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TMI Blog1960 (10) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Hindu Permanent Fund case (supra)did not attract the principle laid down in New York Life Insurance Co. v. Styles [1889] 14 App. Cas. 381 (H.L.). On the basis of these observations the assessments were made on the assessee for the assessment years 1932-33, 1933-34 and 1934-35. Before the assessee could canvass :he correctness of these assessments by way of reference, another decision was rendered by our High Court in Sivaganga Sri Meenakshi Swadeshi Saswatha Nidhi Ltd. v. Commissioner of Income-tax [1935] 8 I.T.C. 83 (Mad.), wherein the Mylapore Permanent Fund decision (supra) was reaffirmed. Accordingly the Commissioner of Income-tax set aside the assessments made on this assessee for the above assessment years. From then onwards the assessee was being assesed only in respect of income derived from non-members. English and Scottish Joint Co-operative Society v. Commissioner of Income-tax [1929] 3 I.T.C. 385 (Mad.) was decided by the High Court in favour of the assessee on the application of the principle of Styles' case (supra). The correctness of this decision came to be considered in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things to enable the shareholders to save money, to invest the shareholders' savings in a prescribed manner, to advance loans at favourable interest, to receive deposits and to borrow if need be, etc. The nominal capital of the association was fixed at ₹ 33 lakhs divided into as many shares of rupee one each. The articles of association, however, limited the scope of the memorandum in particular manner. Article 5 lays down that the fund shall have dealings only with its shareholders. Under article 3 a shareholder or member is defined to mean the duly registered holder for the time being of a share of the fund and to include also applicants for shares pending allotment provided that allotment is made. The fund is authorised to receive deposits of money only from shareholders and from no one else, These deposits are of two kinds, fixed deposits and recurring deposits, Interest is allowed on fixed deposits. Recurring deposits are of three kinds. Any shareholder could deposit a rupee per month for a period of 46, 86 or 24 months, and at the end of the period he is entitled to receive Ls. 50, ₹ 100 or ₹ 25 respectively. Loans of different kinds could e granted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent has been that the fund is an entity quite apart from its members, and that this different capacity of the fund cannot be ignored in the circumstances of the case, and, if that is so, the fund can rightly be subjected to tax on its profits, though realised from its members. It is necessary to examine the principle that has been enunciated in the several previous decisions. The earliest case is that of the Mylapore Hindu Permanent Fund (supra) , decided by our High Court. That fund was also registered under the Indian Companies Act. It started with 11,904 shares and increased it to nearly ten times that number. A shareholder subscribed one rupee per share per month and at the end of seven years during which he had so subscribed ₹ 84, the fund paid ₹ 102-8-0 when he ceased to be a shareholder. The amount of ₹ 18-8-0 so earned by a shareholder was the guaranteed rate of interest. A defaulting shareholder, that is one who did not pay monthly subscriptions in time, had to pay default interest. The fund also granted loans to the shareholders, apparently from out of the amount realised by way of subscription. Such amounts as were not immediately required were inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainly support the result arrived at in both. I am not disposed to see therefore that those two cases were wrongly decided although, in my opinion, New York Life Insurance Co. v. Styles [1889] 14 App Cas. 381 (HC)does not govern them. Though the answer to the specific question that was before them, Are the facts of this case such that the ruling in New York Life Insurance Co. v. Styles [1889] 14 App Cas. 381 (HC)can be applied to them , was couched in the above form, relief was given to the assessee on the ground that the guaranteed interest is interest on capital borrowed for the purpose of the fund's business and that its payment is not in any way dependent on the earning of profit , and that it was deductible under section 10(2)(iii) of the Act. Notwithstanding the doubts cast on the applicability of Styles' case (supra) to funds of this kind in the Madura Permanent Fund Ltd. Case (supra), the principle of Styles' case (supra) was held applicable in Sivaganga Sri Meenakshi Swadeshi Saswatha Nidhi Ltd. v. Commissioner of Income-tax [1935] 8 I.T.C. 83 (Mad.) to that fund, which was precisely of the same constitution and carried on the same business as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain came up for consideration in Trichinopoly Tennore Hindu Permanent Fund v. Commissioner of Income-tax [1937] 5 ITR 703 (Mad.). This case is of some importance. Though in outward form the features of that fund were almost similar to those of the Mylapore Hindu Permanent Fund, it appeared that the rules of the fund provided for the grant of loans to non-members as well. The learned judges observed in dealing with the facts: The Trichinopoly Tennore Hindu Permanent Fund Ltd., however, differs in material respects from the Mylapore Hindu Permanent Fund Ltd. The company obtained, as I have already mentioned, considerable income from loans to non-members. No doubt it now only gives loans to persons who become 'members,' but it is said that the membership is in many cases merely nominal and that the company carries on in reality the same business as it did before the memorandum and the articles of association were altered. It appears to us that there is much substance in this contention. A person who wants a loan can obtain one from this company if he pays one rupee for a share, and he is entitled to have that one rupee paid back to him at the end of two years ..The no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Cas. 147 (C.A.) Styles' case (supra) was distinguished from an earlier decision referred to as Last's case (supra). Smith L. J. observed.: It seems to me that the main disiction that they (House of Lords) drew between Styles' case ( supra)and Last's case (supra ) was that in Styles' case (supra)it was a case of mutual insurance pure and simple, and that there was no company, as in the present case, and as there was in Last's case (supra); but in reality I may phrase it in this way: The members of the company which did exist-that is, the members of the mutual insurance company -were partners inter se, and there was no profit making at all in the concern, and that, therefore, that distinguished Styles' case (supra) from Last's case (supra ). Now why do I say this? In the first place, I find in Styles' case (supra )- it is stated in the case which was drawn up-'The company has no shareholders and there are no shares. The company is organised for and (except for as hereinafter stated) does business solely under the plan of mutual insurance.' There was no company other than the mutual insurance company; there were no directors; there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of dividends, a chance of a right to dividends if declared, upon the share capital, and to one side of that a dealing with people who happened to be the owners of the share capital, affording benefits to those people one by one individually, for which they pay money by way of subscriptions if I and by way of entrance fees as a sort of overriding subscription, may use that word, which opens the door to subscriptions, there is no reason at all for saying that you are to neglect the incorporation, or that you can regard otherwise than as profits the difference which is obtained by dealings between that corporation and people who happen to be its members. On behalf of the department, it is argued that the features relied upon by Rowlatt J. in holding against the appellant in that case exist in the case of the assessee fund, in the sense that here also is a company earning profits and declaring dividends to its shareholders. But from the facts it appears that the Corn Trade Association, besides providing for its shareholders certain facilities, extended precisely the same facilities to others on payment of subscriptions. This was a prominent feature which distinguished it from St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case (supra) and laying down the tests of mutuality Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills [1932] 16 Tax Cas. 430, 442 (H.L.): As the common fund is composed of sums provided by the contributors out of their own moneys, any surplus arising after satisfying claims obviously remains their own money. Such a surplus resulting merely from miscalculation or unexpected immunity cannot in any sense be regarded as taxable profit. This was clearly laid down in the case of New York Life Insurance Co. v. Styles [1889] 14 App. Cas. 381 (H.L.), and is now beyond dispute. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial. Now this cannot be predicated of the employers' liability insurance and the miscellaneous insurance business conducted by the appellant company. The common funds created to meet employers' liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy-holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. In dealing with the case before them, they stated: It is clear to us, taking the facts admitted or found in the case before us, that the principles of Styles' case 37, as explained by subsequent decisions noted above, can have no application to this case. Here there is no mutual dealing between the members inter se in the nature of mutual insurance, no contribution to a common fund put up for payment of liabilities undertaken by each contributor to the other contributors and no refund of surplus to the contributors. There being no mutual dealing the question as to the complete identity of the contributors and the participators need not be raised or considered. Suffice it to say that in the absence, as there is in the present case, of any dealing between the members inter se in the nature of mutual in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance the same as those enjoyed by the public. Those facilities are given to members and non-members alike for a price. The character of the charges made on members is precisely the same as or is similar to that of the charges made on non-members, for the company receives moneys from both members and non-members in return for the same or similar facilities given to both in the course of one and the same business. The dealings in both cases disclose the same profit earning motive and are alike tainted with commerciality. From this lengthy discussion it is apparent that two features must exist before the income of a fund like the one in the present case can be exempt from tax. Firstly, the profit made by the fund must arise from its own members and secondly there should be mutuality, in the sense that the contributors to these profits must also be participators therein. There should be, as the decisions have it, complete identity between the body of contributors and the body of participators. If these features are available then according to the decisions, the fact that the body has been incorporated and has a juristic personality would make no difference. It should be obvious t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality can attach to such mutual trading. This profit after the 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. There is no doubt whatsoever that there is complete mutuality. But the view taken by the department appears to be that though all the members of the fund are entitled to share in the surplus profits it is only a part of the members who would contribute thereto; that is to say, it is only that smaller group of members who had availed themselves of the facilities for taking loans or who would have contributed to the common fund going to make up this profit represented by the interest. Accordingly, it is the contention that there is no complete identity between the contributors and the participators. It seems to us that this view is untenable. If it is the argument that unless every member of the society makes a contribution and every member also participates therein, there cannot be this complete identity, it is difficult to follow the argument. To accept that would mean that ach member takes what he puts in by way of surplus. If so, it is difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp and contribute to the profits, every member had a right to go to the camp and contribute to the profits. Therefore, for the purpose of mutuality it may not be necessary that contribution in fact should be made by every member, but every member should have the right to make the contribution and, Mr. Justice Finlay points out at page 506, that in a club which gives various facilities some members may avail themselves of some facility and others may avail themselves of other facilities. From that it does not follow that all the facilities were not available to the members or the members could not participate in all the facilities. 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. We have examined the balance-sheets of the fund for the relevant years in order to discover whether the dominant intention of the fund was to embark on banking business in general in order to earn profits for its members. That the fund had no de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to meet the cost of tea to be supplied and the market prices of tea applied to them were debited against these payments. The supplies were recorded as sales to the members. Out of the proceeds from the sales, the expenses of production and management and the interest on loans were paid or provided for. Under the rules of the society, its net profits were applied in depreciation of land, building etc., payment of interest on share capital, appropriation to a reserve fund etc., and payment of a dividend to members in proportion to the amount of purchases made by them. The plea was put forward by the society that it was a mutual association whose transactions with its members were incapable ofproducing a profit. The Calcutta High Court found against the appellant society and the matter was taken in appeal to the Privy council. It is necessary also to mention that a case under the Indian income-tax Act in relation to this society was decided by the Madras High Court in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Income-tax [1929] 3 I-T.C. 385 (Mad), in which it had been held that the society was a purely mutual co-operative society making no prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal and agent. On the facts stated, the members genuinely made a loan to the appellant; the appellant genuinely owned the land which it itself genuinely cultivated and it genuinely sold the tea at a genuine market price to its members. It is obvious from the above passage that the view was taken that the society and the two constituent members were distinct personalities, and that the society did in fact enter into the trade on its own account though such trade was limited to the members. It quite naturally followed that in whatever form the transactions were clothed the real purport of the transactions revealed that the society as a trading body was in receipt of profits from its trade. Both for that reason and for the reason that there was no common fund to which the members of the appellant society contributed and in which they participated the Privy Council held that the society was not exempt from liability to agricultural income-tax. Though the Privy Council appears to have cast some doubts upon the applicability of Styles' case (supra)to other kinds of businesses than mutual insurance, they did not decide that that was not applicable to mutual benefit associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers as a whole are entitled to the benefits thereof. The position was exactly similar in the other fund cases to which reference has been made in which the entire net profits were held immune from tax. We are, therefore, unable to see how a different conclusion is possible in the present case. In the result, we answer the question in the negative and in favour of the assessee. Rajagopalan, J.-In Ramaswami Aiyangar v. Commissioner of Income-tax [1960] 40 ITR 377 (Mad.) a Bench of this court held that in appropriate cases there can be a direction to refund to the successful assessee the initial deposit of ₹ 100 for each of the cases referred. The learned counsel for the department pointed out that the present case, where a similar request has been preferred, can be distinguished on facts from Ramaswami Aiyangar's case (supra). In the present case, the department went back upon their earlier decision in other assessment years not to treat the income as assessable income and assessed the assessee fund with reference to eight years to which the consolidated reference related. In view of the special circumstances of this case we think this is a fit case where the institut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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