Commissioner Of Income-Tax, Madras v. Kumbakonam Mutual Benefit Fund Ltd

20.J. SUPREME COURT REPORTS sought to be put upon the expression "income~ in su!J:.s.' (2) o( s. 26 by the Revenue is . accepted, then the absence· of News-tli.~! _word in the ?rov!-5° destroys the· argume?t. Bu! ·the. Lldi' more reasonable .view IS that both the sul>-section and·. the J. p~ov_is() deal only with ·the profits uncl~r ihe 4th head men" tioJ'led in s. 6 and, so construed, it cxcludci capital g:tlns:· 'fl1e argument that sub-s:. (2) of s. 26 re..:d v,ith the prbviso theretO _indicates that the total · · income · of the· person · st1cceeded. is the !=r!_terion· f_?r' separate .assessment ·~-~,.: __ ..- · sub-s. (2) and for assessment and realisaticm-unoer the· ···pf.ovis0 is on. the assumption.that·ruO:S.-(2) and the proviso_ deal with all the h~uds n1entionect in s. 6 of the Act; ·nut. if,· as;ve.hav(fbeld, the scope of sul>-s.-(2)of s. 26 fa· only· ---- ··fonrted to the income from the· busirtess, ; the" share' under suJ;s. (2) and the assessment and realisation•· under the pro.visa can only relate to the inrome · ,from the businCs.5. The argument is really begging the question itself. ·Jn the' result we agree with the High Court in regard to" the answer it has given in respect of the second question. 1964 CJ.T; Express v'. News-papers Lldi' Subba-~ao J. In. this view no other ' questidn" arises . for·· oor consideiatiOn: · , In the result, the appeal fails and is dismissed with · costs. . Appeal 'dismin.ed: 1964 l\fay 7 COMMISSIONER OF INCOME~TAX, MADRAS KUMBAKONAM MUTUAL' BENEFiT FUNn LTD. (K. I SUBBA •; • . RAo, J. C. • SHAH ._ • .' • ANDS. '. • ~ M. ' ; SIKRI, / . ' • J.J.) . . Mutual Btnefit Socfety2-company engd:;id ·ili'"bmillng bU°sine.U restrldeii"J to ml'mbers-Not e,,•ery member-made ·deposit} or_ loaii.J-.P~ mainly earned fr~1n l~n.s to m~mber;-All me"m.be~$ enlitlM.llt.; diVidend~Whe.tfi~, ,.-.,.---.· - , ••! · r~quiren?e;.tt"' '· · "';,; of -, ·'mUf~i,Y·' '"-.,. P. 1>et;:een· -. ' 'cOnt~.c;;-· • '<' I '·•·.'I -arid · · partici,,Dtors · satisfied~Ther_tfore. · w~tller company eic1"pt ,,;,a;r· i. •1ocziiwi;'1.Coine-i;._,, ;1c;;-1m · · · ~ ;,_._-' · (_ 1' ·1·-· .; ·ii··;.-' h, ;~ ,; j._A .•. I ·, /1'.:.,_ ,,~,-.The ~Ssee~ Kumb3.kon3.in ~tutual Be1:iefit Fund;. _Ltd. •. carried_. on,: ruiokini' buSiDcSS ·wbiCh. 'wis-- reStncted i.o! its s?iareholdd.t! In ·the"COum . . . ·' ' . . . . . . «>f ill 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 .. a result of these deposits, loans were given to members and the intezat from such Joans constituted the assessee's main income. After the payment out of this income of interest on the deposits as also aU the other expenses and outgoings 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 c.ontendcd 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 Ne"" York Life Assurane< Co. v. Styles, 2 T.C. ~. which was followed in Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., (1924) l.L.R. 47 Mad. I. the Income-tax Officer ~ the entire profits. of the asscssee. 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 require: ment of identity between contributors and participators as in Style's cast! was not satisfied. Section: CONCLUSION 1be Appellate Assistant Commissioner and the Incon1e~tax Appellate Tribunal, upon appeals made lo them in turn, upheld the order of the lnoome-tax Officer; the Tribunal, however, referred to the High Court, inl~t alia, the question whether there were materials for the tribunal to hold that the assessee ~·as a banking concern, asses'iahle under s. 10 and was not therefore exempt. The High Court in answering the question in the negt\tivc applied the test that both the right to contribute and the right to participate must be available to an identical body but il was not nece.;;;ary that every member should contribute before he could lie allovted to parti-cipale. 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 conimon fund must be entitled to participate in the surplus and all participators mmt be cootributors to the common fund; and not only that all part:-cipators must be entitle"d to contribute. Municipal Mutual Insurance Ltd. v. Hills, 16 T.C. 430. C.I.T. >. R'1,1Dl Western Indian Turf Club Ltd .• [1954] S.C.R. 289. Dibrugarh Di!lrict Chit Ltd. v. C.l.T., :Assam, 2 l.T.C. 521, Thomas v. Richarl Evans & Co .• 11 T.C. 790, The National Association of Local Govern- 1964 CJ.T. .. M. Bt,..fit Ftmd Ltd. K. M. Benefit Fund Ltd. SiUI J. 206 ment Officers v. Watkins, 18 T.C. 499 and lsmailia Grain Mi!rcliant¥ Association v. C.l.T., A.1.R. 1958 Born. 32. referred to: The decision in the Board of Revenue v. The Mylapore Rirtlb.t Permanent Fund Ltd. (1924) I.LR. 47 Mad. J, could not haW> been rightly based on Style's case. The Madura Hindn Permallent Fund Ltd. v. C.1.1'., 6 I.T.C. 3?6, referred ro. The decisions in the Sivaganga Sri Meenakshi Swadeshi Saswatlra Nidhi ltd. v. C.l.T., 8 l.T.C. 83 llnd TtrtJjore Permanent Fund v. CJ.T. 5 I.T.R. 160, were base<! on the decision ·in the Mylapore Hindu Permanent Fu1Zd 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. Civil Appellate Jurisdiction: Civil Appeals Nos. 637--644 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. Rajagopa/ Sastri and R. N. Sachthey, for th~ appellant. P. Kesava Iyengar, M. S. K. Iyengar and Krishna Pillai, for the respondent. May 7. 1964. The Judgment of the (ourt was deliver-ed by StKRI 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 sh.ares of Re. I each. It carries on banking business restricted ti' its shareholders. i.e .. the shareholders are entitled to partici-pate in the various recurring deposit schemes of the assessee or to obtain loans on security. The statement of the case describes the working of the assesscc thus: "Recurring deposits are obtained from members for fixed - amounts to be contributed monthly by them for a fixed number of months as stipulated. i 'F i 'F at the end of which a fixed mnount 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. how-ever. to offer substantial security, therefor, by way of either the paid up value of their recur-ring 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 managemer.t and the balance is divided among the members pro rata according to their share-holdings after making provision for reserves, etc .. as required by the Memorandum of Arti-cles 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 Incm>1e Tax Officer held that New York Life A.n11ra11ce Cnmpany v. Styles(') did not apply to the facts of this case. He distinguished Style's<') 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 (IJ 2 T.C. 46o 1964 K. M. Be"41 Fund Ltd. Slkri I. 1964 CJ.T. v. K. ltl. Bctw(ii Fwtd Ltd. Sikri J. on the other hand get more than wh.1t he con-tributes. A fixed depositor gets back on maturity of the deposit not only the amount he deposited but also th.e interest thereon. A r~­curring depositor who pays, say a rupee eacil 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 m1mcy for .a .com-mon purpose and getting back that much of his contribution as is not required for the common purpose. From the point of view of the indivi-dual member, an investment in the assessee fund is just like any other lucrative investment and his primary object in inv~sting his money with the fund is the income. which comes to him in the guise of interest or dividend." Relying on Rowlatt, .l.'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 Jncome 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 partici-pators 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 le~t to its members, interest on Government securities, rents from pro-perty, 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 1964 1964 are those members who have borrowed from t_he assessee and paid interest on their borrowings. If the requirement of the complete identity between contributors and partici-pators 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 faci-lities afforded by the fund but may be content to receive such dividend as is declared. C.1.T. T. K. M. Benefit Fund Ltd. Sikri J. The Appe!late 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 Roard 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 fluc.tuating 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 110 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 require-ment is th.at all the contributors to the common fund must be able to participat~ 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 divi-dend. But those sh.1reholders who contribute to the recurring deposits of various duration receive guaranteed interest. The persons who contnbute to the income of the company are those shareholders who borrow from the appel-lant and pay interest on their borrowings. (1) [1924] I.L.R. •7 Mad. 1 51 S.C.-14 1964 C.1.T. re. M. "· B•M(il Fund Lid. Sikri J. 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 co11tribu-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 assess-ment 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 allow-able 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, answer-ed 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('). According to it, the facts that the benefits of the association (1) T.C. 460