Locke,
J.:—This
is
an
appeal
from
a
judgment
of
Hyndman,
D.J.,
delivered
in
the
Exchequer
Court
allowing
the
appeal
of
the
Minister
from
a
decision
of
the
Income
Tax
Appeal
Board,
which
had
allowed
the
appeal
of
the
taxpayer
from
an
assessment
to
income
tax
for
the
year
1947.
The
appellant
is
incorporated
by
letters
patent
under
the
provisions
of
Part
11
of
the
New
Brunswick
Companies
Act
(R.S.N.B.
1927,
c.
88,
as
amended)
issued
in
the
year
1937.
By
these
letters
patent
the
applicants,
all
of
whom
were
farmers
living
in
that
province,
were
created
a
body
corporate
and
politic
with
all
the
rights
and
powers
given
by
Part
11
of
the
said
Act
and
the
Insurance
Act,
1937
(c.
44,
Statutes
of
New
Brunswick,
1937).
The
purposes
of
the
company
are
stated
to
be:
—
‘“To
undertake
contracts
of
insurance
against
loss
by
fire,
lightning
or
explosion
upon
farm
and
other
non-hazardous
property
upon
the
premium
note
plan,
subject
to
the
provisions
of
Part
11
of
the
‘New
Brunswick
Companies
Act
and
the
Insurance
Act,
1937
The
company
has
no
capital
stock.
The
Companies
Act
of
the
Province,
as
enacted
in
the
Revised
Statutes
of
1927,
was
amended
by
the
addition
of
Part
11
by
c.
19
of
the
Statutes
of
1937.
Sections
129
to
153
of
the
amendment
under
the
heading
“Provincial
Mutual
Insurance
Companies’
1
provide
for
the
incorporation
of
such
companies.
Companies
incorporated
under
this
Part
have
no
shares
but
each
person,
partnership
or
corporation
insured
under
a
policy
is
declared
to
be
a
member
thereof.
Any
five
or
more
persons
residents
of
and
owning
real
estate
in
any
county
in
the
province
may
apply
to
the
Superintendent
of
Insurance
appointed
under
the
provisions
of
the
Insurance
Act,
1937,
for
his
approval
to
promote
the
organization
of
such
a
company
and,
with
his
approval,
organization
may
be
undertaken.
After
insurance
has
been
subscribed
by
fifty
or
more
subscribers
to
an
amount
not
less
than
$100,000.,
the
promoters
may
call
an
organization
meeting
and,
if
so
authorized,
petition
the
Provincial
Secretary
Treasurer
for
incorporation
under
a
name
which
must
include
the
words
‘
‘
Mutual
Fire
Insurance
Company.’’.
Each
subscriber
to
the
subscription
book
for
the
organization
of
the
company
is
required,
within
three
weeks
from
the
date
of
the
incorporation
or
such
further
period
as
may
be
allowed
by
the
Superintendent,
to
apply
for
a
contract
of
insurance
in
an
amount
not
less
than
the
amount
subscribed
for
by
him,
and
is
subject
to
a
penalty
for
failure
to
do
so.
Each
member
not
being
in
default
for
any
dues,
fees
or
assessments
is
entitled
to
one
vote
at
all
meetings
which
he
attends.
The
directors
must
be
members
of
the
company
in
good
standing
and
insured
by
it
for
at
least
$1,000.
or
be
an
accredited
representative
of
a
partnership
or
corporation,
being
a
member
in
good
standing
insured
for
at
least
that
amount.
Companies
so
incorporated
are
empowered
to
make
by-laws
not
inconsistent
with
the
Act
or
the
the
Insurance
Act,
1937,
or
the
Regulations,
for
the
management
of
its
business,
regarding
the
regulation
of
the
tariff
of
fees,
the
levying
of
assessments
and
the
forms,
terms
and
conditions
of
its
insurance
policies,
and
generally
for
all
matters
incident
to
its
incorporation
or
necessary
for
carrying
out
its
purposes,
but
no
such
by-law
is
of
any
force
or
effect
until
the
same
is
approved
by
the
Superintendent.
His
approval
is
likewise
required
to
the
alteration,
repeal
or
reenactment
of
any
of
the
by-laws.
By-laws
passed
by
the
Board
of
Directors
may
also
be
enacted
but
become
effective
only
with
approval
of
the
Superintendent.
Section
142
provides
that
any
member
may,
with
the
consent
of
the
directors,
withdraw
from
the
company
upon
such
terms
as
the
directors
may
lawfully
prescribe,
and
upon
such
withdrawal
his
policy
shall
be
cancelled
but
he
shall
nevertheless
be
liable
to
be*
assessed
for
and
pay
his
proportion
of
‘‘losses,
expenses
and
reserve”?
to
the
time
of
cancelling
the
policy.
The
Insurance
Act
of
1937
deals
with
the
subject
of
insurance
in
all
its
branches
within
the
province
and
Part
XII
under
the
heading
‘‘
Provincial
Mutual
Insurance
Companies’’
by
Sections
226
to
249,
both
inclusive,
deals
particularly
with
the
operation
of
such
companies.
Section
129
of
Part
11
of
the
Companies
Act
provides
that
the
word
“company”
in
that
part
shall
mean
a
“provincial
mutual
company”
as
defined
in
Section
2
of
the
Insurance
Act,
which
defines
such
a
company
as
meaning
a
mutual
insurance
corporation
incorporated
by
or
under
an
Act
of
the
Legislature.
Subsection
40
of
Section
2
of
the
Insurance
Act
reads
:
—
“MUTUAL
INSURANCE.
Mutual
insurance
means
a
contract
of
insurance,
in
which
the
consideration
is
not
fixed
or
certain
at
the
time
the
contract
is
made
but
is
to
be
determined
at
the
termination
of
the
contract
or
at
fixed
periods
during
the
term
of
the
contract
according
to
the
experience
of
the
insurer
in
respect
of
all
similar
contracts
whether
or
not
the
maximum
amount
of
such
consideration
is
predetermined.’’
The
word
‘‘member’’
where
used
in
Part
XII
is
defined
as
meaning
a
person
holding
a
contract
of
insurance
from
a
provincial
mutual
insurance
company.
Such
companies
are
prohibited
from
undertaking
any
risk
in
respect
of
any
one
property
or
risk
subject
to
the
hazard
of
a
single
fire,
for
an
amount
greater
than
$3,000.
unless
it
be
reinsured
to
an
amount
sufficient
to
reduce
the
net
liability
of
the
insurer
to
that
amount.
However,
with
permission
of
the
Governor
in
Council,
risks
not
exceeding
$5,000.
may
be
undetaken.
The
form,
terms
and
conditions
of
the
applications
and
policies
of
insurance
are
to
be
determined
by
the
Board
of
Directors
but
are
subject
to
the
approval
of
the
Superintendent.
Each
application
and
policy
is
required
to
bear
the
words
“Mutual
company—subject
to
pro
rata
distribution
of
assets
and
losses”
together
with
a
statement
of
the
company’s
total
reserves
as
of
the
preceding
31st
of
December.
The
Board
may,
subject
to
the
provisions
of
the
Act
and
with
the
approval
of
the
Superintendent,
adopt
a
‘‘tariff
of
rates
for
premium
notes’’
and
vary
the
same
from
time
to
time.
A
company
may
accept
premium
notes
for
insurance
and
may
issue
policies
thereon
and
such
notes
must
be
assessed
for
the
losses
and
expenses
of
the
insurer
in
the
manner
provided
by
the
Act.
The
form
of
such
notes
must
be
approved
by
the
Superintendent.
The
Board
is
required
to
demand
and
collect
a
cash
payment
on
the
note
at
the
time
of
the
application
for
the
insurance
of
such
amount
as
may
be
fixed
by
by-law
and
if
the
amount
so
collected
in
cash
is
more
than
sufficient
to
pay
any
losses
and
expenses
during
the
maintenance
of
the
policy,
any
surplus
becomes
part
of
the
reserve
fund.
The
Board
is
further
authorized
to
make
assessments
upon
premium
notes
before
losses
have
happened
or
expenses
have
been
incurred
and
any
surplus
from
any
such
assessment
becomes
part
of
the
reserve
fund.
All
assessments
on
premium
notes
are
required
to
be
made
by
the
Board
with
the
approval
of
the
Superintendent,
such
assessments
to
be
made
at
such
intervals
and
of
such
sums
as
the
Board
determines
and
the
Superintendent
approves
to
be
necessary
to
meet
losses,
expenses
and
reserve
of
the
insurer
during
the
currency
of
the
policies
on
which
the
notes
were
given.
If
any
assessment
in
respect
of
a
policy
be
not
paid
within
thirty
days
after
the
mailing
of
the
notice
of
assessment,
the
policy
becomes
null
and
void
as
against
the
insured
as
to
any
claim
for
losses
occurring
during
the
time
the
policy
holder
is
in
default.
If
the
policy
be
cancelled
or
avoided
by
the
company,
the
liability
of
the
insured
on
his
premium
note
ceases
from
the
date
of
such
cancellation
or
avoidance
in
respect
of
any
loss
that
occurs
thereafter,
but
the
insured
shall
nevertheless
be
liable
to
pay
his
proportion
of
the
losses
and
expenses
of
the
insurer
up
to
that
time
and,
upon
payment
of
his
proportion
of
all
assessments
then
payable
or
to
become
payable
in
respect
of
losses
and
expenses
sustained
up
to
that
time,
he
shall
be
entitled
to
a
return
of
his
premium
note.
The
limit
of
the
liability
of
the
member
under
the
premium
note
plan
is
the
face
amount
of
the
note.
Under
the
sub-heading
‘‘Reserve
and
Guarantee
Fund’’
Section
249
provides
:—
‘249.
(1)
The
insurer
shall
form
a
reserve
fund
to
consist
of
all
money
which
remains
on
hand
at
the
end
of
each
year
after
payment
of
expenses
and
losses
;
and
in
addition
shall
levy
an
annual
assessment,
not
exceeding
twenty-five
per
centum,
and
not
less
than
five
per
centum,
on
the
premium
notes
held
by
the
insurer
until
such
reserve
reaches
the
sum
of
five
hundred
dollars
for
every
one
hundred
thousand
dollars
of
the
first
one
million
dollars
insurance
in
force,
and
three
thousand
dollars
for
each
additional
one
million
dollars
or
part
thereof
in
force,
up
to
which
minimum
level
it
shall
be
maintained,
and
for
such
purpose
the
insurer
shall
thereafter
levy
annually
such
adequate
assessment
as
the
Superintendent
approves.
(2)
Such
reserve
fund
may,
from
time
to
time,
be
applied
by
the
board
to
pay
off
such
liabilities
of
the
insurer
as
are
not
provided
for
out
of
the
ordinary
receipts
for
the
same
or
any
succeeding
year.
(3)
The
reserve
fund
shall
be
the
property
of
the
insurer
as
a
whole
and
no
member
shall
have
a
right
to
claim
any
share
or
interest
therein
in
respect
of
any
payment
contributed
by
him
towards
it;
nor
shall
such
fund
be
applied
or
dealt
with
by
the
insurer
or
the
board
other
than
in
paying
its
creditors,
except
on
the
order
of
the
Governor
in
Council.’’
Section
61
of
the
Act
permits
an
insurer
to
invest
its
reserve
in
securities
in
which
trustees
are
by
law
permitted
to
invest
trust
funds,
with
a
limitation
as
to
the
amount
permitted
to
be
invested
in
mortgages
on
land
and
requires
that
uninvested
funds
shall
be
kept
on
deposit
in
the
name
of
the
insurer
in
a
post
office,
provincial
savings
bank
or
chartered
bank
of
Canada.
The
by-laws
adopted
by
the
company
state
that
:—
''The
object
of
the
company
is
a
mutual
association
of
the
members
thereof
for
the
relief
of
each
other
in
case
of
loss
by
fire
or
lightning.’’
They
provide
that
the
company
may
insure
against
loss
or
damage
by
fire
or
lightning
isolated
dwelling
houses,
farm
buildings,
churches
and
school
houses
and
any
other
useful
isolated
non-hazardous
buildings
and
the
ordinary
contents
of
such
buildings
when
situate
within
the
Province
of
New
Brunswick,
but
shall
not
insure
mercantile
risks.
No
property
may
be
insured
for
more
than
two-thirds
of
its
value.
Each
person
insuring
for
the
first
time
is
required
to
pay
a
Membership
Fee
of
$1.00.
Schedules
of
rates
on
all
isolated
buildings
100
feet
distant
from
all
others
not
part
of
the
premises,
with
their
contents,
are
fixed
at
a
premium
note
of
2%
of
the
amount
of
the
policy
for
three
years
with
a
cash
payment
thereon
of
one-half
of
the
amount
after
discount,
if
any,
has
been
allowed.
On
public
halls
with
their
contents
and
rented
buildings
of
the
first
class
100
feet
distant
from
all
others
not
part
of
the
premises,
the
rates
are
fixed
at
a
premium
note
of
214%
with
a
cash
payment
of
one-half
of
that
amount,
less
any
discount.
The
balance
sheet
of
the
appellant
company
for
the
year
ending
December
31st,
1947,
shows
its
assets
to
consist
of
bonds
to
the
value
of
$37,000.00,
accrued
bond
interest
$319.98,
cash
to
the
amount
of
$4,936.01
and
stirrup
pumps
valued
at
$220.00.
As
against
this,
liabilities
in
respect
of
unearned
premiums
are
shown
as
being
$19,824.51,
an
amount
classified
as
Reserve
Fund
$6,103.69
and
a
further
amount
as
Surplus
in
the
sum
of
$16,557.79.
The
profit
and
loss
account
for
the
year
shows
income
totalling
$16,050.27
made
up
of
premiums
earned,
membership
fees,
in-
terest
and
an
item
designated
“Special
Permits’’.
The
expenses
totalled
$9,946.50,
this
including
fire
losses
of
$6,838.
agents’
fees
and
commissions
$1,671.87,
the
balance
being
made
up
of
salaries,
directors’
fees,
printing
and
stationery
and
other
incidental
expenses.
The
excess
of
receipts,
including
premiums
earned,
over
the
disbursements
was
$6,103.69,
which
amount
was
transferred
to
the
Reserve
Fund
pursuant
to
the
provisions
of
Section
249
of
the
Provincial
Insurance
Act.
No
question
arises
regarding
the
interest
earned
upon
the
company’s
investment
of
its
reserve
fund
which
is
conceded
to
be
taxable.
The
dispute
is
as
to
the
balance
on
hand
at
the
end
of
the
year’s
operations
resulting
from
the
fact
that
the
cash
premium
receipts
and
the
amounts
assessed
upon
the
premium
notes
exceeded
the
outgoings
for
losses
and
other
necessary
expenses.
The
appellant
was
assessed
to
income
tax
upon
$6,103.69,
the
amount
transferred
to
the
reserve
fund,
and
on
the
taxpayer
filing
a
notice
of
objection
the
Minister
affirmed
the
assessment.
The
appeal
to
the
Income
Tax
Appeal
Board
was
allowed.
Mr.
Justice
Graham,
with
whom
Mr.
Fabio
Monet,
Q.C.,
agreed,
considered
that
the
operations
of
the
company
did
not
result
in
any
profit
and
that
the
surplus
resulting
from
the
year’s
operations
was
not
income,
within
the
meaning
of
that
term
as
defined
by
subsection
(1)
of
Section
3
of
the
Income
War
Tax
Act,
as
amended,
other
than
the
amount
received
from
bond
interest.
Mr.
W.S.
Fisher,
Q.C.,
the
third
member
of
the
Board,
dissented.
The
appeal
of
the
Minister
to
the
Exchequer
Court
was
allowed.
Mr.
Justice
Hyndman
considered
that
the
company
was
not
in
essense
a
genuine
mutual
company,
as
defined
by
the
authorities,
being
of
the
opinion
that
the
essential
feature
of
such
concerns
was
that
the
contributors
to
the
funds
must
also
be
participators
in
the
surplus,
and
that
this
was
excluded
in
the
present
matter
by
subsection
3
of
Section
249
of
the
Insurance
Act.
The
learned
trial
Judge
concluded
that
there
was
no
real
distinction
between
the
appellant
company
and
any
ordinary
fire
insurance
company
and
that
the
surplus
must
be
regarded
as
profit
or
gain
to
it
and
not
to
the
members.
Subsection
1
of
Section
3
of
the
Income
War
Tax
Act,
in
so
far
as
it
affects
the
present
matter,
reads
:—
‘
‘
For
the
purposes
of
this
Act
1
income
’
means
the
annual
net
profit
or
gain
.
.
.
.
being
profits
from
a
trade
or
commercial
or
financial
or
other
business
or
calling
.
.
.
.
and
shall
include
the
interest,
dividends
or
profits
directly
or
indirectly
received
from
money
and
interest
upon
any
security
or
without
security
or
from
stocks
or
from
any
other
investment,
and
whether
such
gains
or
profits
are
divided
or
distributed
or
not.
’
’
The
question
is
whether
the
surplus
resulting
from
the
amounts
received
from
premiums
paid
in
cash
at
the
time
the
insurance
is
effected
and
from
assessments
being
in
excess
of
that
required
for
the
company’s
operations
is
a
profit
or
gain.
For
the
Minister
the
contention
is
that
accepted
by
Mr.
Justice
Hyndman
that
by
the
very
terms
of
the
Insurance
Act
the
reserve
fund
is
the
property
of
the
company
and
not
of
its
members:
accordingly
since
its
receipts
for
the
year
have
exceeded
its
expenditures
the
balance
remaining
is,
of
necessity,
a
profit
or
gain
to
the
company
since
its
assets
have
been
increased
to
that
extent.
The
question
of
the
liability
to
income
tax
of
the
surplus
funds
of
mutual
insurance
companies
has
been
considered
in
several
cases
in
England.
In
New
York
Life
Insurance
Company
v.
Styles
(1889),
14
App.
Cas.
381,
the
question
of
the
liability
of
such
a
fund
resulting
from
payments
of
premiums
by
the
participating
shareholders
of
the
company
was
considered.
The
company
had
no
shares
or
shareholders,
the
only
members
being
the
holders
of
participating
policies,
each
of
whom
was
entitled
to
a
share
of
the
assets
and
liable
to
all
losses.
A
calculation
was
made
by
the
company
of
the
probable
death
rate
among
the
members
and
of
probable
expenses
and
other
liabilities
and
the
premiums
charged
were
commensurate
therewith.
Annually
an
account
was
taken
and
the
greater
part
of
the
surplus
of
such
premiums
over
expenditures
was
returned
to
the
policy
holders
as
bonuses,
either
by
addition
to
the
sums
insured
or
in
reduction
of
future
premiums
and
the
remainder
of
the
surplus
was
carried
forward
as
funds
in
hand
to
the
credit
of
the
general
body
of
the
members.
It
was
conceded
that
the
income
derived
by
the
company
from
investments
and
from
transactions
with
persons
not
members
was
assessable.
It
was
held
that
no
part
of
the
premium
income
received
under
participating
policies
was
liable
to
be
assessed
to
income
tax.
The
case,
on
the
face
of
it,
it
distinguishable
from
the
present
in
that
the
entire
surplus
resulting
annually
from
the
transactions
of
the
company
with
participating
shareholders
was
either
returned
to
them,
utilized
for
their
benefit
by
increasing
the
amount
of
the
insurance
or
held
for
their
benefit,
to
be
accounted
for
thereafter.
That
an
operation
of
this
nature
was
mutual
insurance
could
not
be
questioned.
Lord
Watson,
speaking
of
the
plan,
said
(pp.
393-4)
:—
“The
individuals
insured
and
those
associated
for
the
purpose
of
receiving
their
dividends,
and
meeting
policies
when
they
fall
in,
are
identical;
and
I
do
not
think
that
their
complete
identity
can
be
destroyed,
or
even
impaired,
by
their
incorporation.
The
corporation
is
merely
a
legal
entity
which
represents
the
aggregate
of
its
members;
and
the
members
of
the
appellant
company
are
its
participating
policy-holders.
When
a
number
of
individuals
agree
to
contribute
funds
for
a
common
purpose,
such
as
the
payment
of
annuities,
or
of
capital
sums,
to
some
or
all
of
them,
on
the
occurrence
of
events
certain
or
uncertain,
and
stipulate
that
their
contributions,
so
far
as
not
required
for
that
purpose,
shall
be
repaid
to
them,
I
cannot
conceive
why
they
should
be
regarded
as
traders,
or
why
contributions
returned
to
them
should
be
regarded
as
profits
In
my
opinion,
a
member
of
the
appellant
company,
when
he
pays
a
premium,
makes
a
rateable
contribution
to
a
common
fund,
in
which
he
and
his
co-partners
are
jointly
interested,
and
which
is
divisible
among
them,
at
the
times
and
under
the
conditions
specified
in
their
policies.
’
’
Lord
Bramwell,
who
was
of
the
same
opinioin,
said
in
part
(pp.
394-5)
:—
“The
appellants
do
not
carry
on
a
profession,
trade
or
employment,
or
vocation
from
which
profits
or
gains
arise
or
accrue
within
the
meaning
of
the
Income
Tax
Act
.
.
.
.
I
speak,
of
course,
of
the
mutual
insurance
business.
They
are
a
corporation,
but
the
case
may
be,
as
is
admitted,
dealt
with
as
though
they
were
an
unincorporated
association
of
individuals.
Take
it
that
they
were;
take
it
that
half-a-dozen
persons
so
associated
themselves
at
the
beginning
of
the
year;
they
each
put
into
a
common
purse
£10,
to
be
given
to
the
executors
of
any
one
who
dies,
or
divided,
if
more
than
one
dies,
among
the
executors
of
those
having
died.
In
fact,
no
one
dies,
and
the
money
is
returned,
or
carried
on
for
the
next
year.
Is
it
possible
to
say
that
this
is
an
association
for
the
purpose
of
profit,
or
that
it
has
made
any
profit
“.?
’
’
Lord
Herschell,
after
referring
to
the
fact
that
the
Attorney-
General
had
conceded
that
the
fact
that
the
persons
thus
associating
themselves
together
for
the
purpose
of
mutual
insurance
had
been
incorporated
was
immaterial
and
that
the
case
might
be
treated
as
though
it
were
an
association
of
individuals
unincorporated,
said
that
persons
who
agree
to
contribute
to
a
common
fund
for
mutual
insurance
would
not
in
ordinary
parlance
be
regarded
as
carrying
on
a
trade
or
vocation
for
the
purpose
of
earning
profit,
and
continuing
(pp.
409-10)
:—
“Let
us
see
how
the
so-called
profit
arises.
It
is
due
to
the
premiums
which
the
members
are
required
to
pay
being
in
ex-
cess
of
what
is
necessary
to
provide
for
the
requisite
payments
to
be
made
upon
the
deaths
of
members,
and
not
being,
as
the
case
states
they
were
intended
to
be,
commensurate
therewith.
This
may
result
either
from
the
contributions
having,
owing
to
an
erroneous
estimate
or
overcaution,
been
originally
fixed
at
a
higher
rate
than
was
necessary,
or
from
the
death
rate
being
lower
than
was
anticipated.
Can
it
be
properly
said
that,
under
these
circumstances,
the
association
of
mutual
insurers
had
earned
a
profit?
The
members
contribute
for
a
common
object
to
a
fund
which
is
their
common
property;
it
turns
out
that
they
have
contributed
more
than
is
needed,
and
therefore
more
than
ought
to
have
been
contributed
by
them,
for
this
object,
and
accordingly
their
next
contribution
is
reduced
by
an
amount
equal
to
their
proportion
of
this
excess.
I
am
at
a
loss
to
see
how
this:can
be
considered
as
a
‘profit’
arising
or
accruing
to
them
from
a
trade
or
vocation
which
they
carry
on.”’
Lord
Macnaghten
who
agreed
that
the
surplus
was
not
taxable
was
also
of
the
opinion
that
the
fact
that
the
insured
who
were
also
the
insurers
carried
on
their
business
through
the
medium
of
a
company
had
been
properly
treated
as
immaterial.
In
Jones
v.
South
West
Lancashire
Coal
Owners’
Association,
[1927]
1
K.B.
38,
the
manner
of
operation
of
the
Association,
whose
liability
to
taxation
was
considered,
more
closely
resembled
those
of
the
present
appellant.
A
colliery
company
was
a
member
of
an
Association,
a
company
limited
by
guarantee
the
sole
activity
of
which
was
the
indemnity
of
its
members
against
compensation
in
respect
of
fatal
accidents
to
their
workmen.
The
Association
was
a
mutual
concern,
every
person
indemnified
by
it
being
a
member,
and
calls
were
made
by
it
and
paid
by
the
members
for
insurance,
and
nothing
more.
Out
of
these
calls
a
general
fund
was
built
up
to
meet
claims
for
indemnity
and
a
reserve
fund
was
also
created
the
interest
earned
upon
which
might
be
applied
in
diminution
of
the
calls
upon
members.
It
is
of
importance
to
note
that
if
a
member
retired
from
the
Association
he
was
entitled
to
receive
back
a
proportion
only
of
what
was
called
his
share
of
the
reserve
fund,
the
balance
being
retained.
Rowlatt,
J.,
by
whom
the
case
was
tried,
held
that
the
principle
stated
in
the
New
York
Life
case
was
applicable.
As
to
the
reserve
fund,
he
said
(p.
47)
:—
“No
doubt,
as
the
money
is
not
distributed
year
by
year,
and
calls
are
not
limited
to
actual
losses,
but
to
enable
a
fund
to
be
built
up,
it
may
in
a
sense
be
said
that
the
Association
has
a
fund
which
it
holds
as
a
company
and
which
it
does
not
divide
among
all
the
people
who
have
built
it
up,
inasmuch
as
members
may
come
in
when
the
fund
has
been
largely
built
up,
and
so
there
is
a
fund
which
does
not
go
back
to
those
people
who
subscribed
it
individually.”
and,
after
saying
that,
in
his
opinion,
this
did
not
distinguish
the
case
from
the
New
York
Life
case,
said
(p.
48)
:
‘“The
broad
principle
was
there
laid
down
that,
if
the
interest
in
the
money
does
not
go
beyond
the
people
or
the
class
of
people
who
subscribed
it,
then,
just
as
there
is
no
profit
earned
by
the
people
subscribing,
if
they
do
the
thing
for
themselves,
so
there
is
none
if
they
get
a
company
to
do
it
for
them.
’
’
This
decision
was
upheld
by
the
Court
of
Appeal
and
by
the
House
of
Lords.
Two
questions
had
been
decided
by
Rowlatt,
J.,
the
first
being
as
to
whether
the
colliery
company
was
entitled
to
charge
the
amount
of
the
levies
made
by
the
Association
as
an
expense
of
its
business
and
as
to
this
he
had
decided
that
such
payments
were
properly
deductible.
In
the
reasons
for
his
judgment
on
the
appeal,
Lord
Hanworth,
M.R.,
said
in
part
(p.
58)
:—
‘
‘
It
is
said
that
once
the
first
case
is
decided
in
the
way
it
has
been,
that
these
moneys
were
absolutely
paid
over
by
the
insured
to
the
Association
for
the
purpose
of
obtaining
insurance,
then
the
moneys
that
have
been
so
paid
over
become
the
property
of
the
Association,
and
that
the
Association
ought
then
it
its
turn
to
be
liable
to
income
tax
in
respect
of
the
excess
that
they
have
received.
It
appears
to
me
that
there
is
no
inconsistency
in
saying
that
both
judgments
of
Rowlatt,
J.,
are
right.
True,
in
the
first
case
the
sum
is
deducted
because
it
represents
the
cost
of
obtaining
the
insurance
by
the
assured,
but
it
does
not
necessarily
follow
that
the
money
received
by
the
Association
is
as
to
a
part
of
it
the
reaping
of
a
reward
or
gain
by
the
Association.
It
must
still
~be
looked
at
from
the
point
of
view
of
mutual
insurance.
Regarded
as
such,
the
Association
does
not
make
a
profit
or
gain
which
is
of
the
nature
or
character
which
subjects
it
to
income
tax."
Serutton,
L.J.,
after
referring
to
the
fact
that
if
a
member
withdrew
he
only
got
back
part
of
his
share
of
the
reserve
fund,
the
balance
being
retained
by
the
Association,
considered
this
did
not
affect
the
matter
and
that
no
part
of
the
accumulations
added
to
the
reserve
fund
from
year
to
year
were
subject
to
taxation.
The
report
of
the
proceedings
in
the
House
of
Lords
[1927]
A.C.
827,
shows
that
the
same
arguments
now
made
on
behalf
of
the
Minister
were
made
by
the
Attorney-General
and
there
rejected.
It
was
contended
that
since
the
company
was
carrying
on
a
trade
or
business,
within
the
meaning
of
the
Income
Tax
Act,
1918,
the
surplus
of
the
receipts
over
the
expenditures
was
profit
and
that
it
was
immaterial
how
that
profit
was
applied,
that
the
company
owned
the
contributions
of
the
members
in
response
to
calls
and
the
reserve
fund
belonged
to
the
company
and
was
available
to
creditors
and
that
no
individual
member
had
interest
in
it.
Viscount
Cave
considered
that
the
decision
of
the
House
in
the
New
York
Life
Case
completely
covered
the
case.
The
accumulated
reserve
fund
of
the
Coal
Owners’
Association
exceeded
£150,000.
A
passage
from
the
Lord
Chancellor’s
judgment
reads
(p.
832)
:—
4
‘In
this
case,
as
in
the
New
York
Life
Insurance
Co.’s
case,
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.”
While
the
first
sentence
of
the
above
quotation
would
indicate
that
Lord
Cave
thought
that
the
entire
amount
contributed
to
the
reserve
fund
was
refunded,
the
concluding
sentence
makes
it
clear,
I
think,
that
he
had
not
failed
to
note
that
the
contrary
was
the
case
and
that
less
might
be
returned
than
had
been
paid
in.
The
important
point
was
that
the
whole
of
the
fund
must
go
back
to
the
members
as
a
class.
By
this,
I
assume
he
meant
that
this
would
occur
on
a
winding-up
or
in
the
event
of
the
discontinuance
of
business
by
the
Association.
In
Ayrshire
Employers
Mutual
Insurance
Association,
Ltd.
v.
Commissioners
of
Inland
Revenue,
[1944]
S.C.
421,
the
Association
had
as
its
principal
object
the
insuring
of
its
members
on
the
mutual
principle
against
claims
arising
out
of
accidents
to
their
workmen.
By
levies
upon
the
members
for
premiums
in
excess
of
the
amounts
required,
a
reserve
fund
had
been
accumulated
a
proportion
of
the
revenue
from
which
was
credited
to
each
member.
Members’
accounts
were
cleared
annually
and
when
an
account
showed
a
surplus,
part
was
returned
to
the
member
as
a
bonus
the
balance
being
retained
by
the
Association.
The
articles
provided
that
a
retiring
member,
unless
he
was
giving
up
his
business,
forfeited
half
of
his
contribution
to
the
surplus
assets.
Where,
however,
he
was
giving
up
busi-
ness,
or
if
his
membership
was
terminated
by
the
Association,
he
was
entitled
to
recover
his
whole
contribution.
The
decision
in
Jones
v.
South
West
Lancashire
Coal
Owners’
Association
was
applied,
the
Court
of
Session
deciding
that
the
transactions
between
the
Association
and
its
members
did
not
give
rise
to
a
profit
subject
to
income
tax.
It
is
to
be
noted
that
in
the
course
of
the
judgment
of
Lord
Fleming
(p.
427)
he
referred
to
a
passage
from
a
judgment
of
Lord
Macmillan
in
Municipal
Mutual
Insurance
v.
Hills,
[1932]
147
L.T.R.
62
at
67,
where,
after
referring
to
the
principle
on
which
the
surpluses
arising
in
the
conduct
of
a
mutual
insurance
scheme
are
not
taxable
as
profits,
he
said
in
part
:—
“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.
’
’
Lord
Fleming
did
not
appear
to
construe
this
as
meaning
that
it
was
essential
that
the
contributors
to
the
reserve
fund
should
be
entitled
to
have
refunded
to
them
the
full
amount
of
their
contributions,
in
view
of
the
term
of
the
by-laws
referred
to
above.
That
portion
of
the
argument
directed
to
Section
31(1)
of
the
Finance
Act,
1933,
does
not
touch
the
present
matter.
The
appeal
to
the
House
of
Lords
was
dismissed
(
[1946]
1
All
E.R.
637).
Lord
Thankerton
who,
alone
of
the
law
Lords,
referred
to
what
had
been
said
by
Lord
Macmillan
in
the
Municipal
Mutual
Insurance
case
and
did
not
mention
the
provisions
in
the
by-laws
whereby
a
member
withdrawing
received
back
only
one-half
of
his
contributions
to
the
surplus,
considered
that
the
appeal
failed.
Lord
Macmillan,
after
referring
to
an
argument
advanced
on
behalf
of
the
Commissioners
that
a
surplus
arising
from
transactions
of
the
company
with
non-members
was
taxable,
said
(p.
640)
:—
‘“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.’’
In
my
opinion,
the
business
carried
on
by
the
appellant
company
in
the
taxation
year
1947
is
properly
described
as
that
of
mutual
insurance.
The
purpose
of
the
company,
as
declared
by
the
letters
patent,
is
that
of
insuring
on
the
premium
note
plan,
subject
to
the
provisions
of
Part
11
of
the
Companies
Act
and
of
the
Insurance
Act,
1937.
A
premium
note
is
defined
by
subsection
(48)
of
Section
2
of
the
latter
statute
to
mean:—
‘An
instrument
given
as
consideration
for
insurance
whereby
the
maker
undertakes
to
pay
such
sum
or
sums
as
are
legally
demanded
by
the
insurer,
the
aggregate
of
such
sums
not
to
exceed
an
amount
specified
in
the
instrument
and
includes
any
undertaking
to
pay
such
sums
regardless
of
the
form
thereof
and
whether
or
not
accompanied
by
a
deposit
of
money
or
security.
’
’
The
premium
notes
taken
by
the
appellant
company
conform
to
the
first
part
of
this
definition.
It
is
of
the
essence
of
such
a
plan
that
each
member
insuring
with
the
company
will
to
a
a
maximum
figure
(being
the
principal
amount
of
the
note)
and,
from
time
to
time
during
its
currency,
to
the
extent
of
the
balance
which
may
become
payable
under
it,
share
the
risk
of
loss
by
fire
or
lightning
by
any
of
the
members
with
all
the
members
of
the
company.
Such
a
plan
falls
within
the
definition
of
“Mutual
Insurance’’
in
subsection
(40)
of
Section
2
of
the
Act
and,
in
addition,
within
the
generally
accepted
meaning
of
the
term.
I
think
it
is
true
that
the
question
does
not
differ
from
that
which
would
arise
had
those
persons
who
were
members
of
the
appellant
company
for
the
year
1947
entered
into
an
agreement
among
themselves
each
to
contribute
his
proportionate
share
of
the
loss
by
fire
suffered
by
any
of
them
to
an
agreed
amount,
the
members’
liability
being
limited
to,
say,
the
sum
of
$20.00,
each
member
to
contribute
part
of
this
sum
in
cash
in
order
to
pay
expected
losses
and
the
expenses
of
carrying
out
the
plan,
assessments
to
be
made
upon
the
notes
for
further
amounts
when
required
by
a
committee
of
the
members,
any
surplus
resulting
from
the
cash
payments
and
such
assessments
to
be
placed
at
the
end
of
the
year
in
a
reserve
fund
to
the
credit
of
the
members,
any
member
withdrawing
from
the
plan
during
the
year
to
forfeit
any
interest.
he
might
have
in
the
amount
accumulated.
Had
this
plan
been
followed
it
would
be
quite
impossible,
in
my
opinion,
to
sustain
a
contention
that
such
a
fund
represented
a
profit
or
was
taxable
income
if
distributed
among
the
members,
except
perhaps
to
the
extent
that
they
might
individually
participate
or
be
entitled
to
participate
in
the
portion
of
such
sur-
plus
contributed
by
the
members
who
had
withdrawn.
That
would
be
a
truly
mutual
plan
of
insurance
and
I
think
the
situation
is
not
changed
when
the
members,
availing
themselves
of
the
provisions
of
the
Companies
Act
and
the
Insurance
Act,
1937,
carry
out
such
a
plan
through
the
medium
of
an
incorporated
company.
The
plan
provided
by
the
terms
of
Part
11
of
the
Companies
Act
and
the
relevant
sections
of
the
Insurance
Act
enables
persons
wishing
to
associate
with
others
in
such
an
enterprise
to
substitute
the
covenant
of
a
separate
legal
entity
for
the
individual
covenant
of
the
proposed
members.
It
is
clear
that
in
enacting
this
legislation
it
was
contemplated
that
the
persons
who
would
take
advantage
of
its
provisions
would
be
unlikely
to
be
skilled
in
insurance
matters
and
perhaps
in
financial
matters
involving
the
undertaking
of
considerable
financial
obligations.
Accordingly,
after
organization
in
the
manner
required
by
the
Companies
Act,
the
operations
were
made
subject
to
the
supervision
of
the
Superintendent
of
Insurance
and,
inter
alia,
the
forms
to
be
used
and
the
extent
of
the
assessments
to
be
made
upon
the
premium
notes
made
subject
to
his
approval.
While
such
a
company
could,
no
doubt,
operate
by
assessing
its
members
upon
their
premium
notes
from
time
to
time
as
losses
occurred,
the
Legislature
apparently
considered
it
prudent
to
require
the
establishment
of
a
reserve
fund
to
the
amount
provided
in
Section
249
of
the
Insurance
Act,
to
be
available
to
pay
the
liabilities
of
the
company
to
the
extent
that
the
ordinary
receipts
were
insufficient.
Much
importance
has
been
attached
in
argument
to
the
fact
that
by
subsection
(3)
of
that
section
the
reserve
fund
is
declared
to
be
the
property
of
the
insurer.
Since
it
is
the
company
that
incurs
the
obligation
to
the
members
by
issuing
policies
of
insurance,
of
necessity
the
reserve
fund
must
be
its
property,
since
the
whole
purpose
of
the
requirement
is
that
it
may
be
resorted
to
in
satisfaction
of
the
company’s
liabilities.
The
argument
loses
its
force
when
it
is
realized
that
the
fund
is
accumulated
as
directed
by
the
statute,
not
in
pursuance
of
a
profit
making
enterprise
but
in
furtherance
of
a
mutual
insurance
plan
carried
on
by
the
company
in
the
interests
of
its
members
and
which
may
not
be
applied,
except
on
the
order
of
the
Governor
in
Council,
to
any
purpose
other
than
the
settlement
of
claims
or
other
liabilities.
Counsel
for
the
respondent
argues
that
the
case
at
bar
is
distinguished
from
the
cases
relied
upon
by
the
appellant
by
reason
of
the
further
provisions
of
subsection
(3).
The
argument
is
that
any
surplus
ultimately
remaining
after
payment
of
all
claims
will
not
necessarily
be
returned
to
the
members.
I
think
it
clear,
however,
from
the
provisions
of
the
Winding-Up
Act
and
of
the
Insurance
Act,
read
together,
that
on
a
winding-up
the
surplus,
if
any
remaining
after
payment
of
the
liabilities,
would
be
returned
to
the
members
of
the
company.
In
the
Jones
and
the
Ayrshire
Employers
Mutual
cases,
the
fact
that
only
part
of
the
amounts
contributed
by
the
members
to
the
reserve
fund
was
in
certain
circumstances
returned
to
them
on
their
withdrawal
was
held
not
to
affect
the
matter
and
it
was
decided
that
the
amounts
thus
accumulated
from
year
to
year
were
neither
profits
nor
gains
of
the
Association.
In
my
opinion,
the
principle
applied
in
these
two
cases
is
applicable
to
the
present
case.
Counsel
for
the
Minister
referred
to
paragraph
(d)
of
subsection
(1)
of
Section
6
of
the
Income
War
Tax
Act
which
provides
that
in
computing
the
amount
of
the
profits
or
gains
to
be
assessed
a
deduction
shall
not
be
allowed
in
respect
of
amounts
transferred
or
credited
to
a
reserve,
except
such
an
amount
for
bad
debts
as
the
Minister
may
allow
and
except
as
otherwise
provided
in
the
Act.
This,
however,
clearly
refers
to
amounts
received
which
must
properly
be
taken
into
account
in
determining
whether
a
profit
or
loss
has
resulted
from
the
company’s
operations
and
cannot,
in
my
opinion,
apply
to
amounts
such
as
are
in
question
here
received
by
the
company
for
the
purpose
defined
by
the
Insurance
Act.
With
all
the
great
respect
that
I
hold
for
any
opinion
of
Mr.
Justice
Hyndman,
my
consideration
of
the
present
matter
leads
me
to
a
different
conclusion.
This
appeal
should
be
allowed
with
costs
here
and
in
the
Exchequer
Sourt.
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