(1.) THE assessees are a limited company registered under the Indian Companies Act with an authorised capital of Rs. 3,00,000 divided into 12,000 shares of Rs. 25 each. THE subscribed and the paid-up capital on the 30th November, 1932, was Rs. 2,47,475 in 9,899 shares. THE objects of the company as set out in its memorandum and articles of association are :-
(1) to enable shareholders to save money;
(2) to grant loans on jewels, landed property, Government promissory notes and other approved securities;
(3) to receive fixed deposits from the public on such terms and conditions as may be fixed by the Managing Committee from time to time;
(4) to make a permanent provision for payment of a grant-in-aid to the Sriman Madhwa Siddhantha Onnahini Sabha; and
(5) to do all such other things as are incidental or conducive to the attainment of the above objects.
(2.) THE important articles of association are : Article 2 (b) which provides that the full amount of capital due on a share is to be paid in one lump sum, Article 5 (a) which provides that the paid up capital of the shareholders is to carry guaranteed interest at the rate of 6 1/2 per cent. per annum, Article 5 (b) which provides that the net income earned by the company after deducting the cost of establishment, the other incidental charges and the interest payable under Article 5 (a) is to be treated as the Nidhis profits for the year, Article 6 (b) which provides that a shareholder may, with the sanction of the directors, transfer the whole of his paid-up capital on any particular share or shares to any other person, and Article 7 (a) according to which the shareholder or his heir and legal representative or his registered nominee is entitled to withdraw the whole or any part of his share capital after giving six months previous notice and in such a case the shareholder is to be paid also the interest accrued on the share capital up to the date of withdrawal. Article 19 authorises the company to receive deposits from the public and Article 20 to give loans both to the shareholders and non-shareholders.
The respondents claim that an amount of Rs. 16,569 which is the guaranteed interest paid to their shareholders on the paid-up share capital according to Article 5 (a) is not liable to be assessed to income tax by reason of Section 10 (2) (iii) of the Indian Income Tax Act. Section 10 (1) provides that the tax shall be payable by an assessee under the head business in respect of the profits or gains of any business carried on by him and sub-Section (2) that such profits or gains shall be computed after making the following allowances, namely, inter alia, (3) in respect of capital borrowed for the purpose of the business, where the payment of interest thereon is not in any way dependent on the earning of profits, the amount of interest paid. The respondents contend that the paid-up capital which carried interest is capital borrowed for the purpose of the business, the interest payable upon it not being in any way dependent on the earning of profits. Hence they claim that this sum of Rs. 16,569 the interest upon that borrowed capital, must be deducted from the profits and gains of the business. In support of the respondents case, reliance was placed upon Commissioner of Income Tax, Madras v. Madura Hindu Permanent Fund, Ltd., [(1932) I.L.R. 56 Mad. 415] a decision upon an income-tax reference, of a Bench consisting of five judges. It is contended that the facts of the present case are indistinguishable from the facts there. In my view, that decision cannot be applied to this case as the facts are clearly distinguishable. There the assessee company was a mutual benefit society although it had not been prescribed. It was, like the respondent company here, incorporated as a limited company under the Indian Companies Act of 1882. It had its capital contributed by A and B class subscribers at the rate of Re. 1 per mensem per share. The subscribers in A class paid their subscriptions for 45 months and those in B class for 84 months. As soon as an A class subscriber had paid Rs. 45 for one share in that manner, his account, in so far as that particular share was concerned, was closed, and he was paid off with a sum of Rs. 50. A B class subscriber was paid off at the end of 84 months with Rs. 102-8-0. The amounts of Rs. 5 and Rs. 18-8-0 thus paid out to A and B class subscribers in excess of their subscriptions to the fund were called guaranteed interest. Although the rules of the fund made provision for deposits and loans by and to non-subscribers or co-operative societies, in fact all the transactions of the fund were with its own members. The members of the fund subscribed the capital and the subscribed capital was lent to them. A sum of Rs. 68,000 odd was in the year of account distributed by the fund in the shape of guaranteed interest to the A and B class subscribers and the fund claimed to be entitled to deduct that sum from its total income during the year of account. It was held that this guaranteed interest was interest on capital borrowed for the purpose of the funds business within the meaning of Section 10 (2) (iii) of the Income Tax Act, that is payment was not in any way dependent on the earning of profits and that the fund was entitled to claim a deduction in respect of the amount distributed as guaranteed interest. It was also held that the fund was a mutual benefit society with a fluctuating capital dependent entirely upon the amount subscribed by its members and the repayment of subscriptions plus the guaranteed interest to the members and that the subscriptions, though called share capital, were not really so, nor were they capital borrowed for the purpose of the business as that capital is ordinarily understood, this being shown by the explanation to Section 10 (2) (iii) of the Income Tax Act. It is clear upon an examination of the answers given to the questions referred that they were based entirely upon a construction of the latter explanation. This was a mutual benefit society, the subscriptions were recurring and were paid periodically by the shareholders or subscribers and as such were deemed to be capital borrowed within the meaning of Section 10 (2) (iii). It was contended there on behalf of the assessees that this was not really share capital at all but subscription capital raised by recurring subscriptions paid periodically by shareholders. In dealing with this contention on page 427 (of 56 Mad.) I say :
In my opinion, although these subscriptions are called share capital, they are not really so as that description is understood in its ordinary sense, nor is this capital borrowed for the purpose of the business as that capital is ordinarily understood. It is something different from both. That this is so and that the legislature recognised the distinction is clearly shown by the explanation to Section 10 (2) (iii) of the Income Tax Act where recurring subscriptions paid periodically by shareholders or subscribers in such mutual benefit societies as may be prescribed are to be deemed to be capital borrowed within the meaning of Section 10 (2) (iii). If it is to be deemed to be capital borrowed, then it is not really capital borrowed but is for the purpose of the Indian Income Tax Act to be so considered. The fact that no mutual benefit societies have as yet been prescribed may be due to various causes with which we are not really here concerned. What we are concerned with is the apparent intention of the legislature to recognise an association of persons not having share capital but borrowing and lending from and to themselves for the mutual benefit of themselves. This borrowing is to be deemed to be a borrowing of capital.
The facts of the present case are very different. The respondents are not a mutual benefit society but are an ordinary banking concern. They are not concerned to transactions only with their own members. The shares are to be paid for in one lump sum; and to my mind this is an all important distinguishing feature. In order to satisfy the requirements of the explanation to Section 10 (2) (iii), there must be recurring subscriptions paid periodically.Recurring means a happening again and again, not that which occurs only once. There is here no periodical payment and this is not a mutual benefit society. It is only if those conditions are to be found that that which is not capital borrowed is to be deemed to be capital borrowed. This capital then clearly cannot be given that description and unless it is capital borrowed the allowance claimed under Section 10 (2) (iii) cannot be permissible. Not being capital borrowed, the question as to whether the interest thereon is or is not in any way dependent on the earning of profits does not arise.
The answer to the question referred must, therefore, be in the negative. The Commissioner of Income Tax will get Rs. 250 costs.
RAMESAM, J. - I agree.
SUNDARAM CHETTY, J. - I agree.
Question answered against assessee.