1943 (12) TMI 7 - HC - Income Tax

Court apportions payment between pension and salary for tax purposes

Tilley Versus Wales (Inspector of Taxes)

The court concluded that the lb40,000 paid to the appellant should be apportioned between the commutation of the pension and the reduction of salary. The ... - Issues Involved:1. Whether the lb40,000 paid to the appellant is subject to income tax under Schedule E.2. Whether the sum paid in commutation of a pension is taxable.3. Whether the sum paid for the reduction of salary is taxable.4. Whether the lb40,000 can be apportioned between the commutation of pension and reduction of salary.Detailed Analysis:1. Whether the lb40,000 paid to the appellant is subject to income tax under Schedule E:The primary issue in this case is whether the two sums of lb20,000 each, paid to the appellant by Stevenson & Howell, Ltd., are taxable under Schedule E as profits from his employment as managing director. The appellant had entered into three agreements with the company, and the payments were made under the agreement dated April 6, 1938. This agreement involved the appellant releasing the company from an obligation to pay a pension and agreeing to serve at a reduced salary. The court had to determine if these payments constituted taxable income.2. Whether the sum paid in commutation of a pension is taxable:The court examined whether a sum paid in commutation of a pension is taxable under Schedule E. The court referenced the case of Dewhurst v. Hunter, where it was held that a lump sum paid to commute a pension is in the nature of a capital payment and not taxable under Schedule E. The court concluded that the sum paid to commute the pension does not constitute profit from the office and is not taxable. The pension itself was distinct from the profit of an office and exchanging it for a lump sum did not make it taxable.3. Whether the sum paid for the reduction of salary is taxable:The court also considered whether a sum paid for the reduction of salary is taxable. It referenced the case of Cameron v. Prendergast, where it was held that a lump sum paid in lieu of a reduced salary is taxable as a profit from the office. The court concluded that any part of the lb40,000 that represented the reduction in salary is taxable under Schedule E. The court emphasized that remuneration for service, even if paid as a lump sum, retains its character as income and is taxable.4. Whether the lb40,000 can be apportioned between the commutation of pension and reduction of salary:The court addressed the issue of whether the lb40,000 could be apportioned between the commutation of the pension and the reduction of salary. The Attorney-General agreed that the sums should be treated as apportionable if the court found that tax was due under one head but not the other. The court decided that the sums could be apportioned, and the Commissioners were directed to determine a reasonable apportionment. The portion of the sums attributable to the reduction of salary would be taxable under Schedule E, while the portion attributable to the commutation of the pension would not be taxable.Conclusion:The court concluded that the lb40,000 paid to the appellant should be apportioned between the commutation of the pension and the reduction of salary. The portion representing the reduction of salary is taxable under Schedule E, while the portion representing the commutation of the pension is not taxable. The case was referred back to the Commissioners to determine the appropriate apportionment. The appellant was awarded the costs of the appeal to the House, with no costs awarded in the Court of Appeal.