Central London Railway Company v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 21 May 1936 |
| Date | 21 May 1936 |
| Court | House of Lords |
NO. 987-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax - Interest payment charged to capital account under private Act - Taxed income of payer sufficient to meet interest - Whether interest payable or paid out of profits or gains brought into charge - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Section 36, and General Rules 19 and 21; Finance Act, 1927 (17 & 18 Geo. V, c. 10), Section 26.
The Appellant Company in the first case issued certain debenture stock under statutory powers which, inter alia, enabled the Company, during the material periods, to charge the interest thereon to capital. In the Company's accounts for the year 1930, which were in the statutory form prescribed for railway companies' accounts, the interest, which was paid under deduction of tax, was charged, as to part, to capital account.
The Company had only one banking account into which all moneys were paid and out of which all payments were made. The amount of income on which Income Tax had been paid or suffered by the Company for the year 1930-31 was ample to satisfy the payment of the debenture interest.
The Company was assessed under General Rule 21 (as amended by Section 26 of the Finance Act, 1927) for the year 1930-31 on the amount of the debenture interest charged to capital in its accounts. On appeal, the Company contended (a) that the form of its accounts did not affect its liability to Income Tax and, although the payment was debited to capital account, that did not make it a payment out of capital in fact; and (b) that, as there existed adequate taxed income out of which the payment of the interest could be made, it must be deemed to have been paid out of that income.
The facts and contentions in the second case presented no material differences from those in the first case.
In the third case, the Appellant Company had statutory power to charge to capital account the interest on certain moneys borrowed from a bank. Up to December, 1929, the interest was debited in the Company's accounts, which were in statutory form, to a suspense account and was later transferred to a capital account, to which was also charged the interest for subsequent periods. The income of the Company, on which tax had been paid or suffered, was adequate to pay the interest to the bank. The Company claimed repayment of Income Tax under Section 36 of the Income Tax Act, 1918, for the years 1927-28, 1928-29 and 1929-30, in respect of the interest paid to the bank, contending that such interest had been paid out of profits or gains brought into charge to tax.
Held, that the interest in the first two cases was not "payable "out of profits or gains brought into charge" within the meaning of General Rule 19 of the Income Tax Act, 1918, and that in the third case the interest was not "paid out of profits or gains "brought into charge" within the meaning of Section 36 of that Act.
(1) Central London Railway Co. v. Commissioners of Inland Revenue
CASE
Stated under the Income Tax Act, 1918, Section 149, and the Finance Act, 1927, Section 26, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on the 20th March, 1933, the Central London Railway Company, hereinafter called "the Appellant "Company", appealed against an assessment to Income Tax in the sum of £2,340 1s.11d. for the year ending 5th April, 1931, made upon it under the provisions of the Income Tax Acts.
1. The said assessment was made by the Special Commissioners under the provisions of Rule 21 of the General Rules applicable to Schedules A, B, C, D and E of the Income Tax Act, 1918, as amended by Section 26 of the Finance Act, 1927.
2. Under powers contained in the London Electric, Metropolitan District, Central London and City and South London Railway Companies Act, 1930, hereinafter referred to as "the "Railway Companies Act", the Appellant Company raised £850,000 by means of an issue of 5 per cent. Redeemable Debenture Stock 1985-95. The interest on this stock ranks as a first charge upon the Company's revenues pari passu with the interest upon the Company's other debenture stocks, which stocks amount to £1,534,000. A copy of the Railway Companies Act, marked "A", is annexed to and forms part of the Case(1).
3. Under the provisions of the Railway Companies Act the Appellant Company had power to charge interest on the said debentures to capital account. Parts IX and X of the Railway Companies Act contain the financial provisions affecting the Appellant Company. Our attention was directed, in particular, to Section 106, 109, 117, 118, 123 and 124.
4. At the hearing reference was made to the Central London Railway Act, 1891, a copy of which, marked "B", is annexed to and forms part of the Case(1). Section 24 of this Act, in particular, was referred to.
5. The said Debenture Stock was offered for sale to the public on 8th October, 1930, by Baring Brothers & Co., Limited, N. M. Rothschild & Sons and J. Henry Schroder & Co. A copy of the prospectus containing this offer, marked "C", is annexed to and forms part of the Case(1). The copy of a letter written by the Appellant Company's Chairman, contained therein, was read at the hearing.
6. The following statement shows the amounts on which Income Tax was paid or suffered by the Appellant Company for 1930-31 and the annual payments from which Income Tax was deducted. The sum of £4,250 shown therein as interest on 5 per cent. Debenture Stock charged to capital account represents the gross amount (without deduction of Income Tax) of interest paid upon the 5 per cent. Redeemable Debenture Stock 1985-95 referred to in paragraph 2 hereof:-
Amount |
|
£ |
|
Case I assessment for 1930-31 (based on profits for 1929) |
280,282 |
Assessed under Schedule A |
7897 |
Income received under deduction of tax |
4982 |
£293,161 |
£ |
|
Chief rents paid |
827 |
Interest on Debenture Stocks :- |
|
Interest on 5 per cent. Debenture Stock charged to capital account |
4250 |
Interest on other debenture stock |
65,150 |
£70,227 |
|
Dividends :- |
|
Preference Dividend |
21,600 |
Ordinary Dividend |
150,000 |
£241,827 |
7. The Appellant Company's Accounts are published in accordance with the Railway Companies (Accounts and Returns) Act, 1911, and Section 77 (1) of the Railways Act, 1921.
A copy of the Appellant Company's Accounts for the year ended the 31st December, 1930, marked "D", is annexed to and forms part of the Case(1).
The sum of £2,340 1s. 11d. appearing in Account Number 5 headed "Details of capital expenditure for year ended 31st December, "1930", under the description of "Interest on 5% Redeemable "Debenture Stock (1985-95) during construction, less interest "on unexpended proceeds", is the sum of £4,250 referred to in the last preceding paragraph, less an allocation of £1,909 18s. 1d. out of the general interest received by the Appellant Company to represent interest received upon the unexpended proceeds of the Debenture issue. The general interest received by the Company is all taxed in its hands, and the assessment under appeal has therefore been restricted to the aforesaid amount of £2,340 1s. 11d.
This item is also reflected in Accounts Numbers 4, 7 and 19. The said sum of £2,340 1s. 11d. represents the gross amount of the interest in question; the Appellant Company in fact paid its debenture interest (including this sum) less Income Tax at the current rate. The Income Tax so deducted from the said sum of £2,340 1s. 11d. is held in suspense pending the final determination of the appeal.
8. The following table sets out the available profits of the Appellant Company for the year 1930 and reserves at 31st December, 1930:-
£ |
|
Balance of profits per page 3 of published Accounts |
380,809 |
Less : |
|
Rentals, &c. |
£10,587 |
Debenture interest charged to revenue |
65,150 |
75,737 |
|
305,072 |
|
Less : |
|
*Appropriation to reserve for contingencies |
21,410 |
283,662 |
|
Less : |
|
Dividend on Preference Stock |
21,600 |
262,062 |
|
Less : |
|
Dividend on Ordinary Stock |
150,000 |
Revenue account balance carried forward |
112,062 |
Less : |
|
|
Interest charged to capital account per Rule 21 assessment |
2340 |
109,722 |
|
Add : |
|
*The amount appropriated during the year to reserve for contingencies (as above) |
21,410 |
£131,132 |
In addition there are the following accumulated taxed reserves shown on the General Balance Sheet-
Account No. 19 of published Accounts :- |
|
Renewal Funds |
£287,247 |
Contingencies |
48,994 |
£336,241 |
9. The Appellant Company has only one banking account, into which all moneys are paid, and out of which all payments are made.
10. On behalf of the Appellant Company it was contended that:-
(2) The fact that a payment is debited to capital account does not make it a payment out of capital in fact.
(3) The form of the Appellant Company's Accounts does not affect its liability to Income Tax.
(4) As there existed adequate taxed income out of which the payment of the interest in question could be made, it must be deemed to have been paid out of that income.
(5) The assessment, the subject of the appeal, imposes pro tanto a double charge to tax upon the Appellant Company's profits.
(6) The true effect of Section 118 of the Railway Companies Act, upon the exercise of the option to charge the interest in question to capital account, was not to cause the interest to be paid out of capital, but to permit a modification of the statutory form of the Accounts and to confer upon the Appellant Company, in relation to that interest, that liberty of action, in the...
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