The interest earning from deposited surplus funds of clubs is taxable as the principle of mutuality does not apply once funds are deposited in banks, exposing them to commercial operations.

JUDGEMENT

NAGARATHNA, J. Since leave has been granted in Special Leave Petition Nos.

035895-035901 of 2011, in the connected matters also leave is granted.

2. In these cases, since common questions of law and facts arise, they have been clubbed together and are heard and disposed of by this common judgment. These appeals arise from the High Courts of Andhra Pradesh at Hyderabad 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.

Bird’s eye view of the controversy:

3. A short but interesting question of law arises in these cases, which is, 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 (hereinafter referred to as “the Act” for the sake of convenience). The High Courts in the impugned judgments have 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.

4. In the above context, the pertinent controversy is whether, the judgment of this Court in the case of Bangalore Club vs. Commissioner of Income Tax, (2013) 5 SCC 509 (“ Bangalore Club ”) calls for reconsideration in view of the earlier order of this Court in Commissioner of Income Tax vs. M/s Cawnpore Club Ltd., Kanpur (“ Cawnpore Club ”) disposed of by this Court on 05.02.1998 reported in (2004) 140 Taxman 378 (SC).

5. While considering the above controversy, we dispose of these appeals by holding that the judgment in Bangalore Club does not call for reconsideration and these appeals could be disposed of in terms of the said judgment. We proceed to delineate on the subject and support our conclusion by first discussing the cases concerning Commissioner of Income Tax, Bihar vs. Bankipur Club Ltd., (1997) 5 SCC 394 (“ Bankipur Club ”); Cawnpore 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 fees, readmission fees, periodical subscriptions from the members etc., under the head “others” and (b) service charges from the members for rendering specific services to the members under the head “service to the members”, or the same would not be taxable on the principle of mutuality.

(v) Group E concerned cases where the assessee clubs had derived income from property let out and also interest received from Fixed Deposit Receipt (FDR), National Savings Certificate (NSC), etc. by the clubs. Paragraphs 4 and 19 of the Bankipur Club are relevant and they read as under:

4. …. the appeals coming within Group E — CIT v. Cawnpore Club L