1964 (12) TMI 49 - HC - Income Tax

Supreme Court denies income tax exemption in chit business case, emphasizing lack of mutuality test.

The Supreme Court ruled against the assessee's claim for income tax exemption in the case involving income from chit business, emphasizing that the income ... - Issues:- Whether the assessee's income from chit business is exempt from tax.Analysis:The case involved the Arcot Dhanasekhara Nidhi Ltd., which conducted chit fund business, received deposits, and lent money. The source of income was from commission and default interest from chit fund subscribers and interest on loans. The company claimed income exemption based on the principle of mutuality, stating it only transacted with its shareholders. However, the Income-tax Officer rejected the claim due to dividends received by certain shareholders without contributing. The Appellate Assistant Commissioner and the Tribunal upheld the rejection. The Supreme Court reversed a previous decision favoring such claims, leading to the current dispute.The court examined whether, despite the Supreme Court's decision, any part of the income should be exempt based on identity between contributors and surplus participators. The court disagreed with this view, emphasizing that the incorporated entity earning the income cannot be ignored unless complete identity exists between contributors and participants. The court stated that income received is as dividends by shareholders, not based on mutual contributions. Thus, even if some individuals contributed and participated, it does not meet the mutuality test. Consequently, the court ruled against the assessee's claim for income tax exemption, considering the changed structure of the case post the Supreme Court decision. The judgment concluded with a negative answer to the exemption claim and no order as to costs.