Hutton v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 01 May 1953 |
| Date | 01 May 1953 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Surtax-Income from distribution by company of interest on Tax Reserve Certificates-Whether such distribution is out of company's taxed profits and liable to Surtax in hands of recipient - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Rule 20 of the General Rules.
A company, in which the Appellant held shares, applied Tax Reserve Certificates to the discharge of its tax liability and showed the interest earned by the Certificates, which represented a saving of tax, as a separate credit in its profit and loss account. An amount equivalent to this interest was distributed to the shareholders.
Additional assessments to Surtax were made on the Appellant in respect of his share of the distributions on the basis that the payments represented net income after deduction of Income Tax.
On appeal before the Special Commissioners, it was contended, on behalf of the Appellant, that the payments were dividends from a fund, namely, interest on Tax Reserve Certificates, which was exempt from tax, and they were therefore not taxable in the hands of the recipient; alternatively, that they were made ultra vires and that in the Appellant's hands they were money of the company to which he had no title. It was argued for the Crown that the payments could not be regarded as distributions of interest on Tax Reserve Certificates because such interest comes into existence only for the purpose of discharging tax liability; they were distributions out of the company's general taxed profits and the Appellant had been correctly assessed to Surtax in the gross amounts.
The Special Commissioners dismissed the appeal and confirmed the assessments.
Held, that the Commissioners' decision was correct.
Stated under the Finance Act, 1927, Section 42 (7) and the Income Tax Act, 1918, Section 149, 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 13th June, 1951, Philip Hutton, hereinafter called the Appellant, appealed against additional assessments to Surtax made upon him for the following years and in the several amounts shown:-
£ |
||||||
1943-44 |
… |
… |
… |
… |
… |
79 |
1944-45 |
… |
… |
… |
… |
… |
229 |
1945-46 |
… |
… |
… |
… |
… |
338 |
1946-47 |
… |
… |
… |
… |
… |
329 |
1947-48 |
… |
… |
… |
… |
… |
265 |
1948-49 |
… |
… |
… |
… |
… |
106 |
The said additional assessments are in respect of several payments received by the Appellant from the Hutton Shoe Co., Ltd. (hereinafter called "the company") as set forth in this Case. They are made in gross amounts on the basis that the said payments represented net income in the Appellant's hands after deduction of Income Tax.
2. At all material times the Appellant owned half the issued shares of the company, the remaining half being owned by a Mr. Walding. The Appellant and Mr. Walding were the sole directors of the company.
A copy of the memorandum and articles of association of the company is annexed, marked "A", and forms part of this Case(1).
3. In each of the years 1943 to 1948, as hereinafter set forth, a payment was received by the Appellant which represented his half share in a distribution purporting to shareholders to be made by the company in respect of interest received by it on Tax Reserve Certificates. The said interest had been applied pro tanto as it arose in payment of tax due from the company, as required under the terms of issue of Tax Reserve Certificates (see paragraph 7 below).
4. Interest on Tax Reserve Certificates (which are hereinafter referred to as "certificates") is exempted from charge to Income Tax by Section 29 (1) of the Finance Act, 1942.
5. The issue before us was whether, as was contended for the Crown, the aforesaid distributions were in reality dividends paid by the company out of its taxed profits, with the result that the gross equivalent of the several payments received by the Appellant formed part of his total income for Surtax purposes for the respective years and had been correctly brought into charge; or whether, as was contended for the Appellant, the said distributions were dividends paid, as they purported to be, in respect of interest on certificates, with the result that, since such interest is exempt from charge to Income Tax, the payments received by the Appellant were not part of his total income for Surtax purposes and could not be brought into assessment; or again whether-if the said distributions were held not to be dividends paid in respect of interest on certificates-they were, as was contended in the alternative for the Appellant, made without authority and ultra vires, with the result that the several sums received by the Appellant were in no case his income, but were money of the company in his hands to which he had no title whatsoever.
6. In the course of the company's trading years from that ended 30th June, 1942, to that ended 30th June, 1946, the company purchased certificates, the figures of which are set out in paragraph 8 below.
Copies are annexed, marked "B" and "C" respectively and forming part of this Case(1), of a Treasury memorandum headed "Tax Reserve Certificates", dated 22nd December, 1941, and of a Bank of England prospectus headed "Issue of Tax Reserve Certificates (Second Series)", dated 15th April, 1946. The terms of these documents were accepted as governing the several purchases of certificates in the present case.
In paragraph 1 of the Treasury memorandum it is stated that
The Certificates will earn interest at 1 per cent. per annum, in so far as they are applied to the payment of taxes, etc., but they will carry no interest to the extent that they are not so applied.
7. The Bank of England prospectus states that a certificate will entitle the holder, in accordance with conditions set out in paragraphs numbered 1 to 5,
to tender it together with accrued interest in payment of certain taxes or contributions, or, if the Certificate is not so tendered, to obtain repayment of the principal without interest.
The taxes or contributions in or towards payment of which certificates may be tendered are specified in (a) of paragraph 1. In (b) it is stated that
If a Certificate is so tendered the principal together with interest will be accepted and applied in or towards payment of the tax or contribution in respect of which the tender is made,
interest being calculated as set forth. In (c) it is stated that,
If a Certificate is tendered in payment of a tax or contribution and the principal together with interest exceeds the amount of the tax or contribution in respect of which it is tendered, there will be applied in payment of the tax or contribution such part of the principal as with interest on that part is equal to the amount of the tax or contribution.
In (g) it is noted that
Interest allowed on these Certificates is by statute exempt from Income Tax, Sur-tax, National Defence Contribution, and Excess Profits Tax.
8. A copy is annexed, marked "D" and forming part of this Case(1), of the Tax Reserve Certificate account from the books of the company. From this it appears that in the course of its trading years from that ended 30th June, 1942, to that ended 30th June, 1950, the company purchased certificates, and made surrenders in payment of tax as follows, the interest on certificates surrendered being as shown:-
In year to |
|||||||
30th June |
Purchases |
Surrenders |
Interest |
||||
£ |
£ |
£ |
s. |
d. |
|||
1942 |
… |
… |
10,400 |
- |
- |
||
1943 |
… |
… |
41,200 |
18,600 |
78 |
13 |
4 |
1944 |
… |
… |
40,000 |
30,000 |
229 |
3 |
4 |
1945 |
… |
… |
33,500 |
35,500 |
337 |
18 |
4 |
1946 |
… |
… |
23,500 |
32,500 |
362 |
1 |
8 |
1947 |
… |
… |
- |
21,500 |
291 |
13 |
4 |
1948 |
… |
… |
- |
6500 |
116 |
13 |
4 |
1949 |
… |
… |
- |
- |
- |
||
1950 |
… |
… |
- |
2,000 |
40 |
0 |
0 |
£148,600 |
£146,600 |
£1,456 |
3 |
4 |
On 17th August, 1946, a certificate to the value of £2,000 was surrendered for cash of that amount, without interest.
9. On the left hand side of the Tax Reserve Certificate account the several amounts of interest on certificates surrendered up to 30th June, 1948, appear as "paid to shareholders".
The resolutions relative to these payments passed in ordinary general meeting appear in the minute book of the company. A copy of the relevant extracts is annexed, marked "E", and forms part of this Case(1).
The earliest of these resolutions is dated 30th July, 1943, and is in terms in terms
that the sum of £78 13s. 4d.… received in respect of Interest on Tax Reserve Certificates for the year to 30th June, 1943, be paid direct to the shareholders individually in proportion to their holdings of shares as at 30th June, 1943.
On the left hand side of the Tax Reserve Certificate account (annexe D) this sum appears as having been "credited to Profit & Loss A/c" on 30th June, 1943, and as "paid to shareholders" on 31st December, 1943.
The resolutions for later years in each instance take the form of confirming a corresponding distribution already made, that dated 21st July, 1944, expressly referring to the distribution as "the action by the Directors". The formula in the years 1945 to 1948 is slightly changed, the payment being described as "in respect of interest received on Tax Reserve Certificates".
10. Some time in 1949 or early 1950, the Inspector of Taxes concerned, on seeing the company's accounts, told the company's accountants that the distribution of interest on certificates which the company had purported to make was a thing which it could not do. The Inspector's view was at that time accepted. The directors consequently took action which appears in the following minute of a directors' meeting, dated 10th February, 1950. (By this date, which falls outside the...
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Philip Hutton v Commissioners of Inland Revenue
...the appeal must be dismissed with costs. [Solicitors:-Wigan & Co. for Phipps and Troup; Solicitor of Inland Revenue.] 1 Reported [1953] 2 All E.R. 93; 215 L.T. Jo. 277; 97 S.J. 388; [1953] 1 W.L.R. 1 Not included in the present print. 1 Not included in the present print. 1 Not included in t......