of the revenue, the High Court held :-

“12. On the facts of this case and in the light of the legal principles it is clear to us that what has been done by the club is nothing but what could have been done by a customer of a Bank . The principle of ‘no man can trade with himself’ is not available in respect of a nationalised bank holding a fixed deposit on behalf of its customer. The relationship is one of a banker and a customer.”

Consequently, the High Court reversed the decision of the Tribunal and restored the order of the assessing officer. Hence, this appeal by the assessee.

4. Thus, the short qu