Central London Ry. Company v Commissioners of Inland Revenue ; London Electric Ry. Company v Commissioners of Inland Revenue ; Metropolitan Ry. Company v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Blanesburgh,Lord Macmillan |
| Judgment Date | 21 May 1936 |
| Judgment citation (vLex) | [1936] UKHL J0521-1 |
| Date | 21 May 1936 |
| Court | House of Lords |
[1936] UKHL J0521-1
House of Lords
Lord Chancellor.
Lord Blanesburgh.
Lord Russell of Killowen.
Lord Macmillan.
Lord Roche.
After hearing Counsel, as well on Monday the 10th, as on Tuesday the 11th, Thursday the 13th and Friday the 14th, days of February last, upon the Petition and Appeal of the Central London Railway Company, of 55, Broadway, Westminster, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal, of the 22d of June 1934, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Order might be reversed, varied, or altered, or that the Petitioners might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 22d day of June 1934, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
I have had the advantage of reading in print the Opinion which my noble and learned friend, Lord Macmillan, has prepared and which he is about to deliver. I entirely concur in that Opinion and in the motion with which my noble and learned friend proposes to conclude.
My Lords,
I am authorised by the Lord Chancellor, Lord Russell of Killowen and Lord Roch to indicate their concurrence in the Opinion which I am about to deliver.
My Lords,
In these three appeals, which were heard together, substantially the same question is raised. I propose to follow the example of counsel in selecting as typical the case of the Central London Railway Company.
The facts may be briefly stated. In 1930 the Railway Company by a private Act passed in that session were empowered to raise £850,000 of additional capital by means of an issue of 5 per cent. Redeemable Debenture Stock. By Section 118 of the Act the Railway Company were authorised to charge to capital account for five years the interest accruing on all money raised by the issue. The Debenture Stock was duly issued and was purchased by certain issuing houses which in turn offered it for sale to the public.
In the year ending 31st December, 1930, the Railway Company paid interest amounting to £4,250 to the holders of this Stock. To the extent of £1,909 18s. 1d. this sum was met out of interest on the unexpended proceeds of the issue. The balance of £2,340 1s. 11d. was charged to capital account by the Railway Company in pursuance of the power to do so conferred by Section 118 of the Act. In the statutory accounts compiled and published by the Railway Company in compliance with the Railway Companies (Accounts and Returns) Act, 1911, for the year to 31st December, 1930, this sum of £2,340 Is. 11d. appeared as an item in Account No. 5, "Details of Capital Expenditure for Year ended 31st December, 1930", where it was described as "Interest on 5 per cent. Redeemable Debenture Stock (1985/1995) during construction, less interest on unexpended proceeds".
The total interest paid by the Railway Company in the year 1930 on this and their other debenture stocks was just under £70,000. For the fiscal year ending 5th April, 1931, the profits or gains of the Railway Company as assessed for income tax purposes on the basis of their profits for the year to 31st December, 1929, under Case I of Schedule D of the Income Tax Act, 1918, amounted to over £280,000, apart from an assessment of £7,897 under Schedule A and £4,982 of income received under deduction of tax. It will thus be seen that the total interest which the Railway Company paid to their debenture stockholders in 1930 was a much smaller sum than their assessed income for tax purposes for the year 1930-31.
On paying the £4,250 of interest to their new debenture stockholders in the year 1930 the Railway Company deducted the income tax thereon. They maintain that they are entitled to retain for their own uses the whole of the tax so deducted and are not bound to account for any part of it to the Crown. No question has been raised as to their right to retain the tax on the £1,909 18s. 1d. of interest which they charged to revenue account. It is solely with the question of their right to retain the tax deducted from the £2,340 Is. 11d. which they debited to capital account that the present case is concerned.
To answer this question your Lordships have once more to consider Rules 19 and 21 of the General Rules applicable to All Schedules of the Income Tax Act, 1918. These two Rules and the previous similar enactments which they replaced have on several occasions been the subject of examination by your Lordships.
The material words of Rule 19 are as follows:—
"19.—(1) Where any yearly interest … is payable wholly out of profits or gains brought into charge to tax, no assessment shall be made upon the person entitled to such interest, … but the whole of those profits or gains shall be assessed and charged with tax on the person liable to the interest … and the person liable to make such payment … shall be entitled on making such payment to deduct and retain thereout a sum representing the amount of the tax thereon …."
Rule 21 deals with the converse case of payments of interest "not payable or not wholly payable out of profits or gains brought into charge" and requires the payer in such cases to deduct tax when making payment and to deliver an account of the amount of tax so deducted to the commissioners, who are thereupon directed to assess and charge the same against the payer.
It will thus be seen that the Railway Company, in order to justify the retention of the tax deducted by them in paying the £2,340 1s. 11d. of interest must show that it was "payable wholly out of profits or gains brought into charge to tax."
In ordinary course a company in preparing its profit and loss account, in order to ascertain the profit on its year's trading available for dividend, debits revenue with the interest which it has had to pay to its debenture holders who are among its creditors. But in compiling a return of its profits or gains for tax purposes a company is not permitted to deduct such interest. This is forbidden by Rule 3 of the Rules applicable to Cases I and II of Schedule D which enacts that "in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of … ( l) any annual interest." Consequently as the amount of the debenture interest is not a permissible deduction it forms an element in the computation of the company's profits or gains for income tax purposes, on which it pays tax in the following year. But in a question with its debenture holders the company is entitled to deduct income tax from the interest which it pays to them and to retain the tax so deducted if the interest is "payable out of profits or gains brought into charge to tax."
The requirement that the company shall, at any rate primo loco, pay income tax in respect of what it has to pay out to its debenture holders is part of the general scheme of deduction of tax at the source. The qualified right which it possesses to recoup itself by retaining the tax which it in turn deducts in making payment to its debenture holders of the interest which it owes to them has been justified on various grounds, as for example that the company may be regarded as sharing its income with its debenture holders and, having paid the tax both on its own and on their share, is properly entitled on handing the debenture holders their share to deduct and retain the tax it has paid on that share. [ Cf. per Lord Davey in London County Council v. Attorney-General, [1901] A.C. 26 at p. 42.] The object is plainly to avoid double taxation of the same income.
But the language in which Rule 19 is expressed gives rise to much difficulty. The critical words "payable out of profits or gains brought into charge to tax" manifestly cannot be read literally. If the expression "profits or gains brought into charge to tax" be taken to mean the assessed profits or gains on which the company is charged to and pays tax in the year in which it makes the payment of interest then the statutory requirement could never be fulfilled when the assessed profits are based on a return made by the company of its actual profits for the preceding year. It is only where interest is paid out of income taxed in the year of its receipt as, e.g., out of dividends taxed by deduction, that the payment can be made out of actual profits or gains brought into charge in the same year as that in which the payment of interest is made, for it is only in such a case that assessed income is based on the year of charge and not on the preceding year. An illustration will make the matter clear. Assume that the results of a company's trading for three consecutive years are as follows:—
1st Year. Profits before payment of debenture interest, £10,000.
2nd Year. Profits before payment of debenture interest, Nil.
3rd Year. Profits before payment of debenture interest,...
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