Commissioner of Income Tax vs Tanjore Permanent Fund Ltd.

The Commissioner of Income Tax has referred to the opinion of the High Court the question ""whether the sum of Rs. 61,304 being the income

or the profits of the Fund derived from the transactions with the share-holders is liable to assessment."" The petitioner is the Tanjore Permanent

Fund Limited. It is a company incorporated in 1901 under the Indian Companies Act 6 of 1882, now Act 7 of 1913. The Company started with

2,222 shares of Rs. 45 each share and a nominal capital of Rs. 99,990. The amount of each share is payable in monthly installments of Rs. 1. The

share account of each share-holder is closed on the expiry of 45 months from the last date of the month in which he was admitted by his being paid

Rs. 50 and then he ceases to be a share-holder. The difference between the amount subscribed by him and the amount paid to him at the end of

the 45th month, viz. Rs. 5, is called ""guaranteed interest"". The Fund accepts deposits from its share-holders on which interest is allowed to them.

The Directors are authorized temporarily to borrow from time to time, if necessary, sums to carry on its transactions. The collections of the Fund

are used to be lent to the share-holders at specified rates of interest on the security of the shares held by them and also on their other properties.

The moneys belonging to the Fund may be invested by the Directors with banks or Co-operative Societies or in Government securities, Treasury

Bills or Post Office Cash Certificates. The Fund does not accept deposits from other persons than its share-holders nor does it give loans to

outsiders.

The Fund''s main source of income is the interest on the loans advanced to the share-holders. It also derives income from interest on the

deposits with banks, interest on securities, house rent and other minor items. The excess of interest earned by the Fund over the expenses of the

institution and the interest earned by the share-holders is regarded as profits of the Fund out of which 70 per cent, is divided among the share-

holders and the balance after paying the legal adviser, remuneration and bonus to the establishment, is carried to the reserve fund. The number of

share-holders of the Fund and the amount of shares fluctuate from time to time. On 15th August 1931, as mentioned by the Commissioner, there

were on the register of the Fund 9,984 shareholders with 110,740 shares and the sub-scribed capital of Rs. 49,83,300. For the assessment of the

year 1932.33, the Fund returned an income amounting to Rupees 14,178. In submitting this account, it did not include as assessable income a sum

of Rs. 61,304, the profits derived from the share, holders. The question referred to us is whether the Income Tax can be levied on this amount.

A case exactly like the present one was decided in Secretary, Board of Revenue v. Mylapore Hindu Permanent FundLyd. (1923)10 AIR Mad

648 in which it was held that a fund like this was a Mutual Benefit Society and therefore the receipts from share holders were not income liable to

assessment under the Act. The Income Tax Officer did not follow this decision, as before he completed the assessment, this Court decided the

case in Commissioner of Income Tax v. The Madura Hindu Permanent Fund Ltd. (1933) 20 AIR Mad 347 That decision was interpreted by him

to mean that profits earned by the Fund by lending money may be taxed. He therefore held that the decision in Secretary, Board of Revenue v.

Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR Mad 684 was no longer applicable and assessed the fund on the total income including the

profits of Rs. 61,304. The Assistant Commissioner confirmed the order of the Income tax Officer. The Commissioner in referring the case to us

says that the combined effect of these two decisions and of the decision of this Court in Sivagange Sri Meenakshi Nidhi v. Commissioner of

Income Tax, Madras (1934) 8 I.T.O. 83. is not very clear to him. He also argues that the petitioner Fund is a company carrying on a trade and as

such the fact that it carries on the trade with its own customers does not make it any the lesser trader and that the profits resulting from the trade

are liable to tax unless specially exempted and as there is no question of any such exemption here, the amount of profits earned, viz. Rupees

61,304, is assessable to tax.

At the outset, we may observe that so far as the decisions of this Court are concerned, there is no conflict amongst them. The decision in

Commissioner of Income Tax v. The Madura Hindu Permanent Fund Ltd. (1933) 20 AIR Mad 347 followed by the Income Tax Officer, does not

touch the question of the liability to assessment of the profits earned by the Fund from its share, holders nor does it in our opinion shake the

authority of the decision in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR Mad 684 In that case,

Commissioner of Income Tax v. The Madura Hindu Permanent Fund Ltd. (1933) 20 AIR Mad 347, the question was whether the ""guaranteed

interest"" may be deducted from the total income of the Fund during the year of account. This Court held that the guaranteed interest was interest on

capital borrowed for the purpose of the fund''s business within the meaning of Section 10 (2)(3), Income Tax Act, that its payment was not in any

way dependent on the earning of the profits and that the fund was entitled to claim deduction in respect of that sum distributed by it as guaranteed

interest. The question now referred to us did not arise for decision in that case. In Sivagange Sri Meenakshi Nidhi v. Commissioner of Income Tax,

Madras (1934) 8 I.T.O. 83 this Court pointed out that that case was one like Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund

Ltd. (1923) 10 AIR Mad 684

It is conceded by the learned Counsel for the Commissioner that on the facts this case would fall exactly within the scope of the decision in

Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR Mad 684 What he wants to argue is that that case was

wrongly decided and that he should be allowed to re-open the question. So far as this Court is concerned, the question has been considered and

decided by the Full Bench in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR Mad 684 As pointed out in

Commissioner of Income Tax v. The Madura Hindu Permanent Fund Ltd. (1933) 20 AIR Mad 347 the Fund though registered under the Indian

Companies Act and subject to its provisions is not really a company but a Mutual Benefit Society with a fluctuating capital. The subscriptions

though called share capital are not really so, nor are they capital borrowed for the purpose of the business as that capital is ordinarily understood.

In enacting the Explanation to Section 10(2)(3), Income Tax Act, it would seem that the Legislature has shown its intention to recognize the

existence of such Mutual Benefit Societies like the one in question.

As the law on the point has been clearly laid down in Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR

Mad 684 and as this case falls exactly within its scope, we are not inclined now to re-open the question and to disturb the practice which has been

followed since Secretary, Board of Revenue v. Mylapore Hindu Permanent Fund Ltd. (1923) 10 AIR Mad 684 whatever view we may be

inclined to take if the point was res Integra. Though the term ""shareholder"" has been here used, we do not wish to be understood as deciding that

these subscribers are share-holders properly so called within the meaning of the Companies Act. The matter is not before us. Our answer to the

question accordingly is that the sum of Rs. 61,304 is, in the circumstances of the case, not liable to assessment. The assesses is entitled to Rs. 250

for costs and will get a refund of the Rs. 100 deposit.