P L D 1959 (W (PLP)

(5) other measures designed to improve the work and extend the usefulness of such societies, Under bye‑laws 3 and 31 (3), the funds and income of the assessee are to be applied for furtherance of the aforesaid objects, the maintenance of the staff for supervision of the societies within the working area of the assessee, spreading knowledge of the benefits .of the co‑operation, payment of dividend not exceeding 10 per cent. formation of certain funds and to certain charitable purposes specified under section 34 of the Co‑operative Societies Act (in the bye‑laws printed in the paper book, instead of bye‑law 31 (3) reference is made to bye‑law 30, but it appears to be a mis‑print, because that bye‑law deals with the appointment of, a treasurer and has nothing to do with the application of the assessee's income). Mr. Abdul Haq, learned counsel for the department, urged before us that the doctrine of mutuality did not apply to the facts of this case, and cited a number of authorities in support of this submission including Lest v. London Assurance Corporation (2 T C 100 (H L)) ; Styles (Surveyor of Taxes) v. New York Life Insurance Company(2 T C 460 (H L)) ; Secretary Board of Revenue (Income‑tax) Madras v. The Mylapore Hindu Permanent Fund Ltd. (1 I T C Mad. 217) ; Trichinopoly Tennore Hindu Permanent Fund, Ltd. v. The 'Commissioner of Income‑tax, Madras (2 T C Mad. 386) ; Trichinopoly Tennore Hindu Permanent Fund Ltd. v. Commissioner of Income‑tax, Madras (1 T R 1937 703) ; Commissioner of Income‑tax;, Madras v. Salem District Urban Bank Ltd. (1 T R 1940 Mad. 269) ; The English and Scottish Joint Co‑operative Wholesale Society, Ltd. v. Commissioner of Agricultural Income‑tax, Assam (1 T R 1945, 295) ; The English and Scottish Joint Co‑operative Wholesale Society Ltd. v. Commissioner of Agricultural Income‑tax, Assam (I T R 1948 P C 270=P L D 1948 P C 203) and Municipal Mutual Insurance Ltd. v. Hills (16 T C 430). A perusal of these authorities shows that decision in each case is based on its own peculiar facts. The question which arose for decision in the House of Lords in Lest's case was whether the bonuses paid to the participating policy holders by the assessee were to be included in the calculation of its profits assessable to income‑tax. The agreement between the policy holders and the assessee Company incorporated in the prospectus provided that the two‑thirds of the gross profits of the participating series of policies are allotted every five years to the assured, every policy in force at the date of the valuation being entitled to participate. The assured had the option of receiving their share of the profits in cash, or of appropriating it in increase of the sum assured, or in reduction of the future annual premiums. Lord Black‑burn interpreted this contract as purchase of a share in the profits of the assessee, if any, earned during those five years and under 5 and 6 Victoria, chapter 35, section 54, a corporation was to be assessed before any dividend shall have been made thereof to any other persons having any share, right, or title in or to such profits. Lord Fitz Gerald came to the conclusion that the premiums paid to the company in respect of the participating policies formed part of the annual profits of the company just as much as any other portion of their revenue, and that the quinquennial allotments represented no return to the policy holders of any aliquot proportion of the premiums they had paid, but constituted what the parties have directly described as a participation in two‑thirds of the gross profits, if any, realised in the quinquennial period. On this view, it was held that the bonuses paid to the participating policy holders were to be included in the calculation of profits assessable to income‑tax. In Styles (Surveyor of Taxes) v. New Yark Life Insurance Company the same‑question arose for decision of the House of Lords and it was held that so much of the surplus as arose from the excess contributions of the participating policy holders was, not profit assessable to the income‑tax, In this case the assessee was a mutual life insurance company which had no members other than the holders of .the participating policies to whom all the assets of the company belonged, At the close, of each year, an actuarial valuation was inade and if the aggregate receipts of the Company had been more than sufficient to cover the expenses and estimated liabilities, the surplus was divided between the participating policy holders who received their dividends in the shape either of a cash reduction from future premiums or of a reversionary addition to the amount of their policies. In discussing the wrong application of the Lest's case to the facts of this case by the Courts below, Lord Watson observed that the London Assurance Corporation (the assessee in Lest's case) was a proprietary office, or in other words the Corporation and its share‑holders formed a body quite distinct in personality and in interest from the insured. The Corporation, as a branch of its business, dealt in what are termed participating policies, which it issued to all persons whether members or not who had insurable lives and were willing to pay premiums on a higher scale than those charged for ordinary or non‑participating policies. In consideration of these increased payments, the Corporation undertook to return to the holders of the participating policies by way of bonus or abatement of premiums, two‑thirds of any surplus funds applicable to such policies, which were to be ascertained and allotted every five years. The one‑third retained by the Corporation admittedly represented business profits ; and it was not a matter of dispute that the remaining two‑third would also have been profits of the Corporation except for its agreement to return that amount to the insured. In view of these facts, Lord Watson proceeded to observe that the only point decided by the House of Lords in that case was that the two‑third of the surplus payable to the insured did not constitute a proper debt of the Corporation falling to be deducted from receipts in ascertaining its trading profits but was in reality a share of profits. The appellant company in Style's case issued life policies of two kinds participating and non‑participating : but the relations existing between the Corporation and the two classes of insured differed materially. There were no shares and no shareholders in the ordinary sense of the term ; but each and every holder of a participating policy became ipso facto a partner of the Company with a voice in its administration entitled to a share of its assets and liable for all losses and expenses incurred by it. On the other hand, the holder of a non‑participating policy was not a partner of the Company ; he was a creditor merely without any interest in its assets and without any liability for its debts. The rate of premiums paid for participating policies were different from that which applied to non‑participating policies and was moreover not fixed, but fluctuated. After pointing out these distinctions between the facts of the two cases, Lord Watson proceeded to observe that when a number of individuals agreed to contribute funds for a common purpose, such as the payment of annuities, or of capital sums to some or all of them, on the occurrence of events certain or uncertain ; and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, he could not conceive why they should be regarded as traders or why contributions returned to them should be regarded as profits. For these reasons, it was held that the transactions of the appellant Company in so far as that related to the participating policies did not constitute the carrying on .of a trade within the meaning of the Income‑tax Acts and that the surplus funds returned or credited to its members were not profits. In Secretary, Board of Revenue (Income‑tax) Madras v. The Mylapore Hindu Permanent Fund Ltd., the assessee, a mutual benefit society registered under the Companies Act, had its share capital subscribed entirely by its members by way of periodical payments, and the income of the fund was derived chiefly from interest earned on overdue subscriptions or on loans given exclusively to its members, every one of them being entitled under the rules to take loans and occasionally from interest from outside investments with banks. On these facts, it was held that the income earned by the assessee by way of interest from its own members was not taxable as its profits within the meaning of section 9 of the Income‑tax Act, though the‑ fund, as a registered company, might for certain purposes be a separate legal entity from its members. The principle laid down in the Style's case was found applicable to this case. In Trichinopoly Tennore Hindu Permanent Fund Ltd. v. The Commissioner of Income‑tax, Madras, it was held that in the constitution and objects of the fund there being no principle of mutuality, no purpose of mutual benefit to be obtained or derivable from membership alone, the fund was not a mutual benefit society entitled to be assessed as such under the ruling in Molapore Hindu Permanent Fund case. Referring to the constitution of the assessee, the learned Judges pointed out that its objects were perfectly general and there was no hint that those who were to be enabled to save money or to secure loans were confined to the members of the Company, or that the essence of the object was the low rate of interest, so that the purpose aimed at was not profits, but a lowering of* the rate of interest as far as possible. The stated objects of the fund were, therefore, to be found not incompatible with a purely business effort to make as much profits as possible out of lending money on favourable rate of interest. After this adverse finding, the assessee altered its constitution by substituting the word "members" for "Persons" in the original memorandum which provided for its object to enable persons to save money and to enable persons to secure loans at favourable rates of interest on sufficient security and a new class of shares called ordinary share of Re. 1 each were issued to persons who under the former scheme would have been non‑member borrowers. After this alteration, the assessee's income was not taxed for the years 1917‑28 to 1930‑31, but in 1931 the authorities took a different view and levied assessment under section 34 of the Act for the year 1930‑

31. The assessee again took the question to the High Court Trichinopoly Tennore Hindu Permanent Fund Ltd. v. Commissioner of Income‑tax, Madras but the former decision was reaffirmed, because in the view of the Full Bench, which decided this case, the membership of the borrowers was only nominal and the' bulk of the profits of the assessee was dis tributed to the permanent shareholders who were distinct from the body of nominal shareholders, namely, the borrowers. This category of members was given‑only one rupee share at the time of the application for obtaining the loan and consequently practically nothing was paid to them out of the profits either by way of dividend or by reduction of interest: By borrowing from the assessee they made for it a large profit in which they were not allowed to share and on these facts, it was considered impossible for the assessee to contend that it was a mutual benefit society and its income was not taxable. The case Commissioner of Income‑tax, Madras v. Salem District Urban Bank Ltd. is more directly in point, but not of much assistance. The assessee was a Co‑operative Central Bank registered under the Co‑operative Societies Act of 1912. It consisted of 671 shareholders of whom 138 were persons and 533 were co‑operative societies. The main object of the bank was the collection of funds for financing co‑operative societies, but it also carried on general banking business not repugnant to the provisions of the Co‑operative Societies Act. For the assessment year 1937‑38, the income‑tax authority held that the assessee had a total income of Rs. 37,445 and after excluding Rs. 1,519 representing interest on tax‑free securities and Rs. 26,624 being profits from co‑operative business, which were exempted by notification issued under section 60 (1) of the Act from being charged to tax, but not exempted from inclusion in the total income, they assessed the assessee as an association of individuals on the balance of Rs. 9,302 representing interest on taxed securities and interest obtained on deposits at a rate which would be payable on an income of Rs. 37,

445. On these facts, one of the questions referred to the Full Bench was whether the bank was not a mutual benefit society and as such could be said to have derived a sum of Rs. 26, 624 as a co‑operative society to be included in its total income. It was answered against the assessee, but unfortunately without any discussion. The learned Chief Justice (Leach, C. J.), who delivered the judgment, merely observed that the principles stated in Trichinopoly Tennore Hindu Permanent Fund Ltd. v. The Commissioner of Income‑tax and repeated` in Trichinopoly Tennore Hindu Permanent Fund Ltd. v. The Commissioner of Income‑tax applied. In The English and Scottish Joint Co‑operative Wholesales Society Ltd. v. Commissioner of Agricultural Income‑tax, Assam decided against the assessee at first by the High Court of Calcutta 1945 1 T R 269 and on appeal by the Privy Council 1948 I T R 270=P L D 1948 P C 203, the assessee society consisted of only two members. The society was registered under the Industrial and Providents Societies Act, 1893 in the United Kingdom with the object of carrying on business of planters, growers, producers, merchants and manufacturers and brokers of tea, 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 costs of tea to be supplied and the market prices of tea supplied 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 loan were paid or provided. Under the rules of the society, its nett profits were applied‑ (a) in depreciation of land, buildings, live and rolling stock ; (b) payment of interest not exceeding 6% per annum on the share capital ; (c) appropriation to a reserve fund ; (d) appropriation to a special fund for making grants as determined in general meeting ; (e) payment of a dividend to members rateable in proportion to the amount of purchases made by them from the society ; and (f ) the remainder, if any, carried forward to the next account. The society contended that it was a mutual association whose transactions with its members were incapable of producing a profit and it was not, therefore, liable to be assessed under the Assam Agricultural Income‑tax Act. But the contention was overruled by the Privy Council on the ground that the constitution rules and business practice of the assessee society closely conformed to the pattern of an ordinary profit making concern. A number of English authorities, including Style's case referred to above, and Municipal Mutual Insurance Ltd. v. Hills were reviewed in this judgment and it was held that the assessee was not exempt from liability to Assam Agricultural Income‑tax in respect of profits from the sale to its members of tea cultivated or manufactured at its estate. In arriving at this conclusion, reliance was made on the following observation of Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills :‑ "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", This requirement was held not to be satisfied, for there was no common‑fund to which the members of the appellant society contributed and in which they participated. It will have been noticed that the decision in each one off the aforementioned cases is confined to its own facts. But their close examination has led us to the conclusion that in determining the applicability of the doctrine of mutuality one should loon to ‑ (1) the constitution of the assessee ; (2) the objects with which it is formed; (3) the true character of the relationship between the assessee and its members from whom the income in question has been derived ; (4) the terms of the agreement between the assessee and its members ; and (5) the application of the income and fund of the assessee. Keeping in view the above criterion, we find that under the aforementioned bye‑laws of the assessee the income derived as interest on loans advanced to the members of the assessee should be exempt from tax, for the assessee bank has been constituted to facilitate the operation of registered co‑operative societies and its funds are to be applied to the furtherance of that object. The membership of the assessee is confined under bye‑law to registered co‑operative societies and unions in the Lyallpur District and the persons who joined in the application for registration or might be approved by the managing committee under that bye‑law. The Deputy Commissioner of Lyallpur District is the ex officio, member without holding a share. Apart from the members from whom the income in question has been derived, there is no other separate body of shareholders entitled to participate in the funds and income of the assessee. There is thus a complete identity between the contributors and the participators as pointed out by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills. It is true that the assessee advances loans to non‑members, but loans are advanced to the members at a lower rate. (This was stated from the bar by Mr. Mahmud Shah and subsequent query made from the assessee approved it) and the income derived from the non‑members is admittedly liable to _tax. 1n the last‑mentioned case 16 T C 430, representative of local authorities had formed the appellant company for the purpose of enabling local authorities and other public bodies by co‑operation to ensure against fire on the most favourable terms. The effective control of the company was in the hands of the fire policy holders, who alone were entitled in the event of a winding‑up, to the surplus assets of the company. The company's memorandum of association prohibited the transfer of any part of the company's income or property by way of profit to the members. 1ht course of time the company undertook in addition to the fire insurance and extensive business in employers' liability and miscellaneous insurance. Cumulative reductions were allowed in fire insurance premiums, but no similar reductions were allowed in the case of policy of other classes than fire. On these facts the Crown admitted that the fire insurance business of the company was a. business of mutual insurance which did not attract liability to assessment to income‑tax. It has been noticed in the earlier part of this judgment that before the tribunal it was a common ground between the parties that the assessee was a mutual benefit society and we hold that the concession was well‑founded. The income derived as interest on loans, advanced to its members by the assessee must, therefore, be exempt from tax on the doctrine of mutuality. As a result of the view expressed above, we answer the question referred to us in the negative. The respondent shall be entitled to costs in this Court. K.B.A./A.H. Question answered in the negative,