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TMI Blog1946 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion 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 incometax by virtue of the said Section 31(1) of the Finance Act, 1933." The case was heard by the First Division of the Court of Session, by whose Interlocutor dated 20th 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 *[1889] 14 App. Cas. 381 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 my noble and learned friend Lord Macmillan in the Municipal Insurance case [1932] 16 Tax Cas. 430, at p. 448. as follows: "The cardinal requirement is that all the contributors to the common fund must be entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (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 the Attorney-General submitted three points on the construction of sub-section (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 conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and should be dismissed with costs, the judgment of the First Division of the Court of Session being affirmed. 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 5th April, 1936. This sum represented the surplus arising from the 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... .Section 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nonmembers. 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 contract 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 nonmembers. But it is unnecessary to elaborate the point, for I find myself in complete agreement with the opinions expressed by the Lord President and his brethren, which are as unanswerable as they are admirably lucid. The Legislature has plainly missed fire. Its failure is perhap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and participation in some mutual scheme. I do not think it necessary to decide this question, which may in other connections have far-reaching importance. For, assuming for this purpose that the argument is so far well founded, the Attorney-General is still faced with a difficulty which appears to me, as it did to the learned Lord President, to be insuperable. For the hypothetical profit or surplus with which the section deals is one that is assumed to arise out of "those transactions" with "non-members." What are "those transactions"? They are exhypothesi transactions in which the element of mutuality is an integral, essential and inseparable part. How then can the two factors coalesce? On the one hand a transaction in which mutuality is essential, on the other hand a party to that transaction who by the postulated definition of non-member is excluded from any transaction which involves just that element of mutuality. It follows that, upon an initial assumption in favour of the Attorney-General, the section becomes meaningless and the hypothetical profit or surplus indeterminable. The appeal must, in my opinion, be dismissed. LORD UTHWATT.― ..... X X X X Extracts X X X X X X X X Extracts X X X X
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