1940 (2) TMI 13 - HC - Income Tax

Bank's Tax Status: Association of Individuals; Not Mutual Benefit Society.

COMMISSIONER OF INCOME TAX, MADRAS Versus SALEM DISTRICT URBAN BANK LTD.

The Court determined that the Bank qualifies as an 'association of individuals' under the Indian Income-tax Act, 1922, despite including corporate bodies ... - Issues Involved:1. Whether the Bank is an association of individuals within the meaning of Section 3 of the Indian Income-tax Act, 1922, and whether it can be assessed to income-tax as an association of individuals.2. Whether the Bank is a Mutual Benefit Society and whether it can be said to have derived a profit of Rs. 26,624 as a co-operative society to be included in its total income.Issue-wise Detailed Analysis:1. Association of Individuals:The first issue revolves around whether the Bank qualifies as an 'association of individuals' under Section 3 of the Indian Income-tax Act, 1922, and if it can be assessed as such. The argument presented by the Bank was that it should not be categorized as an association of individuals because it includes both individuals and registered societies as members. The Bank contended that the term 'individual' should only refer to human beings, and therefore, an association of individuals should not include corporate bodies like co-operative societies.The Court, however, disagreed with this interpretation. It emphasized that the term 'individual' has a broader meaning, which includes entities like companies or societies. The judgment referenced the Oxford Dictionary's definition of 'individual' as 'one in substance or essence; forming an indivisible entity; indivisible,' which supports the inclusion of corporate bodies within the term. The Court cited previous judgments, such as the Currimbhoy Ebrahim Baronetcy Trust case, where a corporation was deemed an 'individual' under the Act. The Court also referred to decisions from the Allahabad and Lahore High Courts, which supported the view that the term 'individual' encompasses more than just human beings.The Court concluded that the Bank, being a corporate body with perpetual succession, falls within the category of an 'association of individuals.' Therefore, the Bank is assessable under Section 3 of the Act as an association of individuals.2. Mutual Benefit Society:The second issue addressed whether the Bank can be considered a Mutual Benefit Society and thus exempt from taxation on the profits derived from transactions with its members. The principle underlying mutual benefit societies is that one cannot make a profit out of oneself. The Bank claimed exemption on the grounds that it functions as a Mutual Benefit Society.The Court examined the nature of the Bank's activities and found that it operates as an ordinary banking concern, engaging in transactions not only with its members but also with non-members. The Bank's operations included borrowing and lending money at fixed interest rates, similar to any other banking institution. The Court noted that the Bank's activities lacked the 'mutuality' required to qualify as a Mutual Benefit Society, as its transactions were not confined to its own members.The Court referenced the Notification issued by the Government of India under Section 60 of the Act, which exempts the profits of co-operative societies from income tax but requires these profits to be included in the total income for tax rate determination. The Court concluded that the Bank's claim to be a Mutual Benefit Society was unfounded and that it must pay tax at the rate applicable to its total profits, including the Rs. 26,624 derived from its business activities.Conclusion:The Court answered both questions in the affirmative, holding that the Bank is an association of individuals within the meaning of Section 3 of the Act and that it cannot be considered a Mutual Benefit Society. Consequently, the Bank is liable to pay income tax on its total income, including the profits derived from its business activities. The assessee was ordered to pay costs fixed at Rs. 250.