Chancery Lane Safe Deposit and Offices Company Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
JudgeLord Reid,Lord Morris of Borth-y-Gest,Lord Upjohn,Lord Wilberforce,Lord Pearson
Judgment Date15 December 1965
Judgment citation (vLex)[1965] UKHL J1215-1
Date15 December 1965
CourtHouse of Lords

[1965] UKHL J1215-1

House of Lords

Lord Reid

Lord Morris of Borth-y-Gest

Lord Upjohn

Lord Wilberforce

Lord Pearson

Chancery Lane Safe Deposit and Office Co. Ltd.
and
Commissioners of Inland Revenue

Upon Report from the Appellate Committee, to whom was referred the Cause Chancery Lane Safe Deposit and Office Co. Limited against Commissioners of Inland Revenue, that the Committee had heard Counsel, as well on Thursday the 21st as on Monday the 25th, Tuesday the 26th and Wednesday the 27th, days of October last upon the Petition and Appeal of Chancery Lane Safe Deposit and Office Co. Limited, whose Registered Office is situate at Chancery House, 53-64 Chancery Lane, London, W.C.2, praying. That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 26th of November 1964, might be reviewed before Her Majesty the Queen, in Her 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 Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the 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 Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 26th day of November 1964, 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.

Lord Reid

My Lords,

1

The Appellants were assessed to Income Tax under section 170 of the Income Tax Act, 1952, for the five years 1954/55 to 1958/59 in respect of sums amounting in all to some £35,000. Subject to slight reduction in amount these assessments were confirmed by the Special Commissioners. On appeal Plowman, J. discharged the assessments but they were restored by the Court of Appeal.

2

The Appellants have owned for many years premises in Chancery Lane consisting of a basement which they use as a safe deposit and upper storeys which they let out. During the last war the upper storeys were destroyed by enemy action and, in order to finance reconstruction, they borrowed large sums from time to time. In paying interest on these sums they properly deducted tax. The sums in these assessments are part of the interest so paid so that, if these assessments stand, the Appellants will have to pay over to the Respondents the amounts of tax which they have deducted and retained in respect of this interest. It is admitted by the Respondents that the parts of the interest not included in the assessment fall within the scope of section 169 so that the Appellants are entitled to retain the income tax deducted with respect to these parts.

3

The Respondents make this difference because of the way in which the Appellants treated this interest in making up their accounts. On the advice of their auditors the Appellants debited to capital those parts of the interest which are now the subject of this assessment, and debited the rest to revenue account. Apart from one year about which no question now arises, the Appellants had in each year ample profits to cover the whole of this interest and admittedly it would have been quite proper both from an accounting and from a legal point of view for them to have debited the whole of the interest in each year to revenue account. But the Appellants chose to follow their auditors' advice and it is not disputed that in so doing they acted quite legally and followed the better accounting practice. But the Respondents assert that by taking this course the Appellants have increased their tax liability, though they gained no financial advantage by doing so. I find it impossible to suppose that Parliament can have intended such a strange result but I must proceed to consider whether we are compelled either by the wording of the relevant section or by weight of authority so to find.

4

The relevant parts of section 169 and 170 are as follows:

"Section 169 (1) Where any yearly interest of money annuity or other annual payment is payable wholly out of profits or gains brought into charge to tax—

( a) no assessment shall be made on the person entitled to the interest, annuity or annual payment; and

( b) the whole of the profits or gains shall be assessed and charged with tax on the person liable to the interest, annuity or annual payment, without distinguishing the interest, annuity or annual payment; and

( c) the person liable to make the payment whether out of the profits or gains charged with tax or out of any annual payment liable to deduction, or from which a deduction has been made, shall be entitled, on making the payment, to deduct and retain out of it a sum representing the amount of the tax thereon at the standard rate for the year in which the amount payable becomes due; and

( d) the person to whom the payment is made shall allow the deduction on receipt of the residue of the payment, and the person making the deduction shall be acquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid.

Section 170 (1) Where—

( a) any interest of money, annuity or other annual payment charged with tax under Schedule D;

is not payable or not wholly payable out of profits or gains brought into charge, the person by or through whom any payment thereof is made shall, on making the payment, deduct out of it a sum representing the amount of the tax thereon at the standard rate in force at the time of the payment.

(2) Where any such payment as aforesaid is made by or through any person, that person shall forthwith deliver to the Commissioners of Inland Revenue, for the use of the Special Commissioners, an account of the payment, or of so much thereof as is not made out of profits or gains brought into charge, and of the tax deducted out of the payment or out of that part thereof, and the Special Commissioners shall assess and charge the payment for which an account is so delivered on that person."

5

There has been in the past a good deal of misunderstanding of section 169 (or of the old Rule 19 which it replaced) so I think it best to begin by analysing its language. There is no doubt that in applying section 169 each year must be taken separately—there is no question of carrying forward any balance, real or notional, from a previous year. So you must first find an annual payment actually paid during the year in question, and it is not disputed that the sums now assessed are such payments. Then the annual payments must have been "payable wholly out of profits or gains". I shall have to return to this phrase later and I only note here that the word is "payable" not "paid". And finally the annual payment must have been payable out of "profits or gains brought in charge to tax". And that requires a good deal of explanation.

6

If these conditions are satisfied the taxpayer is entitled to deduct tax when paying the annual payment to his creditor and he is permitted to retain that tax. That produces a fair result. In making up profit and loss accounts for income tax purposes these annual payments are not permissible deductions although ordinary principles of commercial accounting would require them to be deducted before the taxpayer's real profit was determined. So in the first instance the taxpayer pays too much tax but as against that he gets the right under section 169 to retain the tax which he deducts. But the working out of this scheme is complicated by the fact that the "profits or gains brought into charge to tax" for a particular year are not the actual profits for that year. They are a notional sum computed on income tax principles from the trader's accounts for the previous year. So the apparent difficulty arises—how can a real annual payment be payable out of such a notional sum? The solution of that problem requires a close examination of the authorities. But if one carries the matter a stage further the real situation may become clearer. The profits brought into charge may be a notional sum, but the tax which the taxpayer has to pay on that notional sum is a very real sum, and there is no difficulty in comparing that sum with the amount of tax which he actually deducts in making the annual payments to his creditor. The practical result is that, if the taxpayer actually pays for a particular year a larger amount of tax than the amount of tax which he deducts in that year in making the annual payments, then he is entitled to retain the tax which he has so deducted.

7

If one were entitled to adopt such a straightforward approach, the point for decision in this case would become simple. In each of the years in question the Appellant company did pay more tax than the amounts of tax deducted in making the annual payments. It is not disputed that, but for the way in which they chose to make up their accounts, they were entitled to retain the whole of the tax so deducted. So why should the way in which they kept their accounts produce a windfall for the Revenue and in effect produce double taxation?

8

The true interpretation of the old Rule 19 was first explained by Lord Macmillan in his speech, unanimously adopted, in Central London Railway Co. v. C.I.R. [1937] A.C. 77and it was further developed by Lord Greene in Allchin v. South Shields [1942] 2 K.B. 228, and his explanation was unanimously accepted in this House ( [1943] A.C. 607). As Lord Macmillan pointed out the real difficulty was...

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