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TMI Blog1964 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 or 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 1951-54. 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 Lif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Mylapore Hindu Permanent Fund Ltd. applied to the facts because the capital was also fluctuating in this case. He however held that this 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 shareholder may not participate in the interest earning 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion that the assessee satisfied the conditions necessary for the applicability of Styles' case. According to it, the facts that the benefits of the association 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 held 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Dibrugarh District Club Ltd. v. Commissioner of Income-tax, which was noticed by this court, the Calcutta High Court, distinguishing Styles' case held that the fact of incorporation could not 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-shareholders, while 74 out of 445 of the shares were held by non-members of the club, and the profits cf 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., at pages 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 carrying its shareholders, or if a trading company, by trading with the shareholders--even if it is limited to trading with them--makes a profit, that profit bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the members." He emphasizes 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. 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. Mylapore Hindu Permanent Fund Ltd., 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 a 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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