M/S BANGALORE CLUBversusCOMMISSIONER OF INCOME TAX & ANR.

                     [2013] 1 S.C.R. 267


                  M/S BANGALORE CLUB                                A
                               v.
        COMMISSIONER OF INCOME TAX & ANR.
            (Civil Appeal No. 124 of 2007)
                     JANUARY 14, 2013
                                                                    B
    [D.K. JAIN AND JAGDISH SINGH KHEHAR, JJ.]

     INCOME TAX ACT, 1961:

     s. 2 (24) (vii) - Interest earned by assessee-Club on          c
surplus funds invested in fixed deposits with corporate
member-Banks - Exemption from income tax claimed on the
basis of doctrine of mutuality - Held: The amount of interest
earned by assessee from member banks will not fall within
the ambit of mutuality principle and will, therefore, be exigible
                                                                    0
to Income-Tax in the hands of assessee-Club.

      Doctrines/principles - 'Mutuality principle' in the context
-of s.2(24)(vii) of Income Tax Act - Explained.

    The assessee appellant Club, an unincorporated                  E
Association of Persons (AOP), sought e'Xemption from
payment of income tax on the interest earned by it on the
fixed deposits kept with certain banks, which were
corporate members of the assessee, on the basis of
doctrine of mutuality. The claim was rejected by the                F
assessing officer, but allowed by the Commissioner of
Income Tax as also by the Income Tax Appellate Tribunal.
However, the High Court upheld the view of the
assessing officer.

    In the instant appeal, filed by the assessee-Club, the          G
question for consideration before the Court was: whether
or not the interest earned by the assessee on the surplus
funds invested in fixed deposits with the corporate
member banks was exempt from levy of Income Tax,
                              267                                   H
   268      SUPREME COURT REPORTS              (2013] 1 S.C.R.


A based on the doctrine of mutuality?

         Dismissing the appeals, the Court

      HELD: 1.1. Doctrine of mutuality relates to the notion
  that a person cannot make a profit from himself. An
B amount received from oneself is not regarded as income
  and is, therefore, not subject to tax; only the income
  which comes within the definition of s. 2(24) of the Income
  Tax Act, 1961 is subject to tax (income from business
  involving the doctrine of mutuality is denied exemption
C only in special cases covered under clause (vii) of s. 2
  (24) of the Act). The concept of mutuality has been
  extended to defined groups of people who contribute to
  a common fund, controlled by the group, for a common
  benefit. Any amount surplus to that needed to pursue the
o common purpose is said to be simply an increase of the
  common fund and as such neither considered income
  nor taxable. [Para 7) [277-F-H; 278-A]

       1.2. Mutuality is not a form of organization, even if the
  participants are often called members. Any organization
E can have mutual activities. A common feature of mutual
  organizations in general and of licensed clubs in
  particular, is that participants usually do not have
  property rights to their share in the common fund, nor can
  they sell their share. And when they cease to be
F members, they lose their right to participate without
  receiving a financial benefit from the surrender of their
  membership. A further feature of licensed clubs is that
  there are both membership fees and, where prices
  charged for club services are greater than their cost,
G additional contributions. It is these kinds of prices and/
  or additional contributions which constitute mutual
  income. [Para 7) [278-B-0]

     1.3. The doctrine of mutuality finds its origin in
H common law. In Styles' case, three features were found
BANGALORE CLUB v. COMMISSIONER OF INCOME269
               TAX & ANR.
essential to attract the doctrine. The first condition          A
requires that there must be a complete identity between
the contributors and participators; the particular label or
form by which the mutual association is known is of no
consequence. The second feature demands that the
actions of the participators and contributors must be in        B
furtherance of the mandate of the association. In the case
of a club, it would be necessary to show that steps are
taken in furtherance of activities that benefit the club, and
in turn its members. The mandate of the club is a
question of fact and can be determined from the                 c
memorandum or articles of association, rules of
membership, rules of the organization, etc. However, the
mandate must not be construed myopically. While in
some situations, the benefits may be evident directly in
the short-run, in others, they may be accruable to an.          0
organization indirectly, in the long-run. Space must be
made for both such forms of interactions between the
organization and its members. Thirdl./fthere must be no
scope of profiteering by the contritfutors from a fund
made by them which could only be expended or returned
to themselves. [Para 8, 12 ,15 and 19-21] [278-E; 281-D-        E
E; 283-C; 285-B-C-D-F; 286-A]

     Commissioner of Income-Tax, Bombay City Vs. Royal
Western India Turf Club Ltd 1954 SCR 289 =AIR 1954 SC
85; CIT v. Firozepur Ice Manufacturers' Association 84 ITR      F
607; Chelmsford Club Vs. Commissioner of Income Tax,
Delhi (2000) 3 SCC 214; Thomas Vs. Richard Evans & Co.
Ltd. (1927) 11 TC 790; Commissioner of Income Tax, Madras
Vs. Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96
-refu~d~                                                        G

    Styles (Surveyor of Taxes) Vs. New York Life Insurance
Co. 1889 2 TC 460; The Commissioners of Inland Revenue
Vs. The Comish Mutual Assurance Co. Ltd. 1926 12 T.C. 841
(H.L.); The Bohemians Club Vs. The Acting Federal
Commissioner of Taxation (1918) 24 CLR 334; Municipal           H
    270      SUPREME COURT REPORTS             [2013] 1 S.C.R.


A Mutual Insurance Ltd. Vs. Hills (1932) 16 TC 430, 448 (HL);
  Carlisle and Sil/oth Golf Club v. Smith, (1913) 3 K.B. 75 ;
  Jones Vs. South-West Lancashire Coal Owners' Association
  Ltd. 1927 AC 827; The English & Scottish Joint Co-operative
  Wholesale Society Ltd. Vs. The Commissioner of Agricultural
B Income Tax, Assam AIR 1948 PC 142 (E); National
  Association of Local Government Officers Vs. Watkins (1934)
  18 TC 499; 503, 506; Commissioner of Income Tax, Bihar
  Vs. Bankipur Club Ltd. (1997) 5 SCC 394 - referred to.

C       Halsbury's Laws of England, 4th Edition; Simon's Taxes,
    Vol. B, 3rd Edn., Kanga & Palkhivala on "The Law and
    Practice of Income Tax" (8th Edn. Vol. I, 1990); British Tax
    Encyclopedia  m. 1962 Edn. (edited by G.S.A. Wheatcroft)
    at pp. 1201 - referred to
o        1.4. In the instant case, the assessee-Club is an AOP.
    The banks concerned are all corporate members of the
    Club. The interest earned from fixed deposits kept with
    non-member banks was offered for taxation and the tax
    due was paid. As regards the interest earned by assessee
E   on fixed deposits kept with member banks, firstly, the
    arrangement lacks a complete identity between the
    contributors and participators. Till the stage of generation
    of surplus funds, the setup resembled that of a
    mutuality; the flow of money, to and fro, was maintained
F   within the closed circuit formed by the banks and the
    club, and to that extent, nobody who was not privy to this
    mutuality, benefited from the arrangement. However, as
    soon as these funds were placed in fixed deposits with
    banks, the closed flow of funds between the banks and
    the club suffered from deflections due to exposure to
G   commercial banking operations. During the course of
    their banking business, the member banks used such
    deposits to advance loans to their clients. Therefore, in
    the instant case, with the funds of the mutuality, member-
    banks engaged in commercial operations with third
H   parties outside of the mutuality, rupturing the 'privity of
BANGALORE CLUB v. COMMISSIONER OF INCOME 271
               TAX & ANR.
mutuality' and, consequently, violating the one to one           A
identity between the contributors and participators as
mandated by the first condition. Thus, in the instant case,
the first condition for a claim of mutuality is not satisfied.
[Para 25-26] [289-C-H]
     1.5. Secondly, the surplus funds were not used for          B
any specific service, infrastructure, maintenance or for
any other direct benefit for the members of the club.
These were taken out of mutuality when the member-
banks placed the same at the disposal of third parties,
thus, initiating an independent contract between the bank        C
and the clients of the bank, a third party, not privy to the
mutuality. This contract lacked the degree of proximity
between the club and its member, which may in a distant
and indirect way benefit the club, nonetheless, it cannot
be categorized as an activity of the club in pursuit of its      D
objectives. It needs little emphasis that the second
condition postulates a direct step with direct benefits to
the functioning of the club, stands violated. [Para 27] [290-
B-E]
                                                                 E
     1.6. Thirdly, though the funds do return to the club,
however, before that, they are expended on non-
members i.e. the clients of the bank. The banks generate
revenue by paying a lower rate of interest to club-
assessee, that makes deposits with them, and then loan
out the deposited amounts at a higher rate of interest to        F
third parties. This loaning out of funds of the club by
banks to outsiders for commercial reasons snaps the link
of mutuality and, thus, breaches the third condition.
There is nothing on record which shows that the banks
made separate and special provisions for the funds that          G
came from the club, or that they did not loan them out.
Therefore, clearly, the club did not give, or get, the
treatment a club gets from its members; the interaction
between them clearly reflected one between a bank and
its client. This directly contravenes the third condition. If    H
    272       SUPREME COURT REPORTS           [20131 1 S.C.R.

A profits are distributed to shareholders as shareholders,
  the principle of mutuality is not satisfied. [Para 28- 29]
  [290-F-H; 291-A-C]

      Styles (Surveyor of Taxes) Vs. New York Life Insurance
  Co. 1889 2 TC 460; (. ;mmissioner of Income Tax, Madras
B Vs. Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96;
  Thomas Vs. Richard Evans & Co. Ltd. (1927) 11 TC 790 -
    referred to Para 29

          1.7. Thus, the interest accrues on the surplus
c deposited by the club like in the case of any other deposit
  made by an account holder with the bank. The interest
  earned by the assessee even from the member banks on
  the surplus funds deposited with them had the taint of
  commerciality, fatal to the principle of mutuality. [Para 29
D and 31] [292-B; 293-B]

       Commissioner of Income Tax, Madras Vs.
    Kumbakonam Mutual Benefit Fund Ltd AIR 1965 SC 96 -
    relied on

E      1.8. Besides, the assessee is already availing the
  benefit of the doctrine of mutuality in respect of the
  surplus amount received as contributions or price for
  some of the facilities availed by its members, before it is
  deposited with the bank. This surplus amount was not
F treated as income; since it was the residue of the
  collections left behind with the club. A fa~ade of a club
  cannot be constructed over commercial transactions to
  avoid liability to tax. Such setups cannot be permitted to
    claim double benefit of mutuality. [Para 32) [293-C-E]
G         Commissioner of Income Tax, Bihar Vs. Bankipur Club
    Ltd. (1997) 5 sec 394 - referred to

      1.9. The amount of interest earned by the assessee
  from the four banks will not fall within the ambit of the
H mutuality principle and will therefore, be exigible to
BANGALORE CLUB v. COMMISSIONER OF INCOME 273
               TAX & ANR.
Income-Tax in the hands of the assessee-club. [Para 33]       A
[294-D]

                     Case Law Reference:
  1889 2 TC 460                referred to   Para 8, 29
                                                              B
  1926 12 T.C. 841 (H.L.)      referred to   Para 9
  (1918) 24 CLR 334            referred to   Para 10
  1954 SCR 289                 referred to   Para 11
  (1932) 16 TC 430, 448 (HL) referred to     Para 12          c
  1927 AC 827                  referred to   Para 17
  (1934) 18 TC 499; 503, 506 referred to     para 20
  (1997) 5 sec 394             referred to   para 20          D
  (1997) 5 sec 394             referred to   para 32
  (1927) 11 TC 790             referred to   Para 21
  (1927) 11 TC 790             referred to   Para 29
                                                              E
  AIR 1965 SC 96               referred to   para 22
  AIR 1965 SC 96               referred to   Para 29
  AIR 1965 SC 96               relied on     para 30
                                                              F
     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 124
of 2007.

    From the Judgment & Order dated 21.07.2006 of the High
Court of Karnataka at Bangalore in l.T.A. No. 70 of 2000.
                                                              G
                            WITH

C.A. Nos. 125 of 2007, 272, 273, 274, 275, 276-277 & 278 of
2013.

    Joseph Vellapally, Dayan Krishnan, Gautam Naryana (for    H
    274        SUPREME COURT REPORTS               [2013] 1 S.C.R.


A   Nikhil Nayyar), Asmita Singh, Shivendra Singh for the Appellant.

         A.S. Chandhiok, ASG, Gurpreet S. Parwanda, Monika
    Tyagi, Reena Singh, Yatinder Chaudhary, R. Nedumaran, Anil
    Katiyar (for B.V, Balaram Das) for the Respondents.
B         The Judgment of the Court was delivered by

          D.K. JAIN, J. 1. Leave granted in Special Leave Petitions.

      2. This batch of appeals arises from a common judgment
C 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.
0
         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
E "assessee"), the appellant herein, is an unincorporated
  Association of Persons, (AOP). In relation to the assessment
  years 1989-90, 1990-91, 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
F 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,
G 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)-11, Bangalore ("CIT (A)" for short) reversed
H the view taken by the assessing officer, and held that the
BANGALORE CLUB v. COMMISSIONER OF INCOME 275
          TAX & ANR. [D.K. JAIN, J.]
doctrine of mutuality clearly applied to the assessee's case. On     A
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/Banf1991):

    "7. In the instant case, the funds of the club are given in      B
    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 n9t. Apparently, they had dealt        C
    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             D
    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        E
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             F
     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             G
     applicable to the fund deposited in tile 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?"                       H
    276        SUPREME COURT REPORTS               [2013] 1 S.C.R.


A       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."

c        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 question for determination is whether or
  not the interest earned by the assessee on the surplus funds
0
  invested in fixed deposits with the corporate member banks is
  exempt from levy of Income Tax, based on the doctrine of
  mutuality?

        5. Mr. Joseph Vellapally, learned senior counsel appearing
E for the assessee strenuously urged that the assessee meets
  all the requirements, as laid down in The English & Scottish
  Joint Co-operative Wholesale Society Ltd. Vs. The
  Commissioner of Agricultural Income Tax, Assam 1, as
  affirmed by this Court in Chelmsford Club Vs. Commissioner
F of Income Tax, Delhi2 in order to fall within the ambit of the
  principle of mutuality. According to the learned counsel, there
  is a complete identity between the contributors to the fund and
  the assessee and the recipients from the funds, in as much as
  the interest earned by the assessee from the surplus fund
G invested in fixed deposits with member banks are always
  available and are used for the benefit of members alike. It was
  asserted that there is no commercial motive involved in the

    1.   AIR 1948 PC 142 (E).
H   2.   (2000) 3 sec 214.
BANGALORE CLUB v. COMMISSIONER OF INCOME 277
         TAX & ANR. [D.K. JAIN, J.]
dealings of the assessee with its members, including the banks      A
concerned. It was also argued that the interest earned on such
deposits with the member banks was always available for use
and benefit of the members of the assessee, in as much as
the said interest merged with the common fund of the club.
                                                                     B
     6. Mr. A.S. Chandhiok, learned Additional Solicitor
General of India, on the other hand, contended that the
fundamental principle for applicability of the doctrine of mutuality
is a complete identity between the contributors and the
participators, which is missing in this case. It was submitted C
that in the present case, the surplus funds in the hands of the
assessee were placed at the disposal of the corporate
members viz. the banks, with the sole motive to earn interest,
which brings in the commerciality element and thus, the interest
so earned by the assessee has to be treated as a revenue
receipt, exigible to tax. It was pleaded that transaction between D
the assessee and the member banks concerned was in the
nature of parking of funds by the assessee with a corporate
member and was nothing but what could have been done by a
customer of a bank and therefore, the principle that "no man
could trade with himself' is not applicable.                         E

     7. Before we evaluate the rival stands, it would be
necessary to appreciate the general understanding of doctrine
of mutuality. The principle relates to the notion that a person
cannot make a profit from himself. An amount received from          F·
oneself is not regarded as income and is therefore not subject
to tax; only the income which comes within the definition of
Section 2(24) of the Act is subject to tax (income from business
involving the doctrine of mutuality is denied exemption only in
special cases covered under clause (vii) of Section 2 (24) of       G
the Act). The concept of mutuality has been extended to defined
groups of people who contribute to a common fund, controlled
by the group, for a common benefit. Any amount surplus to that
needed to pursue the common purpose is said to be simply
an increase of the common fund and as such neither                  H
    278        SUPREME COURT REPORTS             [2013J 1 S.C.R.


A considered income nor taxable. over time, groups which have
  been considered to have mutual income have included
  corporate bodies, clubs, friendly societies, credit unions,
  automobile associations, Insurance companies and finance
  organizations. Mutuality is not a form of organization, even if
8 the partic"1pants are often called members. Any organization can
  have mutual activities. A common feature of mutual
  organizations in general and of licensed clubs in particular, is
  that participants usually do not have property rights to their
  share in the common fund, nor can they se!I their share. And
c when they cease to be members, they lose their right to
  participate without receiving a financial benefit from the
  surrender of their membership. A further feature of licensed
  clubs is that there are both membership fees and, where prices
  charged for club seNices are greater than their cost, additional
0 contributions. II is these kinds of prices and/or additional
  contributions which constitute mutual income.

       8. The doctrine of mutuality finds its origin in common law.
  One of the earliest modem judicial statements of the mutuality
  principle is by lord Watson in the House of lords, in 188g, in
E Styles (Surveyor of Taxes) Vs. New Yori< Life Insurance Cd'.
  {hereinafter referred to as the "Styles case"). The appellant in
  that case was an incorporated company. The company issued
  life policies of two kinds, namely, participating and non-
  participating. The members of the mutual life insurance
F company were confined to the holders of the participating
  policies, and each year, the surplus of receipts over expenses
  and estimated r1ab"11ities was divided among them, either in the
  form of a reduction of future premiums or of a reversionary
  addition to the policies. There were no shares or shareholders
G in the ordinary sense of the term but each and every holder of
  a participating policy became ipso facto a member of the
  company and as such became entitled to a share in the assets
  and liable for a share in the losses. The company conducted a
  calculation of the probable death rate amongst the members
H   3.   [1889] 2 TC 460.
     BANGALORE CLUB v. COMMISSIONER OF                      279
        INCOME TAX & ANR. [D.K. JAIN, J.]
and the probable expenses and liabilities; calls in the shape A
of premiums were made on the members accordingly. An-
account used to be taken annually and the greater part of the
surplus of such premiums, over the expenditure referable to
such policies, was returned to the members i.e. (holders of
participating policies) and the balance was carried forward as B
a fund in hand to the credit of the general body of members.
The question was whether the surplus returned to the members
was liable to be assessed to income tax as profits or gains.
The majority of the Law Lords answered the question in the
negative. It may be noticed that in that case the members had      c
associated themselves together for the purpose of insuring each
other's life on the principle of mutual assurance,'that is to say,
they contributed annually to a common fund out of which
payments were to be made, in the event of death, to the
representatives of the deceased members. Those persons
                                                                    0
were alone the owners of the common fund and they alone were
entitled to participate in the surplus. This surplus was obtained
partly from the profits arising from non-participating policies and
other business. It was held that that portion of the surplus which
arose from the excess contributions of the holders of
participating policies was not an assessable profit. It was E
therefore, held to be a case of mutual assurance. The individuals
insured and those associated for the purpose of receiving their
dividends and meeting other stipulated requisites under the
policies were identical. It was held that that identity was not
destroyed by the incorporation of the company. Lord Watson F
even went to the extent of saying that the company in that case
did not carry on any business at all, which perhaps was stating
the position a little too widely as pointed out by Viscount Cave
in a later case; but, be that as it may, all the Noble Lords, who
formed the majority, were of the view that what the members G
received were not profits but their respective shares of the
excess amount contributed by themselves. They held thus:

     "... when a number of individuals agree to contribute funds
     for a common purpose ... and stipulate that their             H
     280         SUPREME COURT REPORTS               [2013] 1 S.C.R.


A          contributions, so far as not required for that purpose, shall
           be repaid to them. I cannot conceive why they should be
           regarded as traders, or why contributions returned to them
           should be regarded as profits."

         9. Lord Watson's statement was explained by the House
8
    of Lords in The Commissioners Of Inland Revenue Vs. The
    Comish Mutual Assurance Co. Ltd. 4 wherein it was held that
    a mutual concern may be held to carry on a business or trade
    with its members, though the surplus arising from such trade
    is not taxable income or profit.
c
        10. The High Court of Australia first considered the
    mutuality principle in The Bohemians Club Vs. The Acting
    Federal Commissioner of Taxation 5 in 1918:

D          "A man is not the source of his own income ... A man's
           income consists of moneys derived from sources outside
           of himself. Contributions made by a person for expenditure
           in his business or otherwise for his own benefit cannot be
           regarded as his income ... The contributions are, in
           substance, advances of capital for a common purpose,
E
           which are expected to be exhausted during the year for
           which they are paid. They are not income of the collective
           body of members any more than the calls paid by
           members of a company upon their shares are income of
           the company. If anything is left unexpended it is not income
F          or profits, but savings. which the members may claim to
           have returned to them."

                                                   (Emphasis added)

G       11. One of the first Indian cases that dealt with the principle
    was Commissioner of Income- Tax, Bombay City Vs. Royal
    Western India Turf Club Ltd. 6 • It quoted with approval three
    4.   (1926) 12 T.C. 841 (H .L.)
    5.   (1918) 24 CLR 334.
H 6. AIR 1954 SC 85.
      BANGALORE CLUB v. COMMISSIONER OF                                    281
         INCOME TAX & ANR. [D.K. JAIN, J.]
. conditions stipulated in The English & Scottish Joint Co-                         A
  operative Wholesale Society Ltd. (supra), which were
  propounded after referring to various passages from the
  speeches of the different law Lords in Styles case (supra). Lord
  Normand, who delivered the judgment of the Board summarized
  the grounds of the decision in Styles case (supra) as follows:                    B

      "From these quotations it appears that the exemption was
      based on (1) the identity of the contributors to the fund and
      the recipients from the fund; (2) the treatment of the
      company, though incorporated, as a mere entity for the                        C
      convenience of the members and policy holders, in other
      words, as an instrument obedient to their mandate; and (3)
      the impossibility that contributors should derive profits from
      contributions made by themselves to a fund which could
      only be expended or returned to themselves."
                                                                                    D
      12. We will consider each of these conditions in detail
 before proceeding to the facts of the case. The first condition
 requires that there must be a complete identity between the
 contributors and participators. This was first laid down by Lord
 Macmillan in Municipal Mutual Insurance Ltd. Vs. Hills7                            E
 wherein he observed:

       "The cardinal requirement is that all the contributors to the
       common fund must be entitled to participate in the surplus
       and that all the participators in the surplus must be
                                                                                    F
       contributors to the common fund; in other words, there must
       be complete identity between the contributors and the
       participators." .

      13. On this aspect of the doctrine, especially with regard
 to the non-members, Halsbury's Laws of England, 4th Edition,                       G
 Reissue, Vol. 23, paras 161 and 162 (pp. 130 and 132) states:

       "Where the trade or activity is mutual, the fact that, as
 7.   (1932) 16 TC 430, 448 (HL); CIT v. Firozepur Ice Manufacturers' Association
      M~~                                                                           H
    282          SUPREME COURT REPORTS               [2013} 1 S.C.R.


A         regards certain activities, certain members only of the
          association take advantage of the facilities which it offers
          does not affect the mutuality of the enterprise.

          ** *
8         Members' clubs are an example of a mutual undertaking;
          but, where a club extends facilities to non-members, to that
          extent the element of mutuality is wanting ... ."

         14. Simon's Taxes, Vol. 8, 3rd Edn., paras 81 .218 and
c   81. 222 (pp. 159 and 167) formulate the law on the point, thus:

          ".. it is settled law that if the persons carrying on a trade
          do so in such a way that they and the customers are the
          same persons, no profits or gains are yielded by the trade
          for tax purposes and therefore no assessment in respect
D
          of the trade can be made. Any surplus resulting from this
          form of trading represents only the extent to which the
          contributions of the participators have proved to be in
          excess of requirements. Such a surplus is regarded as their
          own money and returnable to them. In order that this
E         exempting element of mutuality should exist it is essential
          that the profits should be capable of coming back at some
          time and in some form to the persons to whom the goods
          were sold or the services rendered ....

F         *      *     *

          It has been held that a company conducting a members'
          (and not a proprietary) club, the members of the company
          and of the club being identical, was not carrying on a trade
          or business or undertaking of a similar character for
G         purposes of the former corporation profits tax.

          *      *     *
          A members' club is assessable. however. in respect of
H         profits derived from affording its facilities to non-members.
BANGALORE CLUB v. COMMISSIONER OF INCOME 283
          TAX & ANR. [D.K. JAIN, J.]
     Thus, in CarHsle and Sil/oth Golf Club v. Smith, (1913) 3         A
     K.B. 75, where a members' golf club admitted non-
     members to play on payment of green fees it was held that
     it was carrying on a business which could be isolated and
     defined, and the profit of which was assessable to income
     tax. But there is no liability in respect of profits made from    B
     members who avail themselves of the facilities provided
     for members."

                                             {Emphasis supplied)

     15. In short, there has to be a complete identity between         C
the class of participators and class of contributors; the particular
label or form by which the mutual association is known is of no
consequence. Kanga & Palkhivala explain this concept in "The
Law and Practice of Income Tax" {8th Edn. Vol. I, 1990) at p.
113 as follows:                                                        D
     " ... The contributors to the common fund and the
     participators in the surplus must be an identical body. That
     does not mean that each member should contribute to the
     common fund or that each member should participate in             E
     the surplus or get back from the surplus precisely what he
     has paid." The Madras, Andhra Pradesh and Kerala High
     Courts have held that the test of mutuality does not require
     that the contributors to the common fund should willy-nilly
     distribute the surplus among!?t themselves : it is enough if      F
     they have a right of disposal over the surplus, and in
     exercise of that right they may agree that on winding up
     the surplus will be transferred to a similar association or
     used for some charitable objects .... "
                                             {Emphasis supplied)       G

    16. British Tax Encyclopedia (/), 1962 Edn. (edited by
G.S.A. Wheatcroft) at pp. 1201, dealing with "mutual trading
operations", the law is stated as under:
                                                                       H
    284       SUPREME COURT REPORTS                 [2013] 1 S.C.R.

A         "For this doctrine to apply it is essential that all the
          contributors to the common fund are entitled to participate
          in the surplus and that all the participators in the surplus
          are contributors, so that there is complete identity between
          contributors and participators. This means identity as a
B         class. so that at any given moment of time the persons
          who are contributing are identical with the persons entitled
          to participate: it does not matter that the class may be
          diminished by persons going out of the scheme or
          increased by others coming in ... ."
c                                               (Emphasis supplied)

        17. In Jones Vs. South-West Lancashire Coal Owners'
    Association Ltd. 8, Viscount Cave LC held that "sooner or later,
  in meal or in malt, the whole of the associations" receipts must
D go back to the policy holders as a class, though not precisely
  in the proportions in which they have contributed to them and
  the association does not in any true sense make any profit out
  of their contributions.

E       18. Therefore, in the case of Royal Western India Turf
    Club Ltd. (supra), since the club realized money from both
    members and non- members, in lieu. of the same services
    rendered in the course of the same business, the exemption
    of mutuality could not be granted. This Court held thus:

F         "As already stated, in the instant case there is no mutual
          dealing between the members inter se and no putting up
          of a common fund for discharging the -common obligations
          to each other undertaken by the contributors for their
          mutual benefit. On the contrary, we have here an
G         incorporated company authorised to carry on an ordinary
          business of a race course company and that of licensed
          victuallers and refreshment purveyors and in fact carrying
          on such a business. There is no dispute that the dealings

H 8.   1927 AC 827.
     BANGALORE CLUB v. COMMISSIONER OF                     285
        INCOME TAX & ANR. [D.K. JAIN, J.]
    of the company with non-members take place in the            A
    ordinary course of business carried on with a view to
    earning profits as in any other commercial concern."

                                          (Emphasis supplied}

      19. The ·second feature demands that the actions of the B
participators and contributors must be in furtherance of the
mandate of the association. In the case of a club, it would be
necessary to show that steps are taken in furtherance of
activities that benefit the club, and in turn its members.
Therefore, in Chelmsford Club (supra}, since the appellant C
provided recreational facilities exclusively to its members and
their guests on "no-profit-no-loss" basis and surplus, if any, was
used solely for maintenance and development of the club, the
Court allowed the exception of mutuality.
                                                                  D
     20. The mandate of the club is a question of fact and can
be determined from the memorandum or articles of association,
rules of membership, rules of the organization, etc. However,
the mandate must not be construed myopically. While in some
situations, the benefits may be evident directly in the short-run, E
in others, they may be accruable to an organization indirectly,
in the long-run. Space must be made for both such forms of
interactions between the organization and its members.
Therefore, as Finlay J. observed in National Association of
Local Govemme'nt Officers Vs. Watkins9, where member of a
club orders dinner and consumes it, there is no sale to him. At F
the same time, as in case of Commissioner of Income Tax,
Bihar Vs. Bankipur Club Ltd. 10, where a club makes 'surplus
receipts' from the subscriptions and charges for the various
conveniences paid by members, even though there is no direct
benefit of the receipts to the customers, the fact that they will G
eventually be used in furtherance of the services of the club must
be considered as a furtherance of the mandate of the club.

9. (1934) 18 TC 499; 503, 506.
10. (1997) 5 sec 394.                                             H
    286        SUPREME COURT REPORTS                   [2013] 1 S.C.R.


A       21. Thirdly, there must be no scope of profiteering by the
  contributors from a fund made by them which could only be
  expended or returned to themselves. The locus classicus
  pronouncement comes from Rowlatt, J's observations in
  Thomas Vs. Richard Evans & Co. Ud. 11 wherein, while
B interpreting Styles case (supra), he held that if profits are
  distributed to shareholders as shareholders, the principle of
  mutuality is not satisfied. He observed thus:

          "But a company can make a profit out of its members as
          customers, although its range of customers is limited to its
c         shareholders. If a railway company makes a profit by
          carrying its shareholders, or if a trading company, by
          trading with the shareholders - even if it limited to trading
          with them - makes a profit, that profit belongs to the
          shareholders. in a sense. but it belongs to them qua
D         shareholders. It does not come back to them as purchasers
          or customers. It comes back to them as shareholders.
          upon their shares. Where all that a company does is to
          collect money from a certain number of people - it does
          not matter whether they are called members of the
E         company, or participating policy holders - and apply it for
          the benefit of those same people, not as shareholders in
          the company, but as the people who subscribed it, then,
          as I understand the New York case, there is no profit. If the
          people were to do the thing for themselves, there would
F         be no profit, and the fact that they incorporate a legal entity
          to do it for them makes no difference, there is still no profit.
          This is not because the entity of the company is to be
          disregarded, it is because there is no profit, the money
          being simply collected from those people and handed
G         back to them, not in the character of shareholders, but in
          the character o,f those who have paid it. That, as I
          understand it, is the effect of the decision in the New York
          case."

                                                  (Emphasis supplied)
H 11. (1927) 11 TC 790
BANGALORE CLUB v. COMMISSIONER OF INCOME 287
         TAX & ANR. [D.K. JAIN, J.]
     22. In Commissioner of Income Tax, Madr~s Vs.                    A
                                                   12
Kumbakonam Mutual Benefit Fund Ltd., this Court
differentiated the facts of the case before it from those of Styles
case (supra) and denied the exemption of mutuality because
of the taint of commerciality. It was observed thus:

     "It seems to us that it is difficult to hold that Style's case   B
     applies to the facts of the case. A shareholder in the
     assessee company is entitled to participate in the profits
     without contributing to the funds of the company by taking
     loans. He is entitled to receive his dividend as long as he
     holds a share. He has not to fulfil any other condition. His     C
     position is In no way different from a shareholder in a
     banking company, limited by shares. Indeed, the position
     of the assessee is no different from an ordinary bank
     except that it lends money to and receives deposits from
     its shareholders. This does not by itself make its income        D
     any the less income from business within S. 10 of the Indian
     Income Tax Act."
                                             ,
     23. However, at what point mutuality ends and
con:imerciality begins is a difficult question of fact. It is best    E
summarized in Bankipur Club (supra) wherein this Court
echoed the following views:

     " ... if the object of the assessee company claiming to be a
     "mutual concern" or "club'', is to carry on a particular
     business and money is realised both from the members             F
     and from non-members, for the same consideration by
     giving the same or similar facilities to all alike in respect
     of the one and the same business carried on by it, the
     dealings as a whole disclose the same profit earning
     motive and are alike tainted with commerciality. In other        G
     words, the activity carried on by the assessee in such
     cases, claiming to be a "mutual concern" or
     "members' club" is a trade or an adventure in the nature

12. AIR 1965 SC 96.                                                   H
    288       SUPREME COURT REPORTS                  [2013] 1 S.C.R.


A         of trade and the transactions entered into with the
          members or non-members alike is a trade/business/
          transaction and the resultant surplus is certainly profit -
          income liable to tax. We should also state, that "at what
          point, does the relationship of mutuality end and that of
B         trading begin" is a difficult and vexed question. A host of
          factors may have to be considered to arrive at a
          conclusion. "Whether or not the persons dealing with each
          other, is a 'mutual club' or carrying on a trading activity or
          an adventure in the nature of trade", is largely a question
c         of fact [Wilcock's case - 9 Tax Cases 111, (p.132);
          C.A. (1925) (1) KB 30 at p. 44 and 45]."

      24. In Royal Western India Turf Club Ltd. (supra), this
  Court made similar observations, holding that it is not always
  the case that a legal entity cannot make profits out of its
D members. It held as follows :

          "14 ... The principle that no one can make a profit out of
          himself is true enough but may in its application easily lead
          to confusion. There is nothing 'per se' to prevent a
E         company from making a profit out of its own members.
          Thus a railway company which earns profits by carrying
          passengers may also make a profit by carrying its
          shareholders or a trading company may make a profit out
          of its trading with its members besides the profit it makes
F         from the general public which deals with it but that profit
          belongs to the members as shareholders and does not
          come back to them as persons who had contributed them.

                Where a company collects money from its members
          and applies it for their benefit not as shareholders but as
G         persons who put up the fund the company makes no profit.
          In such cases where there is identity in the character of
          those who contribute and of those who participate in the
          surplus, the fact of incorporation may be immaterial and
          the incorporated company may well be regarded as a mere
H         instrument, a convenient agent for carrying out what the
BANGALORE CLUB v. COMMISSIONER OF INCOME 289
          TAX & ANR. [D.K. JAIN, J.]
    members might more laboriously do for themselves. But A
    it cannot be said that incorporation which brings into being .
    a legal entity separate from its constituent members is to
    be disregarded always and that the legal entity can never
    make a profit out of its own members .. ."
                                                                     B
                                           (Emphasis supplied)

     25. This brings us to the facts of the present case. As
aforesaid, the assessee is an AOP. The concerned banks are
all corporate members of the club. The interest earned from
fixed deposits kept with non- member banks was offered for           C
taxation and the tax due was paid. Therefore, we are required
to examine the case of the assessee, in relation to the interest
earned on fixed deposits with the member banks, on the
touchstone of the three cumulative conditions, enumerated
above.                                                               D

     26. Firstly, the arrangement lacks a complete identity
between the contributors and participators. Till the stage of
generation of surplus funds, the setup resembled that of a
mutuality; the flow of money, to and fro, was maintained within
                                                                     E
the closed circuit formed by the banks and the club, and to that
extent, nobody who was not privy to this mutuality, benefited
from the arrangement. However, as soon as these funds were
placed in fixed deposits with banks, the closed flow of funds
between the banks and the club suffered from deflections due
to exposure to commercial banking operations. During the             F
course of their banking business, the member banks used such
deposits to advance loans to their clients. Hence, in the present
case, with the funds of the mutuality, member banks engaged
in commercial operations with third parties outside of the
mutuality, rupturing the 'privity of mutuality', and consequently,   G
violating the one to one identity between the contributors and
participators as mandated by the first condition. Thus, in the
case before us the first condition for a claim of mutuality is not
satisfied.
                                                                     H
    290       SUPREME COURT REPORTS                  [2013) 1 S.C.R.

A        27. As aforesaid, the second condition demands that to
    claim an exemption from tax on the principle of mutuality,
    treatment of the excess funds must be in furtherance of the
    object of the club, which is not the case here. In the instant case,
    the surplus funds were not used for any specific service,
B   infrastructure, maintenance or for any other direct benefit for the
    member of the club. These were taken out of mutuality when
    the member banks placed the same at the disposal of third
    parties, thus, initiating an independent contract between the
    bank and the clients of the bank, a third party, not privy to the
c   mutuality. This contract lacked the degree of proximity between
    the club and its member, which may in a distant and indirect
    way benefit the club, nonetheless, it cannot be categorized as
    an activity of the club in pursuit of its objectives. It needs little
    emphasis that the second condition postulates a direct step
    with direct benefits to the functioning of the club. For the sake
0
    of argument, one may draw remote connections with the most
    brazen commercial activities to a club's functioning. However,
    such is not the design of the second condition. Therefore, it
    stands violated.

E      28. The facts at hand also fail to satisfy the third condition
  of the mutuality principle i.e. the impossibility that contributors
  should derive profits from contributions made by themselves to
  a fund which could only be expended or returned to themselves.
  This principle requires that the funds must be returned to the
F contributors as well as expended solely on the contributors.
  True, that in the present case, the funds do return to the club.
  However, before that, they are expended on non- members i.e.
  the clients of the bank. Banks generate revenue by paying a
  lower rate of interest to club-assessee, that makes deposits
G with them, and then loan out the deposiLd amounts at a higher
  rate of interest to third parties. This loaning out of funds of the
  club by banks to outsiders for commercial reasons, in our
  opinion, snaps the link of mutuality and thus, breaches the third
  condition.
H
BANGALORE CLUB v. COMMISSIONER OF INCOME 291
         TAX & ANR. [D.K. JAIN, J.]
     29. There is nothing on record which shows that the banks          A
made separate and special provisions for the funds that came
from the club, or that they did not loan them out. Therefore,
clearly, the club did not give, or get, the treatment a club gets
from its members; the interaction between them clearly reflected
one between a bank and its client. This directly contravenes            B
the third condition as elucidated in Sty/es and Kumbakonam
Mutual Benefit Fund Ltd. cases (supra). Rowlatt J., in our
opinion, correctly points out that if profits are distributed to
shareholders as shareholders, the principle of mutuality is not
satisfied. In Thomas Vs. Richard Evans & Co. (supra), at pp.            c
822-823, he observed thus:

     "But a company can make a profit out of its members as
     customers. although its range of customers is limited to
     its shareholders. If a railway company makes a profit by
     carrying its shareholder's. or if a trading company. by            D
     trading with the shareholders - even if it limited to trading
     with them - makes a profit. that profit belongs to the
     shareholders. in a sense. but it belongs to them qua
     shareholders. If does not come back to them as purchasers
     or customers. It comes back to them as shareholders.               E
     upon their shares. Where all that a ·company does is to
     collect money from a certain number of people - it does
     not matter whether they are called members of the
     company, or participating policy holders - and apply it for
     the benefit of those same people, not as shareholders in           F
     the company, but as the people who subscribed it, then,
     as I understand the New York case, there is no profit. If
     the people were to' do the thing for themselves, there would
     be no profit, and the fact that they incorporate a legal entity
     to do it for them makes no difference, there is still no profit.   G
     This is not because the entity of the company is J be
     disregarded, it is because there is no profit, the money
     being simply collected from those people and handed
     back to them, not in the character of shareholders, but in
     the character of those who have paid it. That, as I
                                                                        H
    292       SUPREME COURT REPORTS                 [2013] 1 S.C.R.

A         understand it, is the effect of the decision in the New York
          case."

                                                (Emphasis supplied)
  In the present case, the interest accrues on the surplus
B deposited by the club like in the case of any other deposit made
  by an account holder with the bank.

          30. An almost similar issue arose in Kumbakonam Mutual
    Benefit Fund Ltd. case (supra). The facts in that case were that
c   the assessee, namely, Kumbakonam Mutual Benefit Fund Ltd.,
    was an incorporated company limited by shares. Since 1938,
    the nominal capital of the assessee was Rs.33,00,000/- divided
    into shares of Rs.1/- each. It carried on banking business
    restricted to its shareholders, i.e., the shareholders were
0   entitled to participate in its various recurring deposit schemes
    or obtain loans on security. Recurring deposits were obtained
    from members for fixed amounts to be contributed monthly by
    them for a fixed number of months as stipulated at the end of
    which a fixed amount was returned to them according to
E   published tables. The amount so returned, covered the
    compound interest of the period. These recurring deposits
    constituted the main source of funds of the assessee for
    advancing loans. Such loans were restricted only to members
    who had, however, to offer substantial security therefor, by way
    of either the paid up value of their recurring deposits, if any, or
F   immovable properties within a particular district. Out of the
    interest realised by the assessee on the loans which constituted
    its main income, interest on the recurring deposits aforesaid
    was paid as also all the other outgoings and expenses of
    management and the balance amount was divided among the
G   members pro rata according to their share-holdings after
    making provision for reserves, etc., as required by the
     Memorandum or Articles aforesaid. It was not necessary for the
     shareholders, who were entitled to participate in the profits to
     either take loans or make recurring deposits.
H
BANGALORE CLUB v. COMMISSIONER OF INCOME 293
          TAX & ANR. [D.K. JAIN, J.]
      31. On these facts, as already noted, the Court                A
distinguished Sty/es case (supra) and opined that the position
of the assessee was no different from an ordinary bank except
that it lent money and received deposits from its shareholders.
This did not by itself make its income any less income from
business. In our opinion, the ratio of the said decision is on all   B
fours to the facts at hand. The interest earned by the assessee
even from the member banks on the surplus funds deposited
with them had the taint of commerciality, fatal to the principle
of mutuality.

      32. We may add that the assessee is already availing the       C
benefit of the doctrine of mutuality in respect of the surplus
amount received as contributions or price for some of the
facilities availed by its members, before it is deposited with the
bank. This surplus amount was not treated as income; since it
was the residue of the collections left behind with the club. A      D·
fa~ade of a club cannot be constructed over commercial
transactions to avoid liability to tax. Such setups cannot be
permitted to claim double benefit of mutuality. We feel that the
present case is a clear instance of what this Court had
cautioned against in Bankipur Club (supra), when it said:            E

     • ... if the object of the assessee company claiming to be
     a "mutual concern" or "club". is to carry on a particular
     business and money is realised both from the members
     and from non-members. for the same consideration by             F
     giving the same or similar facilities to all alike in resoect
     of the one and the same business carried on by it. the
     dealings as a whole disclose the same profit earning
     motive and are alike tainted with commerciality. In other
     words. the activity carried on by the assessee in such          G
     cases. claiming to be a "mutual concern· or Members' club"
     is a trade or an adventure in the nature of trade and the
     transactions entered into with the members or non-
     members alike is a trade/business/transaction and the
     resultant surolus is certainly profit - income liable to tax.   H
    294         SUPREME COURT REPORTS                [2013] 1 S.C.R.


A          We should also state, that "at what point, does the
           relationship of mutuality end and that of trading begin" is
           a difficult and vexed question. A host of factors may have
           to be considered to arrive at a conclusion. "Whether or not
           the persons dealing with each other, is a "mutual club" or
B          carrying on a trading activity or an adventure in the nature
           of trade" is largely a question of fact [Wilcock's case - 9
           Tax Cases 111, (132) C.A. (1925) (1) KB 30 at 44 and
           45]."
                                                 (Emphasis supplied)
c
        33. In our opinion, unlike the aforesaid surplus amount
  itself, which is exempt from tax under the doctrine of mutuality,
  the amount of interest earned by the assessee from the afore-
  noted four banks will not fall within the ambit of the mutuality
D principle and will therefore, be exigible to Income-Tax in the
  hands of the assessee-club.
      34. In light of the afore-going discussion, these appeals
  are bereft of any merit and are thus, liable to be dismissed.
E Accordingly, we dismiss all the appeals with costs.
    R.P.                                         Appeals dismissed.