Commissioners of Inland Revenue v Paget. Paget v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Year | 1938 |
| Date | 1938 |
| Court | Court of Appeal |
Revenue - Sur-tax - Bearer bonds - Default in interest payments - Sale of coupons - Whether liable to tax -
Miss Paget was the owner of bearer bonds of the City of Budapest. Interest payments in sterling were stopped by a decree of the Hungarian Government and the Municipality of Budapest was required to pay into the Hungarian National Bank an equivalent sum in pengos to the credit of a foreign creditors' fund, out of which holders might obtain payment of their interest coupons in pengos, subject to the proceeds being applied to certain purposes within Hungary.
Miss Paget was also the holder of certain bearer bonds of the Kingdom of Yugoslavia. In respect of these bonds the Government of Yugoslavia suspended payment in New York, offering holders the option of payment in dinars in Belgrade, subject to restrictions on the use to which the dinars could be put, or payment of 10 per cent. in dollars, and the issue of funding bonds for the remainder.
Miss Paget did not avail herself of any of these options, but sold to agents, at a discount, the coupons of both sets of bonds as they fell due.
The question to be determined was whether the gross sums received by Miss Paget during the year ending April 5, 1933, from the sale of the coupons of the City of Budapest bonds and the gross sums received by her during the year ending April 5, 1934, from the sale of coupons of the bonds of Yugoslavia respectively formed part of her total income from all sources for those two years, so as to render her liable to be assessed for sur-tax in respect of them.
The Special Commissioners decided this question in favour of the Crown in relation to the Budapest bonds and in favour of Miss Paget in relation to the Yugoslavia bonds. An appeal by the Crown and a cross-appeal by Miss Paget were taken to Finlay J., who decided both in favour of Miss Paget.
On an appeal to the Court of Appeal by the Crown in both cases:—
Held, as to both sets of bonds that the proceeds of sale were not income arising to Miss Paget either under Case IV. of Sch. D or under Sch. C, and did not fall to be included in her total income for the purposes of assessment to sur-tax.
APPEALS by the Crown from decisions of Finlay J. on a Case stated by the Special Commissioners of Income Tax.F1
At a meeting of the Special Commissioners on January 22, 1936, the Hon. Dorothy Wyndham Paget appealed from two assessments to sur-tax in respect of the years ending April 5, 1933, and April 5, 1934. During those years Miss Paget was the holder of 4½ per cent. bearer bonds issued by the City of Budapest in the year 1914. The half-yearly interest coupons were payable in sterling in London, and in certain other countries in their respective currencies. By a decree dated December 22, 1931 (a translation of which was circulated to bondholders by the Department of Overseas Trade), the Royal Hungarian Government forbade the Municipality of the City of Budapest, while the decree remained in force (but without prejudice to the full rights of creditors after its expiry), to make payments of interest on the bonds to the creditors. The Municipality was directed to deposit with the Hungarian National Bank, as each payment fell due, the equivalent in pengos of the sum due. Provision was made for the formation of a foreign creditors' fund into which payments of pengos should be made, and for the control of the fund by the Hungarian National Bank. The decree was in force from December 23, 1931, to December 22, 1934.
After the decree came into force payment of interest coupons could be obtained in Hungary in pengos, but such payment could only be made out of the sums deposited by the City of Budapest pursuant to the decree to the credit of an account controlled by the Hungarian National Bank, and if required for certain specified purposes within Hungary. No such payment was obtained by Miss Paget.
A market existed in London for the sale of the interest coupons in question, and during the years of assessment ending April 5, 1933, and April 5, 1934, Miss Paget made sales of interest coupons through agents or coupon dealers in London amounting to 1172 l. 10s. gross and 1554 l. 7s. 8d. gross respectively. The purchasers deducted income tax from the proceeds of sale on payment to Miss Paget.
During the year of assessment ending April 5, 1934, Miss Paget was also the holder of 7 per cent. bearer bonds of the Kingdom of Yugoslavia issued in 1922, the half-yearly interest coupons being payable in American dollars in New York. On July 24, 1933, the Government of Yugoslavia expressed to the bondholders its inability to pay interest on the bonds in full, and put before the bondholders a scheme for meeting the coupons falling due from November 1, 1932, to May 1, 1935, both dates inclusive, under which holders might accept either —
(a) a payment of each coupon in dinars in Belgrade, the disposal and use of such dinars to be governed by the general legislative or regulatory provisions of the Kingdom of Yugoslavia from time to time in force regarding transactions in moneys and foreign exchange; or
(b) the payment of 10 per cent. of the face value of each coupon in American dollars, and the issue of funding bonds for the remainder.
In September, 1933, Miss Paget sold the interest coupons of her bonds falling due for payment on November 1, 1932, and May 1, 1933, through agents or coupon dealers in London. The nominal amount of the coupons was $7000, and the amount realized on sale was $3587.50 or 760 l. 1s. 3d. The coupon dealers deducted income tax from the proceeds of sale and the net amount was credited to Miss Paget's bank account in Montreal.
It was contended on behalf of Miss Paget: (a) That no interest arose from any of the bonds in either of the years of assessment: (i.) as regarded the Budapest bonds, the deposit of pengos with the Hungarian National Bank by the Municipality was not a payment to her; (ii.) as regarded the Yugoslav bonds, Miss Paget had not accepted the offer of the Yugoslav Government, and no payment had been made by that Government. (b) That the proceeds of the sales of coupons were not interest, but merely the price of the expectancy of interest, and were not income of Miss Paget. (c) That the proceeds of the sale of the coupons did not arise to Miss Paget from bonds, but from contracts of sale. (d) That Miss Paget was not liable to pay or bear income tax on the proceeds of the sales of coupons under Sch. C or Sch. D or at all, and therefore such proceeds did not form part of her income for the purposes of sur-tax.
It was contended on behalf of the Crown that the proceeds of the sale of the coupons were income and fell to be included in the assessments appealed against as income of Miss Paget.
The Commissioners gave the following decision in writing: “We hold the 4½ per cent. City of Budapest bonds are instruments subject to Hungarian law, and capable of being affected by the decrees of the Hungarian Government. In our opinion the deposit of pengos with the Hungarian National Bank in accordance with the decree constituted performance by the Municipality of its obligation to pay interest on the bonds, and the proceeds of the coupons falling due at the respective dates of deposit represent interest to the appellant must be included in her return of total income for the purposes of sur-tax. As regards the 7 per cent. bonds of the Kingdom of Yugoslavia, interest coupons of which fell due for payment on November 1, 1932, and May 1, 1933, we hold that there was default on the part of the Yugoslav Government, and that the offer to pay in dinars, or partly in United States dollars and partly in funding bonds did not, in the absence of acceptance by Miss Paget and payment to her, constitute performance or satisfaction of its obligation. In our opinion the sale of the coupons did not amount to an implied acceptance of this offer, and the mere fact that the existence of the offer gave some value to the coupons in the market did not cause interest to arise. We therefore exclude this item from the assessments for the years 1932–33 and 1933–34.”
Both parties appealed.
FINLAY J. held as to both sets of bonds, that the proceeds of sale were not income arising to Miss Paget either under Case IV. of Sch. D or under Sch. C and did not fall to be included in her total income for the purposes of assessment to sur-tax.
The Crown appealed. The appeals were heard on December 1, 2 and 3, 1937.
Sir Donald Somervell A.-G., J. H. Stamp, and R. P. Hills for the Crown.
A. M. Latter K.C. and F. Grant for Miss Paget.
[The arguments fully appear from the judgments.]
1938. Jan. 31. The following judgments were read:—
SIR WILFRID GREENE M.R. These appeals relate to certain assessments to sur-tax made upon the respondent, Miss Paget, in respect of the proceeds of sale of interest coupons sold by her in the circumstances hereinafter stated. The coupons in question were coupons for interest payable upon the bonds of two foreign loans which she held, and the facts relating to them are as follows: City of Budapest Loan. Miss Paget was the holder of certain 4½ per cent. bearer bonds issued by the City of Budapest. Attached to the bonds were coupons for interest which fell due for payment on July 1 and January 1 in every year. The coupons were payable in London in sterling and in certain foreign countries in the appropriate currencies.
By a decree of the Hungarian Government which came into force on December 23, 1931, for the period of one year and was afterwards continued in force until December 22, 1934, the City of Budapest was forbidden, while the decree remained in force “but without...
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