TaxTMI 
TaxTMI 
1936 (12) TMI 31
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....idering what are the assessable profits under Case I. Then there is a second main question, which arises in the event of the first question being decided against the Revenue, and that is, what deductions are permissible under the rules in order to ascertain the balance of profits and gains under Case I ? There are comparatively few facts which I need detail. There is a summary or skeleton statement of the financial position of the bank, so far as is material for the purposed of this case - that is to say, a statement of the material receipts and expenses of the London branch. That summary of accounts refers to four sets of receipts on the credit side. The first is interest on 5 percent. War Loan amounting to Pounds 75,621; the second is interest on India 3 per cent. Stock, which amounts to Pounds 1,500; then there are two other items which go together - one is interest on Grand Trunk Pacific Railway Bonds, which is Pounds 412, and the other is interest on Auckland Electric Power Board Bonds, Pounds 1,203. These four figures are the items about which the dispute centers. On the other side there are set out working expenses and various other expenses, and a particular matter to wh....
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....tions apply to the three classes of point arises whether the Pounds 41,262, which is treated as paid in respect of the money invested in the securities, ought to be excluded in ascertaining the balance of profits and gains under Case I of Schedule D, of whether any part of that should be so excluded. The special Commissioners and Lawrence, J., have both decided against the Crown and in favour of the taxpayer, the bank. I may say at once that a great many cases have been cited to this court and a great many arguments have been adduces. If I do not refer in detail to all those cases or to all those arguments, it must not be thought that I have failed to do so out of any disrespect or from any disregard of the cases and the arguments which I have considered to the best of my ability. But it seems to me any of these authorities and many of these contentions do not really assist in coming to a conclusion on the matters before the Court and I have, therefore, felt it best to decide the case, as far as I can or the constructions of the relevant sections and on the broad principles which appear to me to be necessary to be applied in construing these sections. I shall deal first with ....
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....ion I do not think throws any real light on the question here. There is, however, another section to which I ought to refer, and that is section 49(2) : "The Treasury may direct that any Exchequer bonds, issued under their authority during the continuance of the present war and a period of six months thereafter, and any securities issued under the War Loan Acts, 1914 to 1917, or any Act amending those Acts shall be issued, or shall be deemed to have been issued, subject, to the condition that the interest on the bonds and securities shall be paid without deduction of tax, and the interest shall be so paid accordingly; but any such interest shall be chargeable under Case III of Schedule D." I think it is useful, without going into the history of this particular line of legislation too minutely, to refer to one section in the Finance Act of 1915, namely, section 47, which was reproduced in Section 46 of the Act of 1918, which I have just read, but be it noted that Section 47 of the Finance (No. 2) Act, 1915, has not been repealed, and, therefore, must be read along with Section 46 of the Act of 1918. It is in these words : "The Treasury may, if they think fit, during the continuance ....
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....only escape taxation if the tax is sought to be imposed upon him under Case III of Schedule D and that he is liable to be taxed under the precisions of Case I of Schedule D, then it seems to me that a result is being reached which is quite contrary to the apparent meaning of the particular legislation and which, to my mind, involves the very serious frustration of what I imagine the parties, taking the securities from time to time, might be assumed to have contemplate. The section was put in 1935, when it was undoubtedly desired to attract subscriptions to loans which were being put forward, as we well remember in those critical years of the War. It seems to me that it would be rather deplorable if, notwithstanding what I regard as the clear language of Section 46, the owner, not being ordinarily resident in the United Kingdom, were still taxed on this War Loan as part of his trading profits, and in my view that is not the true construction the section. The words of section 46 are not introduces in respect of any particular Schedule; they are quite general and that they are quite general is made even more apparent when reference is made to Section 47 of the Finance (No. 2.) Act, 19....
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....on 46 only related to interest as such and, further, praying in aid Section 49(2), contended that the interest in question was transferred to Case III of Schedule D; that the effect of Section 46 was merely to debar the Crown from enforcing that charge and that the Crown were therefore free to charge under Case I of scheduled as part of the trading profits, notwithstanding the terms of Section 46, which, he said, were irrelevant in this connection, and he relied very strongly on the well-known proposition that the Crown, in certain cases, may elect under which cases of Schedule D - because that is all he is concerned to argue in this court - they will charge the taxpayer. He relied on Liverpool, London and Globe Insurance Co. v. Bennett. In that case, which is very familiar, an insurance company which carried on business here and abroad had very large investments in foreign states, as the condition of carrying on an insurance business there. They did not bring the interest on those investments home to this country. They received it abroad and did not remit it here. Under the law as it then stood, under the fourth Case of Schedule D of the Act of 1842, the duty to be charged was onl....
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....ed under any specific Schedule - in this case schedule C - because the bank is a non-resident and, as in the previous case, whether the crown, notwithstanding such exemption as there is, are still entitled to charge under Case I of Schedule D on the footing that the interest in question constitutes profits of a non-resident trader. The position here depends on the General rules of Schedule C. The interest of the India stock in question constitutes profits payable out of the public revenue. There are certain rules applicable to Schedule C which define the content and nature of the charge. The first body of rules is called General Rules. I need not refer to No. 1, but No. 2 is a rule relied on as embodying the exemption. It say : "No tax shall be chargeable in respect of "certain items, and the first is (a) : The stock, dividends or interest transferred to accounts in the books of the Bank of England in the name of the treasury or the National Debt Commissioners in pursuance of any Act of Parliament, but the Bank of England shall transmit to the special commissioners an account of the total amount thereof"; and then (b) : "The stock, dividends or interest belonging to the Crown in....
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....issioners and entrusted., "That will deal with cases under rule 2 (d). There are elaborate provisions dealing with, among other things, the way in which the tax in a case of this sort has to be dealt with. In the first place, the person responsible for collecting the tax is the person entrusted with the payment of the dividends, and he is under an obligation to make returns to the inspectors appointed by the commissioners are to have all necessary powers to examine and check the books and accounts of dividends (rule 2), "and shall assess and charge the dividends at the rate of tax in force at the time of payment, but reduced by the amount of the exemptions (if any) allowed by them" - that is by the special commissioners" and shall give notice of the amount so assessed and charged to the person entrusted with payment" - that is to say the agent or nominee of the foreign or Colonial Government who is the person responsible to pay the dividends on behalf of the person entitled thereto and pay the tax to the general account of the Commissioner. That in itself is in one sense machinery but it has this effect, that the tax is not directly chargeable upon the owner of the security, but it....
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....unsel for the appellant put forward is, however, to my mind this, that the exemption under Schedule C, rule 2(d), is an unlimited exemption, as unlimited as the exemption which I have already discussed in the case of War Loan. I think that appears from the mere language of Schedule C, rule 2(d), but if there where any doubt about it I think that doubt would be resolved by the consideration that this Act is a Consolidation Act and that Schedule C, rule 2 (d), is, as I think, merely repeating the exception which was given for the first time to securities of the class in Section 71 of the finance (1909-10) Act, 1910. That exception, which is unlimited in language, cannot be taken us appertaining to any particular Schedule, except on the ground, of course, that there should be no charge on these particular securities except under Schedule C; but the section itself, sub-section (2), runs in these terms : "Income-tax shall not be payable in respect of the interest of dividends of any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the commissioners that the person owning the securities and entitled t....
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....sions of which were incorporated in every Customs and Inland Revenue Finance Act up to 1918, when the present consolidation Act was passed. I need not repeat the familiar Schedules altered and extended by the Act of 1853. It is only necessary to refer to section 100 of the Act of 1842, which defined the tax to be imposed under Schedule D" and further on Lord Atkin quotes from Schedule D : "The said last mentioned duties shall extend to every description of property or profits which shall not be contained in either of the said Schedules (A), (B) or (C), and to every E. My Lords, nothing could be clearer to indicate that the schedules are mutually exclusive; that the specific income must be assessed under the specific Schedule; and that D is a residual Schedule so drawn that its various cases may carry out the object so far as possible sweeping in profits not otherwise taxed. For this reason no doubt the actual Schedule was drawn in the widest terms". Then Lord Atkin proceeds, after quoting the words, "Such language covers income from land in Schedule A and from Government securities in Schedule C. Its true meaning is made apparent by Sec. 100. Moreover, the dominance of each Schedul....
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....am, of course, in this judgment not dealing with super-tax at all, but with matter arising on what used to called "ordinary income-tax". I pass now to head - namely, the question of the securities of the two Colonial companies. That arises a different question, because in order to deal with that case it is necessary to arrive at conclusion as to the meaning of rule 7(1) of the Miscellaneous Rules applicable to Schedule D. If that construction of that rule is held to be of a particular nature, its effect will simply be to throw the income of these particular securities into the same class and into subjection to the same rules as I have held should be applied in regard to foreign and Dominion securities. Whether or not that is so is a matter not without difficulty, but I have come to the conclusion, in agreement with the Commissioners and the learned Judge, that rule 7(1) has that effect, and that, therefore, the same conclusion applies to these securities as that which applies to those which I have last been discussing. There are, however, various matters to be considered in order to justify that conclusion. Rule 7(1) appears, as I have indicated, in the body of Miscellaneous ....
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.... that the rules are only modes of applying the charge previously expressed. The conclusion is drawn that this paragraph being only a rule, does not operate to prevent the principle of construction of that charge laid down in Brown v. National Provident Institution from applying and accordingly there payment is taken out of any charging words. If, however, it is right to hold that treated as profit involves chargeability as profit, then the mere fact that these words are words of charge additional to the charge at the commencement of the Schedule does not prevent them from being effectual as a charge or render that part of their full meaning surplusage. All that has happened is that there are two statements as to chargeability, and the words treated as profit for the year still contain a specific charge. "I rely on that statement involving this, that the court must consider the exact language and effect of a provision such as that now in question in rule 7(1). Though the fact that the provision merely appears in one of the rules and not in part of the Act which is ostensibly and specifically of a charging character is something which ought to be borne in mind, and even, to some exte....
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....ceeds in clause 2 : "All the provisions of Schedule C relating to the tax to be assessed and charged in respect of dividends payable out of any public revenue other than that of the United Kingdom, and entrusted to any person (other than the National Debt commissioners or the Bank of england or the Bank of Ireland) to the tax to be assessed and charged under this rule. "Now, it is to be noticed at once that the extension is without qualification - "All the provisions so Schedule C relating to the tax to be assessed and charged in respect of dividends", and so forth. The argument which has been put forward is that the rules which are so extended are to be read in limited sense. If you go back to Schedule C, there are first general rules applicable to C, and then there are "rules as to interest, etc., payable out of public revenue to or though the Bank of England or the Bank of Irelands, or by the National Commissioners." These obviously cannot apply to the securities dealt with in rule 7(1) of the Miscellaneous rules to which I am referring, and they are expressly excepted in rule 7(2). Then there are a number of "Rules as to interest, etc., with the payment of which persons other t....
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....10. There is certainly some force in that argument. Prima facie as I have already said, a consolidation Act merely consolidates, and, generally speaking, ought to be construed according to it own language, and if its language can only be construed in one way, then it must be construed as changing the law. There is every reason why all the provisions of Schedule C should apply to the very analogous case of this foreign interest intrusted to a person in the United Kingdom. The position is identical for practical purposes with that in respect of the interest on foreign Government securities. Although I think it is true to say that Sec. 71(2) of the finance (1909-10) Act, 1910, does not deal with these securities at all, still that may have been a casus omissus which the draftsman in framing the Consolidation Act might will have made good when the law was consolidated, as it was, in 1918. However, that may be, I think that this rule ought to be construed as counsel for the respondent bank has contended, though I do not accept his argument that under the various provisions of the Act of 1853, and so on, it is possible to treat Sec. 71 of the Act of 1910 as extending to the particular se....
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....rely a statutory confirmation or recognition, as it were, of what the construction of rule 7 was thought or intended to be, because under Part III of the Act is among other things, provided that "Part II of this Act" (that is the Part in which the section to which I have been referring occurs)" Shall be construed together with the Income Tax Acts.," and therefore you cannot construe rule 7 without reading into it the provisions of this section of the Act of 1924 to which I have already referred. There is one other section in the Finance Act, 1926 which points to the same conclusion, and it is section 5 of Part II of the section Schedule, which says (sub-section 1) : "Any person who is intrusted with the payment of any interest, dividends or other annual payments which are payable to any persons in Great Britain or Northern Ireland out of the public revenue of the Irish free State or out of or in respect of the stocks, funds, shares or securities of any Irish free State company, society, adventure or concern shall be relieved from the obligation imposed on him by general Rule 1 of Schedule C and Miscellaneous rule 7 of Schedule D to pay tax thereon on behalf of the persons entitled ....
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....is rule 3 : "In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purpose of trade, profession, employment or vocation." That is put in negative form but is generally, and I think correctly, treated as being capable of being converted into a position enactment, with the result that it provides that" money wholly and exclusively laid out or expended for the purposes of the trade" may be deducted. So far as I know, these are the only two provisions in the Act which are relevant for the discussion of the novel point which has now been raised. The point is this : the effect of the decision that the interest on the securities in question here should be exempted and excluded is that the assessable profits are reduced by that exemption to the extent of Pounds 78,556. The case finds that the expenses which can be attributed to the earnings of those profits -that is to the 5 per cent. War Loan and the India Stock and the two Colonial companies securities - are Pounds 41,252. It is contended on behalf of the Crown that, if the banks get the ....
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....n this figure of Pounds 41,000. The case for the Crown can, I think, be put most forcibly in this way, that this particular sum of Pounds 78,000 odd is to be taken out of the trade altogether, and treated as if it had never been there at all. It can be put out of the computation and along with it the cost or earning it should also be excluded, and in that way the trade from both points of view would be considered as if there never had been any such profits at all. But I cannot find in the Act anywhere any provision which would justify any such elimination of a part of the expenses, where, as here, there is only one indivisible trade. It is quite different, as I say, from the cases to which I have referred which counsel of the appellant has cited. There is only one trade and we know exactly what are the expenses of that trade, and rule 3(a) of the Rules applicable to Cases I and II so Schedule D provide that the expenses of the trade, if the "money is wholly and exclusively laid out for the purposes of the trade" are to be deducted. The result seems to be that the Legislature in the Income Tax Acts has expressly provided for certain exemptions and exclusions which will operate when ....
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....se IV of Schedule D of the Income Tax Act. The Company, however, had not received in the year of assessment any interest from those securities; the interest had been allowed to accumulate as they then stood, the Company was not liable to direct assessment in respect of any of that interest. In those circumstances the company sought to have excluded from a statement of its profits and gains in its business the interest on those securities which had accrued to it abroad but had not been sent into this country, and they sought to have it excluded on the ground that inasmuch as they were not liable to be charged under that case, Case IV, in respect of that interest, so, too, they were not liable to be charged in respect of that interest under Case I. Now, it the argument of counsel for the appellant on the first point is to be accepted, one would have thought that the Court would have disposed of the application of the insurance company in a very short way. They would have said : "Case IV of Schedule D is dealing with interest. Case I of Schedule D is dealing with profits and gains of a trade - trading receipts; what have we got to do with interest ?" That is not the view they took.....
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....s, the interest amongst other things, the interest described in sub-rule (d). In my opinion there is no justification for so qualifying the word "tax". In rule 1 we find this : "Tax under this Schedule." In rule 3 we find the expression" tax under this Schedule". Rule 2, in contradiction to those two rules, says : "No tax shall be chargeable". I should have been surprised to find that in clause 2 this particular kind of interest was only excluded from taxation under Schedule C because, as has been pointed out by the Master of the Rolls, before the Act of 1918 such interest was excluded from taxation under any and every Schedule by reason to the provisions of Sec. 71, of the Finance (1909-10) Act, 1910, and, to say the least of it, it is extremely unlikely that when passing the consolidated statute of 1918 and introducing, as it has been introduced by a rule of Schedule C, the provisions of Sec. 71, the Legislature intend those provisions to have a more restricted operation than they had before. I now pass to the third question which, I agree, is rather more difficult. That question relates to interest on certain securities in a Canadian company and a New Zeland company respectiv....
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....se that a company - a non-resident company trading here - has in a particular year trading receipts amounting to Pounds 3,000, consisting of Pounds 1,000 from War Loan and Pounds 2,000 from other sources, and supposing that its trading expenses, properly chargeable under Schedule B, Case I, amount in the year to Pounds 600 the balance of profits and gains is Pounds 2,400. On that sum the Crown would be entitled to levy tax, but it will be observed that of that Pounds 2,400, Pounds 1,600 may be said to come from sources of revenue other than the interest of War Loan and Pounds 800 from interest of War Loan, and when the Crown seeks to lay its hand on the Pounds 800 for the purpose of taxing it, the tax-payer may say : "No. Sec. 46 forbids that; therefore you can only tax me on Pounds 1,600." In other words, the result of Sec. 46 would be to remove from the company's profit and loss account not the whole Pounds 1,000 interest on War Loan, but the Pounds 1,000 less its proper proportion of the trading expenses of the company. That is lone way of looking at it. The other way of looking at it involves the application of Sec. 46 at an earlier stage. The application takes place in thi....
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....ride the perfectly plain language of the section. It is a matter of some satisfaction that construction which I consider should be placed upon the section will enable the perfectly clear undertaking given in the prospectus when this War Loan was issued to the public to the public to be kept both in the spirit and in the letter. The second point arises Schedule C, rule 2. The subject-matter with which it is concerned is interest on securities of a British possession, an rule 2 of Schedule C provides that no tax shall be chargeable in respect of that interest in the case of non-residents. Now it is to be observed that this particular interest has its proper home in Schedule C. Schedule C is the Schedule to which, in the first instance, it is quite plainly appropriate, and it is by that Schedule that this class of interest is in fact taxed. Now, when I find that the Schedule to which a class of income is appropriate and in which it is dealt with says, in terms, that no tax shall be chargeable in respect of that income in certain circumstances, I myself find it quite impossible to read those words as meaning simply "no tax shall be chargeable under this Schedule". The fact that t....
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.... from the charge any dividends payable to what, for convenience, I call a non-resident and should do that not by virtue of any express exemption collected from Schedule C but because by Schedule D itself the tax is limited to non-residents. I have not myself heard it explained with regard to that last point why it is that the words should not be sufficient to bring under charge to tax dividends payable to non-residents, in view of sub-paragraph (b) of paragraph 1 of Schedule D, in which there is no mention of residence at all, and Case VI. However that may be, the result will work out, according to counsels argument, in this way, as I understand it. The Special commissioners are assessing the paying agents. They will not - and it is common ground that they will not - probably the majority of cases have before them the information as to the ownership of the securities which would enable them to give effect to any exemption which an owner is entitled to on the ground that he was a non-resident. They will, therefore, assess the paying agent in respect of the amount which he is to pay over to the owner of the shares. Now, what is to happen ? According to counsels argument, the re....
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....on-residence and then obtaining relief by way of allowance or repayment. That that is what the Legislature intended is, in my opinion, made quite clear when the Finance Act, 1924, is examined. Under Sec. 27 of that Act a new right of appeal to the Special Commissioners was given from a decision of the Commissioners of Inland Revenue. It is to be observed that the right is a right to appeal from a decision. When the decisions which the section deals are examined, omitting for the moment the one relevant to this point, it will be found that each and every one of them is a decision of the Commissioners of Inland Revenue under a statutory power given to them in the Act to decide the issue of fact, residence or non-residence, domicile or non-domicile, as the case may be. Therefore, it appears to me extremely unlikely that in such a context there will be found a right appeal given -as counsel would have as construe the paragraph to which I am about to refer - not from a decision of the Commissioners given in the exercise of a statutory jurisdiction to decide a matter of fact but from some administrative refusal to repay tax which has been improperly levied. I myself find it quite impo....
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....revenue would not have been apt to cover it, and if it was to have been brought under Schedule C, Schedule D was the appropriate Schedule in which to put it, but the Legislature, having regard to the close correspondence between the circumstances of the two cases, when they brought it into Schedule D made it subject to the provisions of schedule C with regard to the matters appropriate to schedule C and that, to my mind, is the history of the matter. Whether or not before the Act of 1918 there was some gap in that correspondence is beside the point. In my opinion the correspondence, if it was not perfect before, was made perfect by the Act of 1918. That brings me to the last point, the question of expenses. The judgment for the crown on that point is of this nature, that in the account of a trading company made out for the purpose of its return under Case I of Schedule D the interest with which we are concerned must, in the first instance, be brought into the account as an item of receipt; and that the statutory provisions which exempt the interest from tax are to be given effect to by then removing altogether that item from the statement of profits and gains, and removing with ....