This reference under Sect. 51 of Act VII of 1918 relates to the assessing of the Mylapore Hindu Permanent Fund, for purposes of Income-tax.
The fund was established in 1872, being registered under the Indian Companies Act of 1866. It then started with 11, 904 shares and gradually increased the shares up to 119, 047 shares. A share-holder subscribes one rupee per share per mensem and at the end of seven years draws 102½ rupees and then he ceases to be a shareholder (qua that share). The rate of interest works out at slightly less than 6¼ per cent. at simple interest. The amount of Rs. 18½ thus earned on each share is described as the guaranteed rate of interest. Other rules reduce the rate earned in case of withdrawal within seven years. A share-holder has to pay interest on the subscription, if not paid within the time prescribed by the rules. The Fund gives loans to the share-holders, divided into ordinary loans and special loans. Occasionally when there are large amounts not borrowed by the share-holders, they may be invested on fixed or current deposits, in outside institutions, such as the public Banks of Madras. The excess of interest earned by the fund over the expenses of the institution and the interest earned by the share-holders is regarded as the profits of the Fund. One-eighth of this goes to the Reserve Fund, three-eighths (subject to a maximum of Rs. 5,000) is divided among the Directors and the rest is partly added to the Reserve Fund and partly distributed among the share-holders, with reference to the number of the shares and the number of months, during which they have held them (R. 85).
It is clear from the above summary of the rules of the Fund that the number of the so-called share-holders is fluctuating, from time to time, the figure 119,047 representing only the maximum limit and that its earnings consist of (1) chiefly interest from the share-holders, either on loans, or on overdue subscriptions, and (2) occasionally, interest from outside investments; so far as the second of these items is concerned, it is conceded on both sides that the amount earned is liable to income-tax and the whole controversy centered on the 1st item. As to this item, it seems to me that the case is governed by New York Life Insurance Company v. Styles. The principle of that case is that income to be taxable must come in, from outside and not from within. The fact that the Fund is a legal entity (for certain purposes) does not matter, for, in the language of Lord Watson (p. 393-4.)
“it represents the aggregate of its members,”
and the members are the participators of its profits and
“I do not think that their complete identity can be destroyed or even impaired by their incorporation.”
Last v. London Assurance Corporation was distinguished by Lord Bramwell (p. 396), on the ground that the profits were made and meant to be made, not from its own members, but from those it dealt with. There were in that case two bodies, the share-holders and the assured. In Style's case and in the case before us, the persons dealt with and the participators are identical. To the same effect, are Lord Herschel's observations at p. 409 and Lord Macnaughten's at p. 412, where he describes Style's case, as one where the business is a mutual undertaking pure and simple. In Equitable Life Assurance Society of the United States v. Bishop(2), the share-holders of the Company were entirely different people from the members of the mutual insurance body (Vaughan Williams, L. J., at p. 190).
The case of Leeds Benefit Building Society v. Mallandaine(3) was strongly relied on by the learned Government Pleader. The judgment of the Divisional Court is reported in 76 L. T. R., 650. The learned Judges (Willes and Grantham, JJ.) observed,
“the case of New York Life Assurance Company v. Styles(4) was not in point, as the society is not a mutual society”
whereas that Insurance Company was (at p. 662). On appeal, the whole argument turned on the application of Clerical Medical, and General Life Assurance Society v. Carter(5) and no reference was made to Style's case, either in the judgment of the Court of Appeal or the arguments before it, and the decision of the Court of Appeal is no authority on the point now discussed. In that case, a benefit building society consisted of two classes of members, (1) investors, each of whom invested one or more sums of £ 100, and (2) borrowers, who did not invest, but borrowed from the society on shares, or fifth-parts of shares and paid 2s 6d., per share, or 6d. per fifth-part of a share, per week, to the fund after the borrowing, this sum being intended to be a discharge of (1) the interest on the loan and (2) the principal. The resemblance between that case and the present one is in the fact, that both the investors and the borrowers participate in the surplus and that the investors are like the share-holders in the present case, but the difference consists in the fact that the borrowers are not like the share-holders and an investor can never be a borrower. It is obvious that the fact, that, while the investors only were the capitalists, the final participators consisted of the investors and borrowers, prevented its being a mutual company. If the real company in that case is regarded as consisting of the investors only, the income was earned from outsiders only and Style's case cannot apply. This must have been the view of the Divisional Court, the borrowers being regarded as outsiders. It is clear that their payments of 2s., 6d. per share, or 6d. per fifth-part of a share, per week, can bear no analogy to the sums of £ 100, contributed by the investors and the final participation of the borrowers in the profits was considered as a bait to them and as a reduction of the interest they pay and not to alter their position as outsiders. Glasgow Corporation Water Commissioners v. Miller and Mullingar Rural District Council v. Rowles relate to the supply of water by the Glasgow Corporation and the District Council of Mullingar and cannot help us in the present case. In Carlisle and Silloth Golf Club v. Smiths Buckley, L. J., says at p. 82:
“A man cannot make a loss or profit out of himself and that was the ground of the decision in New York Life Insurance Company v. Styles.
I am therefore of opinion that all earnings of the Fund from within are governed by Style's case and are not liable to be taxed.
The Government must pay the costs of this reference to the other side: Fee Rs. 250.
K.V.SReference Answered.