1. In this reference three questions have been referred to this Court by the Commissioner of Income-tax. Of these, questions Nos. 2 and 3 have not been pressed. Then question No. 1 remains, that is:
Should this Fund be assessed as a Mutual Benefit Society or as a Company?
2. The Commissioner of Income-tax has decided that the Fund is not a Mutual Benefit Society and is therefore not entitled to the benefit of the ruling of this Court reported in Board of Revenue v. Mylapore Fund ILR (1923) 1(SB).
3. In the main this question is a question of fact and this Court will not differ from the finding unless that finding is vitiated by some error of law. The chief contention of the learned vakil who appears for the Fund is that the Commissioner has radically misunderstood the constitution of the Fund as set out in its Memorandum of Association and its Articles.
4. The point at issue is whether the Fund is a society constituted essentially for the mutual benefit of its members or whether it is an ordinary money lending bank engaging in money lending with a view to earning profit for distribution among its shareholders. A legal definition of a Mutual Benefit Society has not been set out in any statute and we do not attempt such a definition here as it is not necessary. The claim put forward here on behalf of the Fund is that it is of the same nature and constituted on the same footing as the New York Life Insurance Co. in the reported case of The New York Life Insurance Company v. Styles (1889) LR 14 AC 38l and as the Mylapore Hindu Permanent Fund in the case reported in Board of Revenue v. Mylapore Fund ILR (1923) M 1(SB). If that claim is substantiated, then by force of these rulings the present fund will be Mutual Benefit Society. We shall therefore examine that claim.
5. The New York Life Insurance Company was founded on principles of Mutual Life Insurance. Two sorts of policies were issued, participating policies and non-participating. There were no shares, but the holder of every participating policy became ipso facto a partner while the holder of a non-participating policy was a mere creditor, without any interest in the assets or liabilities of the Company. The rate of premium for participating policy holders was calculated from time to time at a figure sufficient to cover the probable disbursements. Then an account was taken of the transactions of the company and the excess, if any, of premiums received over expenditure was returned or repaid to the members. The essential condition in the constitution of this company was that the contributions of the members so far as they were not required for the common purpose of the company should be repaid to them; that is, the aim of the company was not to make a profit for distribution to members but to make no profit; any realisation of profit meant that the purpose of the company had so far been imperfectly fulfilled because too large a contribution had been levied. The return of such profit, if it could be called profit, to the members was merely a return to them of the excess of contribution which had been levied from them and any dividend, if it can be called a dividend, was paid to them not as shareholders but as policy holders. In the report of that case, at p. 411, Lord Macanawghten says:
What is to become of the surplus if everything goes right? The practice is to take an account every year of assets and liabilities and to give the insured the benefit of the surplus either by way of reduction of premium or by way of addition to the sum insured. It can make no difference in principle whether the surplus is so applied or paid back in hard cash. In either case it is nothing but the return of so much of the amount contributed as may be in excess of the amount really required. I do not understand how this excess can be regarded from any point of view or for any purpose as gain or profit earned by the contributors.
That this was the principle underlying this decision is also the view adopted by Rowlatt, J., in Liverpool Corn Trade Association v. Monks LR (1926) 2 KB 110, and it has been applied to a similar case Thomas v. Richard Evans & Co. and Jones v. South West Lancashire Coal Owners' Association LR (1927) 1 KB 33, where the company was an association founded solely for affording indemnity to its members against compensation in respect of fatal accidents to workmen. In the case of the Mylapore Hindu Permanent Fund ILR (1923) M 1, the learned Judges held that it was on all fours with the New York Life Insurance Co., since the income did not come from outside, but from inside, and was therefore not taxable. There the capital was made up solely of investments by members, and the income was derived from interest earned on loans to members. The essence, of the Society was mutuality and the members and constituents were one and the same.
6. Now we have to see whether the constitution of the present company is at all on those lines of mutuality. Its object as set out in the Memorandum of Association is 'to enable persons to save money' and 'to secure loans at favourable rates of interest.' This is a perfectly general object and there is no hint that those who are to be enabled to save money or to secure loans are confined to the members of the company, or that the essence of the object is the low rate of interest, so that, for example, the purpose aimed at is not profits but a lowering of the rate of interest as far as possible. The stated object of this Fund is not incompatible with a purely business effort to make as much profit as possible out of lending money on favourable rates of interest. The capital paid up or subscribed is made up of shares limited in number and in value, and the shareholders and subscribers constitute the controlling authority while membership is restricted to such shareholders or subscribers. Outside these members is a class called monthly depositors who are, by a by-law under Article 34, practically on the same footing as subscribers but are not subject to the losses and liabilities of the Fund. Here the principle of mutality, if it existed before at all, is entirely abandoned. Loans are granted to any one and are of two kinds, 'term loans' restricted to subscribers and monthly depositors and 'temporary loans' to any constituent. There is no special concession whatever which is confined to shareholders and subscribers. They are exactly on the same footing as outsiders for example, monthly depositors. Profits are distributed in the way of dividends in the ordinary business fashion and are expressed to be 'out of the net profit arising from the business of the Fund'. Sec Article 55(1-a). There is no suggestion that the dividends paid to the shareholders and subscribers are mere by way of return of their original capital subscribed and, as we noticed, there is no hint that the aim of the company is not to make a profit by lending money on interest. We find therefore in the constitution and objects of this fund no purpose of mutual benefit, no society of persons banded together to lend money to each other, no benefit to be obtained by, or derived from, membership alone. The constitution of this fund therefore differs fundamentally from that of the New York Life Insurance Co., or the Mylapore Hindu Permanent Fund, and the claim of the fund that they are entitled by virtue of. the rulings in those cases to be exempt from taxation in regard to any of their profits cannot be sustained. The Commissioner had made no mistake in holding that there is here no mutal benefit society and that the net profits of the fund are taxable in full.
7. We must therefore answer this reference that this Fund should be assessed as a Company. The Fund will pay the costs of this reference which we fix at Rs. 250.