John Beaumont, Kt., C.J.
1. In this case the Commissioner asks for our ruling as to whether the surplus of the calls or premiums and further sums mentioned in Article 5 of the articles of association of the assessee company received from its members over the expenditure of the year 1929-30 is liable to be assessed to income-tax as profits or gains of business under Section 6 (iv) and Section 10 of the Indian Income-tax Act, XI of 1922. Then he asks whether such income or any part thereof is liable to be assessed to income-tax under any other and if so under which of the provisions of the said Act.
2. Now, apart from one article, to which I shall refer later, it is quite clear that the assessee company is what is called a Mutual Insurance Company. The company was established by various millowners in Bombay for the purpose of insuring themselves against claims under the Workmen's Compensation Act. It was laid down by the House of Lords in the case of New York Life Insurance Company v. Styles (1889) 14 App. Cas. 381 that the premium income derived by a mutual insurance company from its own members was not profit liable to income-tax, the general principle being that if a body of persons choose to contribute a sum of money for their own purposes, any surplus of that sum remaining after expenses have been paid cannot be regarded as profit. This Court recently held in a case, Commissioner of Income-tax v. National Mutual Life Association of Australasia (1031) 33 Bom. L.R. 807 that the principle of Styles' case applied to cases under the Indian Income-tax Act. The only distinction between the present case and the one of Commissioner of Income-tax v. National Mutual Life Association of Australasia lies in article 88 of the assessee company's articles of association. That article provides that the ' Directors may at any time after the company shall Eave carried on business for a period of at least three years ascertain or cause to be ascertained the profits earned by the company during such period.' From this it appears that the directors are not bound to take an account, but they may take an account after the company has carried on business for three years. The article further provides that the ' profits of such period may be ascertained by the directors in such manner as they think fit,' and then it says: ' The divisible profits of the company's business for such period shall be divisible amongst those members only who shall have become members of the company during the first two years after the date at which the oompany shall have become entitled to commence business in such manner and in such proportion as the directors may determine and the directors may divide and distribute the same accordingly.'
3. The company became entitled to commence business from June 30, 1924, and therefore if that article is acted upon, apparently the profits ascertained in this period, whatever it may be, are, according to the terms of the article, divisible in the discretion of the directors amongst persons who were members of the company before June 30, 1926, that is, amongst a class of members. There is no finding that the article has been acted upon, and we are told it has not been acted upon. The Advocate General has maintained that having regard to article 88 the contributions made by all the members may be in a certain event distributed amongst a class of members and therefore that class of members is making a profit, consequently the company must be treated as making a profit, so that the principle of Styles' case does not apply, and he relies on the case of Municipal Mutual Insurance Ltd. v. W.J. Hills (1930) 9 A.T.C. 475 In that case there was an insurance company which carried on three classes of business, namely, fire insurance business, miscellaneous business and employers' liability business. The last two classes of business were carried on not only with members but also with outsiders, and there was a provision in the articles of association that, on a winding up of the company, the assets were to be distributed between the fire policy holders only. Mr. Justice Eowlatt held that the company was making a profit and the principle of Styles' case did not apply. There are two distinctions between that case and the present case; one is that in that case two businesses, miscellaneous business and the employers' liability business, were carried on with outsiders, whereas in the case of the assessee company no business is conducted with outsiders. The second distinction is that in the English case the assets were divisible' on a winding-up among a particular class of shareholders, whereas in the present case there is no such provision. In my opinion the mere existence of the power given to the directors by Article 88, which has not been and may never be exercised, cannot affect the character of the funds held by the company, which funds have been contributed by the members, and as things are at present, will on a winding up come back to the members, I think, therefore, the principle of Styles' case applies to the assessee company, The question whether the principle of Styles' case would apply if on a winding up of the company some of the members only were to get the assets contributed by all does not really arise and I reserve my opinion upon it. Therefore, we answer the questions by saying that the surplus of the calls or premiums and further sums mentioned in Article 5 of the articles of association received by the company from its members over its expenditure of the year is not liable to be assessed to income-tax as profits or gains of business under Sections 6 (iv) and 10 or any other section of the Indian Income-tax Act, XI of 1922.
4. The Commissioner to pay the coats of this reference, which is to be taxed as on the Original Side scale.
5. I agree. The assessee company is a mutual insurance company, the members of which have, under its articles of association, to pay to it all premiums in respect of insurance effected by them, and have also to pay further sums required for the purposes of the company. The sum now sought to be taxed by the income-tax authorities is the sum of Rs. 34,973, which is the surplus of the premiums and other payments over the expenditure of the year ended June 30, 1928. It is obvious that this sum which the company is holding is the property of the members and is the result of the contributions made by them for the purposes of the company. It is clear on the authorities that contributions made by members in such cases and returned to them cannot be regarded as profits liable to be assessed to income-tax. What is to be regarded in such cases is the source from which the fund is derived, and to be taxable the income must come in from outside. But in this case the surplus ia the hands of the company has not in fact been returned to or distributed among the members, and it is difficult to see how it can be regarded as the taxable profits of the company. Article 88 of the articles of association is relied upon, but it simply gives a power to the directors to make a division at any time three years after the company has commenced to carry on its business, and it is admitted that in fact such power has not been exercised. It is argued by the Advocate General that under Article 88 the fund in the hands of the company is divisible only among a particular class of members and not among all members of the company and therefore the case does not fall within the principle of Style's case. It is unnecessary to consider this point, as, in fact, no division has taken place, and I reserve my opinion on it. On the facts before us I am clearly of opinion that the questions must be answered in the manner proposed by my Lord the Chief Justice.