Chancery Lane Safe Deposit and Offices Company Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 1965 |
| Date | 15 December 1965 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax - Mortgage interest charged to capital - Whether payable out of profits or gains brought into charge to tax - Appeal against first assessment to income tax for one year settled by agreement - Whether additional assessment competent - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 169, 170 and 510.
The Appellant Company borrowed money on mortgage to finance the rebuilding of its premises and the erection of new buildings. On the advice of its auditors, a proportion of the interest was charged to capital in the Company's accounts. The Company's income was such that (except in one year) it could have paid the whole of the interest out of profits or gains brought into charge to tax.
The Company was assessed to income tax under s. 170, Income Tax Act 1952, for the years 1954-55 to 1958-59 inclusive on the interest so charged to capital. On appeal, the Company contended (1) that the payments fell within s. 169, Income Tax Act 1952, and (2) that the assessment under s. 170 for the year 1955-56 was barred by an agreement in writing under s. 510, Income Tax Act 1952, in respect of the original assessment for that year. The Special Commissioners dismissed the appeal.
Held, (1) that, since the Company's decision to attribute part of the interest to capital had a practical effect on the amount of the distributable fund represented by, the balances of the profit and loss account carried forward from year to year, the Company could not make an inconsistent attribution for tax purposes; (2) that the agreement relating to the assessment for 1955-56 did not touch the matter in dispute.
Stated under the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts, for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 9th and 10th May 1963, Chancery Lane Safe Deposit & Offices Co. Ltd. (hereinafter called "the Company") appealed against the following assessments to income tax made on various dates in 1960 and 1961 under s. 170 of the Income Tax Act 1952 in respect of mortgage interest:
Year of assessment |
Amount of assessment |
£ |
|
1954-55 |
3500 |
1955-56 |
12,000 |
1956-57 |
14,000 |
1957-58 |
5000 |
1958-59 |
1121 |
2. Shortly stated, the main question for our decision was whether, in the circumstances hereinafter appearing, certain sums of mortgage interest paid by the Company should for tax purposes be regarded as having been paid out of capital. A further question for our decision, in relation to the year 1955-56 only, was whether the assessment was barred by reason of the provisions of s. 510 of the Income Tax Act 1952.
3. The following witnesses gave evidence before us: Sir William Speight Carrington, partner in the firm of Messrs. Whinney, Smith and Whinney, chartered accountants, and Mr. Leonard Anthony Pye, a higher executive officer employed by the Commissioners of Inland Revenue.
4. The following documents were proved or admitted before us:
(2) Memorandum and articles of association of the Company.
(3) Summary of income and charges (exhibit 1 hereto(1) ).
(4) Copies of accounts for year ended 31st December 1954, 15 months ended 24th March 1956, and each of the years ended 24th March 1957, 1958 and 1959.
(5) Summary of profit and loss accounts (exhibit 2 hereto(1) ).
(6) (a) W.S.C.1, (b) W.S.C.2, and (c)W.S.C.3.-schedules prepared by Sir William Speight Carrington (exhibit 3 hereto(1) ).
(7) Notice of assessment for 1955-56 and letter of 5th December 1957, notice of appeal dated 6th December 1957, and letter of 30th December 1957 (exhibit 4 hereto(1) ).
(8) Letter of 16th March 1959 from H.M. Inspector of Taxes to the Company's accountants.
(9) Letter of 21st April 1959 from the Company's accountants to H.M. Inspector of Taxes.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts admitted or proved.
(2) The Company was incorporated in 1894 to purchase and carry on the business known as the Chancery Lane Safe Deposit. It is a public company. The safe deposit was situated in the basement of certain buildings in Chancery Lane; the upper parts of the buildings owned by the Company were let to various tenants. Most of the upper parts were destroyed by enemy action in 1940 and 1941; thereafter for many years only the safe deposit and some small sections of the buildings were usable. Rebuilding commenced in 1949 and a new safe deposit in a slightly different position was opened in 1953. Rebuilding of the upper structures and the erection of new buildings continued until 1958.
(3) The origin of the dispute between the Company and the Inland Revenue was this. For the purpose of financing the rebuilding and the erection of new buildings the Company borrowed money on mortgage; £100,000 was borrowed in 1954 and further sums were borrowed in 1955 and 1956, in order to make progress payments to the builders, until the amount of borrowing reached £650,000, at which sum it remained until 1957. In the Company's financial year ending 24th March 1958 a start was made to repay the mortgages, and by the end of the year to March 1961 the Company had repaid all the mortgages. It is the treatment for tax purposes of part of the interest paid on the aforesaid mortgages that is in dispute between the parties.
(4) A summary of the Company's income and of charges and deductions expended or claimed for the years 1954-55 to 1958-59 inclusive is contained in document (2), which is attached to and forms part of this Case as exhibit 1(1). Briefly, the profit assessable under Case I of Schedule D (the safe deposit business) was covered for the most part by capital allowances. The main items of income were rents (assessable under Schedule A) receivable in respect of buildings let by the Company to various tenants. The income assessed under Schedule A showed a progressive increase in step with the completion of rebuilding and the erection of new buildings which were let as soon as they were ready for occupation. In 1954-55 the total income of the Company as assessed to income tax was £8,933: by 1958-59 it was £75,383. The only items of expenditure by the Company with which we were concerned were those for mortgage interest. It will be seen from exhibit 1 that the mortgage interest paid in the year 1954-55 was £3,260; by 1957-58 it was £29,149 and in 1958-59 (in which year the Company started to repay the mortgages) it was £28,879. It is apparent from the details contained in exhibit 1 that if the Company had chosen to do so it could have paid the greater part of the mortgage interest out of profits and gains brought into charge to tax.
(5) During the period in question, the Company paid dividends to its shareholders, and the amounts of the dividends in relation to the amounts of mortgage interest charged to capital, and to the balance on the Company's profit and loss account, are set out in document (4), which is attached to and forms part of this Case as exhibit 2(1).
-
(6) The Company consulted its auditors, Messrs. Whinney, Smith & Whinney, and accepted their advice as to the proper treatment of mortgage interest in its accounts. The auditors advised the Company that, in order to give a true and fair view of the Company's affairs, and in particular to bring out the cost of the rebuilding and the erection of the new buildings above
referred to, and in accordance with general accountancy practice, it was proper to charge to capital the cost of finance during the period of construction in cases where the outlay was substantial in relation to the size of the Company. We accepted as a fact that this was a proper method for accounting purposes. Sir William Carrington produced a copy of a calculation (document (5)(a), which is attached to and forms part of this Case as exhibit 3 (a)(1) ) which he made for the Company's accounting period to 24th March 1957 in order to arrive at the correct proportion of the mortgage interest to be capitalised in the Company's accounts. All other relevant years were dealt with on similar lines. Briefly, the Company's surveyor was asked to estimate the rents that might be obtained when the building was completed: this letting potential is the denominator (£95,000 for the year ending 24th March 1957) in exhibit 3(a). The actual rents received from the partly completed building (£48,456) is the numerator. The gross amount of mortgage interest paid for the year was £26,536. Using the aforesaid denominator and numerator, the resulting proportion of the mortgage interest to be charged to revenue was 51 per cent. and to be charged to capital 49 per cent. (£13,000). The amounts of mortgage interest charged to capital in the Company's accounts were (as shewn in exhibit 2) as follows:1954-55
£2,753
1955-56
£11,324
1956-57
£13,000
1957-58
£4,372
1958-59
£1,121
(7) The facts stated in this sub-paragraph are concerned with the subsidiary question in dispute, i.e., whether the assessment made on 10th February 1961 for the year 1955-56 was barred by reason of the provisions of s. 510, Income Tax Act 1952.
Contained in document (6), which is attached to and forms part of this Case (as exhibit 4)(1), are the following:
(a) A notice of assessment for the year 1955-56, dated 28th November 1957, on interest paid, £4,216.
(b) A letter dated 5th December 1957 from Messrs. Whinney, Smith & Whinney to H.M. Inspector of Taxes, with which was enclosed a formal notice of appeal, dated 6th December 1957, against the aforesaid assessment; the letter said
.... We wish to point out that in connection with the assessment for the year 1955-56, according...
To continue reading
Request your trial
-
Commissioners of Inland Revenue v Plummer
... ... from the High Court of Justice Chancery Division (Revenue Paper) (Mr. Justice Walton) ... The Slater Walker Group included a company called Baldrene Ltd. ("Baldrene") of which the ... Stated) and a memorandum of agreement to deposit with Hovas securities having a value equivalent ... to his fund of taxed income ( Chancery Lane Safe Deposit and Offices Co. Ltd. v ... ...
-
Scorer v Olin Energy Systems Ltd
... ... FROM THE HIGH COURT OF JUSTICE CHANCERY DIVISION (REVENUE PAPER) (MR. JUSTICE ... CARNWATH (instructed by The Solicitor of Inland Revenue) appeared for the Respondent ... , whether profits earned by the appellant company for a particular accounting period fell to be ... set out in the case stated by the Commissioners for the Special Purposes of the Income Tax Acts ... 13 In 1964 the case of Chancery Lane Safe Deposit and Offices Co. Ltd. v ... ...
-
Scorer (Inspector of Taxes) v Olin Energy Systems Ltd
... ... The special commissioners answered this question in Olin's favour. On l by the Inland Revenue by way of case stated Walton J. reversed ... 371 , per Wilberforce J., at p. 386; Chancery Lane Safe Deposit and Offices Co. Ltd, v. Inland ... profit and loss account of the respondent company which showed the interest as a deduction from the ... ...