Neumann v The Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 01 February 1934 |
| Date | 01 February 1934 |
| Court | King's Bench Division |
NO. 909.-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).-
COURT OF APPEAL.-
HOUSE OF LORDS.-
Sur-tax - Return of total income - Dividend paid without deduction of Income Tax by property-owning company out of rents received in excess of Schedule A assessments - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Rule 20 of the General Rules; Finance Act, 1927 (17 & 18 Geo. V, c. 10), Sections 38 and 39; Finance Act, 1931 (21 & 22 Geo. V, c. 28), Section 7.
The Appellant was a shareholder in the Salisbury House Estate, Ltd. On the 4th April, 1930, the House of Lords, in the case of Salisbury House Estate, Ltd. v. Fry (15 T.C. 266), decided that the rents of the company's properties, which greatly exceeded the annual values as assessed to Income Tax under Schedule A, were profits arising from the ownership of land, in respect of which the assessments under Schedule A were exhaustive, and that such rents in excess of the Schedule A assessments could not be included in assessments under Schedule D as trade receipts of the company.
Pending the final decision in the case, the company had created a reserve fund representing a surplus of accumulated rents which remained in its hands after profits had been distributed to the amount of the Schedule A assessments on its properties. Immediately upon the decision of the House of Lords, the company distributed the whole of the reserve fund by way of dividend to its shareholders.
The dividend was described by the company, at the time of payment, as an "interim dividend of five per cent., free of tax", and the proportionate part paid to the Appellant, amounting to £4,275, was stated to be equivalent to a gross amount of £5,343 15s. 0d., less Income Tax £1,068 15s. 0d. Later, in consequence of the decision in Gimson v. Commissioners of Inland Revenue (15 T.C. 595), the company informed the Appellant
that their earlier description of the dividend as a dividend of five per cent., free of tax, was erroneous, and that the dividend should have been described as a dividend of "five per cent., actual", being a distribution of untaxed income which was not taxable in the hands of the company or in his hands and, therefore, should not be included in any Income Tax or Sur-tax returns made by himThe Appellant was assessed to Sur-tax in respect of the dividend in the amount of £5,343 15s. Od. He appealed, contending, inter alia, that the dividend had been paid out of profits which were not liable to Income Tax, and that accordingly there was no liability to Sur-tax. The Special Commissioners confirmed the assessment.
Held, (a) that the dividend was paid out of profits and gains charged on the company in accordance with the provisions of the Income Tax Acts, and that the dividend was income to be included in a return of total income for the purposes of Sur-tax; (b) that, although deduction of tax from the dividend was authorised by the Income Tax Acts, no deduction had in fact been made, and the sum paid to the Appellant, viz., £4,275, was not a "net amount" to which, by virtue of Section 7 (2) of the Finance Act, 1931, an addition was required in order to arrive at the amount returnable for Sur-tax purposes.
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 King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on the 21st October, 1931, Ludwig Neumann (hereinafter called "the Appellant") appealed against an assessment to Sur-tax made upon him for the year 1929-30.
2. On the basis of a letter dated the 4th April, 1930 (hereinafter set out in paragraph 7 hereof), from Salisbury House Estate, Limited (hereinafter called "the company"), the Appellant included in his return for the purposes of this assessment an item of £5,343 15s.0d. which, according to the said letter, was the gross amount applicable to a net interim dividend of £4,275 received by the Appellant from the company in 1929-30. The assessment, as made upon him, included the said sum of £5,343 15s. 0d. Later, the Appellant was informed by the company that the said sum of £4,275 had been erroneously described by the company as a dividend of five per cent., free of tax, and that, in fact, it represented a sum, distributed out of the untaxed income of the company, which should not have been included in any Sur-tax return made by the Appellant. By a letter dated the 1st October, 1930, the Appellant informed the Clerk to the Special Commissioners that he had been notified that the dividend should not have been returned, that the company informed him that it was in communication with the Board of Inland Revenue on the matter, and that, in the meantime, the Appellant gave notice of appeal against the assessment.
3. The company has, year by year, paid ordinary annual dividends to its shareholders (including the Appellant) and, in the year 1929-30, the company declared such a dividend (in addition to making the interim distribution which is the subject of dispute in this Case) upon which no question arises in this appeal, it being admitted for the purposes of this appeal that the proportionate part thereof, to which the Appellant was entitled, was rightly included in the assessment. The only question for the opinion of the Court is whether or not, in the circumstances more particularly set out in paragraphs 4 to 8 hereof, the item of £5,343 15s. 0d. (or any part of it) was properly included in computing the assessment.
4. The company owns a property in the City of London, the rents from which greatly exceed the amount on which the company is assessed to Income Tax, Schedule A, in respect of the property. For several years, and at all times material to this appeal, both (a) the profits of the company available for dividend, and (b) the ordinary annual dividends of the company, have been greater than the amount on which Income Tax has been paid by the company. It had been contended on behalf of the Crown that the company was carrying on a trade and that, in computing its profits for the purposes of assessment under Schedule D, it was necessary to take into account all its receipts, including receipts from rents, an allowance being made for the amount of the assessment under Schedule A. Assessments under Schedule D were made upon the company upon this basis, against which the company appealed. It was held by the House of Lords on the 4th April, 1930, that the company was not so assessable and that liability to tax in respect of the rents was covered by the Schedule A assessments, and the rents could not be brought into the computation of any liability under Schedule D (Salisbury House Estate, Ltd. v. Fry, 15 T.C. 266).
5. While the above-mentioned litigation was pending, the company had put aside £18,325 out of its profits to the credit of an Income Tax reserve. The House of Lords' decision in favour of the company rendered that reserve no longer necessary, and the company at once, on the 4th April, 1930, declared and paid thereout a further dividend described at the time as an "interim dividend "of 5% free of tax". It was not disputed by the Respondents that this sum of £18,325 was paid out of a surplus of accumulated rents which remained in the hands of the company, after profits had been distributed to the amount of any assessments made upon the company.
6. The resolution of the board of directors of the company reads as follows:-
4th April, 1930.
"Income Tax appeal.
"It was reported that the Crown's appeal to the House of "Lords against the judgment of the Court of Appeal had been "dismissed.
"Interim dividend.
"As a result of the above, it was resolved that an interim "dividend of 5% free of tax on account of the year ending "25th December, 1930, be declared payable to-day.
7. As a result of this declaration of dividend, the Appellant received a cheque for £4,275 together with a letter from the company, dated the 4th April, 1930, in the following terms:-
Salisbury House Estate, Limited,
"Salisbury House,
"Finsbury Circus,
"London, E.C.2,
4th April, 1930.
"L. Neumann, Esq.,
"Salisbury House,
"London Wall, E.C.2.
"Dear Sir,
"I hand you herewith cheque for £4,275 0s. 0d. in respect "of an interim dividend for the year ending 25th December, "1930, of 5% free of tax, on the 85,500 shares registered in "our name.
|
This dividend is equivalent to a gross "amount of |
£5,343 |
15 |
0 |
Less Income Tax at 4s. in the |
1068 |
15 |
0 |
£4,275 |
0 |
0 |
"NOTE.-I hereby certify that the Income Tax deducted as "shown herein has been or will be duly paid to the proper "officer for the receipt of taxes and in the event of any "application being made for exemption from Income Tax, "this certificate can be produced to the Inland Revenue "authorities and should be retained for that purpose.
"Yours faithfully,
"(Sgd.) N.E. MUNNS,
"Secretary.
8. On the 9th May, 1930, the case of Gimson v. The Commissioners of Inland Revenue, 15 T.C. 595, was decided in the King's Bench Division and, in consequence of that decision, the company came to the conclusion that the terms of its directors' resolution and of its letter to shareholders of the 4th April, 1930, were wrong. After correspondence between the company and the Commissioners of Inland Revenue, in which the company vainly tried to persuade the Commissioners of Inland Revenue that the dividend in question fell within the authority of Gimson's case and was not income liable to Sur-tax in the hands of its shareholders, the company (which had previously informed its shareholders as to the attitude it was adopting in its correspondence with the Inland Revenue) sent to the Appellant and to its other shareholders a letter dated the 28th February, 1931, of which the material part was as follows:-
Salisbury House Estate, Limited,
Salisbury House,
...
To continue reading
Request your trial