Commissioner of Income-Tax, Madras Vs.
Kumbakonam Mutual Benefit Fund Ltd. [1964] INSC 156 (7 May 1964)
07/05/1964 SIKRI, S.M.
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 satisfiedTherefore
whether company exempt under s. 10(2)(iii), Incometax 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, upheld the
order of the Income-tax Officer; the Tribunal, however, referred to the High
Court inter alia, the question whether there were materials for the tribunal to
hold that the assessee was a banking concern, assessable under s. 10 and was
not therefore exempt.
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 customerseven if it was limited to
trading only with themand 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 Govern206 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.
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 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 contributes. 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 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 shareholders upon their shares', the Income
Tax Officer held that "the profits made by the fund belong to them as
shareholders 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 shareholder 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 contributors 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 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 contributors
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 institution 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 conditions 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.
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 (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 caring its share holders,
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 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 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 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.C499 (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 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 fulfill 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 throughout.
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.
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