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TMI Blog1945 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... m such land by- (i) agriculture. Such land in (b) is land which is used for agricultural purposes. By Section 4(3)(viii) of the same Act agricultural income is not chargeable to income-tax. Section 2(a)(2)(i) of the Assam Act defines agricultural income identically as it is defined in the Income-tax Act. An explanation to the section provides that:- Agricultural income derived from such land by the cultivation of tea means that portion of the income derived from the cultivation, manufacture and sale of tea as is defined to be agricultural income for the purposes of the enactments relating to Indian income-tax. Rule 24 of the rules under the Indian Income-tax Act provides that:- Income derived from the sale of tea grown and manufactured by the seller in British India shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income, profits and gains liable to tax. Section 8(1) of the Assam Act provides that agricultural income as defined by Section 2(a)(2)(i), shall be assessed on the net amount of such income determined by rules under the Act prescribing the manner of determination. A proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and other association of individuals. Section 6 gives the limits of taxable agricultural income. It is desirable to correct a misstatement, in para. 9 of the reference, that the Society is not chargeable to income-tax in the United Kingdom. The Society is registered in England under the Industrial and Provident Societies Act, 1893. Section 24 of that Act exempted profits of societies registered under it from income-tax unless they sold goods to persons other than members. This section was repealed by the Finance Act, 1918, and its provisions were re-enacted in Section 39 (4) of that statute. Section 39(4) was repealed by Section 31(2) of the Finance Act, 1933. Since the year 1933 the profits of registered societies have been chargeable to United Kingdom income-tax. Section 60(1) of the Indian Income-tax Act empowers the Central Government, by Notification, to make exemptions in respect of income- tax. By Notification under the above sub-section the profits of cooperative societies, registered under the Acts mentioned in the Notification, are exempted from Indian income-tax similarly as they were formerly exempted in England. The Society is not registered under any of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made by an association trading with itself, the transactions of the supply of tea by the Society to its two members are not sales to the members; there is no profit derived from those transactions, which is chargeable to tax; such transactions are mutual dealings between the Society and the members and are transactions by the Society with itself; by distributing the surplus monies, in the 6 above-mentioned ways including paying to the members a dividend of 6% per annum upon the amounts of their respective shares in the Society and making a further payment to them commensurate with the quantities of tea which they respectively purchase from the Society, the Society is merely returning to them the sums which they have each paid to the Society in excess of the values of the quantities of tea supplied to them. In support of these propositions reliance was solely placed upon English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Income-tax, Madras [1929] 3 I.T.C. 385. Before discussing this case it is convenient to refer to two decisions of the House of Lords in England, Last v. London Assurance Corporation [1885] 10 App. Cas. 438 and Styles v. New York ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was subscribed was returned to the persons who had provided it; this residue was not profit and therefore, was not chargeable to tax. In English Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Income-tax, Madras [1929] 3 I.T.C. 885 (of which mention has been made) the facts were identical with those in the present reference and the question which arose was the Society's liability to tax under the Indian Income-tax Act. The Madras High Court considered that it fell within the ambit of Styles' case [1889] 14 App. Cas. 381 and that the principles in Last's case [1885] 10 App. Cas. 438 were inapplicable. It was held that the Society was purely a mutual concern; the whole of its produce (except a small portion sold in India and in respect of which admittedly income-tax was payable upon profits) was distributed amongst its members; the distribution of its surplus in the 6 ways (set out above) was purely a notional division of profits; this was merely a handing back of a portion of the amounts subscribed by the members and was in no sense a dividend on the profits earned by the Society; and the Society was not chargeable to income-tax upon the sums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company made out of what the members paid to it was taxable income of the business which the company undoubtedly carried on. It was held that the company was not a mutual association whose transactions with its members were incapable of producing a profit; it carried on a trade, the profits of which were assessable to income-tax. It is now convenient to return to the facts in the present reference. The Society carries on business in British India as growers, manufacturers and sellers of tea. Each year its two members advance to the Society sums of money to be utilised to pay for the tea which it grows and manufactures and then sells to them (the small quantity of inferior tea sold in India can be ignored). The sales by the Society to its members result in an excess of receipts over expenditure and this is profit made by the Society upon its trading. This profit is distributed in 6 ways, including payment to each member of interest at 6% upon the amount of his shares in the Society and a further distribution to each of a sum rateably in proportion to the amount of tea bought from the Society. In the Madras decision the above facts were considered to fall within the ambit of St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but shareholders in a company are members of the company and are frequently referred to as such. Both a registered society and a company incorporated under the Companies Act are bodies corporate. A member of a registered society is in the same position as regards the society as is the shareholder of a company with respect to that company. The shareholder and the company are separate and distinct entities, even when one shareholder is the proprietor of 20,000 out of 20,007 issued shares, the remainder being held by several of his relations: vide Salomon v. Salomon Co., Ltd. [1897] A.C. 22. When a person buys goods from a company, of which he is a shareholder, the transaction between them is made in their individual characters and each is a separate party to the contract. The relationship of shareholder and company is quite apart from the sale and purchase agreement. The nature of the transactions is the same as a similar transaction between the company and a person who is not a shareholder. When a company sells goods to a shareholder it does not effect a transaction with itself any more than it does when it sells to a non-shareholder. When the Society sells tea to its members the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verpool Corn Trade Association v. Monks [1926] 2 K.B. 110 and are covered by the observations of Rowlatt, J., (quoted above) in the latter case. The same learned Judge's observations in Thomas v. Richard Evans Co. Ltd. [1927] 1 K.B. 33 are also in point. The circumstance that the Society's produce is sold to its members does not affect the position and would not do so even if the Society were restricted to selling to its members alone. The profits to the extent of 60% thereof less permitted deductions, which is distributed and paid by the Society in the 6 ways provided by the rules, is agricultural income as defined by Section 2(a)(2)(i) of the Assam Act. The Society is not registered under any of the Acts in respect of which exemption from liability to income-tax is given by the Notification under Section 60(1) of the Indian Income-tax Act and, therefore, it is not entitled to the benefits given by the Notification. It has not been argued nor considered whether, if registered under any Indian Act, the Society would be exempted from agricultural income-tax under the Assam Act. I would answer in the affirmative the question of law which arises for decision in this Refer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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