Commissioners of Inland Revenue v Land Securities Investment Trust Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE DANCKWERTS,LORD JUSTICE SALMON,LORD JUSTICE FENTON ATKINSON |
| Judgment Date | 20 May 1968 |
| Judgment citation (vLex) | [1968] EWCA Civ J0520-1 |
| Date | 20 May 1968 |
| Court | Court of Appeal (Civil Division) |
[1968] EWCA Civ J0520-1
In The Supreme Court of Judicature
Court of Appeal
(Revenue Paper)
Lord Justice Danckwerts,
Lord Justice Salmon, And
Lord Justice Fenton Atkinson,
MR F. HEYWORTH TALBOT, Q. C., and MR M. P NOLAN., Q. C. (instructed by Messrs Nabarro, Nathanson &Co., 211, Piccadilly, E London, W. l) appeared on behalf of the Appellants.
MR W. A. BAGNAL L, Q. C., and MR J. RAYMOND PHILLIPS Q. C, (instructed by The Solicitor of Inland 'Revenue'," Somerset" House, Strand, London, W. C. 2.) appeared on behalf of the Respondents.
This is a profits tax case. It is an appeal from a Judgment given on the 11th December, 1967, by Mr Justice Cross, who decided in favour of the Revenue reversing the decision of the Special Commissioners.
The question is simply whether certain rent charges which were created by the parties in regard to the relevant transactions are deductible under the provisions of section 177 of the Income Tax Act, 1952, and I think I will start by reading from the observations of the Commissioners in relation to their findings in the Special Case,
I start with paragraph 4; "The Company is a very large public company carrying on business as a property investment trust company. Its issued share and debenture capital total some £85, 000, 000, and it holds (either itself or through subsidiaries) properties valued at over £100, 000, 000. It does not carry on any trade of dealing, and is not assessed to income tax under Case I of Schedule D. Its Chairman and Managing Director at all relevant times was Sir Harold Samuel. One of its wholly-owned subsidiaries is Associated London Properties Ltd. (hereinafter called 'Associated'). Associated was a party to the Agreement and to one of the deeds of transfer referred to later in this case, but we were informed that nothing turned upon this because Associated is grouped with the company for the purpose of assessment to profits tax.
"The Church Commissioners owned certain freehold and leasehold properties which were let or underlet to the Company (or in the case of one property, to Associated) on long leases. By agreement dated 5th January, 1960, the Church Commissioners agreed to sell to the Company their freehold or leasehold interest (or in the case of the property let to Associated, to sell to Associated) subject to the leases and under leases to the company in consideration of rentcharges", and then the particulars are set out in the case and I need not refer to them. The transactions, of course, involved very large figures.
"The Agreement provided that the transfers of the properties should be in a form agreed, and the transfers were duly made on 25th March, 1960. These provided that the rentcharge reserved in each case was a yearly rentcharge for the period of ten years from 1st April, 1959, charged on and issuing out of the property transferred.
"It will be seen from paragraph 5 above that the Company and Associated, which had previously owned long leases or underleases for varying terms 3t rents totalling £62, 500 per annum, acquired by the transfers freeholds and leaseholds, subject to head rents totalling £;22, 000 per annum, burdened with rentcharges totalling £96, 000 per annum for ton years". If I may interpolote, it is to be remarked that they were covenanting to pay £96, 000 per annum for ten years which was an increase in the amount of the rental that had been paid and, of course, that £96, 000 per annum was an addition of the £22, 000 per annum mentioned in that paragraph.
"It common ground that, prior to the transfer, the rents paid by the Company or Associated (totalling £62, 500 per annum) were deductible in computing profits for profits tax purposes; it is also common ground that after the transfer the head rents (£;22, 000 per annum) were so deductible. The dispute concerned the rentcharges.
"The Company or Associated deducted income tax at the standard rate on paying the rentcharges, on the footing that section 177 of the Income Tax Act, 1952, entitled them so to do, and the Church Commissioners did not challenge their right to do so. Section 177 applies to (inter alia)", and then it sets out the provisions of the section, to which I will refer later.
"It was common ground that in the negotiations leading up to the agreement of 5th January, 1960, there was no legally enforceable agreement between the Company or Associated and the Church Commissioners for the purchase of any of the properties for a lump sum".
Then they set out the contentions of the respective parties and I can turn to paragraph 10: "We, the Commissioners who heard the appeal, decided as follows:
(1) We held that the reference in section 177 to 'any. rentcharge' was an unqualified reference to any rentcharge reserved or charged upon land; that the rent-charges reserved by the deeds of transfer were rentcharges reserved or charged on land; that in determining whether section 77 applied to such rentcharges, it was irrelevant to enquire whether on dissection (if any dissection be allowable in law, and we thought it was not) they contained a capital and income element; that the said rentcharges were rentcharges from which section 177 authorised the Company to deduct income tax.
(2) The only other issue before us we understood to be that deduction of the rentcharges in computing the assessable profits was prohibited by section 14(1) Finance (No. 2) Act, 1940; the rentcharge being (it was contended) payments made to secure capital asset's".
Then they continued: "The only assets which might be said to have been acquired by the Company under the transfers were the reversions to their leases and underleases. Having regard to the length of time unexpired on the latter it seemed to us doubtful whether the so reversions had any real monetary value. From a commercial point of view we thought the reality of the matter was that the Company had substituted larger rents for a ten year period for smaller rents for varying longer periods. The payments claimed were in their nature rents and as such, were income payments properly deductible in computing the Company's profits. We left figures to be agreed", and I think that is all I need read.
The Commissioners therefore found in favour of the taxpayer and, of course, an odd feature of this case is that the contentions of the parties are reversed in regard to what usually happens in these Revenue cases, that is to say that the taxpayer Company is arguing that the rentcharge arc subject to income tax and that they can deduct tax and the Church Commissioners have accepted that position. I think the position which annoys the Commissioners of Inland Revenue in this case is that, being a charity, the Church Commissioners claim to be entitled to recover the tax which has been deducted against them and, therefore, that presents a favourable feature to them.
Mr Justice Cross's case is reported in 1968 1 Weekly Law Reports at page 423 and the relevant statutes, including the Finance Act, 1940, arc conveniently set out at the beginning of the report, but I do not propose to readthrough them in detail. The only one I intend to read is section 177 of the Income Tax Act, 1952, which is the relevant section for the purposes of the present case.
The provisions of section 177 of the Income Tax Act, 1952, are as follows: "(1) This section applies to the following payment, that is to say: (a) rents under long leases; and (b) any yearly interest, annuity, rent, rent-charge, foe farm rent, rent service, quit rent, few duty, tend duty, stipend to a licensed curate, or other annual payment reserved or charged upon land, not being rent under a short lease or an annuity within the meaning of the Tithe Acts, 1936 and 1951- (2) Any payment to which this section applies shall, so far as it does not fall under any other Case of Schedule D, be charged with tax under Case VI of this Part of this Act as if it were a royalty or other sum paid in respect of the user of a patent", and I do not think I need trouble with the rest of that.
Mr Justice Cross, with second-sight or otherwise, found a capital ingredient in these rentcharges and the course which he adopted was to send back the case to the Special Commissioners so that they, in effect, might dissect these annual rentcharges and separate the capital element from the income element for the purposes of the provisions of the Act. i am bound to say I find it difficult to agree with his decision. In the first place it is to be observed, as has already been stated in the Case by the Commissioners, there never was any agreement as to any capital sum. We doubt it may be that the Church Commissioners were disposing of a capital asset, but they were disposing of a capital asset entirely for a consideration expressed in the form of the rentcharges which were agreed between the parties.
I therefore turn to the Exhibits to the Stated Case. The first one is the contract between the parties. It was dated the 5th January, 1960, and it is between the Church Commissioners, the Appellant Company and the Associated Company. It provides as follows by paragraph 1: "The Commissioners shall sell and the First Purchaser shall purchase the properties described in Items 1 to 6 inclusive of Column One of the Schedule hereto and the Commissioners shall sell and the Second Purchaser shall purchase the property described in Item 7 of Column One of the said Schedule Subject to the Leases mentioned in Column Three of the said Schedule and Subject and Except and Reserved as hereafter mentioned" - those are leases to which the sale was subject being in favour of other persons.
Then clause 2 provides "The properties are sold subject to the following conditions and stipulations and to the General Conditions of Sale...
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