Inland Revenue Commissioners v Ayrshire Employers Mutual Insurance Association Ltd

[1946] 1 All ER 637

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(Judgment by: Lord Thankerton)

Between: Inland Revenue Commissioners
And: Ayrshire Employers Mutual Insurance Association Ltd

Court:

Judges:
Lord ThankertonLord MacMillan
Lord 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

Hearing date: 25 February 1946
Judgment date: 29 March 1946

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Judgment by:
Lord Thankerton

My Lords, this appeal arises out of an assessment to income tax made on the respondent association for the year ended 5 April 1936, on the sum of £13,492, being the estimated surplus arising in that year from the transactions of the association with its members. It is not disputed that the assessment was made on the footing that such surplus constituted profits chargeable to income tax by virtue of the Finance Act, 1933, s 31, and could not otherwise be justified. On appeal, the Special Commissioners affirmed the assessment, and, on the requisition of the association, stated a case for the opinion of the Court of Session, the question of law being:

'Whether the surplus arising from transactions of insurance of the association with its members is assessable to income tax by virtue of the said sect 31(1) of the Finance Act, 1933.'

The case was heard by the First Division of the Court of Session, by whose interlocutor, dated 20 July 1944, the appeal was sustained and the question of law submitted for their opinion was answered in the negative. Hence the present appeal by the Crown.

It had been settled in a series of cases in this House, beginning with New York Life Insurance Co v Styles and ending with Municipal Mutual Insurance Ltd v Hills, that the surpluses arising out of transactions of purely mutual insurance between an association and its members, or between an association as insurers and the policy holders as the insured, were not assessable to income tax. The ground of these decisions is well summarised by Lord Macmillan in the Municipal Insurance case as follows (16 Tax Cas 430, at p 448):

'The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund: in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial.'

and, earlier on the same page, he stated:

'As the common fund is composed of sums provided by the contributors out of their own moneys, any surplus arising after satisfying claims obviously remains their own money.'

It may be added, however, by way of contrast, that such surpluses were held liable to be included in computing profits for the purposes of corporation profits tax, by virtue of the express provisions of the Finance Act, 1920, s 53(2)(h), the material part of which provides:

'... profits shall include in the case of mutual trading concerns the surplus arising from transactions with members ....'

The Crown concedes that the respondent association is a typical mutual insurance society, indemnifying its members in respect of claims by their workmen for injuries arising out of accidents or alleged accidents, and its members being the only contributors and the only participators, and that the surpluses arising on its transactions would not have been assessable to income tax in view of the decisions already referred to, but the Crown maintains that such liability is imposed by the provisions of the Finance Act, 1933, s 31, the material part of which enacts as follows:

'31(1)

In the application to any company or society of any provision or rule relating to profits or gains chargeable under Case I of Sched. D (which relates to trades) ... any reference to profits or gains shall be deemed to include a reference to a profit or surplus arising from transactions of the company or society with its members which would be included in profits or gains for the purposes of that provision or rule if those transactions were transactions with non-members, and the profit or surplus aforesaid shall be determined for the purposes of that provision or rule on the same principles as those on which profits or gains arising from transactions with non-members would be so determined.

(3)

It is hereby declared that in computing, for the purposes of any provision or rule mentioned in sub-sect (1) of this section, any profits or gains of a company or society which include any income which is chargeable to tax by virtue of the foregoing provisions of this section, there are to be deducted as expenses any sums which:

(a)

represent a discount, rebate, dividend, or bonus granted by the company or society to members or other persons in respect of amounts paid or payable by or to them on account of their transactions with the company or society, being transactions which are taken into account in the said computation; and

(b)

are calculated by reference to the said amounts or to the magnitude of the said transactions and not by reference to the amount of any share or interest in the capital of the company or society.

(7)

In this section the expression "company or society" means any incorporated company or society whether incorporated in the United Kingdom or elsewhere ....'

On behalf of the appellants counsel submitted three points of construction of sub-sect (1) of the section. He maintained, in the first place, that the word "members"-once used in the sub-section-should not be construed as confined to members of the company or society in the strict sense, but should be held to include contributor-participators in an exclusively mutual transaction of insurance, such as was the case in Municipal Mutual Insurance Ltd v Hills, in which the members of the company were not parties to the mutual insurance, nor entitled to participate in any surplus arising thereon. In the second place, counsel contended that the phrase, "if those transactions were transactions with non-members" did not mean that the two sets of transactions could be treated as identical, but only involved that, though the respondent association had no transactions with non-members, the transactions with their members were not to be treated as mutual transactions, and any surplus arising from them would be taxable profit. In the third place counsel contended that, on a proper construction, the sub-section provides that the surpluses are to be deemed to be profits.

Counsel's first contention appears to me to be completely negatived by the definition of "company or society" in sub-sect (7), which limits the members referred to in sub-sect (1) to members of an incorporated company or society, and cannot include contributor-participators in an exclusively mutual insurance scheme, who are not members of the incorporated company or society, who are the insurers. These contributor-participators would, accordingly, be included among the non-members referred to in the sub-section, and this would apparently create havoc in the second contention. In other words, the class of mutual insurance concerns exemplified by the Municipal Mutual Insurance case will remain exempt from liability to assessment to income tax, and their transactions would fall to be included among "transactions with non-members," and the companies or societies who are struck at by the sub-section would hardly object to having their transactions treated as if they were transactions of that class of non-members.

It was hardly surprising that counsel stated that, if he was wrong in his first contention as to the meaning of "members," he was not prepared to say that he could succeed in the appeal. Accordingly, I find it unnecessary to deal further with his contentions, and I am of opinion that the appeal fails, and should be dismissed with costs, the judgment of the First Division of the Court of Session being affirmed.