Commissioners of Inland Revenue v John Dow Stuart, Ltd
| Jurisdiction | Scotland |
| Judgment Date | 14 December 1949 |
| Date | 14 December 1949 |
| Court | Court of Session (Inner House - First Division) |
No. 1434-COURT OF SESSION (FIRST DIVISION)-
HOUSE OF LORDS-
Income Tax - Deduction - Excess Profits Tax payable for chargeable accounting period - Effect of deficiency in subsequent chargeable accounting period - Finance (No. 2) Act, 1939 (2 & 3 Geo. VI, c. 109), Sections 15 (2) and 18 (1).
The Respondent Company was assessed to Excess Profits Tax for the three chargeable accounting periods ended 31st July, 1940, 1941 and 1942, in the sum of £9,568 in all. In September, 1943, the Company paid £1,000 to account of Excess Profits Tax; this payment was credited by the Commissioners of Inland Revenue against the assessment for the chargeable accounting period ended 31st July, 1940. Relief due in respect of deficiencies of profits for the two subsequent chargeable accounting periods ended 31st July, 1943 and 1944 exceeded the tax assessed but unpaid for the earlier accounting periods by £483 and this sum was accordingly repaid to the Company in the year 1946.
The Company was assessed to Income Tax for the years 1941-42 to 1945-46 on the footing that, under Section 15 (2), Finance (No. 2) Act, 1939, the effect of a deficiency of profits in a chargeable accounting period was to reduce the amount of Excess Profits Tax payable for previous chargeable accounting periods, and that the deduction allowable for Income Tax purposes under Section 18 (1), Finance (No. 2) Act, 1939, was the amount of the Excess Profits Tax payable as so reduced, except where a payment of Excess Profits Tax had in fact been made; and, accordingly, that the sum of £1,000 actually paid in respect of the chargeable accounting period ended 31st July, 1940, was to be deducted in computing the profits chargeable to Income Tax for the year 1941-42, and the sum of £483 repaid in respect of the deficiency of profits in the chargeable accounting period ended 31st July, 1944, was to be taken into account, under the proviso to Section 18 (1), as a profit accruing in that period for the purpose of computing the profits chargeable to Income Tax for the year 1945-46.
The Company appealed to the General Commissioners, who accepted the Company's contention that the deduction allowable for Income Tax purposes under Section 18 (1), Finance (No. 2) Act, 1939, was the full amount of Excess Profits Tax payable for each chargeable accounting period, regardless of any relief in respect of subsequent deficiencies.
Held, that the decision of the General Commissioners was correct.
At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of the Lower Ward of the County of Lanark, held for the purpose of hearing appeals at 181 West Regent Street, Glasgow,
C.2, on 3rd February, 1947, John Dow Stuart, Ltd. (hereinafter called "the Company") appealed against assesments to Income Tax under Schedule D of the Income Tax Act, 1918, namely,1941-42 on the sum of £2,338 less wear and tear £80.
1942-43 on the sum of £5,000.
1943-44 on the sum of £5,000.
1944-45 on the sum of £500.
1945-46 on the sum of £500.
The General Commissioners were informed by both parties that the amount of the liability to Income Tax for each of the years concerned had been agreed subject to one point, namely, the proper treatment for Income Tax purposes of amounts payable for Excess Profits Tax and of amounts repayable in respect of deficiencies for Excess Profits Tax for the several chargeable accounting periods. This was the sole point on which the General Commissioners were asked to adjudicate.
1. The following facts were admitted or proved:-
(2) The Company carries on business as building contractors.
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(3) Estimated assessments to Excess Profits Tax were made on the Company and notices of assessment were issued as under:-
Chargeable
Excess Profits
Notice of
Accounting Period
Tax
Assessment Issued
£
s.
d.
4 months to 31st July, 1939
118
4
0
21st May, 1943
12 months to 31st July, 1940
3288
8
0
21st May, 1943
12 months to 31st July, 1941
5000
0
0
17th August, 1943
12 months to 31st July, 1942
5000
0
0
17th August, 1943
(4) Notice of appeal was given by the Company against each of these estimated assessments and no attempt was made by the Commissioners of Inland Revenue, under the provisions of paragraph 5 of Part II of the Fifth Schedule to the Finance Act, 1937, made applicable to Excess Profits Tax by the Finance (No. 2) Act, 1939, Section 21, to collect tax on any undisputed liability. £1000 was paid in September, 1943, as a payment to account of Excess Profits Tax. This payment was credited against the assessment for the chargeable accounting period 31st July, 1940. No further payments on account of Excess Profits Tax were made by the Company.
(5) On 22nd October, 1945, the final accounts for the three years to 31st July, 1941, 31st July, 1942 and 31st July, 1943, were sent to the Inspector of Taxes together with computations of the liability by the chartered accountants who dealt with the matter on behalf of the Company. The accounts for the year to 31st July, 1944, were sent to the Inspector of Taxes by the aforesaid chartered accountants on 16th April, 1946.
(6) Final agreement of the figures of profits and of Excess Profits Tax for all chargeable accounting periods up to that ending on 31st July, 1944, was reached on 13th September, 1946, when the net balance of Excess Profits Tax payable on an accounting in respect of all the chargeable accounting periods up to and including the twelve months ending 31st July, 1944, was agreed to be £517.
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(7) The details of the finally agreed computations were as under:-
Amounts repayable or
to be set off in
Chargeable
Excess Profits Tax
respect of Excess
Accounting Period.
Payable.
Profits Tax
Deficiencies.
4 months to 31st July, 1939
£97 16s. 0d.
(Set off against excess for twelve months to 31st July, 1940)
12 months to 31st July, 1940
£3,548 (after allowance of deficiency of £97 16s. for the period of four months to 31st July, 1939)
12 months to 31st July, 1941
£1,384
12 months to 31st July, 1942
£4,636
12 months to 31st July, 1943
£8,465
12 months to 31st July, 1944
£586
£9,568
£9,051
Deduct deficiencies
£9,051
Net balance of Excess Profits Tax payable
£517
(8) As the Company had, as aforesaid, paid £1,000 the Commissioners of Inland Revenue after satisfying the net balance of Excess Profits Tax payable of £517 repaid in the year 1946 the balance of £483 to the Company.
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(9) The amounts of the profits chargeable to Income Tax before making adjustments in respect of Excess Profits Tax payable and repayable were also agreed by both parties in the following amounts:-
Year to 31st July, 1940
Profit
£4,838
Year to 31st July, 1941
Profit
£2,456
Interest
£21
Year to 31st July, 1942
Profit
£5,783
Year to 31st July, 1943
Loss
£7,645
Year to 31st July, 1944
Profit
£550
(10) The parties, however, did not agree the adjustments to be made for Income Tax purposes in respect of the Excess Profits Tax liabilities payable and the amounts of Excess Profits Tax repayable for deficiencies.
(11) The Company took the view that in computing the Income Tax liability for a particular fiscal year the Excess Profits Tax payable for the accounting year which formed the basis of charge for that fiscal year should be deducted as an expense under Section 18 (1) of the Finance (No. 2) Act, 1939, and that where a deficiency of Excess Profits Tax occurred in any chargeable accounting period the amount repayable should be added as if it had been a profit accruing in the chargeable accounting period in which the deficiency occurred.
(12) The Inspector of Taxes, on the other hand, took the view that the Excess Profits Tax "payable" which formed the deduction for Income Tax purposes in terms of the said Section 18 (1) was not the Excess Profits Tax computed on the accounts for a particular chargeable accounting period alone but was by reason of Section 15 (2) of the said Act (except where an actual payment of Excess Profits Tax had been made) the reduced Excess Profits Tax payable consequent on subsequent deficiencies.
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(13) The following table sets out the alternative computations of profits for Income Tax purposes which were put before us.
A. The Company's ComputationNet Profit for
Income Tax.
Year to 31st July, 1940
Agreed profit
£4,838
Less Excess Profits
Tax payable as finally agreed
£3,548
£1,290
Year to 31st July, 1941
Agreed profit
£2,456
Interest
21
Less Excess Profits
Tax payable as finally agreed
£1,384
£1,093
Year to 31st July, 1942
Agreed profit
£5,783
Less Excess Profits
Tax payable as finally agreed
£4,636
£1,147
Year to 31st July, 1943
Agreed loss
£7,645
Credit for Excess
Profits Tax repayable as finally agreed
£8,465
£820
Year to 31st July, 1944
Agreed profit
£550
Credit for Excess
Profits Tax repayable as finally agreed
£586
£1,136
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(14)
B. The Inspector's ComputationNet Profit for
Income Tax.
Year to 31st July, 1940
Agreed profit
£4,838
Less Excess Profits
Tax actually paid
£1,000
£3,838
Year to 31st July, 1941
Agreed profit
£2,456
Interest
21
Excess Profits Tax actually paid
Nil.
£2,477
Year to 31st July, 1942
Agreed profit
£5,783
Excess Profits Tax actually paid
Nil.
£5,783
Year to 31st July, 1943
Agreed loss
£7,645
Excess Profits Tax actually paid
Nil.
Loss £7,645
Year to 31st July, 1944
Agreed profit
£550
Add Excess Profits
Tax repaid
£483
£1,033
2. Mr. Dickel, chartered accountant, contended on behalf of the Company,inter alia:-
(2) that under Section 18 (1) of the Finance (No. 2) Act, 1939, the amount of Excess Profits Tax payable for any chargeable accounting period should in computing the profits for Income Tax purposes be allowed to be deducted as an expense incurred in that period;
(3) that the proviso...
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