Peracha v Miley (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 21 December 1988 |
| Date | 21 December 1988 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
Mr. Robin Mathew (instructed by Clifford Chance) for the taxpayer.
Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Dunmore v. McGowan (H.M.I.T.) TAX(1978) 52 T.C. 307
General Produce Co. v. United Bank Ltd. (unreported, 30 January 1979)
Macpherson v. Bond (H.M.I.T.) TAX[1985] BTC 538
Income tax - Person entitled to income - Interest - Deposit account and accrued interest retained by bank as part security for debt - Whether taxpayer person entitled to income - Income and Corporation Taxes Act 1970 section 114 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 114(1) (now Income and Corporation Taxes Act 1988 section 59 subsec-or-para (1)Income and Corporation Taxes Act 1988, sec. 59(1)).
This was an appeal by the taxpayer from the decision of a Special Commissioner dismissing his appeal against assessments to income tax under theIncome and Corporation Taxes Act 1970 section 114 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 114(1) in respect of accrued interest on a deposit account retained by the bank as part security for a debt.
In 1971 the taxpayer's family company in what was then East Pakistan obtained substantial loans from the United Bank Ltd. ("UB") in Dacca. At about the same time the taxpayer, who ran the business in London trading as the "General Produce Company", deposited £33,000 with the UB's London branch agreeing that the deposit in London should be used as part security for the loans to the company.
On 18 January 1971 a "letter of lien and authority for advances" was signed on behalf of the taxpayer creating a guarantee under which the company was the primary debtor and the taxpayer was secondarily liable.
When East Pakistan became Bangladesh in 1972 the company was taken over by a government body, the Bangladesh Jute Board. The new government also made an order vesting UB's undertaking in Bangladesh, including the benefit of the rupee loans to the company, in the Janata Bank which was a government bank in Bangladesh.
In 1974 the taxpayer instituted proceedings against UB with a view to obtaining the release of the money held in the deposit account in London. On 30 January 1979 Lloyd J. in General Produce Co. v. United Bank Ltd. (unreported), having construed the letter of 18 January 1971, decided that UB was entitled to retain the money. He held that as a result of the transfer of the rights of UB to the Janata Bank, the company as principal borrower had been released from its obligations to UB but the terms of the letter were such that the taxpayer had become the principal debtor for the amount of the rupee loans. The bank was therefore entitled to insist on the money and the accrued interest remaining on deposit as security in respect of the taxpayer's personal liability. The UB took no steps to recover the loans from the taxpayer at that time and still had not done so in 1985.
The Special Commissioner held that the taxpayer was the person entitled to the interest within Income and Corporation Taxes Act 1970 section 114 subsec-or-para (1)sec. 114(1) of the 1970 Act notwithstanding that he had not received it.
On appeal to the High Court the taxpayer contended that there was no real prospect that the rupee loans would be repaid by anybody other than the taxpayer and UB held the deposit and the accrued interest which it could apply at any time in reduction of the loans. That being so, UB held the entire beneficial interest in the deposit and the accrued interest and accordingly the taxpayer was not entitled to the interest. Alternatively, the taxpayer contended that after UB had successfully resisted the High Court action in 1979 it was bound to set off or appropriate the whole deposit against the rupee loans so that the crediting of the interest to the taxpayer was no more that a book-keeping entry.
The Crown contended that Lloyd J.'s judgment had not decided that the beneficial ownership of the London deposit was in UB. The money remained in the taxpayer's name as part security for the rupee loans, the interest accruing for his benefit in reducing his liability.
Held, dismissing the taxpayer's appeal:
The interest which had been credited by the bank to the taxpayer benefited him to the extent that his continuing liability to repay the loans was reduced. The taxpayer was therefore the person entitled to the interest although he had not received it. (Dunmore v. McGowan (H.M.I.T.) TAX(1978) 52 T.C. 307, followed; Macpherson v. Bond (H.M.I.T.) TAX[1985] BTC 538, distinguished.)
1. On 30 October 1986 one of the Special Commissioners heard the appeals of Mr. Bashir-ud Din Peracha against the following assessments to income tax:
| £ | |
| 1973-74 | 4000 |
| 1974-75 | 4000 |
| 1975-76 | 5000 |
| 1977-78 | 3645 |
| 1978-79 | 3088 |
| 1979-80 | 5000 |
| 1980-81 | 5832 |
| 1981-82 | 6500 |
| 1982-83 | 7000 |
| 1983-84 | 8250 |
| 1984-85 | 9000 |
The assessments were made under schedule DCase III of Sch. D and are in respect of untaxed bank interest. (It appears that an assessment was also made for 1976-77, but that it was not appealed. It was in the figure of £200 only.)
2. Shortly stated, the question for determination was whether Mr. Peracha was "the person receiving or entitled to" the bank interest in question (Income and Corporation Taxes Act 1970 section 114 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 114(1)) having regard to the circumstances of the case and in particular the rights of United Bank Ltd. against Mr. Peracha and the deposit account with that bank on which that interest accrued year-by-year.
3. Mr. Peracha gave evidence. In addition, there was before the Commissioner a statement of facts agreed by the parties, to which were appended:
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(a) a copy of a document referred to in the decision as a "letter of lien and authority for advances"; and
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(b) a transcript of the judgment delivered by Lloyd J. in the Queen's Bench Division on 30 January 1979 in an action entitledGeneral Produce Co. v. United Bank Ltd.
4. The facts are set out in the note of the decision delivered orally at the conclusion of the hearing.
5. (a) It was contended by Mr. S.U. Siddiqui FCA, for Mr. Peracha, that the period covered by the assessments should be divided into two parts: that falling before, that following the judgment of Lloyd J. dated 30 January 1979. As to the first period, the deposit account (including the interest accruing thereon) was effectively frozen by United Bank Ltd. from 1972 and Mr. Peracha was precluded from withdrawing either the principal of or the interest credited to the deposit account. Therefore tax should not be charged on Mr. Peracha unless and until the interest was released to him. Comparison was made to the treatment of unremittable income from assets frozen abroad and income tax is not charged until the sums are at the disposal of the taxpayer. As to the second period following the 1979 decision as judgment was awarded against Mr. Peracha, the sum in the deposit account and the accruing interest should be regarded as in the beneficial ownership of United Bank Ltd. Mr. Peracha should not be prejudiced by the failure of that bank formally to rectify the account by appropriating the balance of the deposit account against the liability to the bank. More generally, it was contended that the present case came within the principle of Macpherson v. Bond (H.M.I.T.)TAX[1985] BTC 538.
(b) The inspector of taxes contended that Lloyd J. had not decided that beneficial ownership of the deposit account lay with the United Bank Ltd.; and that the present case was governed not byMacpherson v. Bond but by Dunmore v. McGowan (H.M.I.T.)TAX(1978) 52 T.C. 307.
6. As appears from the decision, the Commissioner agreed with the inspector of taxes and accordingly dismissed all the appeals in principle.
7. Figures were subsequently agreed between the parties and on 28 September 1987 the Commissioner determined the amounts of the assessments as follows:
| £ | |
| 1973-74 | 5809 |
| 1974-75 | 8717 |
| 1975-76 | 3358 |
| 1977-78 | 3534 |
| 1978-79 | 3063 |
| 1979-80 | 3235 |
| 1980-81 | 5832 |
| 1981-82 | 7818 |
| 1982-83 | 723... |
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Peracha v Miley (Inspector of Taxes)
...(1)Income and Corporation Taxes Act 1988, sec. 59(1)). This was an appeal by the taxpayer against the decision of Vinelott J ([1989] BTC 85) that he was liable to tax under theIncome and Corporation Taxes Act 1970 section 114 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 114......