1. This reference under Section 51 of Act VII of 1918 relates to the assessing of the Mylapore, Hindu Permanent Fund for purposes of income-tax.
2. 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-bolder, subscribes one rupee per shire per mensem and at the end of seven years, draws Rs. 103-8-0 and then he cases to be share-holder (qua that store]. The rate of interest works out at slightly less than that of 6 1/4 per cent, at simple interest. The amount' of Rs. 18-8-0 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 Bund 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 institutions and the interest earned by the share-holders is regarded as the profits of the Fund. One-e;ghth 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 (Rule 85).
3. 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 cent ted oil the first item. As to this item it seems to me that the case is governed by Styles' case in New York Life Insurance Co. v. Styles (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201. The principle of that case is that income to be taxable, must come in from the 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, (pp. 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's case, [Last v. London Assurance Corporation (1885) 10 App.Cas. 438 : 55 L.J.Q.B. 92 : 53 L.T. 634 : 34 W.R. 233 : 50 J.P. 116, was distinguished by Lord Brainwell (P. 396) on the ground that the profits were made and m ant to be made not from its own members but from those it dealt with. There were in that case' two bodies--the share-holders arid the assured. In Styles case (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201 and in the case beforeus the persons dealt with and the participators are identical. To the same effect are Lord Herschell's observation at p. 209 and Lord Macnaughten's at p. 412, where he describes Styles' case; as one Where the business is a mutual undertaking pure and sample. In Equ table Life Assurance Society of the. Unted States v. Bishop (1900) 1 Q.B. 177 : 69 L.J.Q.B. 252 : 48 W.R. 341 : 81 L.T. 693 : 16 T.L.R. 74, the shaire-holders of the Company were entirely different people 'from the members of the Muttial: Insurance body (Vaughan William, L.J., at. p.190).
4. The case of Leeds Permanent Benefit Building Society v Mallanddine (1897) 2 Q.B. 402 : 77 L.T. 122 : 66 L.J.Q.B. 813 : 61 J.P. 675 was strongly relied on by the learned Government Pleader. The judgment of the Divisional Court is reported as Leeds Permanent Benefit Building Society v. Mallandaine (1897) 76 L.T. 650 : 66 L.J.Q.B, 467 : 45 W.R. 501. The learned Judges (Wills and Grantham, JJ.) observed: 'The case of New York Life Assurance Co. v. Styles. (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201 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 : 37 W.R. 346 : 53 J.P. 276 : 58 L.J.Q.B. 224 and no refeirnce was made to Styles' case (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201 either in the judgment of the Court of Appeal on the arguments before it, and the decision of the Court of Appeal is no authority on the point how discussed. In that case a Benefit Bail ding Society consisted of two classes of members (1) Investors each of whom invested one of more sums of 100 and (2) borrowers who do not invest but borrow from the Society on shares or fifth parts of shares and pay as. 6d. per share or 6d. per fifth part of a share pet 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 on 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 Styles' case (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201 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 slims 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. The Cases in Glasgow Corporation Water Commissioner v. Miller (1886) 2 Tax Cas. 131 and Mullingar Rural Council v. Rowles (1913) 6Tax Cas. 85 : 2 Ir. R. 44 relate to the supply of water by the Glasgow Corporation and the District Council of Mallingar and cannot help us in the present case. In Carlisle and Silloth Golf Club v. Smith (1913) 3 K.B. 75 : 82 L.J.K.B. 837 : 108 L.T. 785 : 11 L.G.R. 710 : 6 Tax Cas. 198 : 57 S.J. 532 : 29 T.L.R. 508, Buckley, L.J. says: 'A man cannot make profit or a loss out of himself, and that was the ground of the decision in New York Life Insurance Company v. Styles (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201.'
5. I am, therefore, of opinion that all earnings of the Fund from within are governed by Styles' case (1889)14 App.Cas. 381: 59 L.J.Q.B. 291 : 61 L.T. 201 and are not liable to be taxed.
6. The Government must pay the costs of this reference to the other side. Fee Rs. 250.