1964 (5) TMI 2 - SC - Income Tax

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 ? Held 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 does not by itself make its income any the less income from business within section 10 of the Indian Income-tax Act. The answer to the question referred to the High Court should be in the affirmative.

Summary

Issues Involved:
1. Whether the assessee is a banking concern assessable under section 10 of the Indian Income-tax Act.
2. Whether the payments to the non-recognised provident fund by the assessee are allowable deductions under any provisions of the Act (not discussed in this judgment).

Issue-wise Detailed Analysis:

1. Assessability under Section 10:
The primary issue was whether the Kumbakonam Mutual Benefit Fund Ltd., referred to as the assessee, qualifies as a banking concern assessable under section 10 of the Indian Income-tax Act. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all held that the assessee was indeed a banking concern. They based their conclusion on the following points:

- Income Source and Distribution: The assessee's main income was derived from interest on loans lent to its members, interest on Government securities, and rents from property. This income was distributed to members as guaranteed interest or dividends. The Tribunal emphasized that there was no common fund where contributors and participators were identical, a cardinal requirement for mutuality.

- Nature of Business: The Tribunal concluded that the assessee's business was that of ordinary banking, restricted to its members or shareholders, which did not exempt it from the purview of the charging sections of the Act.

The High Court, however, disagreed, holding that the assessee satisfied the conditions necessary for mutuality as laid down in Styles' case. According to the High Court, the benefits of the association were available only to members, and the profits from mutual trading were distributed among the members, indicating complete mutuality.

Supreme Court's Analysis:
The Supreme Court reviewed the principles of mutuality and the applicability of Styles' case, emphasizing the need for complete identity between contributors to the common fund and participators in the surplus. The Court noted that:

- Principle of Mutuality: The essence of mutuality lies in the return of what one has contributed to a common fund. The Court referred to previous judgments, including Commissioner of Income-tax v. Royal Western India Turf Club Ltd., which clarified that a company could make a profit out of its own members, but such profit belongs to the members as shareholders, not as contributors to a common fund.

- Incorporation and Profit Distribution: The Court observed that incorporation creates a legal entity separate from its members. If profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. The Court cited Rowlatt J.'s observations in Thomas v. Richard Evans and Co., emphasizing that profits distributed to shareholders qua shareholders do not meet the mutuality principle.

- Case Law Review: The Court reviewed several cases, including Dibrugarh District Club Ltd. v. Commissioner of Income-tax and Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., noting that the latter case could not have been rightly based on Styles' case. The Court also distinguished the facts of the present case from those in the cited cases.

The Supreme Court concluded that the High Court's test was unsound and inconsistent with the true decision in Styles' case. The Court held that the assessee's position was no different from an ordinary bank, and its income was assessable under section 10 of the Act.

Conclusion:
The Supreme Court answered the question referred to the High Court in the affirmative, holding that the assessee is a banking concern assessable under section 10 of the Indian Income-tax Act. The appeals were accepted, but no costs were imposed on the assessee due to the longstanding precedent of the Mylapore Fund case in Madras. The Court also noted that the High Court had no jurisdiction to order the refund of the reference fees deposited by the assessee, though it could assess costs to include the reference fee.

Summary:
The Supreme Court held that the Kumbakonam Mutual Benefit Fund Ltd. is a banking concern assessable under section 10 of the Indian Income-tax Act. The Court emphasized the need for complete identity between contributors and participators for mutuality, distinguishing the assessee's operations from mutual benefit societies. The appeals were accepted, but no costs were imposed on the assessee due to the historical precedent in Madras.