My company lends and takes deposits only from its own shareholders and shares the surplus among them. Is that mutual trading, so that the surplus is not taxable?
No. The Supreme Court held that mutuality requires complete identity between contributors and participators: every contributor to the common fund must be entitled to share in the surplus, and every participator in the surplus must be a contributor. Here a shareholder could take his dividend without ever making a deposit or taking a loan, so the surplus came back to him as a shareholder on his shares, not as a person who had put money in. That is a company making a profit out of its members as customers, which is taxable. The Madras High Court's test, that the right to contribute and the right to participate need only be open to an identical body, was held unsound.
Decided by the Supreme Court (Supreme Court of India; S.M. Sikri, K. Subba Rao and J.C. Shah JJ. Judgment by Sikri J) on 1964-05-07, reported as (1964) 53 ITR 241; AIR 1965 SC 96; (1964) 8 SCR 204; (1964) 2 SCJ 473; (1964) 2 ITJ 229; 1965 AIR 96; 1964 SCR (8) 204; AIR 1965 SUPREME COURT 96; 1964 (1) SCWR 847. It bears on section 28, section 4, section 2(24) of the Income Tax Act 1961, in Capital Gains Exemptions, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the decision that fixed the boundary of mutuality for companies limited by shares, and it is still the first case to reach for when a club, association, nidhi or members-only business claims its surplus is untaxable. The distinction it draws is the operative one: money collected from people and applied for the benefit of those same people, as the people who subscribed it, is not profit; but money that comes back to them on their shares is profit, even if the company trades with no one but its own members. It rejects the softer test that participation need only be open to those who may contribute, and it holds that incorporation cannot always be disregarded, since a company is a legal entity that can make a profit out of its own members. It also unsettles a long line of Madras decisions, holding that Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and that the cases following it never debated what happens when shareholders participate as shareholders.
Binding on every court and authority in India.
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The assessee was a company incorporated under the Indian Companies Act, 1882 and limited by shares, with a nominal capital from 1938 of Rs 33,00,000 divided into shares of Re 1 each. It carried on banking business restricted to its shareholders, who could join its recurring deposit schemes or borrow against security. Recurring deposits were taken from members in fixed monthly amounts for a fixed number of months, at the end of which a fixed sum covering compound interest was returned according to published tables. Those deposits were the main source of funds for lending, and loans were made only to members, against the paid-up value of their deposits or against immovable property in Tanjore district. Interest on those loans was the main income. Out of it the company paid interest on the recurring deposits and its management expenses, and divided the balance among the members pro rata according to their shareholdings after providing for reserves. A shareholder entitled to that distribution need not have made any deposit or taken any loan. The Income-tax Officer assessed the whole profits for eight years from 1946-47 to 1953-54, holding Styles inapplicable. The Appellate Assistant Commissioner and the Tribunal agreed, the Tribunal holding the business was ordinary banking merely restricted to members. On a consolidated reference the Madras High Court answered in the assessee's favour, and the Department appealed on a certificate.
The appeals were allowed and the referred question answered in the affirmative, that is, that the assessee was assessable as a banking concern and not exempt. The test applied by the High Court, that both the right to contribute and the right to participate must be available to an identical body and that not every member need contribute before participating, was held unsound and inconsistent with Styles as understood by the Supreme Court. The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and all participators in the surplus must be contributors to it. A shareholder in this company could participate in the profits without contributing anything to its funds by taking a loan, and needed only to hold a share to receive dividend. His position was no different from that of a shareholder in a banking company limited by shares, and the company's position no different from an ordinary bank except that it lent to and took deposits from its shareholders, which does not make its income any the less income from business. The Board of Revenue decision on the Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and the Madras decisions following it had never addressed the point. No costs were awarded, given how long the Mylapore decision had held the field, and the Court noted the High Court had no jurisdiction to order refund of the reference fee, though it could include that sum in assessing costs.
The Court took the cardinal requirement from Lord Macmillan in Municipal Mutual Insurance: complete identity between contributors and participators. It emphasised the exact words, that all participators must be contributors to the common fund, not merely that all participators must be entitled to contribute. That distinction disposed of the High Court's test. The essence of mutuality lies in the return of what one has contributed to a common fund. The Court then applied its own earlier statement in Royal Western Indian Turf Club: nothing prevents a company from making a profit out of its own members, as a railway company does by carrying its shareholders or a trading company by trading with them, and such profit belongs to the members as shareholders rather than as persons who contributed it; only where the company collects money from members and applies it for their benefit as the people who put up the fund is there no profit, and it is then that incorporation may be treated as immaterial and the company as a convenient agent. Rowlatt J's formulation in Thomas v Richard Evans, that the money must come back to the members in the character of those who paid it and not upon their shares, was adopted as correct. The assessee's reliance on the Local Government Officers case failed because that concerned an unincorporated association whose property belonged to the members themselves, a feature Finlay J had treated as fundamental and which the Bombay High Court had overlooked in Ismailia Grain Merchants. On the facts, a member could hold shares, contribute nothing and still draw dividend, and those who did contribute, the borrowers paying interest, were not necessarily the ones who shared the surplus. The identity therefore failed at both ends.
The essence of mutuality lies in the return of what one has contributed to a common fund.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that mutuality requires complete identity between contributors and participators: every contributor to the common fund must be entitled to share in the surplus, and every participator in the surplus must be a contributor. Here a shareholder could take his dividend without ever making a deposit or taking a loan, so the surplus came back to him as a shareholder on his shares, not as a person who had put money in. That is a company making a profit out of its members as customers, which is taxable. The Madras High Court's test, that the right to contribute and the right to participate need only be open to an identical body, was held unsound. This was decided by the Supreme Court (Supreme Court of India; S.M. Sikri, K. Subba Rao and J.C. Shah JJ. Judgment by Sikri J) and bears on section 28, section 4, section 2(24) of the Income Tax Act 1961. It is reported as (1964) 53 ITR 241; AIR 1965 SC 96; (1964) 8 SCR 204; (1964) 2 SCJ 473; (1964) 2 ITJ 229; 1965 AIR 96; 1964 SCR (8) 204; AIR 1965 SUPREME COURT 96; 1964 (1) SCWR 847. This is the decision that fixed the boundary of mutuality for companies limited by shares, and it is still the first case to reach for when a club, association, nidhi or members-only business claims its surplus is untaxable. The distinction it draws is the operative one: money collected from people and applied for the benefit of those same people, as the people who subscribed it, is not profit; but money that comes back to them on their shares is profit, even if the company trades with no one but its own members. It rejects the softer test that participation need only be open to those who may contribute, and it holds that incorporation cannot always be disregarded, since a company is a legal entity that can make a profit out of its own members. It also unsettles a long line of Madras decisions, holding that Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and that the cases following it never debated what happens when shareholders participate as shareholders. If it applies to you, the first step is this: Test the arrangement against complete identity: list who contributes and who participates, and check that no one can share in the surplus without contributing.
The assessee was a company incorporated under the Indian Companies Act, 1882 and limited by shares, with a nominal capital from 1938 of Rs 33,00,000 divided into shares of Re 1 each. It carried on banking business restricted to its shareholders, who could join its recurring deposit schemes or borrow against security. Recurring deposits were taken from members in fixed monthly amounts for a fixed number of months, at the end of which a fixed sum covering compound interest was returned according to published tables. Those deposits were the main source of funds for lending, and loans were made only to members, against the paid-up value of their deposits or against immovable property in Tanjore district. Interest on those loans was the main income. Out of it the company paid interest on the recurring deposits and its management expenses, and divided the balance among the members pro rata according to their shareholdings after providing for reserves. A shareholder entitled to that distribution need not have made any deposit or taken any loan. The Income-tax Officer assessed the whole profits for eight years from 1946-47 to 1953-54, holding Styles inapplicable. The Appellate Assistant Commissioner and the Tribunal agreed, the Tribunal holding the business was ordinary banking merely restricted to members. On a consolidated reference the Madras High Court answered in the assessee's favour, and the Department appealed on a certificate. The matter was decided on 1964-05-07 by the Supreme Court (Supreme Court of India; S.M. Sikri, K. Subba Rao and J.C. Shah JJ. Judgment by Sikri J). On those facts the Supreme Court held as follows. The appeals were allowed and the referred question answered in the affirmative, that is, that the assessee was assessable as a banking concern and not exempt. The test applied by the High Court, that both the right to contribute and the right to participate must be available to an identical body and that not every member need contribute before participating, was held unsound and inconsistent with Styles as understood by the Supreme Court. The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and all participators in the surplus must be contributors to it. A shareholder in this company could participate in the profits without contributing anything to its funds by taking a loan, and needed only to hold a share to receive dividend. His position was no different from that of a shareholder in a banking company limited by shares, and the company's position no different from an ordinary bank except that it lent to and took deposits from its shareholders, which does not make its income any the less income from business. The Board of Revenue decision on the Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and the Madras decisions following it had never addressed the point. No costs were awarded, given how long the Mylapore decision had held the field, and the Court noted the High Court had no jurisdiction to order refund of the reference fee, though it could include that sum in assessing costs.
The Court took the cardinal requirement from Lord Macmillan in Municipal Mutual Insurance: complete identity between contributors and participators. It emphasised the exact words, that all participators must be contributors to the common fund, not merely that all participators must be entitled to contribute. That distinction disposed of the High Court's test. The essence of mutuality lies in the return of what one has contributed to a common fund. The Court then applied its own earlier statement in Royal Western Indian Turf Club: nothing prevents a company from making a profit out of its own members, as a railway company does by carrying its shareholders or a trading company by trading with them, and such profit belongs to the members as shareholders rather than as persons who contributed it; only where the company collects money from members and applies it for their benefit as the people who put up the fund is there no profit, and it is then that incorporation may be treated as immaterial and the company as a convenient agent. Rowlatt J's formulation in Thomas v Richard Evans, that the money must come back to the members in the character of those who paid it and not upon their shares, was adopted as correct. The assessee's reliance on the Local Government Officers case failed because that concerned an unincorporated association whose property belonged to the members themselves, a feature Finlay J had treated as fundamental and which the Bombay High Court had overlooked in Ismailia Grain Merchants. On the facts, a member could hold shares, contribute nothing and still draw dividend, and those who did contribute, the borrowers paying interest, were not necessarily the ones who shared the surplus. The identity therefore failed at both ends. In the words reproduced by the source cited on this page: "The essence of mutuality lies in the return of what one has contributed to a common fund."
It was decided by the Supreme Court on 1964-05-07 and is reported as (1964) 53 ITR 241; AIR 1965 SC 96; (1964) 8 SCR 204; (1964) 2 SCJ 473; (1964) 2 ITJ 229; 1965 AIR 96; 1964 SCR (8) 204; AIR 1965 SUPREME COURT 96; 1964 (1) SCWR 847. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28, section 4, section 2(24), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were allowed and the referred question answered in the affirmative, that is, that the assessee was assessable as a banking concern and not exempt. The test applied by the High Court, that both the right to contribute and the right to participate must be available to an identical body and that not every member need contribute before participating, was held unsound and inconsistent with Styles as understood by the Supreme Court. The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and all participators in the surplus must be contributors to it. A shareholder in this company could participate in the profits without contributing anything to its funds by taking a loan, and needed only to hold a share to receive dividend. His position was no different from that of a shareholder in a banking company limited by shares, and the company's position no different from an ordinary bank except that it lent to and took deposits from its shareholders, which does not make its income any the less income from business. The Board of Revenue decision on the Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and the Madras decisions following it had never addressed the point. No costs were awarded, given how long the Mylapore decision had held the field, and the Court noted the High Court had no jurisdiction to order refund of the reference fee, though it could include that sum in assessing costs. It arises in Capital Gains Exemptions, Assessment & Scrutiny and How Tax Law Is Read matters, on section 28, section 4, section 2(24) of the Income Tax Act 1961, and was decided by Supreme Court of India; S.M. Sikri, K. Subba Rao and J.C. Shah JJ. Judgment by Sikri J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Look at the character in which the surplus is returned. If it is paid on shareholding, in proportion to shares held rather than to dealings, mutuality fails. Do not rest on the fact that outsiders are excluded; a company trading only with its shareholders can still make a taxable profit out of them. Where mutuality is claimed for an unincorporated association, note the different footing the Court recognised, that the property is vested in the members themselves, and plead the facts that show it. If you have been following a long-standing local practice, say so: the Court denied the Department its costs precisely because the earlier Madras decision had held the field since 1923.
Still good law. The source page records the decision as cited in over seventy later cases and it remains a leading authority on mutuality, applied well beyond nidhis to clubs, associations and members-only trading bodies. It construes section 10 of the 1922 Act, whose successor is section 28 of the 1961 Act, and the principle it applies is judge-made rather than statutory, so the change of Act does not affect it. Particular statutory regimes now displace it in places, notably the taxation of co-operative societies and of certain trade and professional associations, none of which was before the Court. Its later history was not otherwise traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/cit-v-kumbakonam-mutual-benefit-fund-mutuality-shareholders/, which asked: Our fund lends only to its own shareholders — is the interest it earns exempt because of mutuality? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The batch line gave the sections as 4 and 2(24). The judgment decides chargeability under section 10 of the Indian Income-tax Act, 1922, whose 1961 Act equivalent is section 28, within the charge in section 4; mutuality is a judicial principle and not a section. Only the first referred question was before the Court; the second, on the deductibility of payments to a non-recognised provident fund for six of the years, was not decided and its fate is not recorded. The judgment does not deal with how the guaranteed interest paid to recurring depositors was to be treated, nor with the years after 1953-54. The harvested page carries a reporter's headnote above the judgment, which has been disregarded, and it wrongly describes the exemption claim as one under section 10(2)(iii). The printed text has several garbled citations and one sentence in which the High Court's reasoning is truncated. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed and the referred question answered in the affirmative, that is, that the assessee was assessable as a banking concern and not exempt. The test applied by the High Court, that both the right to contribute and the right to participate must be available to an identical body and that not every member need contribute before participating, was held unsound and inconsistent with Styles as understood by the Supreme Court. The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and all participators in the surplus must be contributors to it. A shareholder in this company could participate in the profits without contributing anything to its funds by taking a loan, and needed only to hold a share to receive dividend. His position was no different from that of a shareholder in a banking company limited by shares, and the company's position no different from an ordinary bank except that it lent to and took deposits from its shareholders, which does not make its income any the less income from business. The Board of Revenue decision on the Mylapore Hindu Permanent Fund could not rightly have been based on Styles, and the Madras decisions following it had never addressed the point. No costs were awarded, given how long the Mylapore decision had held the field, and the Court noted the High Court had no jurisdiction to order refund of the reference fee, though it could include that sum in assessing costs.
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