07 May 1964
Supreme Court


Case number: Appeal (civil) 637 of 1963






DATE OF JUDGMENT: 07/05/1964


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,



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



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



             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



             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.



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 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



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



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