Ayrshire Employers Mutual Insurance Association v Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Thankerton,Lord Macmillan,Lord Wright,Lord Simonds,Lord Uthwatt |
| Judgment Date | 29 March 1946 |
| Judgment citation (vLex) | [1946] UKHL J0329-2 |
| Court | House of Lords |
| Docket Number | No. 1. |
| Date | 29 March 1946 |
[1946] UKHL J0329-2
House of Lords
Lord Thankerton
Lord Macmillan
Lord Wright
Lord Simonds
Lord Uthwatt
After hearing Counsel for the Appellants on Monday the 25th day of February last, upon the Petition and Appeal of the Commissioners of Inland Revenue, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland, of the First Division, sitting as the Court of Exchequer, of the 20th of July 1944, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Interlocutor might be reversed, varied, or altered, or that the Petitioners might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of Ayrshire Employers Mutual Insurance Association, Limited, lodged in answer to the said Appeal; and Counsel appearing for the Respondents but not being called upon; and due consideration being had this day of what was offered for the said Appellants:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal, in the Court of Parliament of His Majesty the King assembled, That the said Interlocutor of the 20th day of July 1944, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments: And it is also further Ordered, That unless the Costs, certified as aforesaid, shall be paid to the parties entitled to the same within One Calendar Month from the date of the Certificate thereof, the Cause shall be, and the same is hereby, remitted back to the Court of Session in Scotland, or to the Judge acting as Vacation Judge to issue such Summary Process or Diligence for the recovery of such Costs as shall be lawful and necessary.
My Lords,
This Appeal arises out of an assessment to income tax made on the Respondent Association for the year ended 5th 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 section 31 of the Finance Act, 1933, 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 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 the 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 (1932), 16 T.C. 430, 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 (at p. 448) as follows:
"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 paragraph ( h) of subsection 2 of section 53 of the Finance Act, 1920, 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 net 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 section 31 of the Finance Act, 1933, 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 Schedule 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 subsection (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, …"
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