Commissioners of Inland Revenue v Reid's Trustees
| Jurisdiction | England & Wales |
| Judge | Lord Simonds,Lord Normand,Lord Morton of Henryton,Lord MacDermott,Lord Reid |
| Judgment Date | 20 January 1949 |
| Judgment citation (vLex) | [1949] UKHL J0120-4 |
| Docket Number | No. 4. |
| Court | House of Lords |
[1949] UKHL J0120-4
House of Lords
Lord Simonds
Lord Normand
Lord Morton of Henryton
Lord MacDermott
Lord Reid
Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against Trustees of Reid, that the Committee had heard Counsel, as well on Tuesday the 30th day of November last, as on Wednesday the 1st and Thursday the 2d, days of December last, upon the Petition and Appeal of the Commissioners of Inland Revenue, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland, of the First Division, sitting as the Court of Exchequer, of the 21st of July 1947, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Interlocutor 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 Trustees of Joseph Reid, deceased, 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 Interlocutor of the 21st day of July 1947, complained of in the said Appeal, be, and the same is hereby, Reversed except in regard to expenses, and that the Question of Law be answered in the affirmative: And it is further Ordered, That the said Cause be, and the same is hereby, remitted back to the Court of Session in Scotland to do therein as shall be just and consistent with this Judgment: 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 to this House, the amount of such Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That unless the Costs, certified as aforesaid, shall be paid to the parties entitled to the same within one calendar month from the date of the certificate thereof. the Court of Session in Scotland, or the Judge acting as Vacation Judge, shall issue such summary process or diligence for the recovery of such Costs as shall be lawful and necessary.
My Lords,
This appeal is brought against an Interlocutor pronounced by the First Division of the Court of Session as the Court of Exchequer in Scotland upon a case stated under s. 149 of the Income Tax Act, 1918. The case was stated upon a requisition by the appellants who were aggrieved by a determination of the Commissioners for the Special Purposes of the Income Tax Acts discharging an assessment upon the Respondents in a sum of £6,866 in circumstances which I shall shortly narrate. That determination was upheld in the Court of Session. Hence the appeal to this House.
The facts are fully set out in the case and I think it necessary to state only so much as will make the opinion that I have formed intelligible.
The Respondents are the trustees of the will of Joseph Reid, an iron merchant of Glasgow, who died in the year 1909. The assets of the trust include 3,433 shares of £10 each in a South African company, Reid Brothers (South Africa) Limited, which had in the year 1918 been incorporated in the Transvaal under the Companies Act, 1909 (Act No. 31 of 1909). The objects for which it was established were to purchase and carry on the business of Reid Brothers (Johannesburg) Limited, which had been incorporated under the Companies (Consolidation) Act of 1908 with its registered office in Scotland, and to carry on the business of iron and steel merchants and kindred businesses which did not include the buying and selling of land.
The shares in question are held by the trustees as to one quarter for each of the three daughters of the truster for their respective life rents, the fee being payable to their respective heirs, and as to the remaining quarter upon discretionary trusts for behoof of a son of the truster.
On the 23rd October, 1943, the Board of Directors of the company recommended a payment of a dividend of 15 per cent. from the trading Profits of the company for the year ended the 30th June, 1943. This dividend was declared accordingly at the annual general meeting of the company on the 14th December, 1943, and, so far as it was paid to shareholders in the United Kingdom (including the Respondents), it was subjected to deduction of United Kingdom Income Tax in the hands of he paying agent of the company, one James M. Reid. On the same 23rd October, 1943, the Board of Directors also resolved that a dividend of 20 per cent. be declared from capital profits realised on the sale of properties during the past financial year. This dividend also was duly declared and paid. No deduction of income tax was made in the hands of the paying agent or otherwise. The sum of £6,866 now in question represents this dividend of 20 per cent. upon the 3,433 shares held by the Respondents. I am content to state thus shortly the facts which are set out in great detail in the case because I do not understand it to be denied by the Crown, that the dividend of 20 per cent. was in fact paid out of what are conveniently called "capital profits," that is to say, profits which were derived from a sale of capital assets at an enhanced value, and would not, if the company were being assessed to tax under Case I of Schedule D, be included in the computation of its trading profits.
It is in these circumstances that the question arises whether the Court of Session, affirming the Special Commissioners, has rightly held that tax is not exigible.
The claim of the Appellants is founded on Case V of Schedule D. They say that this sum of £6,866 is "income arising from possessions out of the United Kingdom," that the shares in a South African company are possessions out of the United Kingdom and that the sum in question is income arising from those shares. They say that there is no tertium quid. This sum is either capital or income. How can it be capital, if the shares remain intact, so many shares of £10 each in the capital of the company? There is a way of distributing a dividend, while leaving the capital intact, and there is a way of returning part of the capital: it is the former course that has here been taken. This then, they say, is income. When Lord Macnaghten reminded this House in an oft-quoted phrase that income tax is a tax upon income, he did not mean that that only was income which fell within Case I of Schedule D, but he intended a wider and more popular test, a test which is here satisfied by the fact that the sum has been without question treated not as capital but as income of the trust and that this treatment has legal sanction in relevant decisions of high authority, see, e.g., R. A. Hill v. Permanent Trustee Company of New South Wales Ld., [1930] AC. 720, In re Bates [1928] Ch. 682 In re Doughty [1947] 1 A.E.R. 207, Forgie's Trustees v. Forgie [1941] S.C. 188.
My Lords, this is the short and simple case made by the Appellants and I see no answer to it. The learned Lord President accepted an answer which he thus stated:
"The short answer of the Respondents, accepted by the Special Commissioners after investigating the facts, is that this sum is not the income of anyone, and never was. I agree."
My Lords, I must say with great respect that I think that this conclusion can only be reached by ignoring that what may be regarded as capital in the hands of the payer may yet be income in the hands of the payee. It is begging the question to say that this sum is not income in the hands of the shareholders: by every practical test it has proved to be income.
I will assume that the money out of which the dividend was paid was capital in the hands of the Company for the purpose at any rate of ascertaining its taxable profit. I think that the Commissioners were entitled to find that as a fact; but it was not the fact, and they were not entitled to find as a fact, that the dividend in the hands of a recipient shareholder was not his income.
But, it was urged, this will create a strange anomaly. If this was an English company, carrying on its trade in the United Kingdom, and the same series of events occurred, an appreciation of capital assets, a realisation of those assets and a distribution by way of dividend of so called capital profits, no income tax would be exigible in respect of them in the hands of the company or of its shareholders. My Lords, let it be so. I think it should not be necessary to repeat what has so often been said in this House that the position of a company resident in the United Kingdom (I will call it an English company) and its shareholders is wholly different from that of a foreign company and its shareholders, who, being resident here, are taxable in respect of income from their foreign possessions. The most striking difference, which itself cuts at the root of any argument based upon a disparity of treatment, is that a shareholder in an English company is not, but a shareholder in a foreign company is, directly assessable to tax in respect of the dividends that he receives. The consequences that flow from this are far-reaching. They led at one time to what was known as the rule in Gilbertson v. Fergusson now happily laid at rest. They still produce this anomaly, that, while a shareholder in an English company is not assessable to tax because the company (though not his agent) has "nationally" paid it for him or because his dividend has been "franked" by payment by the company (both expressions are used), yet the shareholder in a foreign company must pay tax upon the whole of his dividend under Case V, whether or not that dividend has been paid...
To continue reading
Request your trial
-
Rae v Lazard Investment Company Ltd
...for the Crown was based to a large extent on what was said in this House in Commissioners of Inland Revenue v.Reid's Trustees(1), [1949] A.C. 361. In that case a dividend in the form of cash was received from a South African company by a taxpayer in Scotland. It is clear from several of the......
-
Courtaulds Investments Ltd v Fleming
...intact, is a profit in the nature of income arising from that possession:Commissioners of Inland Revenue v. Reid's Trustees(1) [1949] A.C. 361, per Lord Simonds, at pages 371 and 373, per Lord Normand(2), at page 374, per Lord Morton of Henryton(3) , at page 379,per Lord MacDermott(4) , at ......
-
Cherry Court v Revenue Commissioners
... ... V REVENUE COMMISSIONERS 1990 1 IR 334 BENJAMIN ON SALE OF GOODS 8ED 2 CORMACS TRUSTEES V COMMISSIONERS OF INLAND REVENUE 1924 SC 819 CONVEYANCING ACT 1881 S7 ... 1 ... ...
- Cenlon Finance Company Ltd v Ellwood