Commissioners of Inland Revenue v Australian Mutual Provident Society
Jurisdiction | England & Wales |
Judge | Viscount Simon,Lord Wright,Lord Porter,Lord Simonds |
Judgment Date | 31 March 1947 |
Judgment citation (vLex) | [1947] UKHL J0331-1 |
Date | 31 March 1947 |
Court | House of Lords |
[1947] UKHL J0331-1
House of Lords
Viscount Simon
Lord Wright
Lord Porter
Lord Simonds
Lord Normand
My Lords,
This is an appeal from an Order of the Court of Appeal (Lord Greene M.R., Somervell & Cohen L.J.J.) allowing an appeal by the Respondent Society from the Order of Mr. Justice Macnaghten. The learned Judge had dismissed the Respondent Society's appeal from a decision of the Commissioners for the Special Purposes of the Income Tax Acts upon a Case Stated by those Commissioners.
The Respondent Society carries on Mutual Life Assurance business, having its Head Office in Sydney, New South Wales, but has a branch in London through which it carries on a portion of its life assurance business.
The appeal relates to the computation of the assessable income arising from the profits of the London branch for the years ended 5th April, 1937, 1938, 1939 and 1940 respectively and turns on the proper interpretation and application of Rule 3 of Case III of Schedule D of the Income Tax Act of 1918.
That Rule provides as follows: —
"3. (1) Where an assurance company not having its head office in the United Kingdom carries on life assurance business through any branch or agency in the United Kingdom, any income of the company from the investments of its life assurance fund (excluding the annuity fund, if any), wherever received, shall, to the extent provided in this rule, be deemed to be profits comprised in this Schedule and shall be charged under this Case.
(2) Such portion only of the income from the investments of the life assurance fund for the year preceding the year of assessment shall be so charged as bears the same proportion to the total income from those investments as the amount of premiums received in that year from policy holders resident in the United Kingdom and from policy holders resident abroad whose proposals were made to the company at or through its office or agency in the United Kingdom bears to the total amount of the premiums received by the company:
Provided that in the case of an assurance company having its head office in any British possession, the Commissioners of Inland Revenue may, by regulation, substitute some basis other than that herein prescribed for the purpose of ascertaining the portion of the income from investments to be so charged as being income derived from business carried on in the United Kingdom.
(3) Every such charge shall be made by the special commissioners as though the company under the provisions of this Act had required the proceedings relating to the charge to be had and taken before those commissioners.
(4) Where a company has already been charged to tax, by deduction or otherwise, in respect of its life assurance business, to an amount equal to or exceeding the charge under this rule, no further charge shall be made under this rule, and where a company has already been so charged, but to a less amount, the charge shall be proportionately reduced."
Since the Society was not resident in the United Kingdom for the purposes of United Kingdom Income Tax, it was entitled to exemption from that Tax in respect of interest and dividends of securities and investments falling either ( a) within Section 46 of the Income Tax Act of 1918 or ( b) within Rule 2 ( d) of Schedule C or ( c) within Rule 7 of the Miscellaneous Rules of Schedule D.
The investments of the life assurance fund of the Respondent Society included some investments which were exempted from Income Tax under each of these heads. For example, the income from these exempted investments in the calendar year 1935 amounted to £72,354, and if this figure is relevant, it would enter into the calculation of assessable profit for the fiscal year 1936-7.
When the present appeal reached your Lordships' House a curious, and somewhat embarrassing, situation was disclosed. In the Courts below, and before the Special Commissioners, it seems to have been assumed, both on the side of the Inland Revenue and on the side of the Respondent Society, that the application of Rule 3 to the latter was in some way affected by the existence of this exempted income, and that the question between them was, what was the proper method of making the adjustment called for on this account? But in the course of the argument before us the House invited the Solicitor General to explain why the calculation under Rule 3 was affected by the fact of exempted income at all. A good deal of the subsequent discussion revolved around this point and consequently your Lordships have now to decide two questions, first, what is the proper construction, and application of Rule 3 when an Assurance Society which falls within that Rule holds investments exempt from Income Tax among the investments of its life assurance fund; and, secondly, what is the right decision in the case now before us where the Revenue has in effect made the concession that the existence of exempted income makes a difference to the calculation?
The present Rule 3 had its origin in Section 15 of the Finance Act 1915 (5 & 6 George V Ch. 62). As Mr. Hills pointed out to us, before the Act of 1915 there was much difficulty in getting Income Tax from a Life Assurance Company resident abroad with a branch here. Such a Company could avoid United Kingdom Income Tax on its income from investments, even though it had a branch in the United Kingdom, by so arranging its affairs that its investments were foreign investments, the proceeds of which were not caught by United Kingdom Income Tax. It is true that the Company might be regarded as carrying on in this country a trade through its branch, but there was much practical difficulty in arriving at the figure under Case 1 of Schedule D of annual profits of such a branch for, in the case of life assurance business, the true profits attributable to the branch could not be ascertained in the normal manner, as is shown by provisions in the Assurance Act 1909 for a quinquennial valuation.
Section 15 of the Finance Act 1915 was, it would seem, aimed at meeting this difficulty, and it did so by providing for a conventional figure, which should be "deemed to be profits", comprised in Schedule D, on which a non-resident Life Assurance Company, with a branch in the United Kingdom, would make a contribution to United Kingdom Income Tax, however it arranged its investments. The provisions now contained in Rule 3 of Case III call for the use of certain factors in order to arrive at this conventional figure, upon which such an Assurance Company as the Respondent Society is required to pay tax in respect of the annual profit of its life assurance business carried on in this country.
The Rule itself is expressed in clear terms, and we are not entitled to read into it anything which is not there, unless upon the true construction of the Income Tax Acts as a whole there is some statutory provision which must be treated as modifying it, in order to give it its true effect.
In Sub-rule (1) of the Rule, there is no justification for reading "any income of the Company from the investments of its life assurance fund" as though it ran. "any income of the Company from such part of the investments of its life assurance fund as are exempt from Income Tax". Yet this is the interpretation which is primarily favoured by the Crown. "The investments of its "life assurance fund" must mean all such investments and not a residue of them after first subtracting what may be called "exempted investments". Sub-rule (2) directs how the fraction is to be arrived at which is to be applied to the total of such investments, and naturally involves a comparison between two totals, one attributable to the life assurance business as a whole and the other attributable to the United Kingdom part of it. In the present case the proviso to Sub-rule (2) was put into operation and the necessary fraction was obtained by the use of it. There is no dispute as to what the proper fraction is in this instance—it is roughly one-twentieth.
The language of Sub-rule (4) seems to me to be equally clear. Its effect is to secure that the company's contribution by way of tax under the rule shall be abated, or even wiped out altogether, to the extent to which the company is charged to tax independently of the rule. But there is no justification for reading the words "where a company has already been charged to tax" as though they meant "where the company would be charged to tax if the investments it held were not investments the produce of which is exempt from tax". The relief given by Sub-rule (4) arises from the company paying tax apart from the rule, not from the company holding exempted investments.
From 1915 to 1938, as I understand, the practice of the Revenue, acquiesced in, or at any rate not challenged in litigation, by Life Assurance Companies with their head office abroad and a branch in the United Kingdom was to charge tax on the conventional sum thus arrived at, treating as immaterial the fact that the life assurance fund might contain investments the proceeds of which were not subject to tax. But in 1938 this House decided the appeal of Hughes v. Bank of New Zealand 21 Tax Cases 472, upholding a decision in the Court of Appeal given in December 1936, when my noble and learned friend Lord Wright was presiding as Master of the Rolls. The point there arising had nothing to do with Rule 3 of Case III of Schedule D, and nothing to do with the taxing of Life Assurance Companies. What was being considered was the taxation under Case I of a bank resident in New Zealand with a branch in London. The question was whether, in calculating the profit of the branch by setting off expenses against receipts it was right to include on the receipts side the interest on certain investments the proceeds of which were by statute exempt...
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