TaxTMI 
TaxTMI 
1942 (2) TMI 15
X X X X Extracts X X X X
X X X X Extracts X X X X
....was made, consisted of four partners who for the present purpose may be designated A, B, C and D, and this continued to be the composition of the firm on January 1, 1938, when the first half of the income-tax resulting from the assessment became due. On February 7, 1938, however, the composition of the firm changed, owing to the taking in of a fifth partner, who may be called E. On July 27, 1938, the inspector of taxes, purporting to act in accordance with Rule 9(1) of Cases I and II of Schedule D, certified to the general commissioners particulars of the change which had taken place and the commissioners thereupon purported to adjust the assessment by charging to the firm of five persons, out of the total assessment of GBP 69,355, the apportioned amount of GBP 11,078, with the result that the firm of four persons would be relieved of liability for tax on this latter figure, but would be left answerable for tax on the balance of GBP 58,277. As a matter of mathematical calculation there is no dispute that these figures are correct; they represent the fair apportionment of the total between that part of the year of assessment which lies before February 7, 1938, and that portion which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en set up. The result of this would be that the old trade would be treated as coming to an end in the course of the fiscal year and the assessment in respect of this broken period would be based not on the greater profits of the year before, but on the actual profits of the final period. There would, however, also be a revision of the figure for the previous year. Similarly, if a new trade is to be deemed to be set up on March 25, 1938, income-tax in respect of the opening period could not be ascertained by reference to past profits. Apart from these, considerations which may explain the action taken by the respondents, the Crown naturally wish to secure a final and authoritative interpretation of Rule 9, especially in view of the difficulties which now arise from comparing it with Rule 11. Rule 9 of the Rules applicable to Cases I and II of Schedule D of the Income-Tax Act, 1918, runs as follows: "9.-(1) If a person charged under this Schedule ceases within the year of assessment to carry on the trade, profession, or vocation in respect of which the assessment is made, and is succeeded therein by another person, the surveyor shall, within four months from the fifth day of Ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he apportioned fraction of profits. Rule 9 deals with the persistence of a trade, profession or vocation notwithstanding a change in the persons carrying it on. Such a situation cannot arise in the case of some professions or vocations, for example, in that of a barrister or of a portrait painter. There are other branches of activity where the persistence of the same enterprise, notwithstanding a change of personnel, may be to some extent possible, for example, on the sale of a country doctor's practice; and then there is the large and important class of an established business capable of transfer as a going concern. It may be worth observing, in passing, that the preservation of the identity and continuity of business, notwithstanding a change in those who carry it on, is probably most completely illustrated by changes which may occur from time to time in a partnership firm. The question in the present case is, whether if a stockbroker's business is carried on for part of the year by A, B, C and D in partnerships and for the next part of the year by A, B, C, D and E, this change can be described, within the meaning of Rule 9, as a case in which a person charged "ceas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... profits). It is obvious that this feature of the system, if not modified, might operate with special hardship in the event of a change in the composition of a partnership in the course of the year of assessment, and indeed in the case of any change in the personnel of those carrying on the business in the year for which the tax is being collected. In the case of a partnership, the tax is to be computed and stated jointly and in one sum, separately from any other income-tax chargeable on any of the partners, and the joint assessment is to be made in the partnership name (Rule 10 of Cases I and II of Schedule D of the Income-tax Act of 1918). The liability, therefore, is joint and, unless the income-tax code provides some mitigation, the Crown would be entitled (though we are told this is not what in fact is ordinarily done) to demand the whole amount of tax from a new partner who has only joined towards the end of the year. Moreover, the very fact that there has been a change in the composition of the partnership during the year may, owing, for example, to the dropping out of a partner who has been chiefly instrumental in making the business a success, cause a fall in profits. Agai....
X X X X Extracts X X X X
X X X X Extracts X X X X
...." which follows the word "unless", for there is no expressed antecedent to the word "such". Yet reason of the thing strongly suggests that the partners who can secure relief by alleging a falling short of profits from a specific cause would be the partners who are left after the change has taken place. These obscurities would be more important if the Act of 1842 had not been repealed in 1918 and if the existing provisions on the subject were not differently expressed. In 1880, a new and more effective method was adopted for providing against the hardship with might otherwise be suffered from a change in the carrying on of a concern during the year of assessment. The taxes Management Act of that year is described in its full title and in its preamble as a consolidating Act, but in fact the provision under the head of "Changes" in Section 62 was new. The provision was in almost the same terms as the present Rule 9, and provided that if a "person" ceases within the year of assessment to carry on the concern in respect of which the assessment is made and is succeeded therein by another "person", there shall be a splitting of the assessment by the commissioners so that the predecesso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmediately before and immediately after the change require, by notice signed by all of them or, in the case of a deceased person, by his legal representatives, and sent to the surveyor within three months after the change took place, that the tax payable for all years of assessment shall be computed as if the trade, profession or vocation had been discontinued at the date of the change, and a new trade, profession or vocation had been then set up or commenced, and that the tax so computed for any year shall be charged on and paid by such of them as would have been charged if such discontinuance and setting up or commencement had actually taken place, the tax shall be computed, charged, collected and paid accordingly. (2) If at any time after the said fifth day of April any person succeeds to any trade, profession or vocation which until that time was carried on by another person and the case is not one to which paragraph (1) of this rule applies, the tax payable for all years of assessment by the person succeeding as aforesaid shall be computed as if he had set up or commenced the trade, profession or vocation at that time, and the tax payable for all years of assessment by the per....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w for purposes of amendment in every session of the House of Commons, I find it very difficult to suppose that the existence of Rule 9 as part of the existing code has been forgotten, or that it would be deliberately left, year after year, as a piece of dead wood without any possible usefulness or effect in the ramifications of the ever-spreading income-tax tree. There is indeed another indication that parliament regards the transfer of a business from one partnership to another as a "succession", even though some of the partners remain in the firm throughout. Subsection (2) of Rule 11, in which it is expressly stated that references to a person include references to a partnership, provides that if after April 5, 1928, any person succeeds to any trade which until that time was carried on by another person, and the case is not one to which paragraph 1 of this rule applies, tax shall be calculated as though there had been discontinuance of one trade and the commencement of another. But what is the case to which paragraph 1 of the rule applies? It is the very case under discussion, where there is a persistence of certain partners while other partners have changed. This then assumes....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., it is certainly true that an old partnership cannot be regarded as "ceasing" to carry on the trade, and the new partnership cannot be regarded as "succeeding" to it when some members of the old partnership are also members of the new, and thus do not individually cease to carry on the trade at all. A, B, C and D are carrying on the trade throughout the year; how then can it be said that they, or any of them, have in course of the year ceased to carry it on? If language is accurately used, a partnership firm does not carry on a trade at all it is the individuals in the firm who carry on the trade in partnership. It is not the firm which is liable to income-tax. The individuals composing the firm are so liable, though by Rule 10 when a trade is carried on by two or more persons jointly the tax is computed and stated jointly and in one sum and is separate and distinct from any other tax chargeable to those persons or any one of them, and a joint assessment shall be made in the partnership name. If, therefore (it is argued), Rule 9 is applied to a partnership, it applies not because a partnership is "a person charged under this Schedule", but because the singular includes the plural,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t at all that a partnership is not, as such, a single juristic person. As Farwell, L.J., said in Sadler v. Whiteman (79 L.J.K.B., at pp. 799, 800; [1910] 1 K.B., at p. 889). "In English law a firm, as such, has no existence; partners carry on business both as principals and as agents for each other within the scope of the partnership business; the firm name is a mere expression, not a legal entity, although for convenience under Order XLVIIIA it may be used for the sake of suing and being sued". And again, "It is not correct to say that a firm carries on business; the members of a firm carry on business in partnership under the name or style of the firm". In the end, the House has to choose between two views, neither of which is entirely satisfactory. But, for the reasons I have given, I think that we must in this case be prepared to construe the rule under discussion in a popular rather than in a technical sense, and I am not greatly shocked to find that when dealing with a joint assessment of trade carried on by a partnership, the Legislature has proceeded on the view that when the trade was first carried on by A, B, C and D in partnership and was subsequently carried on by A,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....according to the ordinary meaning of the words used, admits of no doubt. It does not apply to such a case. Rule 9 does not, in terms, refer to partnerships as such at all. Partnerships as such are dealt with by Rules 10, 11 and 12. The word "person", in the singular, in Rule 9 could not, of its own force, include a partnership of two or more persons. Businesses carried on in partnership can only come within the purview of Rule 9 by reason of the Interpretation Act, which enables the singular word "person" to be read as including the plural "persons"; for businesses carried on in partnership are carried on by the individuals who are in partnership, and not by the partnership firm as a separate conception. The firm name is a mere expression to denote the individuals. Read in the light of the Interpreta- tion Act the rule comes into operation upon, but only upon, the following hypothesis (I omit words immaterial for this purpose): "If a person or persons..................ceases or cease within the year of assessment to carry on the trade.............in respect of which the assessment is made, and is or are succeeded therein by another person or other persons." As I read it, that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a spent force when the new Rule 11 came into operation. There is no longer any case to which it can apply. I have stated in my own words my views upon the question of construction, but I am not conscious of having added anything to the judgment of Clauson, L.J., which, in my opinion, is unanswerable. LORD MACMILLAN stated the nature of the appeal and continued: The question for decision is whether Rule 9 of the Rule applicable to Cases I and II of Schedule D of the Income-tax Act, 1918, applies to the circumstances which I have stated. That rule provides that if "a person charged" under Schedule D "ceases within the year of assessment to carry on the trade, profession or vocation in respect of which the assessment is made, and is succeeded therein by another person", then certain procedure shall be set in motion within four months from April 5 next "after any such change", having for its object and effect an adjustment by the general commissioners of the assessment "by charging the successor with a fair proportion thereof from the time of his succeeding to the trade, profession or vocation and relieving the person originally charged from a like amount". The determination of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Income Tax Acts. The word constantly occurs throughout the Acts, and I think that it is most generally used to denote what may be termed an entity of assessment, that is, the possessor or recipient of an income which the Acts require to be separately assessed for tax purposes. Rule 10 provides that "where a trade or profession is carried on by two or more persons jointly the tax in respect thereof shall be computed and stated jointly and in one sum, and shall be separate and distinct from any other tax chargeable on those persons or any of them and a joint assessment shall be made in the partnership name". The profits of a business carried on by a partnership are thus created as a separate subject of assessment and the assessment is made in the partnership name. The personification of partnerships is even more manifest in Rule 12, by which in certain circumstances a "partnership shall be deemed to reside outside the United Kingdom notwithstanding that some of the members of the said partnership are resident in the United Kingdom". That rule uses the expressions "the trade or business of a partnership firm", "the said firm shall be chargeable", "an assessment may be made on the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... I agree with Scott, L.J., that, the Attorney-General's contention being one of law, it is fair to test it by an extreme case. Let it then be supposed, to take a case at the opposite extreme, that what has happened is that in the case of a business carried on originally by four partners A, B, C and D, three new partners E, F and G are assumed and A, B and C resigned. It seems quite natural in such a case to say that A, B, C and D have ceased to carry on the business and have been succeeded by D, E, F and G, although D has throughout had a share, possibly different shares, in carrying on the business. In ordinary parlance one firm would be said to have succeeded to another. B, C and D have certainly ceased to share in carrying it on; B, F and G have certainly succeeded to shares in it. That the terminology of Rule 9 is not inapt to describe what happens when a change in the persons constituting a partnership takes place is illustrated in the case of Brace v. Calder*. That was the case of a firm composed originally of four partners. Two of them retired and the business was continued by the two remaining partners. An employee of the original firm declined to serve the two c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the basis of assessment or within the year of assessment itself; (b) a trade may entirely come to an end in the course of the year of assessment; (c) a trade may be carried on continuously, but there may be changes in the persons conducting it. Such cases present difficulties both of computation and of charge. Special provision was made for (a), new trades, in the 1842 Act, Schedule D, First Case, Rule 1, in the 1918 Act, Schedule D, Rules 1 (2) and 8(1) applicable to Cases I and II, and in the 1926 Act, Section 29(1). For (b), discontinued trades, provision was made in the 1842 Act, Section 134, in the 1918 Act, Schedule D, Rule 8 (2) appli- cable to Cases I and II, and in the 1926 Act, Section 31(1). It is not necessary to say anything more about these special provisions relating to the commencement and the discontinuance of a trade, for they do not apply directly to the case in hand, which is an example of my class (c), that is, where a trade has been continuous, but there have been alterations in the persons carrying it on. A survey of the legislation applicable to continuing businesses discloses two main features. First, as regards computation, a consistent disregard (down....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oviding that this should be so without any new assessment would have been appropriate, if Section 134 did not cover such a case. In 1880 the Taxes Management Act of that year in Section 62 made provision for the first time, in terms almost identical with those of the present Rule 9, for the apportionment of the charge of tax in the case of a person ceasing to carry on a trade and being succeeded therein by another person. The section is comprehensively headed with the word "Changes" and refers to such a case as a "change in the carrying on of the concern". Now it is said, and fairly said, that in endeavouring to ascertain the true import of the present Rule 9 it is relevant to consider how the case now before the House would have stood after the coming into force of the 1880 Act, containing as it did the progenitor of Rule 9, but without the present Rule 11. The draftsman of Section 62 of the Act of 1880, it is suggested, with the provisions of the Fourth Rule of the Act of 1842 before him, deliberately elected to deal with one only of the two cases covered by that rule, namely, the case of a person ceasing to carry on a business and being succeeded in it by another person, and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to cover changes in partnership personnel, the Act of 1918 did not alter the position. Finally, in the progressive development of the law, came Section 32 of the Finance Act of 1926 which substituted for the previous Rule 11 an entirely new rule. It introduced a new refinement by recognising explicitly in paragraph (1) for the first time that, in the case of a continuing trade, changes in the persons carrying it on in partnership might occur which left one or more of the persons who previously carried it on still engaged in it though in a new association. In such a case the rule reasserts the principle of the 1842 Act that the computation of the profits of the trade shall remain unaffected by the change in personnel. Nothing is said about apportionment. There is a proviso, however, to the effect that all concerned may be notice within three months (subsequently altered to twelve months) after the change require the surveyor to treat the case as one of a discontinuance of one trade and the commencement of another and to charge the tax on the several parties as if there had been an actual discontinuanc and commencement. The proviso has quite a different effect from what is dire....
X X X X Extracts X X X X
X X X X Extracts X X X X
....trued the effect of Rule 9, as Clauson, L.J., alternatively suggests, but that does not afford an escape from the fact that Parliament has re-affirmed Rule 9 as part of the existing code and must be presumed to have intended that it should have some effect. In view of Rule 11 the only case left in which it can operate is the case where there has been a change in the personnel of a partnership with a common element continuing and where no notice has been given to the surveyor under the proviso to para. (1) of Rule 11. I agree with Clauson, L.J., that that by itself would be "a very poor ground for giving an entirely unnatural meaning to reasonably plain words", but it is not a circumstance to be disregarded if the words may be reasonably read in a sense which would not only render Rule 9 an effective part of the code but also supply means of apportionment of tax in a case otherwise not covered. It will have been observed that para. (2) of the new Rule 9, which deals with succession to a trade, is to be applicable only if "the case is not one to which para. (1) of this rule applies", and para. (1) deals with changes in partnership personnel. If in the income-tax vocabulary a partn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uced by Section 62 of the Taxes Management Act of 1880 which was headed "Changes", and was substantially identical with the present Rule 9, there was nothing to mitigate the effect of the provision now embodied in Rule 11, which replaced the corresponding provision of Section 100 of the Act of 1842. Notwithstanding the change it was there enacted that there was to be only one assessment for the year and only a limited right to claim a reduction of the assessment was given to the successor in the event of there being a reduction of profits consequent on the change. But the position is not quite so simple. It is a familiar rule of construction that the singular includes the plural. Hence Rule 9 is to be read in law as signifying "if a person or persons ceases or cease" and "is or are succeeded by another person or other persons, etc." But if persons carry on a business they do so jointly and thus the idea of partnership is introduced. Where several persons jointly carry on business some may retire and others takes their place, or a new partner may be admitted by the old partners without any other change in the firm. These and similar questions were, it is clear, present to the mind o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....casus omissus, especially one so obvious as this. I do not find the words "cease to carry on the trade, etc." So precise and unambiguous as to be incapable of the meaning for which the appellants contend, when read in their surroundings. Construction ex ve termini involves a fitting together of words with their context. Words in most cases take their colour from their environment. We must indeed exclude certain words which are so precise and distinctive as to admit of only one meaning. Such words are generally technical or scientific. Other words are so various in their connotation that without the context they cannot be understood, as for instance "quarter". But the majority of words and phrases depend on the context. Hence the familiar phrase that they must be construed secundum subjectam materiam. Rule 9, like Section 62 of the Act of 1880, is a slipshod piece of draftsmanship. It must, it seems, have been intended to cover the types of case mentioned in Rule 11 of the Act of 1918. The framers of Rule 9 may fairly be held to have taken the view that if four partners admit a new partner and continue the business as a partnership of five, there is a change. The four old partner....
X X X X Extracts X X X X
X X X X Extracts X X X X
....charge, but there was no complete change of identity in the partners because at least one partner remained throughout. But that machinery is optional and where the option is not exercised, because for instance, all the partners before and all the partners after the change would not agree to avail themselves of the machinery, Rule 9 is as necessary as it ever was, and indeed is the only machinery to effect the readjustment. It was clearly not repealed by the Act of 1926, which indeed in Section 35 expressly refers to it. I am concious, like the Lord Chancellor, that the question raised in this case does not admit of an entirely satisfactory solution, whichever view is taken. It can never be satisfactory to a Court of construction to have to deal with words such as these. But I agree with him in thinking that on the whole it is more correct to give the wider meaning to Rule 9 than to leave so obvious an anomaly, even though in practice the Revenue authorities may not exercise their powers inequitably. The language of Rule 9 is vague and obscure and though in ordinary parlance it would not at first sight be natural to describe the four partners in a case like the present as ceasing....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... if I were faced only with the rules as they now stand, I think that in common with my noble and learned friend, Lord Macmillan, I should without undue difficulty consider Rule 9 at least capable of bearing the interpretation which the appellants put upon it, more particularly in view of the circumstance, which he has pointed out, that Rule 10 treats the entity of assessment as being the partnership and not the individuals composing it. It is true that Rule 9 speaks of persons ceasing to carry on a trade and being succeeded by another, but for my own part I can conceive of the Legislature, when dealing with a partnership containing of A, B, C and D, describing them as ceasing to carry on a trade when those four individuals cease to carry it on as a group and of their being succeeded by other persons when a different group of four carry it on (for example, A, B, C and F), albeit three out of the four persons who previously constituted the partnership. Some of the individuals indeed remain, but A, B, C and D have ceased to carry on the business and are succeeded by A, B, C and F. The phraseology may be loose, inasmuch as strict accuracy compels one to acknowledge that in England, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....here there is a change of some only or even nothing except an addition to or subtraction from the existent partners without further change. This in my view, suggests that no difference was intended to be made between a complete and a partial change in the ownership of a business. (ii) Rule 11(2) expressly provides that in that paragraph references to a person include references to a partnership. The conclusion I should draw is that the first paragraph was intended to deal primarily with a partial change of partners and the second as including a complete change and in each case the change is treated as a succession. (iii) It was conceded by the respondents in argument that except for the two years before the Act of 1926 came into force Rule 9 would find no set of circumstances upon which to operate. It seems unlikely that Parliament would leave that section unrepealed for all time, if this were the result of the new Rule 11. At best this particular argument is only of slight weight, but I have some doubt as to whether the admission should properly have been made by the respondents if there argument is sound. If the business is carried on not by the partnership but by the indiv....