1960-VIL-58-MAD-DT

Equivalent Citation: [1961] 43 ITR 358 (Madras)

 

MADRAS HIGH COURT

 

Referred Case No. 78 Of 1956

 

Dated: 20.10.1960

 

KUMBAKONAM MUTUAL BENEFIT FUND LTD

 

Vs

 

COMMISSIONER OF INCOME-TAX

 

Bench

Rajagopalan And Srinivasan, JJ.

 

JUDGMENT

Srinivasan,

The question raised in this reference relates to the assessability of the income of the Kumbakonam Mutual Benefit Fund Ltd., for the assessment years 1946-47 to 1953-54. It is desirable at the outset to set out the previous history of the income-tax proceedings relating to this case. As long back as in 1917-18 an assessment was made. But only the income from non-members of the fund by way of interest on Government securities and bank deposits and income from property were subjected to tax. In doing so, reliance was apparently placed on the ruling of our High Court given in Secretary, Board of Revenue, ( Income-tax)v. Mylapore Hindu Permanent Fund Ltd. [1923] 1 I.T.C. 217 (Mad.) Several years later, the case of Commissioner of Income-tax v. Madura Hindu Permanent Fund Ltd. [1933] 1 ITR 46 (Mad.) was decided by the High Court. Certain observations were made by the learned judges which appeared to suggest that the Mylapore 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 Agricultural Income-tax [1948] 16 ITR 270 (P.C.) by the Privy Council. In this case, the Privy Council examined the applicability of Styles' case (supra)to cases like the appellant society before them, and held against the appellant. On the basis of this decision the department proceeded to reopen the assessment during the last eight years holding that the fund was an ordinary banking institution, and that in the absence of such of those special features which would afford immunity to mutual fund concerns from income-tax, its income was assessable to tax. This conclusion of the Income-tax Officer was concurred in by the Appellate Assistant Commissioner. The Tribunal in a consolidated order relating to the, eight assessment years in appeal held against the claim that the assessee fund is a mutual benefit society, and that the cardinal requirement of complete identity between the contributors and the participators to the common fund was not available in this case. The nature of the business was held by the Tribunal to be that of an ordinary banking concern, though the business was restricted to its members or shareholders. But this restriction was held by the Tribunal not to take the income of the assessee out of the purview of the charging sections of the Act.

On an application under section 66(1) of the Act, the following question has been referred to us:

"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?"

Another question, which was also referred, related to the payments made by the assessee fund to a non-recognised provident fund which were claimed as allowable deductions. That question not having been pressed before us, it will be treated as withdrawn.

Before dealing with the question, it is necessary to set out the facts relating to the constitution of this fund. The fund appears to have been originally incorporated under the Companies Act, in 1903. At that time it was almost identical in the scope of its operations with the Mylapore Hindu Permanent Fund, to the constitution of which we shall refer in due course. In 1938 certain changes were made and the fund, as at present constituted, has the following features. According to the memorandum and articles of association of the fund, the objects of the association are among other 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 Rs 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, Rs 100 or Rs 25 respectively. Loans of different kinds could e granted by the fund but only shareholders were eligible for loans. Several of the rules make it clear beyond doubt that in so far as the benefits of the fund are concerned, they are available only to shareholders r members and to no one else. The net "profits" of the fund, consisting presumably of the interest realisations from members taking loans and from outside investments less interest paid by the fund to members making fixed or recurring deposits and other expenses of management, is dealt with in a particular manner under article 100, which sets out that 20 per cent. of the net profits shall be transferred to the reserve fund, 10 per cent. for depreciation of immovable properties and other securities, 5 per cent. for short realisations and 5 per cent. for the building fund. The balance of 60 per cent. is to be divided among the shareholders, as dividend not exceeding 9 per cent. per annum of the amount of the share money paid up. The balance if any is to be appropriated to such fund as the directors might deem fit. It will be noticed that the distribution to the shareholders is called dividend. It is not necessary to notice the other articles.

The prominent feature that is clearly discernible from the above is that the fund is prevented from having any dealings with outsiders, meaning thereby persons who are not members of the fund. It is true that the fund is competent to invest its surplus funds over and above what it requires for its loans to its members in Government securities or in landed property in order to enable it to earn interest. But interest so earned is admittedly outside the scope of this reference. There is no claim put forward by the assessee fund that such interest is also exempt from income-tax. What we are specifically concerned with in this case is interest or "profits" earned by the fund from the transactions with its members. It should be clear from the foregoing that such profits are comprised of interest payments by the members in respect of the loans taken by them from the fund. The short contention of the assessee fund is that in a fund circumscribed in the above manner in its activities, since the "profits" made by the assessee arise only from its members, the principle of the Mylapore Permanent Fund case (supra) and other cases that followed it would apply and render this profit exempt from income-tax. For the department the argument 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 Rs 84, the fund paid Rs 102-8-0 when he ceased to be a shareholder. The amount of Rs 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 invested on fixed or current deposits in outside institutions such as public banks and earned interest. The excess of interest earned by the fund over the expenses of the institution and the interest earned by the shareholders was regarded as the profits of the fund, which were utilised for (i) the reserve fund, (ii) payment to directors subject to a certain maximum, and (iii) distribution among the shareholders with reference to the number of shares and the number of months during which they held them. The learned judges found that the earnings of the fund consisted chiefly of interest from the shareholders either on loan or on overdue subscriptions and occasionally interest from outside investments, and that so far as the latter was concerned, it was liable to income-tax. With regard to the first item of earnings, it was decided :hat the principle of Styles' case (supra)should apply. That principle was explained to be that income to be taxable must come in from outside and not from within. The fact that the fund is a legal entity for certain purposes does not matter, for, in the language of Lord Watson, "it represents the aggregate of its members," and the members are the participators of its profits and "I do not think that their complete identity can be destroyed or even impaired by their incorporation." The learned judges went on to hold further: "In Styles' case (supra)as in the case before is the persons dealt with and the participators are identical." The contusion was accordingly "that all earnings of the fund from within are governed by Styles' case (supra)and not liable to be taxed."

Another Full Bench of this court, in deciding Commissioner of Income-tax v. Madura Hindu Permanent Fund Ltd. [1933] 1 ITR 46 (Mad.), was inclined to the view that Styles' case (supra) did not govern either the Mylapore Fund case (supra) or English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Income-tax [1929] 3 I.T.C. 385 (Mad.). The learned judges did not, however, go to the extent of saying that those cases were wrongly decided, but contented themselves with observing:

"I think that it is hardly right to say that New York Life Insurance Co. v. Styles [1889] 14 App Cas. 381 (HC)1governed either of the two cases referred to-and it does not govern this case-although the observations made by their Lordships in their judgment 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 Mylapore and Madura Permanent Funds. The judgment is a very short one and gives no grounds. In the statement of the case submitted by the Commissioner the ground was taken that the earlier Madura Hindu Permanent Fund 's case (supra)decision decided that Styles' case (supra)did not govern the Madura Hindu Permanent Fund 's case (supra)or Mylapore Hindu Permanent Fund case (supra) and that the Mylapore Hindu Permanent Fund 's case (supra) decision was not followed in the Madura Fund decision 's case (supra). But the Full Bench (which included two of the Judges who had participated in the Madura case (supra)) held that the decision in the Mylapore Hindu Permanent Fund 's case (supra)applied.

The question was again considered by another Full Bench in Tanjore Permanent Fund Ltd. v. Commissioner of Income-tax [1937] 5 ITR 160 (Mad.). Here also the fund was a company incorporated under the Indian Companies Act. It had a share capital, the amount of each share being payable in monthly instalments of Re. 1, the share account being closed on the expiry of 45 months by the member or shareholder being paid Rs 50. Deposits were accepted from the shareholders on which interest was allowed to them. The collections of the fund were lent to the shareholders at specified rates of interest. The fund did no business with any one other than its shareholders. On the question whether the profit derived by the fund from the shareholders was assessable to tax, the Full Bench held that the Mylapore Hindu Permanent Fund case (supra)applied, that the fund, though registered as a company, was not really a company but a mutual benefit society with a fluctuating capital, and that the income in question was not assessable. The importance of this decision consists in the fact, that it was held that there was no real conflict between the decisions in the Mylapore Hindu Permanent Fund case (supra) and in the Madura Hindu Permanent Fund case (supra) for the reason that the latter case dealt with a different question altogether, namely, whether the guaranteed interest paid to the shareholders was an allowable deduction as interest on capital. Inferentially, therefore, it follows that the principle of Styles' case (supra)was held to govern cases of this kind.

The question whether a fund of a similar nature was a banking concern or a mutual benefit society again 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 nominal members, those who had taken one rupee shares, invested practically nothing and consequently nothing was paid to them out of the profits either by way of dividend or in reduction of interest. By borrowing from the company they made for the company large profits, in which they were not allowed to share. In the circumstances it is impossible for the company to contend that it is a mutual benefit society and its income is not taxable."

It appears from the facts set out in the judgment and in the statement of the case that, while the company had a large number of permanent shareholders with a share capital of Rs 9,90,000, in order to effectuate the dealings with non-members the company created what may be broadly described as non-permanent shares. A person who was not a shareholder but wanted a loan from the company became a nominal shareholder paying one rupee. This amount he was entitled to withdraw at the end of two years. It was, therefore, possible for him to cease to be even a nominal shareholder while continuing to be indebted to the fund in respect of the loan which he had taken and on which he paid interest. This was practically a dealing with a non-member, and obviously such a person did not become entitled to any distribution of the profits by way of dividend to which the permanent shareholders were entitled. The absence of any mutuality between the contributor and the participator which was an undeniable feature of the transaction led to the conclusion that it is not a mutual benefit society with consequent immunity from tax.

From a consideration of the above decisions it is clear that the principle of Styles' case [1889] 14 App. Cas. 381 (H.L.)has been repeatedly held to apply to funds which are similar in their constitution and operations to those in the present case. But the case of the department is nevertheless that the activities of the assessee fund are tainted by commerciality, and what the members get is not a share of the common fund but a dividend on their capital, and that, therefore, the fund is no different from a banking concern. Since the question has been debated at length and we have been taken through a large number of English decisions which explain Styles' case23from various viewpoints, we shall proceed to examine these decisions.

In Equitable Life Assurance Society of United States v. Bishop [1899] 4 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 were no shares; and there were no shareholders. Lord Halsbury, in Styles' case (supra), and Lord Fitzgerald (who was one of the majority in Last's case (supra)) did not think that made any difference at all, but the other Law Lords who took part in this case and Styles' ( supra) thought it, did..."

The learned judge went on to state:

"In the assets of the company these policy-holders had no property, and they had no right to any share in its management. There existed, in that case, beyond doubt, a corporation carrying on a trade from which profits or gains arose or accrued to it, the only controversy being whether, inasmuch as the corporation had agreed to permit those with whom it dealt to take a share of the profits, that part of the surplus income which was thus applied was to be regarded as expenditure for the purpose of enabling the corporation to earn profits, or as profits arising or accruing to it."

It would appear from this, therefore, that where the company is a distinct personality, distinct from the members that compose it, the profits earned by transactions with persons entirely outside the company was regarded as profits earned by the company and the division of the profits among the members was not construed as anything other than expenditure enabling the earning of the profits by the company. It should be remembered, however, that though in Style's case (supra) there was an incorporated company, its existence was regarded as immaterial in the particular features of the case and that company had no transactions with any other than its own members.

Liverpool Corn Trade Association Ltd. v. Monks 10 Tax Cas. 442 (K.B.), to which the principle of Styles case (supra)was held inapplicable, has been relied upon by the department. Rowlatt J., in explaining Styles' case (supra), said:

"...the corporation is merely an entity which stands at the back, and all it is doing is to collect from a certain body of people certain funds and hand them back to them as far as they are not wanted; to put it very crudely, that is about what it comes to. In a case like that it does not matter whether there is an incorporation or not, because there is nothing belonging to the corporation which is severable from what belongs to the aggregation of individuals-nothing. But in a case of this kind, where there is a share capital, with a chance 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 Styles' case (supra); the question naturally arose why when what was earned by transactions of the company with non-members was undoubtedly profits, identical transactions with members should not be held to result in profit and why in those circumstances the incorporation should be ignored.

In yet another case, Thomas v. Richard Evans and Co. [1927] 11 Tax Cas. 790 (K.B.), Rowlatt J. noticed:

"The principle laid down in the New York Insurance Company case (supra) is that no one can make a profit out of himself. Now that is very true, but I am not at all certain it does not confuse us in this particular case .... 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 its shareholders-even if it is limited to trading with them-makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders, upon their shares. Where all that a company does is to collect money from a certain number of people-it does not matter whether they are called members of the company, or participating policyholders-and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case (supra), there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference; there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision in the New York case (supra)....

The broad principle was there laid down that, if the interest in the money does not go beyond the people or the class of people who subscribed it, then, just as there is no profit earned by people subscribing, if they do the thing themselves so there is none if they get a company to do it for them."

Dealing with Styles' 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' liability claims and miscellaneous claims are contributed by those who have taken out policies against these risks respectively, and these contributors include both persons who have and persons who have not taken out fire policies, but the surpluses arising redound, not to the benefit of all the contributors to the common funds, but to the benefit only of those contributors who happen also to be holders of fire policies. Certain of the contributors to these common funds thus benefit at the expense of the other contributors. This is, in my opinion, sufficient to negative the contention that either the employers' liability business or the miscellaneous business of the appellant company is conducted on a mutual basis."

In National Association of Local Government Officers v. Watkins [1934] 18 Tax Cas. 499, 505 (K.B.) Finlay J. observed in connection with Styles' case (supra):

"The fundamental point there was that people cannot trade with themselves. There was no outside trade ; it was simply the return to a subscriber of an amount in excess of what was necessary. That is the principle of the New York Insurance Co. case (supra), and, though I repeat there was a company there, that was held by the Lords to be really an immaterial circumstance. I think that distinguishes the case at once from the class of case more than once referred to in later cases."

All these cases came to be considered by the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club [1953] 24 ITR 551 (SC). Briefly stated, the assessee in that case was a company limited by guarantee which carried on the business of a race course. The assessee provided the same or similar amenities to members and non-members, except that non-members had no access to the members' enclosure though both were charged the same admission fee. The assessee claimed that in computing its total income, receipts from members should be excluded. Their Lordships examined the several decisions in which Styles' case (supra )had been considered and approved the observations of Lord Normand and in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax [1948] 16 ITR 270, 279 (P.C.), which were expressed thus:

"From these quotations it appears that the exemption was based on ( i) the identity of the contributors to the fund and the recipients 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 insurance the principles laid down in Styles' case 37 and the cases that followed it can have no application here. The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which 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 contribute 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. What kinds of business other than mutual insurance may claim exemption from tax liability under section 10(1) of the Act under the principles of Styles' case 37need not be here considered; it is clear to us that those principles cannot apply to an incorporated company which carries on the business of horse racing and realises money both from the members and from non-members for the same consideration, namely, by the giving of the same or similar facilities to all alike in course of one and the same business carried on by it."

At page 565 they observed:

"As already stated,...there is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern... The company gives to its members the same or similar amenities as it gives to non-members... The rest of the facilities mentioned above which the members get are in substance 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 that where a large body of persons fluctuating in number join together for effectuating a common purpose, it is necessary that there should be a juristic personality competent to put through the transactions. It is impossible that all the members of the society should join in putting through each and every one of the transactions. The incorporation serves that purpose only and, notwithstanding the creation of such a personality, it does not follow that that personality is different from the body of the members, provided the other conditions set out above exist.

On behalf of the department it has been contended that this is not a case where the principle of Styles' case (supra) should be invoked in favour of the assessee. The English decisions cited earlier wherein the existence of a company distinct from the body of the members was relied upon in denial of the exemption from tax have been relied upon by the learned counsel for the department. We are unable to accept this argument, particularly, in view of the numerous decisions of our High Court, wherein the fact of incorporation has been disregarded in dealing with profits of mutual benefit fund associations like the one in the present case. In almost every one of the cases which came up before our High Court, the fund had been incorporated under the Companies Act, shares had been issued, there were shareholders, the dealings in shares were controlled by the provisions of the Companies Act and dividends were declared from out of the surplus profits of the concern. Nevertheless it was found that, the real purpose of the organisation being to benefit its own members and the income arising only from the members, the incorporation was immaterial. That principle has been too firmly established to be questioned at the present time.

It is next necessary to examine the argument that the fund's activities are tainted by commerciality, and that the test of mutuality is not met. It is not denied that the, benefits of the association are available only to the members thereof. No non-member can participate in the benefits. The profits that arise from this mutual trading are the result of 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. We are at a loss to see how the taint of commerciality 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 to see where mutuality exists. In National Association of Local Government Officers v. Watkins [1934] 18 Tax Cas. 499 (K.B.)a similar question appears to have risen. That was an association of local government officers which purchased a camp to provide cheap holiday facilities for its members. facilities were available to non-members as well and while the sums received from non-members were brought to tax, the question arose whether the sums received from members could be regarded as profits. A subsidiary question appears to have arisen also, whether when all the members did not participate in the benefits of the association, it could till be regarded as entitled to the benefit of mutuality. Finlay J. observed:

"The substance of the argument of the Solicitor-General in the present case appeared to me to be this: he said that this, in a sense, is . club, but it is very different from the ordinary case of a club. Anyhow, s regards this particular activity, the supplying of the holiday camp, he said that that cannot fall within the club principle or mutual principle, because the subscribers to it are only a certain number of members, whereas the participants are the whole of the members ... cannot think that that is a correct way of looking at the matter ... cannot think that you can, in the case of a club, isolate the dining room, the library, or the other various facilities which are offered by the club. The truth of the matter is, I think, that the members own the whole. The members have a right to participate in the whole. Some members will participate in some things. Some members will participate in other things, but to no members can there truly be said to be a sale. There is, I think, no trade among the members. They cannot trade with themselves. It is upon that ground, I am afraid very imperfectly expressed, but which is fundamental and lies at the root of the thing, hat I think that, so far as this camp was used by the members, no profit could accrue from its user."

This point again came up for decision in Ismailia Grain Merchants Association v. Commissioner of Income-tax A.I.R. 1958 Bom. 32, 34. Chagla C.J. after referring to the above English decision observed in dealing with this argument:

"Now the fallacy underlying this argument is that although only a few members of the association could, avail themselves of the benefit of the holiday camp 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 dealings with non-members is conceded by the department. The only outside source of income is by way of investments in government securities or deposits with banks of such of the fund's accumulation which was not required for loans to members. The liability to tax of such outside income is not in dispute. The following figures are sufficient to establish that the fund did not engage itself in activities designed to earn income for its members.

The argument of the department that the fund was motivated with the object of augmenting the capital by making profits finds no support from the above figures, which clearly establishes that virtually the worth of the "profits" was contributed by members alone.

It is now necessary to refer in particular to the decision of the Privy Council on the basis of which the present assessments have been made, the department holding that the immunity which the assessee fund enjoyed up to now was based on erroneous considerations. The appeal to the Privy Council arose from the judgment of the Calcutta High Court. The appellant (the English and Scottish Joint Co-operative Wholesale Society Ltd.) had been incorporated in the United Kingdom under the Industrial and Provident Societies Act, 1893. It had as its object the carrying on the business of planters, growers, producers, merchants and manufacturers and brokers of tea. The society consisted f two members and it owned a tea estate where tea was grown and manufactured. Except a small portion of the produce, the society's output of tea was sold to its two members at market rates. Each year the members paid to the society, by way of advances, sums of money 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 profits and as within the ruling of Styles' case (supra). The Calcutta High Court refused) follow the Madras decision. Gentle J., after considering the matter, said:

"In the view which I hold, the society is a trading concern and carried on business as growers, manufacturers and sellers of tea; out of this business it derives profits; the dividends which it pays to its members are a distribution amongst them of its trading profits; and the payments of these dividends are not a return to the members of balances from the sums which they have subscribed to the society ....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."

Obviously, in the Madras case, the opposing view had been taken. In dealing with this case, Lord Normand examined the previous decisions and after quoting the observations of Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills [1930] 16 Tax Cas. 436 (H.L.), when dealing with the tax exemptions of surplus arising in the conduct of mutual insurance, went on to hold:

"The requirement (or mutuality) is not satisfied in the present case : for there is no common fund to which the members of the appellant society contribute and in which they participate."

Earlier in the judgment, the Judicial Committee noticed that there was a complete dichotomy between the appellant society and its members. They said:

"An argument was addressed to their Lordships by counsel for the appellant in which the advances made annually by the two members to the society were treated as contributions by the members in cash which afterwards came back to them in kind when the tea was sold to them. This is a view of the transaction which their Lordships cannot accept. The advances were a loan to the society for the purpose of enabling it to produce tea on its own land. When the tea was produced it was sold to the lenders and the price was set off against the amount of the loan. There was, therefore, a dual relationship between the appellant and its members; there was a mutual creditor-debtor relationship and there was a buyer and seller relationship. There was nothing notional about either of these relationships; they were not mere conventional machinery to give efficacy to a relationship which was in substance that of principal 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 associations of the kind we are dealing with now. There is no doubt that that decision went on the peculiar facts of the case before the Privy Council and cannot be taken as authority for the proposition, that in all cases where a company is brought into existence by the members for the purpose of facilitating the transactions of business confined to members alone, such incorporation disentitled the members to the considerations applying to mutual benefit associations. On the other hand, we have in the present case a set of facts which establishes that the benefits conferred by the association were available only to the members thereof, and that there is a complete identity, in the sense set out in National Association of Local Government Officers v. Watkins [1934] 18 Tax Cas. 499 (K.B.)and Ismailia Grain Merchants' Association v. Commissioner of Income-tax A.I.R. 1958 Bom. 32, between the contributors and the participators. Under these circumstances, and in the light of the earlier decisions of our High Court of which the most prominent one is the Mylapore Hindu Permanent Fund case (supra), the incorporation of the fund is an immaterial circumstance. It should therefore follow that the surplus profits arising to the fund by transactions with its own members are profits which arise from within and are not liable to be taxed.

A last argument was advanced by the learned counsel for the department that in any event non-liability to income-tax should be limited only to such amount as was actually distributed to the members or was set apart for such distributions. Under the articles of association the allocation of net profits is as below:

1. 20 per cent. to the reserve fund.

2. 10 per cent. to depreciation of immovable properties and securities.

3. 5 per cent. to short realisations.

4. 5 per cent. to the building fund.

5. 60 per cent. for division to members (and to the dividend equalisation reserve).

The argument is that at least items Nos. 1 to 4 above will not come within the: scope of division to the members and should, therefore, be held to be part of the common fund which is not divisible. The argument at first sight is no doubt plausible but is hardly consistent with the principle on which the exclusion is based. The total of such net profits is profits which arise from within ; and though part of it is not immediately divisible, the members 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 Rs 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 institution fee of Rs 100 for each of the references should be ordered to be refunded to the assessee, as part of the costs to which as successful assessee, it will be entitled to.