Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADRAS
Vs.
RESPONDENT:
KUMBAKONAM MUTUAL BENEFIT FUND LTD.
DATE OF JUDGMENT:
07/05/1964
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION:
1965 AIR 96 1964 SCR (8) 204
ACT:
Mutual Benefit Society-company engaged in banking business
restricted to members-Not every member made deposits or
loans-Profits mainly earned from loans to members-All
members entitled to dividends-Whether requirement of
mutuality between contributors and participators satisfied-
Therefor whether company exempt under s. 10(2)(iii), Income-
tax Act, 1922.
HEADNOTE:
The assessee, Kumbakonam Mutual Benefit Fund, Ltd., carried
on banking business which was restricted to its
shareholders. In the course
205
of its working, recurring monthly deposits were obtained
from members for an agreed number of months at the end of
which, an amount, which included interest, was returned to
them. From the funds accumulated as a result of these
deposits, loans were given to members and the interest from
such loans constituted the assessee’s main income. After
the payment out of this income of interest on the deposits
as also all the other expenses and out goings of management,
etc., the balance was divided among the members pro rata
according to their shareholdings. The shareholders who were
thus entitled to participate in the profits need not have
either made deposits or taken loans. Although it was
contended on behalf of the assessee that it was exempt from
assessment to tax as a Mutual Benefit Society under s. 10 of
the Income-tax Act, 1922, on the principle in New York Life
Assurance Co. v. Styles, 2 T.C. 460, which was followed in
Board of Revenue v. Mylapore Hindu Permanent Fund Ltd.,
(1924) I.L.R. 47 Mad. 1, the Income-tax Officer assessed the
entire profits of the assessee. It was held by him that the
profits made by the fund belonged to the members as
shareholders and not as borrowers from the fund or in the
capacity of individuals who had in any way utilised the
facilities afforded by the fund. The requirement of
identity between contributors and participators as in
Style’s case was not satisfied.
The Appellate Assistant Commissioner and the Income-tax
Appellate Tribunal, upon appeals made to them in turn,
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upheld the order of the Income-tax Officer; the Tribunal,
however, referred to the High Court,inter alia, the
questionwhether there were materials for the tribunal to
hold that the assesseewas a banking concern, assessable
under s. 10 and was not therefor eexempt.
The High Court in answering the question in the negative
applied the test that both the right to contribute and the
right to participate must be available to an identical body
but it was not necessary that every member should contribute
before he could be allowed to participate.
Held: (i) The test applied by the High Court was not
sound. There was a clear distinction between a case where
profit which a company made out of its shareholders as
customers- even if it was limited to trading only with them-
and distributed to them as shareholders, and the case where
all that a company did was to collect money from its members
and applied it for the benefit of those same people, not as
shareholders, but as people who subscribed it. For the
principle in Style’s case to apply, it was essential that
all contributors to the common fund must be entitled to
participate in the surplus and all participators must be
contributors to the common fund; and not only that all
participators must be entitled to contribute.
Municipal Mutual Insurance Ltd. v. Hills, 16 T.C. 430,
C.I.T. v. Royal Western Indian Turf Club Ltd., 1954 1 S.C.R.
289, Dibrugarh District Chit Ltd. v. C.I.T., Assam, 2 I.T.C.
521, Thomas v. Richard Evans & Co., 11 T.C. 790, The
National Association of Local Govern-
206
ment Officers v. Watkins, 18 T.C. 499 and Ismailia Grain
Merchants Association V. C.I.T., A.I.R. 1958 Bom. 32,
referred to:
The decision in the Board of Revenue v. The Mylapore Hindu
Permanent Fund Ltd. (1924) I.L.R. 47 Mad. 1, could not have
been rightly based on Style’s case.
The Madura Hindu Permanent Fund Ltd. v. C.I.T., 6 I.T.C.
326, referred to.
The decisions in the Sivaganga Sri Meenakshi Swadeshi
Saswatha Nidhi Ltd. v. C.I.T.. 8 I.T.C. 83 and Tanjore
Permanent Fund v. C.I.T. 5 I.T.R. 160, were based on the
decision in the Mylapore Hindu Permanent Fund Case but in
none of these cases was the point debated as to what the
position would be when shareholders participated in profits
as shareholders and not as contributors.
JUDGMENT:
Civil Appellate Jurisdiction: Civil Appeals Nos. 637644 of
1963.
Appeals from the judgment and order dated October 20, 1960,
of the Madras High Court in Case Referred No. 78 of 1956.
K. N. Rajagopal Sastri and R. N. Sachthey, for the
appellant.
R. Kesava Iyengar, M. S. K. Iyengar and Krishna Pillai,
for the respondent.
May 7, 1964. The Judgment of the Court was delivered by
SIKRI J.The respondent, the Kumbakonam Mutual Benefit Fund
Ltd., hereinafter referred to as the assessee, is a company
incorporated under the Indian Companies Act. 1882, limited
by shares. Since 1938. the nominal capital of the assessee
is Rs. 33,00,000 divided into shares of Re. 1 each. It
carries on banking business restricted to its shareholders,
i.e., the shareholders are entitled to participate in the
various recurring deposit schemes of the assessee or to
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obtain loans on security. The statement of the case
describes the working of the assessee thus:
"Recurring deposits are obtained from members
for fixed amounts to be contributed monthly by
them for a fixed number of months as
stipulated
207
at the end of which a fixed amount is returned
to them according to published tables. The
amount so returned will cover the compound
interest of the period. These recurring
deposits constitute the main source of funds
of the assessee for advancing loans. Such
loans are restricted only to members who have,
however, to offer substantial security,
therefor, by way of either the paid up value
of their recurring deposits, if any, or
immovable properties within ’the Tanjore
district.
Out of the interest realised by the assessee
on the loans which constitute its main income,
interest on the recurring deposits aforesaid
are paid as also all the other outgoings and
expenses of management and the balance is
divided among the members pro rata according
to their shareholdings after making provision
for reserves, etc., as required by the
Memorandum of Articles aforesaid. The
shareholders who are thus entitled to
participate in the profits need not have
either taken loans or have made recurring
deposits."
The Income-Tax Officer assessed the entire profits for eight
years from 1946-47 to 1953-54. In a detailed and closely
reasoned order, dated February 29, 1952, which is part of
the statement of the case, passed in respect of the
assessment year 1947-48, the Income Tax Officer held that
New York Life Assurance Company v. Styles(1) did not apply
to the facts of this case. He distinguished Style’s(1) case
thus:
"Whereas the New York Life Assurance Company
paid to its members what it had saved, the
assessee fund pays to its members what it has
earned. A share-holder in the New York Life
Assurance Company did not get back anything
more than what he contributed, a share-holder
of the Kumbakonam Mutual Benefit Fund does
(1) 2 T.C. 460
208
on the other hand get more than what he con-
tributes. A fixed depositor gets back on
maturity of the deposit not only the amount he
deposited but also the interest thereon. A
recurring depositor who pays, say a rupee each
month for eighty-six months does not get back
Rs. 86 only, or something less, but-Rs. 100,
the balance of Rs. 14 representing the
interest on his deposit. What is returned to
him is not a mere refund and there is no
question here, as in the case of the New York
Life Assurance Company, of his contributing
money for a common purpose and getting back
that much of his contribution as is not
required for the common purpose. From the
point of view of the individual member, an
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investment in the assessee fund is just like
any other lucrative investment and his primary
object in investing his money with the fund is
the income, which comes to him in the guise of
interest or dividend."
Relying on Rowlatt, J.’s, observations in Thomas v. Richard
Evans Co. Ltd.,(1) that ’it-does not come back to them as
purchasers or customers; it comes back to them as share-
holders upon their shares’, the Income Tax Officer held that
"the profits made by the fund belong to them as share-
holders and not as borrowers from the fund or in the
capacity of individuals who have in any way utilised the
facilities afforded by the fund." He further held that
"there should firstly be a common fund and then it must be
proved that the contributors to this common fund and the
participators in the surplus are one and the same. As far
as I can see, there is no common fund in this case. The
income of the assessee is derived from interest on loans
lent to its members, interest on Government securities,
rents from property, etc., and it is distributed to the
members either in the shape of guaranteed interest or
dividends or both. As far as the allegedly "mutual"
transactions of the assessee are concerned, the contributors
to the income of the company
(1)II T.C. 790
209
are those members who have borrowed from the assessee and
paid interest on their borrowings. If the requirement of
the complete identity between contributors and participators
were to be satisfied, then the above contributors should
also be entitled to participate in the profits." He further
pointed out that a shareholder may not hold any deposit with
the fund and may not utilise the borrowing facilities
afforded by the fund but may be content to receive such
dividend as is declared.
The Appellate Assistant Commissioner, on appeal, upheld the
order of the Income Tax Officer. It was urged before him,
inter alia, that the decision in the case of Board of
Revenue Madras v. The Mylapore Hindu Permanent Fund Ltd.,(1)
applied to the facts because the capital was also
fluctuating in this case. He, however, held that it was not
a case of fluctuating capital but only a steady increase of
capital. He further held that a shareholder need not be a
subscriber to the fixed or recurring deposits, and a share-
holder may not participate in the interest earnings if no
dividend is declared.
On further appeal, the Income Tax Appellate Tribunal held as
follows:
"The fund’s claim that it is in reality a
mutual benefit society is untenable. The
cardinal requirement is that all the
contributors to the common fund must be able
to participate in the surplus and that all the
participators in the surplus must be
contributors to the common fund. In other
words, complete identity between the contri-
butors and the participators is essential.
Firstly, there is no common fund. Secondly,
the shareholders may or may not receive a
dividend. But those shareholders who
contribute to the recurring deposits of
various duration receive guaranteed interest.
The persons who contribute to the income of
the company are those shareholders who borrow
from the appellant and pay interest on their
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borrowings.
(1) [1924] I.L.R. 47 Mad. 1
51 S.C.-14
210
Out of the income so derived, the guaranteed
interest to the shareholders who make monthly
deposits, receive guaranteed interest but the
shareholders who do not contribute monthly
deposits may or may not receive any dividend.
Thus, the complete identity between contribu-
tors and participators does not exist. The
nature of the business of the appellant is
that of ordinary banking though the business
is restricted to its members or shareholders
only. This restriction does not in the least
take the income of the appellant out of the
purview of the charging sections of the Act.
In our opinion, the Income-tax authorities
were right in treating the appellant as a
banking concern."
The Appellate Tribunal, however, stated a consolidated case
in respect of the assessment years, 1946-47 to 1953-54, and
referred the following questions to the High Court:
"(1) Whether there were materials for the
Tribunal to hold that the assessee is a
banking concern assessable under Section 10
for all the assessment years and not exempt.
(2) If the answer to the above question is
in the affirmative and against the assessee,
whether the payments to the non-recognised
provident fund by the assessee for the six
years of assessment 1946-47 and 1948-49 to
1952-53 are allowable deductions under any
provisions of the Act."
We are here only concerned with question No. 1. The ’High
Court, for reasons which will be shortly stated, answered
the question in the negative, and awarded costs Rs. 250. It
further ordered the refund to the assessee of the institu-
tion fee of Rs. 100 for each of the references "as part of
the costs to which as successful assessee it will be
entitled to."
The High Court, after a review of the cases cited before it,
came to the conclusion that the assessee satisfied the con-
ditions necessary for the applicability of Style’s case(1).
According to it, the facts that the benefits of the
association (i) T.C. 460
211
are available only to members thereof and no non-member can
participate in the benefits, and that the profits that arise
from this mutual trading are the result of the interest
collected from members who take advantage of the loans
offered by the fund and also of the default interest paid by
members who delay payment of recurring deposits, and that
the ’profit’ after payment of interest to depositors and
after meeting the other expenses of administration of the
fund are available for distribution among the entire body of
the members, showed that there was complete mutuality. It
had that "what is accordingly required is that both the
right to contribute and the right to participate must be
available to an identical body and it is not necessary that
every member should contribute before he can be allowed to
participate. That this test is also satisfied in the
present case is beyond question." It is this test which is
attacked as unsound by the learned counsel for the
appellant.
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The High Court certified the cases as being fit for appeal
to this Court, under s. 66 (A) (2) of the Indian Income Tax
Act, and the appeals are now before us for disposal.
The question that arises in this case is whether the
Style’s(1) case covers the facts of this case. In other
words, to use the language of Lord Macmillan in Municipal
Mutual Insurance Limited v. Hills(1) has the cardinal
requirement, namely, ’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
contributors to the common fund; in other words, there must
be complete identity between the contributors and the
participators’, been satisfied?
Most of the cases, both English and Indian, bearing on the
point under discussion, were reviewed by this Court in
Commissioner of Income Tax v. Royal Western Indian Turf Club
Ltd.(1), and this relieves us of the task of reviewing all
of them again. We however, shortly deal with those in which
companies limited by shares were concerned for they stand on
a slightly different footing from companies limited by
guarantee.
(1) 2 T.C. 460
(2) 16 T.C. 430
(3)[1954] S.C.R. 289
212
Although the facts in the Royal Western Turf Club case were
different, this Court laid down the following:
"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 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 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 the members and applies it
for their benefit not as shareholders but as
persons who ,out 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 instrument, a
convenient agent for carrying out what the
members might more laboriously do for
themselves. But 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."
In the Dibrugarh District Club Ltd. v. The Commissioner of
Income Tax, Assam(1), which was noticed by this Court, the
Calcutta High Court distinguishing Style’s(2) case held that
the fact of incorporation could be neglected on the facts of
the case. In that club, out of the members of the club only
69 were shareholders and 220 were non-
(1) 2 I.T.C. 521
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(2) T.C. 460
213
shareholders, while 74 out of 445 of the shares were held by
non-members of the club, and the profits of the club were
being distributed every year as dividend to shareholders.
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 v.
Richard Evans and Co.(1), at pp. 822-823, he observes 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
carring its hareholders, or if a trading company, by trading
with the shareholders-even if it is limited to trading with
them-makes a profit, that profit belongs to the
shareholders, in a sense, but it belongs to them qua
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 poeple it does not matter
whether they are called members of the company, or partici-
pating 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 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 back to them, not in
the character of shareholders, but in the character of those
who have paid it. That, as I understand it, is the effect
of the decision in the New York ease."
(1) I. T.C. 790
214
It seems to us that the test applied by the High Court is
not sound. It is not consistent with the true decision in
Style’s case, as understood by this Court and in other
subsequent cases. It will be noticed that Lord Macmillan
clearly said that all participators must be contributors to
the common fund and not that all participators must be
entitled to contribute. The essence of mutuality lies in
the return of what one has contributed to a common fund.
Das, J., as he then was, in the passage quoted above, in
Commissioner of Income Tax v. Royal Western Indian Turf Club
Ltd.(1) reiterated the same idea.
The learned counsel for the assessee, relying on The
National Association of Local Government Officers v.
Watkins(1), urged that it is not necessary that all must
contribute to the common fund. But in that case it was an
unincorporated association, and Finlay, J., regarded that as
a matter of fundamental importance, for it followed from it,
as held by Finlay, J., "that the property belongs to the
members and it is a fallacy, as bad been pointed out in
several cases, one at least of which was cited to me, to say
in the case of such a club that, where a member orders a
dinner and consumes it, there is any sale to him. There is
not a sale. The fundamental thing is that the whole
property is vested in the members." He emphasized this again
when he says that "it may be that where you have a separate
entity, where you have a company, in a great many cases the
test is that you have to look at the subscribers, look at
the participants, and see if they are the same. Here it
seems to me to lie at the root of the thing that the
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property was not the property of the Association; it was the
property of the members themselves.. ....."
It is this feature of the case which Chagla, C.J., failed to
notice in Ismailia Grain Merchants Association v.
Commissioner of Income Tax(3).
We may now deal with the cases decided by the Madras High
Court, and relied on by the learned counsel for the
assessee. In Board of Revenue v. The Mylapore Hindu
(1) [1954] S.C.R. 289 (2) 18 T.C- 499
(3) A.I.R. 1958 Bom. 32
215
Permanent Fund Ltd., (1) the Fund was registered under the
Indian Companies Act of 1866. A shareholder subscribed one
rupee per share per mensem and at the end of 7 years drew
Rs. 102-8-0, and then he ceased to be shareholder (qua the
share). A shareholder had to pay interest on the
subscription, if not paid within the time prescribed by the
rules. Apart from the interest on the subscription, the
Fund derived income from interest on loans given exclusively
to its members, every one of them being entitled under the
rules to take loan, and occasionally from interest from
outside investments with bank. The High Court held the
Style’s(2) case applied and also held that the income earned
by the Fund by way of interest from its own members was not
taxable under the Income Tax Act, 1918, in spite of the fact
that such profits were devided among directors and
distributed among the shareholders with reference to the
number of shares and the number of months during which they
had held them. But the point urged by Mr. Rajagopal Sastri
was not raised before the High Court and the High Court was
content to apply. the test ’whether the income comes in from
outside and not from within’. But as held by the Full Bench
in The Madura Hindu Permanent Fund Ltd. v. The Commissioner
of Income Tax ( 3 this case could not have been rightly
based on Style’s case.
In The Sivaganga Shri Meenakshi Swadeshi Saswatha Nidhi Ltd.
v. The Commissioner of Income Tax (4) the High Court, without
adverting to doubts expressed in the decision in Madura
Hindu Permanent Fund Ltd., ( 3 ) regarding the applicability
of Style’s case, which was referred to in thestatement of
the case, and without giving any reasons,, heldthat the
Mylapore Hindu Permanent Trust(1) case applied.
In Tanjore Permanent Fund v. Commissioner of Income Tax(5)
the High Court held that there was no conflict between the
decision in Mylapore Hindu Permanent Fund(1) case and the
Madura Hindu Permanent Fund(1) case. A&.
(1) [1924] I. L.R. 47 Mad. 1
(2) 2 T.C. 460
(3) A I.T.C 326
(4) 8 I.T.C.. 83
(5) 5 I.T.R. 160
216
the facts in the case were similar to that in Mylapore Hindu
Permanent Fund (1) case, the High Court refused to reopen the
question and disturb the practice, but however added that
"though the term ’shareholder’ has been here used, we do not
wish to be understood as deciding that these subscribers are
shareholders properly so called within the meaning of the
Companies Act." As already pointed out, in none of these
cases the point was debated as to what is the position when
shareholders participate in profits as shareholders and not
as contributors.
It seems to us that it is difficult to hold that Style’s
case applies to the facts of the case. A shareholder in the
assessee company is entitled to participate in the profits
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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 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 any
the less income from business within s. 10 of the Indian
Income Tax Act.
In our opinion, the answer to the question referred to the
High Court should be in the affirmative. ’Me appeals are
accordingly accepted, but in view of the fact that the
Mylapore Fund(1) case has held the field in Madras since
1923, we do not wish to burden the assessee with costs.
Accordingly, the parties will bear their own costs through-
,out.
A subsidiary point was raised by Mr. Sastri that the High
Court had no jurisdiction to order the refund of the
reference fees deposited by the assessee. This is true.
But the High Courts can, if they so deem fit in a particular
case, assess the costs in such a way as to include the sum
of Rs. 100 deposited as reference fee.
Appeal allowed.
(1) [1924] I.L.R. 47 Mad. 1 (2) 2 T.C. 460
217