COMMISSIONER OF INCOME-TAX, MADRAS vs. KUMBAKONAM MUTUAL BENEFIT FUND LTD.

CIVIL APPEAL No. 637/1963Supreme Court[1964] 8 S.C.R. 20407 May 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI COMMISSIONER OF INCOME13 pages
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What did the Supreme Court hold?

The Supreme Court held that the test applied by the High Court was not sound. For the principle in Styles' case to apply, it is essential that all contributors to the common fund must be entitled to participate in the surplus, and all participators must be contributors to the common fund. It is not sufficient that all participators are entitled to contribute. The Court found a clear distinction between a company making profits from its shareholders as customers and distributing those profits to them as shareholders, and a company collecting money from its members and applying it for the benefit of the same people, not as shareholders but as subscribers. In this case, a shareholder is entitled to participate in profits without contributing to the funds by taking loans; they receive dividends simply by holding a share. The Court concluded that the assessee's position was no different from an ordinary bank, except that it lent money to and received deposits from its shareholders. This did not make its income any less income from business within Section 10 of the Indian Income Tax Act. Therefore, the answer to the question referred to the High Court should be in the affirmative. The appeals were accepted, and the parties were to bear their own costs.

What were the facts?

The assessee, Kumbakonam Mutual Benefit Fund Ltd., is a company incorporated under the Indian Companies Act, 1882, limited by shares. It conducts a banking business restricted to its shareholders. Shareholders can make recurring monthly deposits and obtain loans against security. The interest earned from loans to members constitutes the assessee's main income. After paying interest on deposits and other expenses, the balance is distributed among members pro rata according to their shareholdings. Shareholders are entitled to participate in profits irrespective of whether they made deposits or took loans. The Income-Tax Officer assessed the entire profits for the assessment years 1946-47 to 1953-54, holding that the profits belonged to members as shareholders, not as contributors or users of the fund's facilities, thus not satisfying the requirement of identity between contributors and participators as per Styles' case. The Appellate Assistant Commissioner and the Income-Tax Appellate Tribunal upheld this order. The Tribunal referred a question to the High Court regarding whether the assessee was a banking concern assessable under Section 10 and not exempt.

What were the issues?

1. Whether the assessee, Kumbakonam Mutual Benefit Fund Ltd., is a banking concern assessable under Section 10 of the Indian Income-Tax Act, 1922, and therefore not exempt from tax? Assessee's contentions: - The assessee argued it was exempt from assessment as a Mutual Benefit Society under Section 10 of the Income-tax Act, 1922, based on the principle in New York Life Assurance Co. v. Styles, 2 T.C. 460, and Board of Revenue v. Mylapore Hindu Permanent Fund Ltd., (1924) I.L.R. 47 Mad. 1. - Relied on The National Association of Local Government Officers v. Watkins, 18 T.C. 499, to argue that it is not necessary for all members to contribute to the common fund. Revenue's contentions: - The Income-Tax Officer held that the profits belonged to the members as shareholders, not as borrowers or users of the fund's facilities, thus the requirement of identity between contributors and participators was not met. - The High Court, in answering the referred question, applied the test that both the right to contribute and the right to participate must be available to an identical body, though not necessarily every member must contribute before participating.

Which sections of the Income-tax Act were involved?

Section 10

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20.

J. SUPREME COURT REPORTS 1964 sought to be put upon the expression "income~ in su!J:.s.' (2) CJ.T; o( s. 26 by the Revenue is . accepted, then the absence· of Express v'. News- tli.~! _word in the ?rov!-5° destroys the· argume?t. Bu! ·the. papers Lldi' more reasonable .view IS that both the sul>-section and·. the Subba-~ao J. p~ov_is() deal only with ·the profits uncl~r ihe 4th head men" tioJ'led in s. 6 and, so construed, it cxcludci capital g:tlns:· 'fl1e argument that sub-s:. (2) of s. 26 re..:d v,ith the prbviso theretO _indicates that the total · · income · of the· person · st1cceeded. is the !=r!_terion· f_?r' separate .assessment ·~-~,.: __ ..- · sub-s. (2) and for assessment and realisaticm-unoer the· ···pf.ovis0 is on. the assumption.that·ruO:S.-(2) and the proviso_ deal with all the h~uds n1entionect in s. 6 of the Act; ·nut. if,· as;ve.hav(fbeld, the scope of sul>-s.-(2)of s. 26 fa· only· ---- ··fonrted to the income from the· busirtess, ; the" share' under ---- suJ;s. (2) and the assessment and realisation•· under the 1964 l\fay 7 pro.visa can only relate to the inrome · ,from the businCs.

5.

The argument is really begging the question itself

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