The Commissioner of the Income-tax has referred for the opinion of the High Court the question whether the sum of Rs. 61,304 being the income or the profits of the Fund derived from the transactions with the shareholders is liable to assessment.
The petitioner is the Tanjore Permanent Fund Limited. It is a company incorporated in 1901 under the Indian Companies Act VI of 1882, now Act VII of 1913. The company started with 2,222 shares of Rs. 45 each share and a nominal capital of Rs. 99,990. The amount of each share is payable in monthly instalments of Re. 1. The share account of each shareholder is closed on the expiry of 45 months from the last date of the month in which he was admitted by his being paid Rs. 50 and then he ceases to be a shareholder. The difference between the amount subscribed by him and the amount paid to him at the end of the 45th month, viz., Rs. 5, called 'guaranteed interest.' The Fund accepts deposits from its shareholders on which interest is allowed to them. The Directors are authorised temporarily to borrow from time to time, if necessary, sums to carry on its transactions. The collections of the Fund are used to be lent to the shareholders at specified rates of interest on the security of the shares held by them and also on their other properties. The moneys belonging to the Fund may be invested by the Directors with banks or Co-operative Societies or in Government securities, Treasury bills or Post Office Cash Certificates. The Fund does not accept deposits from other persons than its shareholders, nor does it give loans to outsiders.
The Funds main source of income is the interest on the loans advanced to the shareholders. It also derives income from interest on the deposits with banks, interest on securities, house rent and other minor items. The excess of interest earned by the Fund over the expenses of the institution and the interest earned by the shareholders is regarded as profits of the Fund out of which 70 per cent. is divided among the shareholders and the balance after paying the legal adviser, remuneration and bonus to the establishment is carried to the reserve fund.
The number of shareholders of the Fund and the amount of shares fluctuate from time to time. On the August 15, 1931 as mentioned by the Commissioner, there were on the register of the Fund 9,984 shareholders with 1,10,740 shares and the subscribed capital of Rs. 49,83,300.
For the assessment of the year 1932-33, the Fund returned an income amounting to Rs. 14,178. In submitting this account it did not include as assessable income a sum of Rs. 61,304, the profits derived from the shareholders. The question referred to us is whether income-tax can be levied on this amount.
A case exactly like the present one was decided in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., in which it was held that a fund like this was a mutual benefit society and therefore the receipts from the shareholders were not income liable to assessment under the Act. The Income tax Officer did not follow this decision as before he completed the assessment this Court decided the case of the Madura Hindu Permanent Fund. That decision was interpreted by him to mean that profits earned by the Fund by lending money may be taxed. He therefore held that the decision in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund, Ltd., was no longer applicable and assessed the Fund on the total income including the profits of Rs. 61,304. The Assistant Commissioner confirmed the order of the Income tax Officer. The Commissioner referring the case to case to us says that the combined effect of these two decisions and of the decision of this Court in Sivaganga Sri Meenakshi Nithi v. Commissioner of Income Tax, Madras, is not very clear to him. He also argues that the petitioner Fund is a company carrying on a trade and as such that the fact that it carries on the trade with its own customers does not make it any the less trader and that the profits resulting from the trade are liable to tax unless specially exempted and as there is no question of any such exemption here the amount of profits earned, viz., Rs. 61,304, is assessable to tax.
At the outset we may observe that so far as the decisions of this Court are concerned, there is no conflict amongst them. The decision in Madura Hindu Permanent Fund Ltd. v. Commissioner of Income Tax, Madras, followed by the Income tax Officer does not touch the question of the liability to assessment of the profits earned by the Fund from its shareholders nor does it, in our opinion shake the authority of the decision in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. In the first case Madura Hindu Permanent Fund Ltd. v. Commissioner of Income Tax, Madras, the question was whether the 'guaranteed interest' may be deducted from the total income of the Fund during the year of account. This Court held that the guaranteed interest was interest on capital borrowed for the purpose of the funds business within the meaning of Section 10(ii)(3) of the Income tax Act, that its payment was not in any way dependent on the earning of the profits and that the fund was entitled to claim deduction in respect of that sum distributed by it as guaranteed interest. The question now referred to us did not arise for decision in that case. In the Sivaganga Minakshi Nidhi Case this Court pointed out that that case was one like Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund, Ltd.
It is contended by the learned counsel for the Commissioner that on the facts this case would fall exactly within the scope of the decision in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. What he wants to argue is that the case was wrongly decided and that he should be allowed to reopen the question. So far as this Court is concerned, the question has been considered and decided by the Full Bench in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. As pointed out in Madura Hindu Permanent Fund Ltd. v. Commissioner of Income-tax, Madras, the Fund though registered under the Indian Companies Act and subject to its provisions is not really a company but a mutual benefit society with a fluctuating capital. The subscriptions though called share capital are not really so, nor are they capital borrowed for the purpose of the business as that capital is ordinarily understood. In enacting the explanation to Sec. 10(ii)(3), Income-tax Act, it would seem that the legislature has shown its intention to recognise the existence of such mutual benefit societies like the one in question.
As the law on the point has been clearly laid down in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., and as this case falls exactly within its scope we are not inclined now to reopen the question and to disturb the practice which has been followed sine Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., whatever view we may be inclined to take if the point was res integra. 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. The matter is not before us.
Our answer to the question accordingly is that the sum of Rs. 61,304 is, in the circumstances of the case, not liable to assessment. The assessee is entitled to Rs. 250 for costs and will get a refund of the Rs. 100 deposit.
Question answered accordingly.