Attorney General v Metropolitan Water Board
| Jurisdiction | England & Wales |
| Judgment Date | 29 November 1927 |
| Date | 29 November 1927 |
| Court | King's Bench Division |
NO. 649.-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).
COURT OF APPEAL.-
Income Tax - Interest paid out of profits of year for which the assessable profits are nil, basis of assessment being previous year's profits - Whether interest paid out of profits brought into charge to tax - Income Tax Act, 1918 (8 -9 Geo. V, c. 40), Rule 21 of General Rules applicable to Schedules A, B, C, D and E.
The Defendants were a body corporate established by statute for the purpose of providing a public water supply. Their profits were assessable under Rule 3 of No. III of Schedule A, Income Tax Act, 1918, by reference to the profits of the year preceding the year of assessment. For the year 1921-22 the Defendants made no profits, and there was consequently no assessment under No. III of Schedule A for the year 1922-23, but during 1922-23 they received income from various sources on which they suffered by deduction or otherwise £8,027 tax. For 1922-23 their profits amounted to £2,481,085 which formed the basis of the assessment under No. III of Schedule A for 1923-24. During the year 1922-23 the Defendants paid interest on debentures, stock, etc., amounting to £1,668,351, from which they deducted tax at the rates in force during the periods through which the various payments of interest were accruing due. The payments of interest were made out of the Defendants' general fund to which all receipts were credited.
The Crown, by Information, claimed payment from the Defendants, under Rule 21 of the General Rules applicable to all Schedules of the Income Tax Act, 1918, of the sum of £409,060,
representing the tax on the interest paid during the year 1922-23 at the rate in force for that year, less the £8,027 tax suffered by the Defendants in that year. The Defendants contended(2) that they were entitled to retain for themselves the whole of the tax deducted from the interest because the interest was payable and had in fact been paid wholly out of profits or gains brought into charge to tax, namely, out of the £2,481,085 profits of the year 1922-23;
(3) that those profits were the profits or gains brought into charge to tax for the year 1922-23 although the liability to Income Tax for that year was to be measured by the amount of the profits of the preceding year;
(4) that the fact that no assessment had been or could be made for the year 1922-23 was irrelevant.
Held, giving judgment for the Crown for the sum claimed, with costs, that the interest paid during 1922-23 was not wholly payable out of profits or gains brought into charge to tax, the amount of the profits brought into charge for the year 1922-23 by assessment under No. III of Schedule A being nil, and that the provisions of Rule 21 were applicable.
1. The Metropolitan Water Board (hereinafter called "the Board") is a body corporate established by the Metropolis Water Act, 1902 (2 Ed. 7, Ch. 41), for the purpose of acquiring by purchase and of managing and carrying on undertakings of various companies mentioned in the Act and generally for the purpose of supplying water within the area laid down in that Act. In acquiring the undertakings of those Companies the Board was required (Sec. 2 (i) of the Act) to assume the obligations and liabilities of the companies whose undertakings were so acquired including the redeemable debentures issued by those companies.
2. By Section 15 of the Act a water fund is established to which all receipts of the Board have to be carried and out of which all payments by the Board have to be made.
3. By Section 16 (1) of the said Act the Board has power to borrow money for the objects therein specified and by Section 16 (2) it is provided that all money borrowed under this Section shall be raised by means of the issue of water stock under the Act unless the Local Government Board consent to some other mode of raising the money, and, where the Local Government Board so consent, any money raised and the interest thereon shall be charged on the water fund or on such property or revenues of the Water Board, and in such manner as the Local Government Board may sanction.
4. For the purpose of enabling the Board to raise money, which it is authorised to borrow under its Acts, it has powers to create and issue stock known as the Metropolitan Water Stock the principal and interest whereof are charged upon the water fund and on the revenues of the Water Board.
5. Under the provisions of Section 17 of the Act of 1902 the Board has issued Water Stock and at the 31st March, 1923, there were issued and outstanding the following amounts of such stock:-
A Stock, £6,060,164 17s. 1d., bearing interest at the rate of 3 per cent. per annum.
B Stock, £34,469,087 13s. 11d., bearing interest at the rate of 3 per cent. per annum.
C Stock, £4,873,754 18s. 11d., bearing interest at the rate of 51/2 per cent. per annum.
In the course of that year £126,000 of the said "B" Stock had been redeemed and cancelled but the interest on that Stock payable before the dates of cancellation is included in the sum of £1,701,685 15s.8d. below mentioned. The Accounts of the Board are made up to the 31st March in every year. The "B" and "C" Stock is managed and the interest thereon is paid by the Bank of England for account of the Board.
In addition to the Stocks above-mentioned the Board has (pursuant to Section 2 (i) of the Act) assumed liability to pay interest upon certain redeemable debentures which had been issued by the companies whose undertakings had been acquired by the Board to the total amount of £7,217,838 and bearing interest as follows:-
£ |
|
49,950 |
2¾ per cent. Redeemable Debenture Stock. |
7067,888 |
3 |
100,000 |
3½ |
£7,217,838 |
The total of the Board's Water Stock and of the said debentures was £52,620,845 9s. 11d. and the interest charge for the year ending 31st March, 1923, in respect thereof was £1,701,685 15s. 8d.
6. In addition to the interest payable on the said stock and debentures there are also certain annual payments due from the Board which in the year ended 31st March, 1923, amounted to£29,066 1s. 2d. The interest paid on such stock and debentures and the annual payments made for the said year amounted to £1,730,751 16s. 10d. made up as follows:-
"A" Stock |
£181,804 |
19 |
0 |
"B" Stock |
£1,034,914 |
1 |
1 |
"C" Stock |
£268,056 |
10 |
5 |
Redeemable Debentures |
£216,910 |
5 |
2 |
Other annual payments |
£29,066 |
1 |
2 |
It is agreed between the Commissioners of Inland Revenue and the Board that the figures above set out shall for the purposes of this Case be taken to represent the actual amount of interest paid on such stock and debentures and the other annual payments made during the year ending 5th April, 1923.
Part of the said sum of £1,730,751 16s. 10d. was paid gross (without deduction of Income Tax) by the Bank of England while as to the sum of £1,668,351 0s. 7d. (the remainder) the Board or the Bank of England (as to the interest on the "B" and "C" Stock) deducted therefrom on payment the sum of £435,617 3s.0d. as the sum representing the tax thereon at the rate or rates in force during the period through which the interest and other annual payments of which the said sum of £1,668,351 0s.7d. is composed was accruing due.
Income Tax at the rate of 5s. in the £, being the rate in force during the year ending April 5th, 1923, on £1,668,351 0s.7d. amounts to £417,087 15s. 2d.
7. The profits of the Board are assessable under Schedule A in accordance with Schedule A, No. III, Rule 3, Income Tax Act, 1918, by reference to the profits of the year preceding the year of assessment. For the year to the 31st March, 1923, the Board's accounts relating to the said undertaking showed (after adjustment for Income Tax purposes) a profit of £2,481,085 out of which the Board paid the interest referred to in paragraph 6 hereof. This figure formed the basis for an assessment under Schedule A, No III, made upon the Board for the year ended 5th April, 1924, against the amount of which assessment an allowance (including sums carried forward from previous years) in respect of wear and tear of plant and machinery fell to be made to the amount of £798,328 leaving a net figure of £1,682,757 for that year.
The accounts relating to the undertaking of the Board for the year to the 31st March, 1922, disclosed (after adjustment for Income Tax purposes) a loss of £57,366 3s. 2d. and therefore no assessment was due to be made or was made upon the Board under Schedule A, No. III, for the year ending the 5th April, 1923.
8. The increase in the profit made in the year to the 31st March, 1923, is due to the fact that the Board was enabled to raise its charges to the public in consequence of the passing of the Metropolitan Water Board (Charges) Act, 1921, which came into force on the 1st April, 1922.
9. The Board for the said year ending the 31st March, 1923, paid Income Tax or suffered tax by deduction in respect of other income to the extent of £8,027 12s. 3d. on the amount of £32,110 9s. 0d. made up as follows:-
Amount. |
Tax paid or deducted. |
|||||
£ |
s. |
d. |
£ |
s. |
d. |
|
Rent receivable (Sch. A) |
7293 |
3 |
1 |
1823 |
5 |
9 |
Property owned and occupied by the Board (Sch. A) |
11,849 |
14 |
0 |
2962 |
8 |
6 |
Interests on Investments (excluding investments of accumulating Redemption Fund) |
12,967 |
11 |
11 |
3241 |
18 |
0 |
£32,110 |
9 |
0 |
£8,027 |
12 |
3 |
The Board also suffered tax by deduction for the year on £5,019 interest on investments of an accumulating Redemption Fund but for the purposes of this Case it is agreed that this interest is not to be taken into account and except as aforesaid the Board did not become liable to pay by deduction or otherwise any Income Tax in the said year ending 31st March, 1923.
10. The Attorney-General contends that for the year ended the 5th April, 1923, the Board is liable to account to the Commissioners of Inland Revenue under Rule 21 of the General Rules applicable to all Schedules of the Income Tax Act, 1918...
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