Board of Revenue vs The Mylapore Hindu Permanent Fund Ltd.

Ramesam, J.—This reference u/s 51 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 shareholder subscribes one rupee per share per mensem and at the end of seven years draws 102

1/2 rupees and then he ceases to be a shareholder (qua that share). The rate of interest works out at slightly less than 6 1/4 per cent at simple

interest. The amount of Rs. 18 1/2 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 shareholder has to pay interest on the subscription if not paid within the time prescribed by the rules. The

Fund gives loans to the shareholders, divided into ordinary loans and special loans. Occasionally when there are large amounts not borrowed by

the shareholders 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 shareholders 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 shareholders with reference to the number of the shares and the number of

months during which they have held them (rule 85).

It is clear from the above summary of the rules of the Fund that the number of the so-called shareholders 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 shareholders 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 first item. As to this item, it seems to me that

the case is governed by New York Life Insurance Company v. Styles (1889) 14 A.C. 881. 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 (1885) 10 A.C. 438 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 shareholders and the

assured. In Styles'' 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 MACNAGHTEN''S at p. 412 where he describes Styles'' case as one where the business is a

mutual undertaking pure and simple. In Equitable Life Assurance Society of the United States v. Bishop [1900] 1 Q.B. 177 the shareholders 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 [1897) 2 Q.B. 402 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 (1889) 14 AC 381 was not in point as the society is not a mutual society

whereas that Insurance Company was (at p. 652). On appeal the whole argument turned on the application of Clerical, Medical and General Life

Assurance Society v. Carter (1889) 22 Q.B.D. 444 and no reference was made to Styles'' 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 shareholders

in the present case but the difference consists in the fact that the borrowers are not like the shareholders 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 investor. 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 Styles'' case (1889) 14 A.C., 381, 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 (1886) 2 Tax

Oas 131 and Mullingar Rural District Council v. Bowles (1912) 6 Tax Case 85 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. Smith [1913] 3 K.B. 75 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 (1889)

14 A.C. 381.

I am therefore of opinion that all earnings of the Fund from within are governed by Styles'' case and are not liable to be taxed.

The Government must pay the costs of this reference to the other side. Fee Rs. 250.