1. The respondent, the Kumbakonam Mutual Benefit Fund Ltd., hereinafterreferred to as the assessee, is a company incorporated under the IndianCompanies Act, 1882, limited by shares. Since 1938, the nominal capital of theassessee is Rs. 33,00,000 divided into shares of Re. 1 each. It carries onbanking business restricted to its shareholders, i.e., the shareholders are entitledto participate in the various recurring deposit schemes of the assessee or toobtain loans on security. The statement of the case describes the working ofthe assessee thus :
'Recurring deposits areobtained from members for fixed amounts to be contributed monthly by them for afixed number of months as stipulated at the end of which a fixed amount isreturned to them according to published tables. The amount so returned willcover the compound interest of the period. These recurring deposits constitutethe main source of funds of the assessee for advancing loans. Such loans arerestricted only to members who have, however, to offer substantial securitytherefore, by way of either the paid up value of their recurring deposits, ifany, or immovable properties within the Tanjore district.
Out of the interest realised bythe assessee on the loans which constitute its main income, interest on therecurring deposits aforesaid are paid as also all the other outgoings andexpenses of management and the balance is divided among the members pro rataaccording to their share-holdings after making provision for reserves, etc., asrequired by the Memorandum or Articles aforesaid. The shareholders who are thusentitled to participate in the profits need not have either taken loans or havemade recurring deposits.'
2. The Income-Tax Officer assessed the entire profits for eight years from1946-47 to 1953-54. In a detailed and closely reasoned order, dated February29, 1952, which is part of the statement of the case, passed in respect of theassessment year 1947-48, the Income Tax Officer held that New York LifeAssurance Company v. Styles 2 T.C. 460 did not apply to the facts of thiscase. He distinguished Style's 2 T.C. 460 case thus :
'Whereas the New York Life Assurance Company paidto its members what it had saved, the assessee fund pays to its members what ithas earned. A share-holder in the New York Life Assurance Company did not getback anything more than what he contributed, a share-holder of the KumbakonamMutual Benefit Fund does on the other hand get more than what he contributes. Afixed depositor gets back on maturity of the deposit not only the amount hedeposited but also the interest thereon. A recurring depositor who pays, say arupee each month for eighty-six months does not get back Rs. 86 only, orsomething less, but Rs. 100, the balance of Rs. 14 representing the interest onhis deposit. What is returned to him is not a mere refund and there is noquestion here, as in the case of the New York Life Assurance Company, of hiscontributing money for a common purpose and getting back that much of hiscontribution as is not required for the common purpose. From the point of viewof the individual member, an investment in the assessee fund is just like anyother lucrative investment and his primary object in investing his money withthe fund is the income, which comes to him in the guise of interest ordividend.'
3. Relying on Rowlatt J.'s observations in Thomas v. Richard Evans and Co.Ltd. 11 T.C. 790 that 'it does not come back to them as purchasers orcustomers; it comes back to them as share-holders upon their shares', theIncome Tax Officer held that 'the profits made by the fund belong to themas share-holders and not as borrowers from the fund or in the capacity ofindividuals who have in any way utilised the facilities afforded by thefund.' He further held that 'there should firstly be a common fundand then it must be proved that the contributors to this common fund and theparticipators in the surplus are one and the same. As far as I can see, thereis no common fund in this case. The income of the assessee is derived frominterest on loans lent to its members, interest on Government securities, rentsfrom property, etc., and it is distributed to the members either in the shapeof guaranteed interest or dividends or both. As far as the allegedly'mutual' transactions of the assessee are concerned, the contributorsto the income of the company are those members who have borrowed from the assesseeand paid interest on their borrowings. If the requirement of the completeidentity between contributors and participators were to be satisfied, then theabove contributors should also be entitled to participate in the profits.'He further pointed out that a shareholder may not hold any deposit with thefund and may not utilise the borrowing facilities afforded by the fund but maybe content to receive such dividend as is declared.
4. The Appellate Assistant Commissioner, on appeal, upheld the order of theIncome Tax Officer. It was urged before him, inter alia, that the decision inthe case of Board of Revenue, Madras v. Mylapore Hindu Permanent Fund Ltd.,(1924) I.L.R. 47 Mad. 1 applied to the facts because the capital was alsofluctuating in this case. He, however, held that it was not a case offluctuating capital but only a steady increase of capital. He further held thata shareholder need not be a subscriber to the fixed or recurring deposits, anda shareholder may not participate in the interest earnings if no dividend isdeclared.
5. On further appeal, the Income Tax Appellate Tribunal held as follows :
'The fund's claim that it is in reality a mutualbenefit society is untenable. The cardinal requirement is that all thecontributors to the common fund must be able to participate in the surplus andthat all the participators in the surplus must be contributors to the commonfund. In other words, complete identity between the contributors and theparticipators is essential. Firstly, there is no common fund. Secondly, theshareholders may or may not receive a dividend. But those shareholders whocontribute to the recurring deposits of various duration receive guaranteedinterest. The persons who contribute to the income of the company are those shareholderswho borrow from the appellant and pay interest on their borrowings. Out of theincome so derived, the guaranteed interest to the shareholders who make monthlydeposits, receive guranteed interest but the shareholders who do not contributemonthly deposits may or may not receive any dividend. Thus, the completeidentity between contributors and participators does not exist. The nature ofthe business of the appellant is that of ordinary banking though the businessis restricted to its members or shareholders only. This restriction does not inthe least take the income of the appellant out of the purview of the chargingsections of the Act. In our opinion, the Income-tax authorities were right intreating the appellant as a banking concern.'
6. The Appellate Tribunal, however, stated a consolidated case in respect ofthe assessment years, 1946-47 to 1953-54, and referred the following questionsto the High Court :
'(1) Whether there werematerials for the Tribunal to hold that the assessee is a banking concernassessable under Section 10 for all the assessment years and no exempt.
(2) If the answer to the abovequestion is in the affirmative and against the assessee, whether the paymentsto the non-recognised provident fund by the assessee for the six years ofassessment 1946-47 and 1948-49 to 1952-53 are allowable deductions under anyprovisions of the Act.'
7. We are here only concerned with question No. 1. The High Court, forreasons 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 theinstitution fee of Rs. 100 for each of the references 'as part of thecosts to which as successful assessee it will be entitled to.'
8. The High Court, after a review of the cases cited before it, came to theconclusion that the assessee satisfied the conditions necessary for theapplicability of Style's case T.C. 460. According to it, the facts that thebenefits of the association are available only to members thereof and nonon-member can participate in the benefits, and that the profits that arisefrom this mutual trading are the result of the interest collected from memberswho take advantage of the loans offered by the fund and also of the defaultinterest paid by members who delay payment of recurring deposits, and that the'profit' after payment of interest to depositors and after meeting the otherexpenses of administration of the fund are available for distribution among theentire body of the members, showed that there was complete mutuality. It hadthat 'what is accordingly required is that both the right to contributeand the right to participate must be available to an identical body and it isnot necessary that every member should contribute before he can be allowed toparticipate. That this test is also satisfied in the present case is beyondquestion.' It is this test which is attacked as unsound by the learnedcounsel for the appellant.
9. 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 beforeus for disposal.
10. The question that arises in this case is whether Style's 2 T.C. 460case covers the facts of this case. In other words, to use the language of LordMacmillan in Municipal Mutual Insurance Ltd. v. Hills 16 T.C. 430 has thecardinal requirement, namely, 'that all the contributors to the common fundmust be entitled to participate in the surplus and that all the participatorsin the surplus must be contributors to the common fund; in other words, theremust be complete identity between the contributors and the participators beingsatisfied
11. Most of the cases, both English and Indian, bearing on the point underdiscussion, were reviewed by this Court in Commissioner of Income-tax v. RoyalWestern Indian Turf Club Ltd. : 3SCR289 , and this relieves us of thetask of reviewing all of them again. We will, however, shortly deal with thosein which companies limited by shares were concerned for they stand on aslightly different footing from companies limited by guarantee.
12. 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 ofhimself is true enough but may in it application easily lead to confusion.There is nothing per se to prevent a company from making a profit out of itsown members. Thus a railway company which earns profits by carrying passengersmay also make a profit by carrying its shareholders or a trading company maymake a profit out of its trading with its members besides the profit it makesfrom the general public which deals with it but that profit belongs to themembers as shareholders and does not come back to them as persons who hadcontributed them. Where a company collects money from its members and appliesit for their benefit not as shareholders but as persons who put up the fund thecompany makes no profit. In such cases where there is identity in the characterof those who contribute and of those who participate in the surplus, the factof incorporation may be immaterial and the incorporated company may well beregarded as a mere instrument, a convenient agent for carrying out what themembers might more laboriously do for themselves. But it cannot be said thatincorporation which brings into being a legal entity separate from itsconstituent members is to be disregarded always and that the legal entity cannever make a profit out of its own members.'
13. In the Dibrugarh District Club Ltd. v. Commissioner of Income Tax, Assam2 I.T.C. 521, which was noticed by this Court, the Calcutta High Court,distinguishing Style's T.C. 460 case held that the fact of incorporationcould not be neglected on the facts of the case. In that club, out of themembers of the club only 69 were shareholders and 220 were non-shareholders,while 74 out of 445 of the shares were held by non-members of the club, and theprofits of the club were being distributed every year as dividend toshareholders.
14. Rowlatt J., in our opinion, correctly points out that if profits aredistributed to shareholders as shareholders, the principle of mutuality is notsatisfied. In Thomas v. Richard Evans and Co. 11 T.C. 790, at pp. 822-823, heobserves thus :
'But a company can make a profit out of its membersas customers, although its range of customers is limited to its shareholders.If a railway company makes a profit by carrying its shareholders, or if atrading company, by trading with the shareholders - even if it limited totrading with them - makes a profit, that profit belongs to the shareholders, ina sense, but it belongs to them qua shareholders. It does not come back to themas purchasers or customers. It comes back to them as shareholders, upon theirshares. Where all that a company does is to collect money from a certain numberof 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 samepeople, not as shareholders in the company, but as the people who subscribedit, then, as I understand the New York case, there is no profit. If the peoplewere to do the thing for themselves, there would be no profit, and the factthat 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 tobe disregarded, it is because there is no profit, the money being simplycollected from those people and handed back to them, not in the character ofshareholders, but in the character of those who have paid it. That, as Iunderstand it, is the effect of the decision in the New York case.'
15. It seems to us that the test applied by the High Court is not sound. Itis not consistent with the true decision in Style's case, as understood by thisCourt and in other subsequent cases. It will be noticed that Lord Macmillanclearly said that all participators must be contributors to the common fund andnot that all participators must be entitled to contribute. The essence ofmutuality lies in the return of what one has contributed to a common fund.
16. as he then was, in the passage quoted above, in Commissioner ofIncome-tax v. Royal Western Indian Turf Club Ltd. (1954) S.C.R. 289reiterated the same idea.
17. The learned counsel for the assessee, relying on National Association ofLocal Government Officers v. Watkins 18 T.C. 499, urged that it is notnecessary that all must contribute to the common fund. But in that case it wasan unincorporated association, and Finlay, J., regarded that as a matter offundamental importance, for it followed from it, as held by Finlay J.,'that the property belongs to the members and it is a fallacy, as has beenpointed out in several cases, one at least of which was cited to me, to say inthe case of such a club that, where a member orders a dinner and consumers it,there is any sale to him. There is not a sale. The fundamental thing is thatthe whole property is vested in the members.' He emphasized this againwhen he says that 'it may be that where you have a separate entity, whereyou have a company, in a great many cases the test is that you have to look atthe subscribers, look at the participants, and see if they are the same. Hereit seems to me to lie at the root of the thing that the property was not theproperty of the Association; it was the property of the membersthemselves....'
18. It is this feature of the case which Chagla, C.J., failed to notice inIsmailia Grain Merchants Association v. Commissioner of Income Tax : AIR1958Bom32 .
19. We may now deal with the cases decided by the Madras High High Court,and relied on by the learned counsel for the assessee. In Board of Revenue v.The Mylapore Hindu Permanent Fund Ltd., (1924) I.L.R. 47 Mad. 1 the Fund wasregistered under the Indian Companies Act of 1866. A shareholder subscribed onerupee per share per mensem and at the end of 7 years drew Rs. 102-8-0, and thenhe ceased to be a share-holder (qua the share). A shareholder had to payinterest on the subscription, if not paid within the time prescribed by therules. Apart from the interest on the subscription, the Fund derived incomefrom interest on loans given exclusively to its members, every one of thembeing entitled under the rules to take loan, and occasionally from interestfrom outside investments with bank. The High Court held that Style's 2 T.C.460 case applied and also held that the income earned by the Fund by way ofinterest from its own members was not taxable under the Income-tax Act, 1918,in spite of the fact that such profits were divided among directors anddistributed among the shareholders with reference to the number of shares andthe number of months during which they had held them. But the point urged byMr. Rajagopal Sastri was not raised before the High Court and High Court wascontent to apply the test 'whether the income comes in from outside and notfrom within'. But as held by the Full Bench in The Madura Hindu Permanent FundLtd. v. The Commissioner of Income-tax 6 I.T.O. 326, this case could not havebeen rightly based on Style's case.
20. In The Sivaganga Shri Meenakshi Swadeshi Saswatha Nidhi Ltd. v. TheCommissioner of Income Tax 8 I.T.C. 83 the High Court, without adverting todoubts expressed in the decision in Madura Hindu Permanent Fund Ltd., [6 I.T.C.326] regarding the applicability of Style's case, which was referred to in thestatement of the case, and without giving any reasons, held that the MylaporeHindu Permanent Trust (1924) I.L.R. 47 Mad. 1 case applied.
21. In Tanjore Permanent Fund v. Commissioner of Income Tax : 5ITR160(Mad) the High Court held that there was no conflict between the decision in MylaporeHindu Permanent Fund (1924) I.L.R. 47 Mad. 1 case and the Madura HinduPermanent Fund 6 I.T.C. 326 case. As the facts in the case were similar tothat in Mylapore Hindu Permanent Fund (1924) I.L.R. 47 Mad. 1 case, the HighCourt refused to reopen the question and disturb the practice, but howeveradded that 'though the term 'shareholder' has been here used, we do notwish to be understood as deciding that these subscribers are shareholdersproperly so called within the meaning of the Companies Act.' As alreadypointed out, in none of these cases the point was debated as to what is theposition when shareholders participate in profits as shareholders and not as contributors.
22. It seems to us that it is difficult to hold that Style's 2 T.C. 460case applies to the facts of the case. A shareholder in the assessee company isentitled to participate in the profits without contributing to the funds of thecompany by taking loans. He is entitled to receive his dividend as long as heholds a share. He has not to fulfil any other condition. His position is in noway different from a shareholder in a banking company, limited by shares.Indeed, the position of the assessee is no different from an ordinary bankexcept that it lends money to and receives deposits from its shareholders. Thisdoes not by itself make its income any the less income from business within s.10 of the Indian Income Tax Act.
23. In our opinion, the answer to the question referred to the High Courtshould be in the affirmative. The appeals are accordingly accepted, but in viewof the fact that the Mylapore Fund (1924) I.L.R. 47 Mad. 1 case has held thefield in Madras since 1923, we do not wish to burden the assessee with costs.Accordingly, the parties will bear their own costs throughout.
24. A subsidiary point was raised by Mr. Sastri that the High Court had nojurisdiction to order the refund of the reference fees deposited by theassessee. This is true. But the High Courts can, if they so deem fit in aparticular case, assess the costs in such a way as to include the sum of Rs.100 deposited as reference fee.
25. Appeal allowed.