126-NLR-NLR-V-41-PUBLIC-SERVICE-MUTUAL-PROVIDENT-ASSOCIATION-v.-COMMISSIONER-OF-INCOME-TAX.pdf
Public Service Mutual Prov. Assn. v. Com. of Income Tax.
489
1940Present : Keuneman and Cannon JJ.
PUBLIC SERVICE MUTUAL PROVIDENT ASSOCIATION v.COMMISSIONER OF INCOME TAX.
128—(lnty.) Income Tax.
Income tax—Loans given by Provident Association to members—Interest onloans—Taxable profit—Income Tax Ordinance, s. 6 (Cap. 188).
Money earned by the Public Service Mutual Provident Associationas interest recovered from loans granted to its members is a taxableprofit under section 6 of the Income Tax Ordinance.
C
ASE stated to the Supreme Court by the Board of Review undersection 74 of the Income Tax Ordinance.
The question referred was whether the Public Service MutualProvident Association is liable to pay Income Tax on interest receivedfrom the members of the Association on loans advanced to them by theAssociation.
G. P. Jayetilleke, K.C., S.-G. (with him Hr H. Basnayake, C.C.),for Commissioner of Income Tax.—The interest earned on the loansto the members of the Association is taxable under section 6 (1) (a) and (e)of the Income Tax Ordinance (Cap. 188).
490
Public Service Mutual Prov. Assn. u. Com. of Income Tax.
The Board of Review upheld the objection of the Association on theauthority of two Indian decisions, viz., Board of Revenue, Madras v. TheMylapore Hindu Permanent Fund’ and the English and Scottish JointCo-operative Wholesale Society, Ltd. v. The Commissioner of Income Tax,Madras*. Those two cases cannot be relied on. They purport to followThe New York Life Insurance Co. v. Styles’, but in the later case ofThe Madura Hindu Permanent Fund, Ltd. v, The Commissioner of IncomeTax, Madras *, Ramesam J. who had decided the Mylapore caseadmitted that Styles’ case (supra) had no application to the Mylapore case.
It was contended on behalf of the respondent Association that theincome by way of interest came from the members themselves and,therefore, did not come under the definition of profits and that thetransactions in question were carried on on a mutual basis between thecorporation and the members. The answer to that contention is thatthe members who borrowed paid interest not in their capacity as membersof the Association but as debtors. There were also debtors who were notmembers, e.g., Banks. According to the rules of the Association, themembers were not bound to’borrow. There were, thus, a large numberof members who participated in the interest earned without contributingtowards it. In order to claim exemption from tax there should becomplete identity between the contributors and the participators. Thecharacter in which they receive the money should be the same as thatin which they paid it.
The present case cannot fall within the ambit of .Styles’ case (supra).See dictum of Rowlatt J. in Jones v. South-West Lancashire Coal Owners’Association, Ltd’. A recent decision of the House of Lords in MunicipalMutual Insurance Ltd. v. Hills ° is in point. See also The Liverpool ComTrade Association, Ltd. v. Monks
H. V. Perera, K.C. (with him F. C. de Saram), for assessee, respondent.—Section 48 of the Income Tax Ordinance is not superfluous. It would be •decisive of this case if we are dealing with a company and its shareholders.In the present case we are dealing not with a company but with acorporation. “ Body of persons ” as defined in the interpretationsection 2 includes a body corporate but excludes a company. Acompany is not the aggregate of its shareholders, whereas" a corporationis the aggregate of its members. A person cannot make a profit out ofhimself. Similarly, a body corporate, which is the aggregate of all itsmembers, cannot make profit out of itself.
According to the constitution of the Association (vide sections 16 and~24 of Cap. 207) a loan to a member does not stand on the same footingas the investment of surplus funds. The former is given in furtheranceof the objects of the Association. There is a distinction between a receiptof interest by a body of persons trading with an outsider and an internalreceipt by a body from any of its own members. The latter, being de-rived from members and distributed to members only, is a mutual matter.All the members of the association belong to a class and are entitled
I. T. G. 217.* 6 I.T.G. 326..
31. T. C. 385.-i • – V.s 11 T. C. 814 at 822.
2 T.C. 460.'• 16 T. C. 430.
1 10 T. C. 142.
KEUNEMAN J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax. 491
to the same privileges. Payments made by a member either by way ofsubscription or for enjoyment of the privilege of membership go to thecommon fund and are distributed according to the rules, among themembers exclusively. There is thus mutuality notwithstanding the factthat the benefit of the payment of interest made by one or more membersdoes not accrue to the individuals paying but to a class as such. Wherethere is mutuality there can be no profit. For test of mutuality, seeJones v. The South-West Lancashire Coal Owners’ Association, Ltd. (supra)
When a loan is given to a member in distress the corporation is merelyliving the life allowed it under the Ordinance. The interest that- issought to be taxed is merely an accretion derived from the internaloperations of the Association. It cannot be treated as an income from asource ; enrichment from within is not income from a source.
The principle underlying the decision in Styles’ case (supra) can beeasily extended to cover the present case. Municipal Mutual Insurance-Ltd. v. Hills (supra) deals chiefly with insurance cases and not with allmutual concerns. All the relevant Indian cases are reviewed in ThEnglish and Scottish Joint Co-operative Wholesale Society, Ltd. v. TheCommissioner of Income Tax, Madras (supra). The Mylapore case (supra)is exactly in point. It has not been overruled in India, nor is there anyother case taking a different view. See also Sunderam on Income Tax(3rd. Ed.), pp. 245-256.
E. G. P. Jayetilleke, K.C., in reply.—Municipal Mutual Insurance, Ltd.v. Hills (supra) is the leading case on what a mutual concern is. The testof mutuality appears in Lord Macmillan’s judgment, The term “profits”is defined in The Mersey Docks and Harbour Board v. Joseph G. Lucas 'as incomings after deducting the expenses of earning and obtaining them.
Cur. adv. vult.
April 25, 1940. Keuneman J.—
This is a case stated by the Board of Review. The Commissionerassessed the respondent, The Public Service Mutual Provident Associa-tion, for the year 1937-1938 in respect of three items of interest, namely,
on Rs. 74,954, unsecured loans to members, (2) on Rs. 51,764,secured loans to members, and (3) on Rs. 12,867, loans to Governmentand Banks. The total tax payable was assessed at Rs. 3,025. Respond-ent admitted liability on item (3), but disputed his liability under items
and (2), and appealed to the Board of Review. That body upheld thecontention of the respondent and ordered that the assessment should becorrected by the deletion of items (1) and (2). The tax payable was thusreduced by the sum of Rs. 2,745.80. The matter now comes before thisCourt.
The respondent is a body incorporated under Chapter 207 of theLegislative Enactments (Ordinance No. 5 of -1891 and subsequent enact-ments). The general objects of the corporation appear in the preambleand in section 3, namely, “ to promote thrift, to give relief to the membersin times of sickness or distress, to aid them when in pecuniary difficulties,and to make provision for their widows and orphans ”. Section 22provides for the vesting of property in the corporation; section 27
1 2 R. 8 A. C. 891.
492 KEUNEMAN J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax.
provides that the corporation may hold property movable or immovable ;section 24 makes it lawful for the Committee of Management to placethe whole or any part of the surplus funds belonging to the corporationand not required for loans, advances, and other current expenses, in fixeddeposit in the local banks, or to invest the same in certain Governmentor Municipal securities ; and section 16 provides for the making of rulesat any general meeting of the Association.
The rules of the Association have been put in—document A. Theseprovide, inter alia,—
for the grant of loans to members up to one-half of the amount
standing to their credit in the books of the Association (Chapter
, Rule 12) ;
for the grant of loans for the purpose of relieving members at a
time of sickness or distress, or of aiding them in pecuniarydifficulties, to the extent of either one month’s or two months'salary or pension according to the standing of the member(Chapter I., Rule 13) ;
for the grant of loans to members on the security of landed property
up to one-half of the appraised value of the lands (Chapter II..Rules 1 and 4).
Each of these classes of loans carries interest at six per centum perannum.
The Board of Review, by a majority decision, held that the respondentAssociation was a body of individuals banded together for mutual help,that the loans to members were in furtherance of the objects of theAssociation and advanced out of the common fund formed by thecontributions of all the members, that the interest from loans to memberswas earned by the mutual fund, and that this sum (less expenses) wasdivided between the members in their capacity of members or contributorsto the mutual fund (from which the loans were made), and not in anycapacity analogous to that of shareholders of a limited liability tradingcompany. The Board depended mainly on the decisions in three cases,namely,
The New York Life Insurance Co. v. Styles1;
Board of Revenue, Madras v. The Mylapore Hindu Permanent Fund,Ltd *; and
The English and Scottish Joint Co-operative Wholesale Society, Ltd.v. The Commissioner of Income Tax, Madras
The case most nearly related to the present one is the Mylapore case,Where a mutual benefit society registered under the Companies’ Actshad its share capital subscribed entirely by its members by way ofperiodical payments, and the income of the fund was derived chieflyfrom interest earned on overdue subscriptions or on loans given exclu-sively to its members, who were entitled under the rules to take loans,and also from interest from outside investments with banks. Theprinciple enunciated in this case is that income to be taxable must comefrom outside and not from within, and that the fact that the Fund is a
» 2 T. C. 400.• 1 I.T. C. 217.
* 3 r.T C. 385.
KEUNEMAN JPublic Service Mutual Prov. Assn. t>. Com. of Income Tax. 493
legal entity for certain purposes does not matter, and that a personcannot make a profit or loss out of himself. It was held therefore thatinterest obtained from members was not taxable, although interest■derived from investments in banks was taxable.
Ramesam J., who delivered the judgment of the Court, held that thiscase was governed by the case of The New York Life Insurance Co. v.Styles (supra).
The Mylapore case would be of some authority but for one infirmityinherent in it. In a later case, namely, The Madura Hindu PermanentFund, Ltd. v. The Commissioner of Income Tax, Madras1, it was held,in considering the Mylapore case, that Styles’ case had no applicationto it, and that the Mylapore case could not be based upon it. RamesamJ. himself admitted that the actual decision in Styles’ case did not applyto the Mylapore case, but he added that the Mylapore case was notwrongly decided, apparently on the ground that the observations madeby their Lordships in Styles’ case supported the result arrived at. Inthe circumstances, I think it is necessary for us to consider Styles’ case,and to see whether the reasoning in that case causes us to arrive' at thesame conclusion. I may add that the same criticism applies to the otherIndian case relied upon by.the Board of Review, namely, The Englishand Scottish Co-operative Society case.
I shall next consider Styles’ case. A mutual life insurance companyhad no members other than the holders of participating policies, towhom all the assets of the company belonged. At the close of each yearan actuarial valuation was made, and if the aggregate receipts of thecompany were more than the expenses and the estimated liabilities,the surplus was divided between the policy-holders who received apremium in the shape of either a cash reduction from future premiumsor a revisionary addition to the amount of their policies. It was heldthat so much of the surplus as arose from excess contributionsof the participating policy-holders was not profit assessable to incometax.
I am of opinion that the principle decided in Styles’ case is, as statedin the judgment of Lord Watson, “When a number of individuals agreeto contribute funds for a common purpose, such as the payment ofannuities or of capital sums -to some or all of them, on the occurrence ofevents certain or uncertain, and stipulate that their contributions, so faras not required for that purpose, shall be repaid to them, I cannotconceive why they should be regarded as traders, or why contributionsreturned to them should be regarded as profits. ” Similarly, LordHerschell says, “ The members contribute for a common object to a fundwhich is their common property ; it turns out that they have contributedmore than is needed, and therefore more than ought to have been con-tributed by them for this purpose, and, accordingly, the next contributionis reduced by an amount equal to their proportion of the excess. I amat a loss to see how.this can be regarded as a “ profitJ> arising or accruingto them from a trade or vocation which they carry on. ”'
1 6 /. T.C 326 at 332.
36-
494 KEUNEMAN J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax.
In the later case of Municipal Mutual Insurance, Ltd. v. Hills1 LordMacmillan laid down the principle of Styles’ case as follows : —
“The principle on which the surpluses arising in the conduct of amutual insurance scheme are not taxable as profits is now well under-stood. Thie essence of the fhatter is that a number of persons who areexposed to some contingency, whether the inevitable contingency ofdeath or such possible contingencies as fire, employees’ claims, marinecasualties- or the like, associate themselves together as contributorsto a common fund on the footing that if the contemplated contingencybefalls any contributors he or his representatives shall receive a com-pensatory payment out of the common fund proportional to hiscontribution. The scale of contributions or premiums is fixed onexperience and estimates. If it is found to yield more than enoughto satisfy the claims that emerge, the contributors receive the entirebenefit in the shape of bonuses, reduction of future contributions orotherwise. As the common fund is composed of sums provided bythe contributors out of their own moneys, any surplus arising aftersatisfying claims obviously remains their own money. Such a surplusresulting merely from miscalculation or unexpected immunity cannot-in any case be regarded as taxable profit. ”
In my opinion, the present case has features which are not possible toreconcile with the Styles’ case, as so interpreted. The present appealdoes not deal with the question of any surplus remaining over as theresult of miscalculation or unexpected immunity. What takes place inthe case of our Society is that money is lent to members at six per cent,interest. It is clear that the volume of these transactions is large, andfor the year in question-in this case a sum of more than two million rupeeshas been so loaned to members. It is difficult to resist the conclusionthat the Society carries on a business with its members in respect of theseloans, in point of fact a bigger business than with the Government andthe Banks. Can the return received by the Society from this businessby way of interest be regarded as otherwise than a taxable profit ?
In this connection I may cite a dictum of Rowlatt J. in Jones v. TheSouth-West Lancashire Coal Owners’ Association, Ltd.'.
“ The principle laid down in the New York Insurance Company case
is that no one can make a profit out of himselfIt is true
to say that a person cannot make a profit out of himself, if what ismeant is that he may provide himself with something at a lesser costthan that at which he could buy it, or if he does something for himselfinstead of employing somebody to do it. He saves money-in those cir-cumstances, but he does not make a profit. But a company can make aprofit out of its members as customers, although its range of customersis limited to its shareholders. If a railway company makes a profitby carrying its shareholders, or if a trading company by trading withits shareholders—even if it is limited to trading with them—makes aprofit, that profit belongs to the shareholders, in a sense, but it belongsto them qua shareholders. It does not come back to them as purchas-ers or customers. ”
.16 T. C. 430.
111 T. C. 814. at 822.
KEUNEMAN J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax. 495
Vide also The Liverpool Com Trade Association, Ltd. v. Monks1 wherea similar point was decided.
With respect, I do not think that in the case of a Society doing businesswith its own members in the way of loans, and earning interest on suchloans to members, there is present the mutuality which existed in Styles’case. I cannot distinguish between the present case and that of a railwaycompany carrying its own members, or a trading company selling to itsown members, and making a profit thereby; and with all deference.I cannot see any decision in Styles’ case or in the subsequent casesdecided in England, which makes me come to a different conclusion.I think that the amount earned by the Society as interest from loansto its members is a taxable profit obtained from a business.
It was strenuously argued by counsel for the respondent that becausethe object of the Society was to give loans to members, and because theloans were obtained by virtue of their membership, therefore all interestreceived was to be regarded as an internal accretion, and that the elementof mutuality was established. I do not think this argument can besustained. In my opinion, the interest was paid by the member quaborrower, and the interest paid helped to swell the resources of the wholebody of members, qua members. There was not that mutuality whichexists between members who pay contributions for a common purposeand receive back the excess after the deduction of necessary expenditure.In the latter case the money is paid and received back in only onecapacity, namely, that of members. In other words the members arereceiving back what has always been their own, and that cannot beregarded as a profit.
Counsel for the respondent also relied on Jones’ case, and in particularon the dictum of Rowlatt J. :
“ The broad principle was there (i.e., in Styles’ case) laid down that,if the interest in the money does not go beyond the people or the class ofpeople who subscribed it, then, just as there is no profit earned by thepeople subscribing, if they do the thing for themselves, so there is noneif they get a company to do it for them. ”
It was argued that the interest earned here was earned from membersand enured to the benefit of members of the same class. I do not thinkthat is the true interpretation of the words. Rowlatt J. was dealingwith the possible distinction between the body of members and thecorporation. What this case established, was that where surpluses wereavailable after deduction of expenditure from the contributions of themembers, it did not matter whether these surpluses were paid backimmediately or carried to a fund the benefits of which would be availableto members who joined subsequently and who had not made the originalcontributions. But the fundamental facts of that case. were that thecontributions were originally made by the members qua members, andthe benefits of the fund were available to them subsequently in the samecapacity, and the principle in Styles’ case was held to be applicable.No doubt the principle enunciated in Styles’ case may be regarded, as therespondent says, as carried one step further, but I do not think thatstep has been taken in the direction which the respondent contends for.
1 16 T. C. 430.
496 CANNON J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax.
I am accordingly of opinion that the interest obtained both in the caseof the secured loans and of the unsecured loans is a taxable profit. Iallow the appeal, set aside the order of the Board of Review, and restorethe items which have been deleted by the Board.
The appellant is entitled to the costs of appeal.
Cannon J.—
This is a case stated by the Board of Review under the Income TaxOrdinance, No. 2 of 1932 (s. 74) for the opinion of this Court as to whetherthe Public Service Mutual Provident Association is liable to pay income;ax in interest received from the members of the Association on the loansadvanced to them by the Association. The Association appealed to theBoard of Review against the decision of the Income Tax authorities toassess this interest for taxation. The Association contended that theAssociation is not a business concern and that the loan transactions wereoetween the members of the Association themselves in pursuance of theprovident objects of the Association on a mutual basis, in that the interestpaid by the members who took loans was returned to the members bybeing distributed as a dividend to the account of every member ; andthat therefore the interest derived from the loans did not come within thestatutory definition of profits—Ch. 188 Sec. (6).
The Board by a majority upheld the objection of the Association andupon the application of the Commissioner stated a case for the opinionof this Court, the question for decision being whether interest derivedfrom loans to members constitutes taxable profits or income under theIncome Tax Ordinance.
The material facts set forth in the case stated are as follows : —
“ The Public Service Mutual Provident Association, which is abody corporate constituted by Ordinance No. 15 of 1891, Chapter 207,was assessed under the Income Tax Ordinance, 1932, for the Year ofAssessment 1937-1938, as being liable to pay Income Tax on a totalinvestment income of Rs. 139,585 which included a sum of Rs. 126,718being the amount of interest derived by the Association from loans tomembers, in the year preceding the year of assessment. The taxpayable on this amount of interest (if the Association is liable to paytax on it) is Rs. 2,745.80. The tax payable on the total investmentincome of Rs. 139,585 is Rs. 3,025.80. The amount of the tax indispute on this appeal is the said sum of Rs. 2,745.80.
The Association was constituted for the general objects of promotingthrift, of giving relief to members in times of sickness or distress, ofaiding them when in pecuniary difficulties and of making provisionfor their widows and orphans—section 3. Rules have been framedby the Association -under the powers given by section 16. Underthe Rules the Committee of Management may grant loans to a memberto the extent of one-half of the nett amount standing to the credit ofsuch member in the books of the Association. The Association canalso make loans to members on the security of landed property to anamount not exceeding one-half of the appraised value of the propertyInterest is payable by members on both types of loan made to them bythe Association at 6 per cent, per annum.
CANNON J.—Public Service Mutual Prov. Assn. v. Corn, of Income Tax. 497
The accounts of the Association, for the relevant period, show thatRs. 2,114,850 had been lent to members and Rs. 633,026 had beeninvested in Government Securities and Fixed Deposits in variousBanks. Of the total loans to members, Rs. 822,054 had been lent tomembers against mortgages of landed property. Of the total sum ofRs. 126,718 received as interest from members Rs. 51,764 was theinterest from secured loans.
No question as to the liability of the Association to pay income taxon the income derived from the investments in Government Securitiesand Fixed Deposits had been raised ; it admits its liability to pay taxon that income.
The Association, however, disputed its liability to pay tax on thesum of Rs. 126,718. ”
For the Income Tax authorities, Mr. E. G. P. Jayatilleke, K.C., theSolicitor-General, pointed out that under the Rules made by the Associ-ation requiring interest at 6 per cent, to be paid by members for loans,such of the Rules as deal with the lending of money to members onmortgage – do not stipulate that the mortgagee shall be in pecuniarydifficulties. The lending of money on interest forms a material part ofthe activities of the Association, the loans totalling Rs. 2,114,850 for theyear in question, those secured bringing in interest a sum ofRs. 51,764 and those not secured an amount of Rs. 74,954. Counselcontended that as the interest earned was distributed not only to thosewho paid it but also to the other members, there was no mutuality asbetween those members who paid and those who received. Memberswere not compelled by the Rules to borrow, and as only some of themtook up loans, those who did not do so nevertheless shared in the incomederived from the interest to which they were not contributors. Suchincome therefore became profit liable to taxation. He relied uponMunicipal Mutual Insurance, Ltd. v. Hills1 and Liverpool Com TradeAssociation, Ltd. v. Monks.'
Mr. H. V. Perera, K.C., for the Association took the point that theAssociation was a body of persons distinct from a trading company andsubmitted that section 48 of the Income Tax Ordinance had in that caseno application to the Association. Section 48 reads : —
“ The profits of a company from transaction with its shareholderswhich would be assessable if such transactions were with persons otherthan its shareholders shall be profits within the meaning of this Ordi-nance ”.
Counsel next argued that the purpose of the loans was not the makingof a profit but the carrying out of one of the objects for. which theAssociation was formed, namely, to aid its members when in pecuniarydifficulties ; and that since any income which resulted from such money-lending transactions was derived from members and distributed tomembers only, it was a mutual matter and not a business transaction, asit would have been, had the transactions been with non-members. Thefact that some members participated in the income derived from interestbut -did not contribute to that income did not, he submitted, make it a
* 10 r. C. 442.
1 16 T. C. 430.
498 CANNON J.—Public Service Mutual Prov. Assn. v. Com. of Income Tax.
profit for the reason that the income did not come from an outside source.It was, he argued, a mere receipt of money which was an accretion derivedfrom the internal operations of the Association in carrying out one of theobjects of its existence, namely, lending money to members in need toaid them and not to gain profit. It was “ the body of persons ” who weretaxed, but the enrichment of that body by internal functioning of itsoperations, according to its objects, was not income derived from atransaction with the outside world and therefore was a matter of mutualityand not business. The borrowing member took the loan in his capacityas a member, not qua borrower or debtor. Though all members did notavail themselves of the right to. borrow, they were entitled to exercisethat right or privilege and consequently there was mutuality betweenthose who did and those who did not borrow. The income need not goback to the identical members who contributed it ; it was sufficient ifit went to the class of people who did so, namely, all those who weremembers of the Association at the time of the distribution. He reliedupon New York Life Insurance v. Styles', Board of Revenue, Madras v.Mylapore Permanent Fund, Ltd.,2 and Jones v. South West LancashireCoal Owners’ Association, LtdJ. ■ My brother Keuneman has in hisjudgment analysed the ratio decidendi of these and the other cases cited. .
The cases supported Mr. Perera’s contentions generally—that atransaction which is restricted to the members of the Association has thecharacter of a mutual transaction and that there is no necessity for the
income ” to be returned to the identical people who contributed it.The point, however, remains that while the loans made by this Associationare taken from the common fund, the interest is not paid out of a commonfund, and, in my view this fact negatives mutuality—see MunicipalMutual Insurance, Ltd. v. Hills {supra)—and this independently of anydistinction that may be drawn between the Association as a tradingcompany and as a body of persons incorporated for provident purposes.Whether or not the lending of money at 6 per cent, interest to members(as distinct from investments of surplus money) can properly be said tobe carrying out the object of the Association of aiding its members whenin pecuniary difficulties is, in my opinion, arguable, but the legality of theRules permitting this and which were made by the Association is notraised by the case stated. The lending of money is obviously not aminor part of the Association’s activities and the rate of interest chargedcan hardly be characterized as a non-commercial rate. By receivingincome from interest which they do not contribute, though they contri-bute to the common fund from which loans are made, non-borrowingmembers make a benefit at the expense'of the other contributors who doborrow, and I would say that all income derived from such interestconstitutes taxable income of the Association under the Ordinance.
I agree that this appeal should be allowed with costs.
1 2 Tax Cases 460.
Appeal allowed.
3 11 Tax Cases 814.
* I Indian Tax Cases 217.