Inland Revenue Commissioners v Ayrshire Employers Mutual Insurance Association Ltd
[1946] 1 All ER 637(Judgment by: Lord MacMillan)
Between: Inland Revenue Commissioners
And: Ayrshire Employers Mutual Insurance Association Ltd
Judges:
Lord Thankerton
Lord MacMillanLord Wright
Lord Simonds
Lord Uthwatt
Subject References:
taxation
Other Taxation
Income Tax
Mutual insurance association
Surplus arising from transactions with members
Whether assessable
Legislative References:
Finance Act, 1933 (c 19) - s 31(1)
Case References:
New York Life Insurance Co v Styles - (1889), 14 App Cas 381; 28 Digest 59, 300; 59 LJQB 291; 61 LT 201; sub nom Styles v New York Life Insurance Co 2 Tax Cas 460
Municipal Mutual Insurance Ltd v Hills - (1932), 147 LT 62; Digest Supp; 16 Tax Cas 430
Judgment date: 29 March 1946
Judgment by:
Lord MacMillan
(read by Lord Simonds]. My Lords, the respondent association was assessed to income tax on a sum of £13,492 for the year ended 5 April 1936. This sum represented the surplus arising from te association's transactions of mutual insurance with its members. The question of law for determination is formulated in the case stated by the Special Commissioners as follows:
'Whether the surplus arising from transactions of insurance of the association with its members is assessable to income tax by virtue of sect 31(1) of the Finance Act, 1933.'
The Special Commissioners answered the question in the affirmative, but their decision was reversed by the First Division of the Court of Session on appeal. The Crown is now in turn the appellant in your Lordships' House.
The association was incorporated in 1898 as a company limited by guarantee. It has no share capital and its transactions are exclusively with its own members. Its purpose is to insure its members on the mutual principle against liability for injuries to their workmen. The constitution of the association is typical of mutual insurance companies, and its familiar provisions are fully set out in the opinion of Lord Fleming. In a series of well known cases before the enactment of the Finance Act, 1933, this House held that a mutual insurance company was not liable to be taxed in respect of a surplus arising from the excess of premiums contributed over claims met. The ground of these decisions was that such a surplus was not profit within the meaning of the Income Tax Acts, but merely represented the extent to which the contributions of those participating in the scheme had proved in experience to have been more than was necessary to meet their liabilities. The balance or surplus was the contributors' own money and returnable to them. Nothing had been earned and nobody had made a profit. Sect 31(1) of the Act of 1933 was passed after these decisions and no doubt in consequence of them.
Counsel for the appellants with engaging candour submitted that he ought to succeed because, although the sub-section might not in terms fit the case, it was nevertheless manifest that Parliament must have intended to cover it; if it did not cover it, then he could not figure any case which it could cover and Parliament must be presumed to have intended to effect something. I can imagine what he would have said had the case been the converse one of a taxpayer pleading that although the words of the charging enactment covered his case, it was nevertheless manifest that Parliament could not have intended to tax him. With this deprecatory preface counsel endeavoured to attack the decision of the First Division.
The structure of sect 31(1) is quite simple. It assumes that a surplus arising from the transactions of an incorporated company with its members is not taxable as profits or gains. To render such a surplus taxable it enacts that the surplus, although in fact arising from transactions of the company with its members, shall be deemed to be something which it is not, namely a surplus arising from transactions of the company with non-members. The hypothesis is that a surplus arising on the transactions of a mutual insurance company with non-members is taxable as profits or gains of the company. But unfortunately for the Inland Revenue the hypothesis is wrong. It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions. If the transactions are of the nature of mutual insurance, the resultant surplus is not taxable whether the transactions are with members or with non-members.
The argument for the Crown sought to make out that the expression "transactions with non-members" in the sub-section meant transactions not of a mutual character and submitted that a mutual transaction with a non-member was a contradiction in terms. But this is a misconception. There is nothing to prevent a mutual insurance company entering into a contact of mutual insurance with a person who is not a member of the company. The argument will not fit the terms of the sub-section. It is "those transactions," that is, mutual transactions with members, which are to be treated as if they were transactions, that is, mutual transactions, with non-members. But it is unnecessary to elaborate the point, for I find myself in complete agreement with the opinions expressed by the Lord President (Normand) and his brethren, which are as unanswerable as they are admirably lucid.
The legislature has plainly missed fire. Its failure is perhaps less regrettable than it might have been, for the sub-section has not the meritorious object of preventing evasion of taxation, but the less laudable design of subjecting to tax as profit what the law has consistently and emphatically declared not to be profit. I should dismiss the appeal.