Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1964 Supreme(SC) 167

SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commissioner of Income-tax Madras, Appellant
Versus
Kumbakonam Mutual Benefit Fund Ltd., Respondent.
Civil Appeals Nos. 637 to 644 of 1963.
Advocates Appeared
Mr. K. N. Rajagopal Sastri, Senior Advocate, (Mr. B. N. Sachthey, Advocate, with him), for Appellant; Mr. R. Kesava Iyengar, Senior Advocate, (M/s. M. S. Iyengar and Mr. Krishna Pillai, Advocates, with him), for Respondent.

Advocates:
K.N.RAJAGOPAL SASTRI, KRISHNA PILLAI, M.S.IYENGAR, R.Kesava Ayyangar, R.N.SACH

The principle of mutuality, as laid down in Style's case, (1889) 2 Tax Cas 460, requires that there must be complete identity between the contributors to the common fund and the participators in the surplus.

Headnote:
INCOME TAX - Banking business - Whether assessee is a banking concern assessable under S. 10 for all the assessment years and not exempt - Whether payments to the non-recognised provident fund by the assessee for the six years of assessment are allowable deductions under any provisions of the Act.
Fact of the Case:

The assessee, a company incorporated under the Indian Companies Act, 1882, carried on banking business restricted to its shareholders. The assessee's income was derived from interest on loans lent to its members, interest on Government securities, rents from property, etc., and it was distributed to the members either in the shape of guaranteed interest or dividends or both. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal held that the assessee was a banking concern assessable under S. 10 of the Indian Income-tax Act and that the payments to the non-recognised provident fund by the assessee for the six years of assessment were not allowable deductions under any provisions of the Act.
Finding of the Court:

The Supreme Court held that the assessee was a banking concern assessable under S. 10 of the Indian Income-tax Act and that the payments to the non-recognised provident fund by the assessee for the six years of assessment were not allowable deductions under any provisions of the Act. The Court held that the assessee's income was not exempt from tax under the principle of mutuality as laid down in Style's case, (1889) 2 Tax Cas 460, as there was no complete identity between the contributors to the common fund and the participators in the surplus.
Issues: 1. Whether the assessee is a banking concern assessable under S. 10 for all the assessment years and not exempt. 2. Whether the payments to the non-recognised provident fund by the assessee for the six years of assessment are allowable deductions under any provisions of the Act.
Ratio Decidendi: 1. The principle of mutuality, as laid down in Style's case, (1889) 2 Tax Cas 460, requires that there must be complete identity between the contributors to the common fund and the participators in the surplus. In the present case, there was no complete identity between the contributors and the participators, as shareholders could participate in the profits without contributing to the funds of the company by taking loans. 2. The assessee's income was derived from interest on loans lent to its members, interest on Government securities, rents from property, etc., and it was distributed to the members either in the shape of guaranteed interest or dividends or both. This income was not exempt from tax under the principle of mutuality.
Final Decision: The appeals were accepted, but the parties were directed to bear their own costs throughout.

Judgment

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 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 share-holdings after making provision for reserves, etc. as required by the Memorandum of Articles aforesaid. The share-holders who are thus entitled to participate in the profits need not have either taken loans or have made recurring deposits."

2. 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 Co. v. Styles, (1889) 2 Tax Cas 460 did not apply to the facts of this case. He distinguished Style s case, (1889) 2 Tax Cas 460, 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 Assurauce Company did not get back anything more than what he contributed, a share-holder of the Kumbakonam Mutual Bonefit Fund does 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."

3. Relying on Rowlatt, J s. observations in Thomas v. Richard Revans Co. Ltd., (1927) 11, Tax Cas 790 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 profit;: 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

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1964 Supreme(SC) 167

The principle of mutuality, as laid down in Style's case, (1889) 2 Tax Cas 460, requires that there must be complete identity between the contributors to the common fund and the participators in the surplus.

Cases Referred (2)