Commissioners of Inland Revenue v Church Commissioners for England
| Jurisdiction | England & Wales |
| Judgment Date | 07 July 1976 |
| Date | 07 July 1976 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Judicial precedent - Decision of Court of Appeal on point held by House of Lords to be irrelevant - Not a binding authority.
The Respondents were a charity. By an agreement dated 5th January 1960 they sold to a property investment company (or in one case to a subsidiary thereof) their freehold or leasehold interest in seven properties, which were already let by them to the company (or its subsidiary) for terms with between 60 and 990 years to run, in consideration of rentcharges reserved for ten years. In the negotiations leading up to that agreement there was no legally enforceable agreement between the parties for the purchase of any of the properties for a lump sum. The rentcharges totalled £96,000 per annum; the aggregate rents payable for the properties by the group before the transaction were £62,500 per annum; three of the properties were burdened with head rents totalling £22,000 per annum. Evidence extrinsic to the agreement showed that the Respondents calculated that the rentcharges would have a market value of about £720,000 based on 18 years' purchase, and that of the £96,000 per annum £40,000 would be available as expendable income and £56,000 would be annually invested to produce an income of 51/2per cent. per annum and at the end of the ten years a sum which would provide an income of £40,000 per annum in perpetuity. The rentcharges were paid under deduction of income tax on the footing that s. 177, Income Tax Act 1952, applied.
The question whether the rentcharges were an allowable deduction in arriving at the purchasers' liability to profits tax was litigated in Commissioners of Inland Revenue v. Land Securities Investment Trust Ltd.(2)45 T.C. 495. Cross J. held at first instance, that they fell to be dissected into income and capital elements; the Court of Appeal held that they were allowable in full, on the ground that rentcharges were prima facie completely payments of income and fell within the direct terms of s. 177, which was the relevant section; the House of Lords held that, irrespective of whether s. 177 applied, the rentcharges were not allowable deductions on the income tax principles applicable for
profits tax purposes (viz., the principles of computation of profits under Case I of Schedule D), because they were the cost of acquiring capital assets, viz., the reversions of the propertiesThe Commissioners of Inland Revenue refused repayment for the years 1959-60 to 1963-64 of the whole of the sums deducted on account of income tax from the rentcharges on the ground that they consisted partly of capital sums which were not payable under deduction of tax, like the annuities in Scoble v. Secretary of State for India 4 T.C. 618 and Vestey v. Commissioners of Inland Revenue 40 T.C. 112. On appeal, the Special Commissioners held (a) that, even if s. 177, Income Tax Act 1952, was applicable to rentcharges only to the extent that they were payments of an income nature, the rentcharges in question were entirely of an income nature and not partially instalments of a capital sum; (b) that since the preliminary negotiations for the sale did not create any legally enforceable contract, and therefore, did not bring into being a price or lump sum capital obligation, the extrinsic evidence of the calculation of the amount of the rentcharges was inadmissible.
The Chancery Division held (1) that, since it was open to the parties to a contract to agree inter se to treat income payments as capital or conversely, in a revenue case extrinsic evidence, such as that ruled out by the Special Commissioners, must always be admissible to show the true character in law of the transaction; (2) that where periodical payments had been held to be wholly or partly capital receipts they were made in discharge of a capital obligation, whether pre-existing or created by the transaction under which they were made, and in the present case there was nothing to indicate that any part of the rentcharges was of a capital nature.
Immediately after judgment was given the Crown applied (subject to further consideration and to the Respondents' consenting) for a certificate for leave to appeal direct to the House of Lords under s. 12, Administration of Justice Act 1969, on the ground that the decision involved a point of law of general public importance relating mainly to the construction of an enactment (viz., s. 177, Income Tax Act 1952) and the other requirements of s. 12 were satisfied. The Crown conceded that the alternative condition that the Judge was bound by the decision of a higher tribunal did not apply.
The Chancery Division held (1) that although only four days of the sittings remained the application ought to be decided before the Long Vacation; (2) that the application would not be granted, because the decision did not relate mainly to the construction of the word "rentcharge" in s. 177 but to whether what were admittedly rentcharges contained a capital element to be dissected out of them, and the Crown's concession that the alternative condition did not apply had been rightly made; alternatively, that if the decision did fall within the relevant conditions the application would be refused in the exercise of the Judge's discretion as not falling within the spirit thereof.
The Court of Appeal held that the extrinsic evidence, whether admissible or not, did not assist in determining the quality of the instalments of rent-charge; the true legal nature of the bargain was that the Church Commissioners sold their reversions for ten annual payments of £96,000 amounting to £960,000 and not for a principal sum of a lesser amount payable by ten instalments of principal and interest.
Held, in the House of Lords,
(1) that the rentcharge payments were wholly of an income nature and contained no capital element having regard both to the true construction of the agreement dated 5th January 1960 and also the preceding negotiations; there could be no "dissection" of the payments into capital and income elements since there was no agreed purchase price; the bargain was always thought of in income terms and was concluded in income terms;
(2) that in revenue cases extrinsic evidence is admissible if it tends to show the true character of a transaction.
Stated under the Taxes Management Act 1970, s. 56, 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 19th and 20th March 1973 the Church Commissioners for England (hereinafter called "the Church Commissioners") appealed against the refusal by the Commissioners of Inland Revenue of claims to relief under s. 447 of the Income Tax Act 1952 for the years 1959-60 to 1963-64 inclusive.
2. Shortly stated, the question for our decision was whether in respect of the years of assessment 1959-60 to 1963-64 inclusive income tax was properly deductible under s. 177 of the Income Tax Act 1952 or otherwise from certain payments of rentcharge made by Land Securities Investment Trust Ltd. (hereinafter called "Land Securities") and by Associated London Properties Ltd. (hereinafter called "Associated") to the Church Commissioners and is repayable to the Church Commissioners, who are a charity, under the provisions of s. 447(1)(a) of the Income Tax Act 1952.
The transaction giving rise to this question is referred to inCommissioners of Inland Revenue v. Land Securities Investment Trust Ltd.(1) 45 T.C. 495.
3. The following documents were admitted before us:
(2) A copy of an agreement made on 5th January 1960 between the Church Commissioners and Land Securities and Associated.
(3) A bundle of copies of deeds comprising deeds of transfer reserving a rentcharge between the Church Commissioners and Land Securities, a deed of transfer reserving a rentcharge between the Church Commissioners and Associated and a deed creating a rentcharge executed by Land Securities.
(4) A copy of the accounts of the Church Commissioners for the year ended 31st March 1960.
Documents 1 and 3 are attached as exhibits to and form part of this Case(1). Document 2, in which the terms of the transfers referred to in clause 9 of document 1 are set out in full, is, to save expense, not attached to this Case.
4. The following facts were admitted between the parties:
(A) The Church Commissioners are, and were at all material times, a charity.
(B) Land Securities is a large public company carrying on business as a property investment trust company. During the period to which these appeals relate Associated was a wholly-owned subsidiary of Land Securities.
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(C) The Church Commissioners owned certain freehold and leasehold properties which were let or underlet to Land Securities (or, in the case of one property, to Associated) on long leases. By an agreement dated 5th January 1960 the Church Commissioners agreed to sell to Land Securities their freehold or leasehold interests (or, in the case of the property let to Associated, to sell to Associated) subject to the leases and underleases to Land Securities and Associated in consideration of rentcharges. Particulars of the properties, the leases to Land Securities or to Associated and the rentcharges are set out in a schedule to this agreement, but for convenience brief particulars are set out below:
Particulars of lease or
Property
underlease to the company
Rentcharge
£
No. 1 Freehold
993 years from 1953 at £5,000
12,000
No. 2 Freehold
150 years from 1948 at £2,000
4800
No. 3 Freehold
150 years from 1947 at £2,000
4800
No. 4 Underlease 71 years from 1949 at £7,500 per annum
whole term less 3 days at £17,500
23,450
No. 5 Leasehold 99 years from 1935 at £5,000 per annum
whole term less 3 days at £7,000
4700
No. 6 Leasehold 99 years from 1934 at...
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