Ferguson v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 11 March 1969 |
| Date | 11 March 1969 |
| Court | Court of Session |
COURT OF SESSION (FIRST DIVISION)-
HOUSE OF LORDS-
Income tax, Schedule D - Annual payment - Sums payable "free of tax" under separation agreement - Whether representing larger gross sums paid under deduction of tax - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 123, Schedule D, Case III, 148, 170 and 506 (2).
By a separation agreement executed in Scotland in 1948 the Respondent's husband undertook to pay "a sum of Thirty five pounds monthly…free of Income Tax" into her bank account in Edinburgh or elsewhere as she should instruct. The Respondent regularly received the monthly sum of £35. The husband was resident in Malaya until 1958 and thereafter in the United Kingdom. For the years 1955-56 to 1957-58 he had no income chargeable to United Kingdom tax out of which the payments could have been made, and for the year 1959-60 his income so chargeable fell short of the payments by £74. The Respondent was assessed to income tax under Case III of Schedule D in the sum of £420 for each of the years 1955-56 to 1957-58 and in the sum of £74 for the year 1959-60.
On appeal, it was contended for the Respondent (a) that the agreement provided for payment of such sums as after deduction of tax at the standard rate would give £35; (b) that deduction of tax by the husband under s. 170, Income Tax Act 1952, was mandatory and he alone could be asked to account for the tax. For the Crown it was contended that the words "free of tax" in the agreement must be disregarded by virtue of s. 506 (2), Income Tax Act 1952, and the Respondent had been correctly assessed. The General Commissioners found that the consistent actings of the parties over a long period showed that the intention of the agreement was to provide for the monthly payment of £35 net after deduction of tax.
In the Court of Session it was further contended for the Respondent that if s. 506 (2) applied the whole agreement was void and the sums in question were not "payable…by virtue of any contract" so as to fall within Case III. The Court of Session rejected all the Respondent's contentions.
In the House of Lords the Crown conceded that, if the true meaning of the agreement was as ultimately held by that House, s. 506 (2) did not apply to it.
Held, that the agreement was to be construed as providing that, in addition to paying the sums stated, the husband would pay any tax becoming due by reason of the payments being made.
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Act 1952, s. 64.
I. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Midlothian held in Edinburgh on 25th October 1965 for the purpose of hearing appeals, Mrs. Ruby Beatrice Ferguson (hereinafter called "the Respondent") of 2 Belford Place, Edinburgh, appealed against the following assessments made on her under Case III of Schedule D under section 123 (1) of Income Tax Act 1952, viz.:
£ |
|||
1955-56 |
… |
… |
420 |
1956-57 |
… |
… |
420 |
1957-58 |
… |
… |
420 |
1959-60 |
… |
… |
74 |
in respect of monthly sums of £35 received by her from her husband under a minute of agreement hereinafter referred to.
II. No evidence was given on behalf of the parties but the following facts were admitted.
(a) Under a minute of agreement dated April 1948 between Mr. Neil George Ferguson (the husband) and Mrs. Ruby Beatrice Ferguson (the wife), a copy of which is annexed hereto and forms part of this Case(1), it was agreed they should separate, and clause 3 of the deed provided as follows:
Three: The husband will during the subsistence of the marriage from the date on which he leaves Edinburgh to return to Malaya pay to the wife for her sole and separate use a sum of Thirty five pounds monthly in advance free of Income Tax by remitting said sum to her account with the National Bank of Scotland Limited, Saint Andrew Square, Edinburgh, or such other Bank Account as the wife might instruct in place thereof.
(b) Since then the wife has regularly received the monthly sum of £35 as provided by the agreement.
(c) The husband was resident in Malaya till 1958, but since then has been resident in the United Kingdom.
(d) In 1961 the Inspector of Taxes discovered the Respondent was in receipt of these annual payments, and assessments were made on the wife for the years 1955-56 to 1961-62. The wife appealed against these assessments. For the years 1958-59, 1960-61 and 1961-62 the husband had sufficient income subject to United Kingdom income tax to make thereout monthly payments of £35, and the assessments on the wife for those years were prohibited by s. 169 (1) (a) of the Income Tax Act 1952. No question now arises in connection with the assessments for these years. For the year 1959-60 the husband's income subject to United Kingdom income tax fell short by £74 of the amount required to cover the monthly payments of £35 which he made to the wife.
(e) For the years 1955-56, 1956-57 and 1957-58 s. 170 (1) of the Income Tax Act 1952 is relevant, the husband in those years having no United Kingdom income chargeable to tax out of which the payments could have been made. Section 170 (1) also applies for 1959-60 in so far as the said monthly payments in that year were not wholly payable out of income brought into charge to United Kingdom tax.
III. It was contended on behalf of the Respondent:
(i) That the words "£35 free of Income Tax" in clause 3 of the deed do not mean "without deduction of tax", but should be read as a form of shorthand for "Such a sum as would after deduction of tax at the standard rate give £35".
(ii) That this interpretation has been adopted by the Courts in the case of "free of tax" payments by Orders of the Court or under testamentary dispositions. It is the ordinary form of words used to describe dividends, etc., paid after deduction of United Kingdom income tax at the appropriate rate in any particular case. The only logical objection to a similar interpretation for other agreements rests on s. 506, Income Tax Act 1952.
(iii) That the case for requiring "free of tax" provisions in other agreements to be treated as void rests on two English cases,Blount v. Blount [1916] 1 K.B. 230 and Noelv. Trust & Agency Co. of Australasia Ltd. [1937] Ch. 438, which are not necessarily binding in a Scottish Court. Moreover, there is no logical necessity to equiparate an agreement to pay without allowing a deduction of tax to an agreement to pay free of tax, and such decisions fail to notice and give effect to the distinction between said two forms of words.
(iv) That in a recent Court of Appeal case, Horton v.Horton (No. 2) [1961] 1 Q.B. 215, a separation deed provided for aliment of £30 per month but was amended by a supplemental deed which substituted "a sum which after deduction of tax shall amount to a clear sum of £30" and included a declaration that this had always been the intention of the parties.
(v) That real intentions can be substituted for faulty draftsmanship with retrospective effect if the actions of the parties throughout have been consistent with the interpretations sought, and in this case the intentions of the parties had always been to provide the wife with a clear £35 per month to spend, as was evidenced by the history of the payments made by the husband throughout the period from 1948 to 1962.
(vi) That the deed is not struck at by s. 506(2) and is capable of interpretation on the lines followed in Horton v.Horton.
(vii) That in the years under appeal s. 170 was applicable; deduction of tax by the husband was mandatory, and he alone could be asked to account for tax. In any event he must be presumed to have paid it:Stokes v. Bennett(1) 34 T.C. 337.
IV. On behalf of the Inspector of Taxes it was contended that:
(i) the contentions put forward by the Respondent regarding interpretation of the "free of Income Tax" phrase in clause 3 of the agreement as meaning such a sum as after deduction of Income Tax for the time being payable in respect thereof would leave a net sum of £35 per month if legally sound made s. 506(2) wholly meaningless;
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(ii) the cases in which the words "free of income tax" had been so interpreted by the Courts as not being within the mischief of s. 506(2), Income Tax Act 1952, were confined to payments under Court Orders and out of taxed funds under testamentary dispositions; there were no decided cases in which the words "free of income tax" as used in an agreement had been held not to be caught by s. 506(2) and void so far as tax was concerned;
(iii) the words "free of tax" had to be construed according to their ordinary meaning in their context unless both parties to the agreement proved that some other meaning was intended;
(iv) the onus of establishing that the words "£35 free of tax" fell to be read as meaning "such a sum as after deduction of tax leaves a sum of £35" was on the Respondent and had not been discharged;
(v) the words "£35 per month free of tax" in this case were within the mischief of s. 506(2), Income Tax Act 1952, and fell to be read as "£35 per month", from which sum tax ought to be deducted;
(vi) in the hands of the Respondent the monthly sums were for income tax purposes instalments of an annuity or other annual payments;
(vii) the Respondent had been correctly assessed under Case III of Schedule D in respect of the monthly sums of £35 received by her and the assessments should be confirmed.
V. Reference was made to the following cases:
Blount v. Blount ELR[1916] 1 K.B. 230
Noel v. Trust & Agency Co. of Australasia Ltd. ELR[1937] Ch. 438
Hutchison v. Commissioners of Inland Revenue TAXSC15 T.C. 89; 1930 S.C. 293
Brooke v. Price ELR[1917] A.C. 115
Commissioners of Inland Revenue v. Cook TAXELR26 T.C. 489; [1946] A.C. 1
Horton v. Horton (No. 2) ELR[1961] 1 Q.B. 215
Hemsworth v. Hemsworth UNKELR[1946] 2 All E.R. 117; [1946] K.B. 431; In re
Shaw ELR[1918] P. 47
Spilsbury v. Spofforth TAX(1937)...
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