TMI Blog1964 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by 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 eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs ; it comes back to them as shareholders upon their shares ", the Income-tax Officer held that " the profits made by the fund belong to them as shareholders 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 surplus are one and the same. As far as I can see, there is no common fund in this case. The income of the assessee is derived from interest on loans lent to its members, interest on Government securities, rents from property, etc., and it is distributed to the members either in the shape of guaranteed interest or dividends or both. As far as the allegedly 'mutual' transactions of the assessee are concerned, the contributors to the income of the company are those members who have 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 fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following, questions to the High Court : " (1) Whether there were materials for the Tribunal to hold, that the assessee is a banking concern assessable under section 10 for all the assessment years and not exempt ? (2) If the answer to the above question is in the affirmative and against the assessee, whether the payments to the non-recognised provident fund by the assessee for the six years of assessment 1946-47 and 1948-49 to 1952-53 are allowable deductions under any provisions of the Act ? " We are here only concerned with question No. 1. The High Court, for reasons 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 the institution fee of Rs. 100 for each of the references " as part of the costs to which as successful assessee it will be entitled to." The High Court, after a review of the cases cited before it, came to the conclusion 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 benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribution and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate 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 Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to contribute. The essence of mutuality lies in the return of what one has contributed to a common fund. Das J.as he then was, in the passage quoted above, in Commissioner of Income-tax v. Royal Western India Turf Club Ltd., reiterated the same idea. The learned counsel for the assessee, relying on National Association of Local Government Officers v. Watkins, urged that it is not necessary that all must contribute to the common fund. But in that case it was an unincorporated association, and Finlay J. regarded that as a matter of fundamental 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 been pointed out in several cases, one at least of which was cited to me, to say in the case of such a club that, where a member orders a dinner and consumes it, there is any sale to him. There is not a sale. The fundamental thing is that the whole property is vested 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madura Hindu Permanent Fund case. As the facts in the case were similar to that in Mylapore Hindu Permanent Fund case, the High Court refused to reopen the question and disturb the practice, but however added that " 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. " As already pointed out, in none of these cases the point was debated as to what is the position when shareholders participate in profits as shareholders and not as contributors. It seems to us that it is difficult to hold that Styles' case applies to the facts of the case. A shareholder in the assessee-company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled to receive his dividend as long as he holds a share. He has not to fulfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money to and receives deposits from its shareholders. This doe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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