Monthly Archives: July 2014

The Doctrine of Mutuality

The doctrine of mutuality finds its origin in common law. One of the earliest modern judicial statements of the mutuality principle is by Lord Watson in the House of Lords, in 1889, in New York Life Insurance Company v. Styles (Surveyor of Taxes), (1889) LR 14 AC 381. The appellant in that case was an incorporated company. The company issued title policies of two kinds, namely, participating and non-participating. The members of the mutual life insurance company were confined to the holders of the participating policies, and each year, the surplus of receipts over expenses and estimated liabilities was divided among them, either in the form of a reduction of future premiums or of a reversionary addition to the policies. There were no shares or shareholders in the ordinary sense of the term but each and every holder of a participating policy became ipso facto a member of the company and as such became entitled to a share in the assets and liable for a share in the losses. The company conducted a calculation of the probable death rate amongst the members and the probable expenses and liabilities; calls in the shape of premiums were made on the members accordingly. An amount used to be taken annually and the greater part of the surplus of such premiums, over the expenditure referable to such policies, was returned to the members, i.e. (holders of participating policies) and the balance was carried forward as a fund in hand to the credit of the general body of members. The question was whether the surplus returned to the members was liable to be assessed to income tax as profits or gains. The majority of the Law Lords answered the question in the negative.
It may be notice that in Styles Case, (1889) LR 14 AC 381, the members had associated themselves for the purpose of insuring each other’s life on the principle of mutual assurance, that is to say, they contributed annually to a common fund out of which payments were to be made, in the event of death, to the representatives of the deceased members. Those persons were alone the owners of the common fund and they were alone entitled to participate in the surplus. This surplus was obtained partly from the profits arising from non-participating policies and other business. It was held that that portion of the surplus which arose from the excess contributions of the holders of participating policies was not an assessable profit. The individuals insured and those associated for the purpose of receiving their dividends and meeting other stipulated requisites under the policies were identical. It was held that that identity was not destroyed by the incorporation of the company.
Lord Watson even went to the extent of saying that the company in Styles Case, (1889) 4 LR 14 AC 381 did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by Viscount Cave in a later case, Jones (Inspector of Taxes) v. South-West Lancashire Coal Owner’s Association Limited, 1927 AC 827 (HL), but be that as it may all the noble Lords who formed the majority were of the view that what the members received were not profits but their respective shares of the excess amount contributed by themselves. They held thus:
“When a number of individuals agree to contribute funds for a common purpose 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.”
Lord Watson’s statement was explained by the House of Lords in Cornish Mutual Assurance Company Ltd. V. IRC, 1926 AC 281, wherein it was held that a mutual concern may be held to carry on a business or trade with its members, though the surplus arising from such trade is not taxable income or profit.
The High Court of Australia first considered the mutuality principle in Bohemians Club v. Acting Federal Commissioner of Taxation, (1918) 24 CLR 334 (Aust) :
“A man is not the source of his own income….A man’s income consists of moneys derived from sources outside of himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income. The contributions are, in substance, advances of capital for a common purpose, which are expected to be exhausted during the year for which they are paid. They are not income of the collective body of members any more than the calls paid by members of a company upon their shares are income of the company. If anything is left unexpended it is not income or profits, but savings, which the members may claim to have returned to them.”
One of the first Indian cases that dealt with the principle was CIT v. Royal Western Indian Turf Club Ltd., AIR 1954 SC 85. It quoted with approval three conditions stipulated in English & Scottish Joint Coop. Wholesale Society Ltd. V. CIT , (1947-48) 75 IA 196: AIR 1948 PC 142, which were propounded after referring to various passages from the speeches of different Law Lords in Styles Case, (1889) LR 14 AC 381. It was held as follows:
“From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy-holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.” Bangalore Club v. CIT, (2013) 5 SCC 509.

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Whistleblower – Basic Requirements

One of the basic requirements of a person being accepted as a “whistleblower” is that his primary motive for the activity should be in furtherance of public good. In other words, the activity has to be undertaken in public interest, exposing illegal activities of a public organization or authority. Every informer cannot automatically said to be a bonafide “whistleblower”. A “whistleblower” would be a person who possesses the qualities of a crusader. His honesty, integrity and motivation should leave little or no room for doubt. It is not enough that such person is from the same organization and privy to some information, not available to the general public. The primary motivation for the action of a person to be called a “whistleblower” should be to cleanse an organistaion. It should not be incidental or byproduct for an action taken for some ulterior or selfish motive. Manoj H. Mishra v. Union of India, (2013) 6 SCC 313.

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Principle of Business Efficacy

The principle of business efficacy is normally invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results. The classic test of business efficacy was proposed in Moorcock, (1889) LR 14 PD 64 (CA). This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied – the bare minimum to achieve the goal. If the contract makes business sense without the term, the courts will not imply the same. It was held as under:
“ In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are businessmen; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.” Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC 131.

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Coparcenary Property

Coparcenary property means the property which consists of ancestral property and a coparcener would mean a person who shares equally with others in inheritance in the estate of common ancestor. Coparcenary is a narrower body than the joint Hindu family and before the commencement of the Hindu Succession (Amendment) Act, 2005, only male members of the family used to acquire by birth an interest in the coparcenary property. A coparcener has no definite share in the coparcenary property but he has an undivided interest in it and one has to bear in mind that it enlarges by deaths and diminishes by births in the family. It is not static. It was further held that so long, on partition an ancestral property remains in the hand of a single person, it has to be treated as a separate property and such a person shall be entitled to dispose of the coparcenary property treating it to be his separate property but if a son is subsequently born, the alienation made before the birth cannot be questioned. But, the moment a son is born, the property becomes a coparcenary property and the son would acquire interest in that and become a coparcener.
In M. Yogendra v. Leelamma N., (2009) 15 SCC 184 it was held as under:
“It is now ell settled in view of several decisions of this Court that the property in the hands of a sole coparcener allotted to him in partition shall be his separate property for the same shall revive only when a son is born to him. It is one thing to say that the property remains a coparcenary property but it is another thing to say that it revives. The distinction between the two is absolutely clear and unambiguous. In the case of former any sale or alienation which has been done by the sole survivor coparcener shall be valid whereas in the case of a coparcener any alienation made by the karta would be valid.” Rohit Chauhan v. Surinder Singh and Others, (2013) 9 SCC 419.

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Mere Failure to fulfill a promise – Is not enough to hold a person guilty of cheating

Mere failure to fulfill a promise cannot be a ground to draw proceedings for prosecution under Section 420 Indian Penal Code. The essential ingredient for an offence punishable under Section 420 Indian Penal Code is dishonest misrepresentation on the part of the accused at the time of making promise. In the case of V.P. Srivastava v. Indian Explosives Ltd., (2010) 10 SCC 361, the Apex Court held that mere failure to perform the promise, by itself is not enough to hold a person guilty of cheating. It is necessary to show that at the time of making promise he had fraudulent or dishonest intention to deceive or to induce person so deceived to do something which he would otherwise not do. It was observed that such a culpable intention right at the time of entering into an agreement cannot be presumed merely from his failure to keep the promise subsequently. Govind Chandra Gupta v. State of U.P., 2014 (85) ACC 743.

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Doctrine of Waiver

In State of Punjab v. Davinder Pal singh Bhullar, (2011) 14 SCC 770, the court explained the doctrine of waiver on the basis of the earlier pronouncements which were taken note of and discussed the same in the following manner:
“In Manak Lal v. Prem Chand Singhvi, AIR 1957 SC 425, the Court held that alleged bias of a Judge/Official/Tribunal does not render the proceedings invalid if it is shown that the objection in that regard and particularly against the presence of the said official in question, had not been taken by the party even though the party new about the circumstances giving rise to the allegations about the alleged bias and was aware of its right to challenge the presence of such official. It was further observed:
Waiver cannot always and in every case be inferred merely from the failure of the party to take the objection. Waiver can be inferred only if and after it is shown that the party new about the relevant facts and was aware of his right to take the objection in question.”
In Power Control Appliances v. Sumeet Machines (P) Ltd., (1994) 2 SCC 448, it was held as under:
“Acquiescence is sitting by, when another is invading the rights….It is a course of conduct inconsistent with the claim….It implies positive acts; not merely silenceor inaction such as involved in laches ….The acquiescence must be such as to lead to the inference of a license sufficient to create a new right in the defendant..”
Inaction in every case does not lead to an inference of implied consent or acquiescence as has been held in P. John Chandy & Co. (P) Ltd. V. John P. Thomas, (2002) 5 SCC 90. Thus the court has to examine the facts and circumstances in an individual case.
Waiver is an intentional relinquishment of a right. It involves conscious abandonment of an existing legal right, advantage, benefit, claim or privilege, which except for such a waiver, a party could have enjoyed. In fact, it is an agreement not to assert a right. There can be no waiver unless the person who is said to have waived, is fully informed as to his rights and with full knowledge about the same, he intentionally abandons them. Vasu P. Shetty v. Hotel Vandana Palace and Others, (2014) 5 SCC 660.

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