The Social Credit Savings & Loans Society Ltd. v. Federal Commissioner of Taxation.Judges:
Gibbs J.: This is an appeal from the decision of a Board of Review confirming assessments made by the Deputy Commissioner of Taxation at Adelaide of income tax payable by the Social Credit Savings and Loans Society Limited (``The Society'') in respect of income derived during two accounting periods being the twelve months ending respectively on 30 September 1967 and 30 September 1968.
The Society was formed, apparently in about the year 1964, by persons who were supporters of the social credit movement and who, sharing the belief held by members of that movement that rates of interest commonly charged for the use of money are too high, decided to form a credit union to whose members money might be made available at reasonable rates of interest. The Society was registered under the Industrial and Provident Societies Act, 1923-1966 (S.A.) and thereby became a body corporate (sec.22). The objects of the Society as set out in r.5 of its rules are as follows -
``The objects of the Society shall be -
a. to assist its members to purchase furniture for a home;
b. to assist its members to pay the expenses of removing household furniture and effects;
c. to assist its members to pay a deposit in respect of the purchase, lease, or securing of any tenancy of a home;
d. to assist its members to defray the cost of painting or affecting any additions or repairs to their homes;
e. to assist its members in reducing or discharging any mortgage on their homes;
f. to assist its members or their dependants in defraying expenses incurred in connection with any accident, sickness or death to or of a member or any of his dependants;
g. to assist its members to discharge any financial liabilities;
h. to make or arrange loans to its members for any purpose;
i. to guarantee loans made by any person to any of the members of the Society for any such purpose;
j. to encourage savings and provide its members with facilities therefor.''
Rule 48 of the Rules provides (inter alia) that loans may be made only to members of the Society and that the total indebtedness of a member shall not exceed $500 or in special circumstances $800 at any one time. In fact, at all material times, the Society made loans only to members. Although, as will be seen, all the members of the Society lent money to it, not all were borrowers from it. At 30 September 1967 the Society had 138 members, 45 of whom did not borrow from the Society, or have any outstanding loan, during the year that ended on that date. The figures at 30 September 1968 were 196 and 66 respectively. About one-quarter of the members never borrowed from the Society at any stage. Not all members who sought loans were granted them, but not many were refused. Loans were usually made to enable the borrower to pay medical bills or other debts or to buy furniture or
ATC 4234household effects. The loans were made without security and interest was charged on the money lent at a flat rate of 4% which amounted to an effective rate of about 7% or 7½%. In a few cases - according to the evidence of the secretary, on possibly two, three or four occasions - the Society, besides making a loan, assisted the borrower to manage his financial affairs; it placed the member on what was called a budget account, and arranged with him to pay a fixed amount of his wage to the Society and for his creditors to accept payment of the debts due to them by instalments. No charge was made to members for this service.
The funds available to the Society, from which loans were made, comprised the paid-up share capital and moneys borrowed by the Society from depositors. Most of the moneys deposited came from members of the Society. By an amendment (registered on 17 May 1967) to r.33 of the Rules of the Society every member of the Society was required to have at least $8 on deposit with the Society but even before that date all members were in fact depositors. In addition wives and children of members were permitted to have savings accounts with the Society and branches of the social credit movement sympathetic to the Society deposited surplus funds with the Society to give it assistance. At 30 September 1967 the respective amounts deposited by 138 members, six wives and children and various associated branches were $11,353, $122 and $1,007. The corresponding amounts at 30 September 1968 were $15,668 (deposited by 196 members), $305 (deposited by three wives and children) and $890 (deposited by the branches). Interest at the rate of 5% was paid to all depositors. The expenses of the Society were small since most of the work involved was done by the secretary free of charge. The Society successfully endeavoured by borrowing and lending money at the rates mentioned to produce a small surplus which it was intended should provide a general reserve to meet bad debts and other contingencies.
The accounts for the year ended 30 September 1967 showed that the amount of interest received from borrowers exceeded the amount paid to depositors by $295. This sum was brought into a receipts and payments account, together with some other small receipts, namely, application fees ($36) bank interest ($5) and expenses recovered ($4). After expenses had been deducted there remained a balance of $237 which was carried to an appropriation account. Similarly in the year ended 30 September 1968 the accounts showed a balance of $278 after expenses had been deducted from receipts comprising the amount by which interest received exceeded interest paid ($390), application fees ($39), bank interest ($12) and budget fees ($2). In its returns the Society showed as assessable income only the amounts received by way of bank interest ($5 and $12 respectively) but the Commissioner has assessed the Society to tax on the respective surpluses of $237 and $278.
The Society's Rules which, as required by the Industrial and Provident Societies Act, 1923-1966 (S.A.), were registered when the Society itself was registered, have since been amended. Rule 134 provides that the Rules may be altered by extraordinary resolution. Extraordinary resolutions for the amendments of the Rules were passed on 12 April 1967 and 10 June 1968 respectively, and the amendments so effected were on 17 May 1967 and 20 February 1969 respectively registered under the Industrial and Provident Societies Act, 1923-1966 (S.A.), sec.12(2) of which provides as follows -
``An amendment of a rule of a society shall not be valid until the same has been registered under this Act, for which purpose two printed copies of the same signed by three members and the secretary shall be sent to the Registrar.''
It was submitted on behalf of the Society that the effect of this section is that once an amendment has been registered it must be treated as having been valid and operative from the date on which the extraordinary resolution for the amendment was passed, but I find it impossible to accept that contention. Section 12(2) provides that an amendment shall not be valid until it has been registered and it follows that an amendment cannot have any effect before the date of its registration. I can see no justification for construing the section so as to give to registration a retrospective effect and to require an amendment to be regarded as having been in force at a date before it was registered, although at that date it was plainly invalid. It follows that the amendments registered on 17 May 1967 were in operation throughout part of the first accounting period and the whole of the second accounting period in question but the amendments registered on 20 February 1969 did not operate during either of those accounting periods.
It is necessary to refer to certain of the rules of the Society, and in some cases to their cases to their amended as well as their original form. Rule 12 provides that shares, which shall be of one class, all ranking equally, shall be of the nominal value of one pound each. Rule 13 in its original form read -
``Every member shall hold at least one share, but no member shall hold shares exceeding the nominal value of five hundred pounds nor shall any member hold more than one-fifth of the shares in the Society.''
By the amendment registered on 17 May 1967 this rule was amended to read -
``Every member shall hold one share.''
By the amendment registered on 20 February 1969 the word ``only'' was added after the word ``share''. Rule 16 in its original form read as follows -
``The funds of the Society shall be applied to carry out the objects of the Society. Any surplus resulting from its operations during a financial year, after providing for depreciation in value of the Society's property or for contingent liability for loss shall at the end of the financial year be applied in payment of dividend on shares and/or as a bonus or rebate of interest paid or due by borrowing members such rebate being based on the business done by such members with the Society and/or as a bonus to any officer or employee; provided that the maximum amount which may be paid to a member by way of dividend in respect of any share held by him shall not exceed five per centum per annum on the amount paid on the share.''
By the amendment registered on 17 May 1967 the second sentence of this rule was amended to read -
``Any surplus resulting from its operations during a financial year, after providing for depreciation in value of the Society's property or for contingent liability for loss may at the end of the financial year be applied in payment of as a bonus or rebate of interest paid or due by borrowing members such rebate being based on the business done by such members with the Society and/or as a bonus to any officer or employee.''
After the amendment effected on 20 February 1969 r. 16 read -
``The funds of the Society shall be applied in carrying out the objects of the Society Any surplus resulting from its operations during a financial year, after providing for depreciation of the Society's property shall be placed in a Reserve Fund for contingent liability for loss. Provided that such Reserve Fund shall not be distributed among members of the Society except in the event of winding up. Provided also that in the event of winding up only members to whom a loan has been made shall share in the distribution of the Reserve Fund.''
Rule 136, in its original form, provided -
``The winding up or dissolution of the Society shall be carried out in accordance with the provision of the Act,''
namely the Industrial and Provident Societies Act, 1923-1966 (S.A.) which by sec.49(2) applied the provisions of the Companies Act (S.A.). By the amendment registered on 20 February 1969 the following words were added to the rule -
``Provided that on winding up, a member shall not in respect of the share held by him be entitled to receive an amount in excess of the amount paid thereon. Any surplus remaining shall be distributed only to members to whom loans have been made.''
Finally, r. 137 provides -
``The shares of the Society shall not be quoted for sale or purchase at any Stock Exchange or in any public manner whatever.''
It is submitted on behalf of the Society that the amounts received by the Society from its members as interest on loans comprised contributions to a common fund in which the borrowers were jointly interested and that the surplus of the fund was not income, or in other words that the so-called principle of mutuality governs the matter. On the other hand, the Deputy Commissioner has made, and supports, his assessments on the basis that the Society is a co-operative company within the meaning of Div. 9 of Part III of the Income Tax Assessment Act 1936 (as amended) (Cth) (``the Act'') and it is convenient first to consider whether the present case does fall with the Div. 9. Section 117 of the Act defines a co-operative company for the purposes of that Division. It is unnecessary to set out the provisions of paras. (a), (b) and (c) of the section which obviously have no application to the present case, but omitting these provisions the section reads as follows -
``In this Division, `co-operative company' means a company the rules of which limit the number of shares which may be held by, or by on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever, and includes a company which has no share capital, and which in either case is established for the purpose of carrying on any business having as its primary object or objects one or more of the following -
(d) the rendering of services to its shareholders;
(e) the obtaining of funds from its shareholders for the purpose of making
ATC 4236loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business.''
The Society, being a company within the definition contained in sec.6 of the Act, and having share capital, can come within the definition contained in sec.117 only if -
(i) Its rules limit the number of shares which may be held by, or by and on behalf of, any one shareholder;
(ii) its rules prohibit the quotation of the shares for sale or purchase at any stock exchange or in any public manner whatever; and
(iii) it is established for the purpose of carrying on any business having as its primary object or objects one or both of the objects specified in paras. (d) and (e).
The second of these requirements is, and has at all material times been, satisfied by r. 137. However, it is doubtful whether the first requirement is satisfied, because it does not appear that r. 13, in any of its forms, limits the number of shares may be held on behalf of, as well as by, a shareholder, and in the form which it assumed from 17 May 1967 to 20 February it is nor clear that it imposes a limitation on the number of shares that may be held rather than lays down a minimum shareholding. It is, however, unecessary to resolve that question because, in my opinion, the third requirement laid down in sec.117 is not satisfied. It seems to me clear that the Society's business did not have as one of its primary objects the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business, within para. (e). It is true that it would have been within the objects of the Society as stated in r.5 of its Rules (particularly in cll. (c), (e) and (h)) to make loans to enable members to acquire land or buildings, although the fact that r.48 limited to $800 the amount of the borrower's total indebtedness rendered it unlikely that loans would be made for this purpose. However, in determining the primary object or objects of the business of a company for the purpose of sec. 117, the Court does not look exclusively at the objects expressed in the memorandum of association but must in addition consider the activities actually carried on by the company:
A. & S. Ruffy Proprietary Limited v. F.C. of T. (1958) 98 C.L.R. 637 at pp.649, 656;
Revesby Credit Union Co-operative Limited v. F.C. of T. (1964-65) 112 C.L.R. 564 at p.576. In fact, the evidence does not show that the Society ever made any loans to enable its members to acquire land or buildings and certainly this was not the purpose for which loans were usually made. It follows that it is impossible to say that it was a primary object of the business of the Society to obtain funds for the purpose of making loans to its members to enable them to acquire land or buildings.
The contention on behalf of the Commissioner however was that a primary object of the business of the Society was described in para. (d) of sec.117, namely, ``the rendering of services to its shareholders''. The meaning of these words was considered in
Employers' Mutual Indemnity Association Limited v. F.C. of T. (1943) 68 C.L.R. 165, where it was held by a majority of this Court that a company which issued insurance policies to its members, and adjusted and paid claims made under those policies, did not thereby render services to its members within sec.117(d). Latham C.J. said (at p.174) -
``In my opinion the words `rendering of services to' persons mean doing work of some kind for those persons... But the issuing of an insurance policy to a person cannot be described as doing work for that person. It is making a contract with him. Work may be done for a person in pursuance of a contract with him, but the making of a contract with him does not amount to doing work for him.''
Starke J. (at p.181) said -
``Mutual insurance companies, associations and clubs are quite common in connection with marine insurance. And so are co-operative societies in connection with the purchase and sale of commodities and loans of money. And all in a general sense give or render service to their members. But the question is what is the meaning of the expression `the rendering of services to its shareholders' in the context in which it is found in the Income Tax Assessment Act 1936-1940. It is used in connection with what is called a co-operative company and the doing of acts for shareholders. And it is in this sense, I think, that the expression is used in the Assessment Act: the doing of acts for shareholders, including the rendering of services to its shareholders such. for instance, as shearing sheep for shareholders, as was suggested during the argument.
The Board was right in rejecting the general sense in which the expression 'giving or rendering services' is sometimes used. And beyond this the question is, as it seems to me, one of fact.''
The third member of the majority, Williams J. (at pp.187-8), considered that the section referred to the rendering of services of a personal nature. It would seem to me inconsistent with these judgments to refer to the making of a contract to lend money, or the payment of the money lent, as the rendering of services to the borrower within sec.117(d), although to lend a man money might be regarded as rendering him a service in a broad and general sense of the word. Moreover, a comparison of the words of para. (d) with those of para. (e) strongly suggests that the making of a loan cannot be regarded as the rendering of services within the former paragraph. If the making of loans by a company to its shareholders can properly be described as the rendering of services by the company to its shareholders within para. (d), it would seem that the provisions of para. (e) were mere surplusage. It is true that para. (e) refers to the obtaining of funds for the purpose of making loans, but if a business had as one of its primary objects the obtaining of funds for the purpose of making loans, it must also be true to say that the making of loans was one of its primary objects. Further the fact that the application of para. (e) is restricted to cases where the funds are obtained for the purpose of making loans to shareholders ``to enable them to acquire land or buildings'' suggests on ordinary principles on construction that the section is not intended to apply where the primary purpose of making the loans is to enable shareholders to pay medical accounts or other debts or to buy furniture or other personal property.
In the present case it was a primary object of the business of the Society to make loans to its members. It was not, however, a primary object of the business of the Society to render services to members otherwise than by making loans to them. No doubt much time was spent by the secretary in answering inquiries and helping would-be borrowers to obtain loans but that was incidental and ancillary to the making of the loans, and the giving of help of that kind could not be said to be a primary object of the business of the Society. It is true that additional assistance was rendered to those members whose financial affairs were managed by the Society but the evidence shows that this was done on only a few occasions and these cases must be regarded as exceptional rather than as typical; to give this assistance was not a primary object of the business of the Society. I hold therefore that the Society was not established for the purpose of carrying on any business having as its primary object the rendering of services to its members within para. (d).
On behalf of the Deputy Commissioner reliance was placed on the decision of McTiernan J. in Revesby Credit Union Co-operative Limited v. F.C. of T., supra, But that case is, in my opinion, distinguishable. The stated objects of the appellant in that case were very similar to those of the Society (see at p.569) but the appellant there, besides lending money, gave to its members ``advice and assistance... of a diverse and general nature, going far beyond the sort of advisory services which might be regarded as incidental to the conduct of a money-lending business, and not related at all to the supervision or collection of repayments or the assessment or enforcement of securities'' (see at pp.573-4). Examples of this advice and assistance are given in the judgment at p.574 and the summary of the activities of the appellant society at p.576 shows that many features of that case are not found in the present case. The conclusion of McTiernan J. are expressed as follow (at p.578-9) -
``I regard the activities of the appellant society as clearly falling within the description of `the rendering of services'. They are more than the making of an agreement and involve positive acts, as the payment of money to members, the giving of advice and the provision of facilities for consultation and the doing of the specific acts of assistance mentioned in the evidence. They are clearly the doing of work for the benefit of another and clearly go beyond the performance of the terms of an ordinary commercial agreement. When the appellant society agrees to lend money it only contracts to make a payment. It does not enter into an obligation to give the advice and assistance of which so much evidence was given and which are such an integral part of its activities. Furthermore, the facts that the appellant society is so much a co-operative organisation rather than a commercial money-lender, that its effective rates of interest are lower than current market rates, and that it gives loans without regard to security and in many cases where commercial institutions would not venture to risk their money, in my view deprives the transactions of the appellant society of that commercial element which characterises the activities of ordinary commercial and financial institutions. Even though a member who has obtained a loan is obliged to repay the capital and pay interest, the terms are such that by comparison with current market standards a benefit is being conferred upon him.''
It may be true to say in the present case also that the Society is rather a co-operative organisation
ATC 4238than a commercial money-lender and that its transactions lack the commercial element which characterises the activities of ordinary commercial and financial institutions and that the terms on which loans are made are such as to confer a benefit on the borrower by comparison with current market standards. These circumstances in themselves would not, in my opinion, justify the conclusion that the making of loans by the Society can be described as the rendering of services to its members within para. (d). The other matters on which McTiernan J. relied - the giving of guidance and advice and the doing of specific acts of assistance for the benefit of the members, which formed an integral part of the activities of the appellant Society in that case - are not, so far as the evidence discloses, present in this case, except either as merely incidental to the making of the loans or as isolated instances.
I hold therefore that Div. 9 of Part III has no application to the present case. This does not however conclude the question whether the surpluses, which represented the amount of interest received less the expenses incurred in gaining or producing it, were assessable income of the Society. When one person lends money to another and receives interest on the money lent it is clear that as a general rule the interest is income within ordinary concepts. However, as I have indicated, it is contended in the present case that the members of the Society were engaged in mutual dealings and that the payments accordingly could not be treated as income.
In England it has been held that where a number of people associated together for a common purpose, have contributed to a common fund in which all the contributors are interested, the surplus of their contributions remaining after the fund has been applied to the common purpose ``is in essence a return of their own moneys which they have overpaid and is not profit''
(Colonial Mutual Life Assurance Society Limited v. F.C. of T. (1946) 73 C.L.R. 604 at pp.618-9). This principle has found particular application in the cases of mutual funds and members' clubs. It may apply notwithstanding that the people thus associated have been incorporated, for the corporation is treated ``as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate''
(English and Scottish Joint Co-operative Wholesale Society Limited v. Commissioner of Agricultural Income-Tax, Assam (1948) A.C. 405 at p.419). Since the members of an association may at the same time engage in dealings that are mutual and business that is not, it may be necessary, and is permissible, to sever a fund which consists of receipts from mutual dealings as well as other receipts:
Carlisle and Silloth Golf Club v. Smith (1937) 3 K.B. 75;
Municipal Mutual Insurance, Limited v. Hills (H.M. Inspector of Taxes) (1930-1932) 16 T.C. 430;
The National Association of Local Government Officers v. Watkins (H.M. Inspector of Taxes) (1934) 18 T.C. 499; Revesby Credit Union Co-operative Limited v. F.C. of T., supra, at p.575.
It was submitted on behalf of the Deputy Commissioner that this principle, which was evolved in England under legislation which taxes profits or gains, has no application in Australia where the Act taxes income, but this submission is contrary to authority:
The Bohemians Club v. The Acting F.C. of T. (1918) 24 C.L.R. 334; Revesby Credit Union Co-operative Limited v. F.C. of T., supra at p. 574. A return to contributors, or a saving for them, of the surplus of their contributions to a common fund is no more income than it is a profit. The mutuality principle has been rendered inapplicable to certain cases by the specific provisions of the Act, but where not excluded it will in appropriate circumstances lead to the conclusion that the surplus arising from a transaction within the principle cannot be treated as income.
The principle can however only apply if ``the contributors to the common fund and the participators in it are two identical bodies'', because it is based on ``the impossibility that contributors should derive profits'' (or in Australia income) ``from contributions made by themselves to a fund which could only be expended or returned to themselves'' (English and Scottish Joint Co-operative Wholesale Society Limited v. Commissioner of Agricultural Income-Tax, Assam, supra, at pp.417, 419). In Municipal Mutual Insurance, Limited v. Hills (H.M. Inspector of Taxes), supra, at p.448, Lord Macmillan said -
``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.''
However the identity of which Lord Macmillan speaks is identity as a class. In Faulconbridge
(H.M. Inspector of Taxes) v. National Employers' Mutual General Insurance Association, Ltd. (1951-52) 33 T.C. 10, at p.125, Upjohn J. said -
``Finally, viewed in the light of the other
ATC 4239cases, I think it is clear that when Lord Macmillan speaks of the cardinal requirement being complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in in their place in the future.''
One of the other authorities to which Upjohn J. referred was
Jones v. South-West Lancashire Coal Owners' Association, Limited (1927) A.C. 287, where it was held that the fact that the surplus of the fund at the end of each year was carried to reserve and not at once returned to the members did not mean that the surplus constituted profits. Lord Cave said (at p.832) -
``In this case, as in the New York Life Insurance Co.'s case (14 App. Cas. 381), there are no shareholders interested, and the whole of the yearly surplus remains to the credit of the members, and must either be applied to meeting their future claims or be returned to them on retirement. Sooner or later, in meal or in malt, the whole of the company's receipts must go back to the policy holders as a class, though not precisely in the proportions in which they have contributed to them; and the association does not in any true sense make a profit out of their contributions.''
In Revesby Credit Union Co-operative Limited v. F.C. of T., supra, McTiernan J. stated the rule in accordance with those authorities when he said at p.575 -
``Also the cases establish that the principle cannot apply unless at any given point in time the contributors to the fund are identical with the beneficiaries of the distribution of the surplus.''
It is obvious enough that in the case of a club not all of the members will necessarily take advantage of all the facilities which the members own in common but it has held that this does not prevent the mutuality principle from applying. In The National Association of Local Government Officers v. Watkins (H.M. Inspector of Taxes), supra, the association, a trade union which was unincorporated - a fact regarded as of importance: see at p.503 - purchased a holiday camp which was vested in trustees for the use and benefit of the members of the association. The profits arising from the camp enured for the benefit of the members of the association as a whole and not of the camp users only and it was submitted on behalf of the Revenue that for this reason the case did not fall within the mutuality principle. This argument was rejected by Finlay J., who considered that the camp was the property of the members themselves and that so far as it was used by the members no profit could accrue from its user (see at p.506). It, of course, does not follow from this decision that trading between an association and its members is necessarily mutual trading. In
Thomas (Inspector of Taxes) v. Richard Evans and Company, Limited (1927) 1 K.B. 33, Rowlatt J., whose judgment was subsequently affirmed in the Court of Appeal and the House of Lords (Jones v. South-West Lancashire Coal Owners' Association, Limited, supra) said (at pp.46-7) -
``But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if any other trading company, by trading with its shareholders even if it is limited to trading with them, makes a profit, that profit belongs to the shareholders in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers; it comes back to them as shareholders upon their shares.''
The view that a corporation can make a profit from its members, even if it is limited to dealing with them, was accepted by the Judicial Committee in English and Scottish Joint Co-operative Wholesale Society Limited v. Commissioner of Agricultural Income-Tax, Assam, supra. There an incorporated society, which produced tea, consisted of only two members to whom the whole output of tea, with an immaterial exception, was sold at market rates. Under the rules of the society the net profits need not necessarily be distributed among the members but might be applied, e.g., in respect of depreciation or by appropriation to a reserve fund, or by appropriation to a special fund for making grants as determined in general meeting, It was held that the sale of the tea by the society to its members resulted in taxable profits. Lord Normand said (at p.417) -
``What kind of business other than mutual insurance may claim exemption from liability to income tax under the principle of Styles' case (14 App. Cas. 381) need not be here considered; but their Lordships are of opinion that the principle cannot apply to an association, society or company which grows produce on its own land or manufactures
ATC 4240goods in its own factories, using either its own capital or capital borrowed whether from its members or from others, and sells its produce or goods to its members exclusively. In the present case the appellant society is not bound by its rules to sell its tea only to its members, but it could make no difference if it were. No matter who the purchasers may be, if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are, subject to the provisions of the taxing act, taxable profits.''
Their Lordships concluded (at p.420) that the requirement referred to by Lord Macmillan in Municipal Mutual Insurance, Limited v. Hills (H.M. Inspector of Taxes), supra, at p.448, was not satisfied in the case before them, because there was no common fund to which the members of the society contributed and in which they participated. In the course of their opinion their Lordships referred to
Liverpool Corn Trade Association, Limited v. Monks (H.M. Inspector of Taxes) (1926) 2 K.B. 110, a case in which an incorporated association, membership of which was confined to persons engaged in the corn trade, provided a corn exchange and other facilities for the purposes of that trade and made charges to its members and other persons permitted to use the facilities proportionate to their use. Subscriptions payable by members were less than those payable by outsiders and the bulk of the receipts of the association were derived from its members. Under the articles, dividends might be declared out of profits. It was argued on behalf of the association that so far as its transactions with its own members were concerned it was a mutual association but this submission was rejected by Rowlatt J. who held the subscriptions paid by members should be included in the association's receipts for the purpose of computing its profits. Their Lordships said in English and Scottish Joint Co-operative Wholesale Society Limited v. Commissioner of Agricultural Income Tax, Assam, supra, at p.419, that this case ``is consistent with the view expressed by their Lordships because the shareholders and the contributors to the fund out of which dividends were paid were not identical''.
The submission made on behalf of the Society in the present case is that a common fund was created by the payments of interest by the members to whom loans were made. The present case does not bear any close analogy to that of mutual insurance, where a common fund is created to enable payments to be made out of it if the agreed contingency occurs, because here the loans were not made out of a fund created by the interest payments. However it was said that the present case is similar in principle to that in which persons who own property or facilities in common, for example, the members of a club, make payments in respect of their use of such property or facilities on terms that such payments become part of their common property. Here, it was said, the interest is paid for the use of the money which the Society had at its disposal, the source from which the money was derived being, it was said, irrelevant. Therefore the submission was that the surplus of the interest payments remaining after the expenses of getting and lending the money have been met is the balance of a common fund which belongs to, and must ultimately in one way or another be returned to, the class of persons who made the payment, and cannot be treated as income
The contributors to the fund, in the Society's argument, were the persons who borrowed money from the Society. It is true that all who borrowed were members, but many members were not borrowers. On the other hand, the right to participate in the fund was not limited to members who had borrowed money. In considering the Rules the amendments that did not take effect until 20 February 1969, and thus after the accounting periods with which I am concerned had expired, must be ignored. Rule 16 dealt with the application of any surplus resulting from the operation of the funds of the Society. In its original form the rule required the surplus to be applied at the end of a financial year whereas after the amendment that became effective on 17 May 1967 it permitted but did not compel such an application. The persons who might benefit from an application of the surplus were not confined to those who had paid interest but included officers and employees to whom a bonus might be paid and, before 17 May 1967, members generally. It was submitted on behalf of the Society that the fact that the surplus might have been applied in favour of employees did not mean that the principle of mutuality could not apply, since the bonus paid to officers or employees should properly be regarded merely as a working expense in the nature of wages. I cannot agree with this submission; it seems to me that the fact that there was power to apply the whole surplus in favour of officers or employees carried the consequence that the surplus did not belong to the persons who had made the interest payments. In any case if the surplus were not applied at the end of a financial year, but remained in reserve - as it in fact did - its ultimate ownership lay in the members of the Society. This was the effect of r. 136 which incorporated by reference the Companies Act (S.A.), sec.247(2) of which provided that on a winding up the Court should distribute any surplus among the persons entitled thereto, which means
ATC 4241among the members in proportion to their shareholdings. It is therefore not possible to say that the members who borrowed money from the Society were entitled - even as a class - to the surplus, or that sooner or later in one way or another the surplus would be returned to them. If the payments of interest are to be regarded as creating a fund, some members who did not pay interest and therefore did not contribute to the fund might receive the benefit of it. There is no identity between the contributors and the beneficiaries of the fund. In this respect the case is indistinguishable from Revesby Credit Union Co-operative Limited v. F.C. of T., where McTiernan J. held that the surplus of the fund that arose in that case should be classed as income (see at pp.574-5).
I find it impossible to regard this case as governed by the decision in The National Association of Local Government Officers v. Watkins (H.M. Inspector of Taxes), supra. It would not be right to say that in borrowing from the Society the members to whom moneys were lent merely made use of a facility which they owned in common with other members. Such an analysis would be completely artificial; the truth is that the Society lent moneys to certain of its members and received interest in respect of the loans, and that within ordinary concepts the Society derived income as a result. In my opinion the present case is indistinguishable in principle from Liverpool Corn Trade Association, Limited v. Monks (H.M. Inspector of Taxes), supra and English and Scottish Joint Co-operative Wholesale Society Limited v. Commissioner of Agricultural Income Tax, Assam, supra. There was no common fund to which the members of the Society contributed and in which they participated, or, put in another way, the payments of interest were made by certain members qua borrowers, whereas even if the power to apply the surplus in favour of officers or employees could be ignored the ultimate ownership of the fund lay in all the members qua members.
I conclude that the Deputy Commissioner was right in treating the surplus in each year as taxable income even though he was wrong in regarding the case as falling within Div. 9 of Part III. For some purposes the fact that the provisions of Div. 9 of Part III do not apply may be material, but not so far as concerns any issue in the present case. If the Deputy Commissioner has, by applying that Division, assessed the Society at too low a rate (which was suggested but not argued) he cannot complain of that in this appeal. The Society has failed to show that the assessments were excessive. The appeal must be dismissed.
Appeal dismissed with costs.
Usual order as to exhibits.
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