Lord Chetwode v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 16 February 1977 |
| Date | 16 February 1977 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax - Avoidance of tax by transfer of assets abroad - Computation of transferee's income attributable to transferor - Transferee an investment company - No deduction for management expenses - Accountancy practice not relevant - Transferee's short-term gains to be included - Such gains to be computed on normal basis - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 412; Finance Act 1962 (10 & 11 Eliz. 2, c. 44), ss. 10(1), Sch. D, Case VII, and 16(8) and Sch. 10; Finance Act 1965 (c. 25), s. 82(2).
The Appellant, being ordinarily resident in the United Kingdom, and having, by virtue or in consequence of a transfer of assets to which s. 412, Income Tax Act 1952, applied, power to enjoy income of a company incorporated in the Bahamas, was assessed to income tax for the years 1967-68 and 1968-69 in respect of the income of that company. At all material times it was an investment company and did not carry on a trade. The assessments were computed on the footing that no deduction was allowable from the company's gross investment income save for costs of collection and that its short-term gains from the acquisition and disposal of investments fell to be included in the income assessed.
On appeal, the Appellant contended (a) that the company's income for the purposes of s. 412 was the balance shown by its income and expenditure accounts, being accounts prepared in accordance with the normal principles of commercial accountancy, so that deductions should be allowed for the expenses and charges shown in those accounts (viz., investment advisory fees, management fees, safekeeping charges, security handling fees and bank charges and registered and executive office fees, amounting in all to £878 for 1967-68 and £1,243 for 1968-69); (b) that, since Sch. 10, Finance Act 1962, provided that for the purposes of s. 412 short-term gains were to be treated as payable in the first instance to the person to whom they accrued, and companies were taken out of the charge to tax on short-term gains under Case VII of Schedule D by s. 82, Finance Act 1965, the Appellant was not taxable in respect of the company's short-term gains; alternatively, (c) that, since Sch. 10 aforesaid provided that s. 412 should apply as if short-term gains were a profit from the trade of dealing in the assets in question, the tax should be computed by reference to the difference between the sale price of the asset disposed of and its open market value at the time of disposal, on the principle of Sharkey v. Wernher36 T.C. 275; [1956] A.C. 58. For the Crown it was contended (a) that, since the company did not carry on a trade, it had for tax purposes no profit consisting of a balance of receipts over expenditure, and, since the statutory relief in respect of the
management expenses of United Kingdom investment companies was irrelevant for the purposes of s. 412, the Appellant was in the same position as regards expenses as if the company had been an individual; (b) that under s. 16(8) and Sch. 10, Finance Act 1962, references to income in s. 412 included short-term gains, and s. 82, Finance Act 1965, had no relevance because foreign companies were never within the charge to tax on such gains: (c) that the principle in Sharkey v. Wernher(1) was not applied by Sch. 10, Finance Act 1962. The Special Commissioners, who took the view that the questions before them were questions of law and not of accountancy practice, upheld the Crown's contentions.
The Chancery Division held that the Commissioners' decision was correct because (1) "income" in s. 412 meant the balance of profit in the case of a trader but in the case of dividends from investments meant the whole of the dividends with no deduction save for the cost of collection, regardless of accountancy practice; (2) since the company was never within the charge to tax on short-term gains s. 82, Finance Act 1965, had no relevance to the Appellant's liability under s. 412 in respect of such gains; (3) Sch. 10, Finance Act 1962, applied s. 412 to short-term gains computed in accordance with the general provisions of Case VII of Schedule D and did not provide for a different method of computation.
The Court of Appeal (1) allowing the taxpayer's appeal in part, held that on a natural construction of s. 412(1) when read together with the preamble to that section the word "income" should be treated as denoting "profit", i.e., the excess of receipts over outgoings properly attributable to revenue account and thus, in determining the amount of the company's income which was to be treated as income of the Appellant in accordance with s. 412(1), it was proper to deduct the company's management expenses; Lord Howard de Walden v. Commissioners of Inland Revenue 25 T.C. 121; [1942] 1 K.B. 389 distinguished; (2) dismissing the taxpayer's appeal in part, held (a) that, since the company was never within the charge to tax on short-term gains by virtue of the fact that it was incorporated in the Bahamas, s. 82, Finance Act 1965, was irrelevant to the Appellant's liability under s. 412 in respect of such gains; (b) that s. 16(8) and Sch. 10, Finance Act 1962, applied s. 412 to short-term gains computed in accordance with the general provisions of Case VII of Schedule D, i.e., the actual gains, having been computed in accordance with the provisions contained in the Finance Act 1962, were treated for the purposes of s. 412(1) as if they were profits from a trade and no concept of notional trading was to be introduced in computing the gains; Sharkey v. Wernher distinguished.
The Crown appealed against the first limb of the decision in the Court of Appeal.
Held, in the House of Lords, (1) that in principle, "income that is assessed to tax is gross income as reduced for the purposes of assessment by such deductions only as are actually specified by the tax code"; dictum of Lord Radcliffe in Commissioners of Inland Revenue v. Frere 42 T.C. 125, at page 147, applied; (2) that dividends, whether received by an individual or by an investment company, were accordingly, as they came in, income of such individual or company, within the meaning of s. 412(1) of the Income Tax Act 1952; (3) that on the facts, the taxpayer had "power to enjoy" (within the meaning of s. 412) the whole of the dividends, not merely what was left after deducting expenses.
Per Lord Wilberforce (concurred in by Lords Salmon, Fraser and Russell): in the case of income of a foreign person which is a company, what s. 412 requires us to identify is not the net income of that company, but any head of taxable income received by it.
Per Viscount Dilhorne (concurred in by Lord Salmon): income is an ordinary word in the English language and, unless the context otherwise requires, should be given its ordinary natural meaning in a statute.
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 3 and 4 July 1973 Lord Chetwode (hereinafter called "the Appellant") appealed against the following assessments to income tax:
1967-68 |
£2,134 |
1968-69 |
£3,670. |
2. Shortly stated, the questions for our decision were:
(a) whether the amount of income which was deemed to be the Appellant's income by s. 412 of the Income Tax Act 1952 was the investment income received gross (viz., with no deduction save costs of collection) by Attleborough Investment Co. Ltd. (hereinafter called "Attleborough") or such income less the expenses incurred by Attleborough in the years in question;
(b) whether the short-term gains of Attleborough were deemed to be income of the Appellant, and if so whether the principle ofSharkey v. Wernher(1) 36 T.C. 275 applied in computing those gains.
3. Mr. David Constable Hobson F.C.A., a partner in the firm of Messrs. Cooper & Lybrand, and Mr. Edward Lawson F.C.A., principal advisory accountant to the Board of Inland Revenue, gave evidence before us.
4. The following documents were proved or admitted before us:
(a) A settlement made on 9 May 1967 between the Appellant and the Trust Corporation of Bahamas Ltd. (exhibit A).
(b) Financial statements of Attleborough as at 31 December 1967, 30 June 1968, 31 December 1968 and 30 June 1969 (exhibits B(i), B(ii), B(iii) and B(iv)).
(c) A schedule of purchases and sales of investments made by Attleborough (exhibit C).
(d) A schedule of dividends received by Attleborough for the years 1967-68 and 1968-69 (exhibit D).
5. We find the following facts proved or admitted:
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(a) On 9 May 1967 the Appellant, who at all material times was ordinarily resident in the United Kingdom, executed a deed of settlement (exhibit A(2) ), the initial trust capital being £100. By the settlement the Trust Corporation of Bahamas Ltd., a company incorporated and existing under the law of the Bahama Islands, was appointed the first trustee thereof. By the terms of the settlement the trustees were to pay the income of the trust fund to the Appellant during his life, and, subject to a power of appointment in favour of a surviving
widow, the capital and income of the trust fund was to be held for the benefit of the Appellant's issue. By transfers of May, August, October, November and December 1967 the Appellant transferred further funds amounting to £167,018 13s. 6d. to the trustee of the settlement. (b) Immediately after the establishment of the settlement the Trust Corporation of Bahamas Ltd. as trustee thereof acquired the entire share capital of Attleborough. Attleborough was a company incorporated on 21 March 1967 under the laws of the Bahama Islands. All the assets of the trust fund were transferred by the trustee to Attleborough (part in payment for the said share capital and the...
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