The essence of mutuality lies in the return of what one has contributed to a common fund, and the mere fact that only those shareholders who have transactions with the Nidhi during the year were entitled to the dividend makes the Nidhi a mutual concern.

Per Shri T. C. A. Ramanujam, Accountant Member - These are three departmental appeals preferred against the finding of the C. I. T. (A) that the assessee is a mutual fund not liable to the levy of income-tax in the assessment years 1980-81, 1981-82 and 1982-83. Shri M. Narayanan, Departmental Representative, appeared for the department and Shri K. Srinivasan & Shri Quadir Hoseyen, Advocates for the assessee.

2. The assessee claimed before the Assessing Officer that the business of the Nidhi was restricted to shareholders and that dividends were paid only to persons who had transactions during the year. The Assessing Officer considered that in respect of dividends claimed for mutuality can be accepted. In respect of other profits he held that the principle of mutuality was not satisfied and brought the Nidhi to tax.

3. In the first appeal the C. I. T. (A) noted that the entire payment of dividend was made only to shareholders and no outsiders were recipient of such dividends. He accepted the contention that no distinction should be made between dividend paid to shareholders having transactions and those not having any transaction and that all the profits of the Nidhi should have been exempt as belonging to a mutual fund.

4. In the appeal Shri M. Narayanan, Departmental Representative, submitted that the principle of mutuality was not satisfied in this case inasmuch as divided was paid to shareholders who did have any transaction during the previous year relevant to the assessment years. There was no complete identity between the contributors and the participants in the common fund. Shri K. Srinivasan, Advocate, on the other hand, argued that there was such complete identity between the contributors and the participants in the surplus and hence no part of the surplus was taxable. The principle of mutuality was fully satisfied in respect of the entire surplus of the Nidhi. He produced before us bye-laws and Articles of Association of the Nidhi in support of his submission.

5. The Nidhi gets deposits from members and interest is paid on such deposits. Some of the shareholders are also having transactions with the Nidhi. Under Art. 63 of the Articles of the Nidhi only those shareholders who had dealings with the Nidhi during the year were entitled to the dividends and non-contributors had no right to share in the dividend. Out of 2843 Shareholders dividend was paid to 1843 shareholders who had transactions and the rest of the shareholders did not get dividends under Art. 63. This case satisfies the test of mutuality laid down by the Supreme Court in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241. If all shareholders were to participate in the dividends irrespective of their having transactions with the Nidhi or not, then as explained by the Supreme Court, the position of the Nidhi would not have been different from that of an ordinary bank. A shareholder in the Kumbakonam Mutual Benefit Funds case (supra) was entitled to receive his dividend as long as he held a share and he need not have to fulfil any other condition. The Supreme Court explained that his position was in no way different from that of a shareholder in a banking company. On the other hand, the essence of mutuality lies in the return of what one has contributed to a common fund. The mere fact that only those shareholders who have transactions with the Nidhi during the year were entitled to the dividend makes the Nidhi a mutual concern. The order of the C.I.T. (A) is upheld. The departmental appeals are dismissed.