Riches v Westminster Bank
|England & Wales
|Viscount Simon,Lord Wright,Lord Simonds,Lord Normand
|21 March 1947
|Judgment citation (vLex)
| UKHL J0321-1
|21 March 1947
|House of Lords
 UKHL J0321-1
House of Lords
The question which the House has to decide has not, it seems, come previously before the Courts. It is whether a sum of money awarded, under the powers conferred by Section 3 (1) of the Law Reform (Miscellaneous Provisions) Act, 1934, as interest, and included in the total sum for which judgment is given, is "interest of money" within the meaning of Schedule D to the Income Tax Act, 1918.
If it is, the Defendant, when paying the judgment debt, is entitled to deduct Income Tax on the amount of this award of interest, and the Plaintiff must "allow such deduction" upon receipt of the balance, while the Defendant will retain what is deducted if he has paid it out of profits or gains brought into charge to tax (Rule 19 of "All Schedules Rules"), or will account for it to the Revenue, in so far as the payment is not made out of profits or gains brought into charge (Rule 21 of "All Schedules Rules").
The facts which give rise to this question may be shortly stated as follows. The Appellant had an agreement with one Ridsdel that, in consideration of the Appellant introducing to him a transaction for the purchase of a block of shares, Ridsdel would pay to the Appellant half of any profits which he realised on the resale of the shares. Ridsdel resold the shares at a profit, but fraudulently pretended that the sum which he thereafter paid over represented the whole of the Appellant's share of the profit. Later, the Appellant ascertained that the profit of which he was to receive one half was much greater that Ridsdel had represented, and after Ridsdel's death he brought an action before Mr. Justice Oliver against the Respondents, as judicial Trustees of Ridsdel's estate, for the balance due to him, which was ascertained to be a sum of £36,255. The learned judge, exercising his power under Section 3 of the Act of 1934, in addition to giving judgment in the Appellant's favour for this amount, awarded an additional sum of £10,028, being the equivalent of interest on £36,255 at 4 per cent. per annum from the 14th June, 1936, to the 14th May, 1943, so that the total sum for which judgment was given was £46,283. The Respondent Bank has paid to the Appellant the amount due under the judgment except that it has deducted £5,014 representing Income Tax at the rate of 10s. in the £ on the additional sum of £10,028.
The Appellant contends that the additional sum of £10,028, though awarded under a power to add interest to the amount of the debt, and though called interest in the judgment, is not really interest such as attracts Income Tax, but is damages. The short answer to this is that there is no essential incompatibility between the two conceptions. The real question, for the purpose of deciding whether the Income Tax Acts apply, is whether the added sum is capital or income, not whether the sum is damages or interest.
Before the coming into force of the Act of 1934, the rule at common law prevailed that when an action for the payment of a debt succeeded the Court could not add interest on the debt down to judgment unless interest was payable as of right under a contract expressed or implied. Provisoes (b) and (c) of Section 3 show that these exceptions were not touched by the Act of 1934 and the discretion conferred on the Court by the enacting words is a discretion to add interest when judgment is given for a debt or damages, although there is no contractual right to interest. The added amount may be regarded as given to meet the injury suffered through not getting payment of the lump sum promptly, but that does not alter the fact that what is added is interest.
This is the view taken by Mr. Justice Evershed and by the Court of Appeal (du Parcq, and Morton L.J.J and Cohen J). Notwithstanding Mr. Grant's excellent argument, this view, in my opinion, is correct.
Two decided cases which might seem to give support to Mr. Grant's argument are (1899) 2 Ch. D. 629 and of Bonner Maurice (1929) 14 T.C. 580.
In the former, Mr. Justice R. S. Wright had before him a case in which an ex-Director of the Bank had been ordered to pay to the liquidator of the Company a sum of money together with interest thereon at 5 per cent, per annum on the ground that he had been guilty of misfeasance in sanctioning the payment of dividend out of capital. The learned Judge declined to allow this individual to deduct Income Tax from the interest he was ordered to pay. He is reported as saying, on page 651, that it is not a question of contract at all and that the order made had the effect that the Company had had its capital withheld and had suffered damages equivalent to 5 per cent. per annum for that reason. The learned Judge added, "I can see no reason why it should not get the whole of the damages back. It is called 'interest,' but it is really damages for withholding its capital from the company." These observations have long been considered as of doubtful validity and the time has come to say that they are wrong. If damages are increased by adding interest upon a principal sum, that does not prove that such interest is not liable to Tax.
The case of of Bonner Maurice was of a very special character. It arose under Article 297 of the Peace Treaty with Germany after the 1914/1918 war. Article 297 provided that the Nationals of Allied and Associated Powers should be entitled to compensation in respect of damage or injury inflicted upon their property rights or interests in Germany. Before the war a British subject had deposited securities stocks and shares in Banks in Germany. He died during the war and as a result of the Peace Treaty claims on the part of his representatives were admitted in respect of amounts representing in part the capital value of those securities and in part compensation under the Treaty computed on the basis of interest on certain amounts. The decision of Mr. Justice Rowlatt that this compensation could not be regarded as interest was confirmed by the Court of Appeal. The Treaty did not give to the Claimants any right to interest as such and the view taken was that the whole amount was compensation such as was authorised by the Treaty. Mr. Justice Rowlatt observed at page 593 that the case was "like damages for detention of a chattel, and unless it can be said that damages for detention of a chattel can be called rent or hire for the chattel during the period of detention, I do not think this compensation can be called interest". I do not consider that this decision can be regarded as leading this House to a conclusion in favour of the Appellant.
Mr. Grant advanced a further argument that the added sum was not in the nature of "interest" in the sense of that expression in the Income Tax Acts because the added sum only came into existence when the judgment was given and from that moment had no accretions under the order awarding it. (Interest on a judgment debt is of course a separate matter and Mr. Grant didnot challenge the view that this latter interest was subject to tax.) But I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded, (or on a part of it) this supplemental payment, the size of which grows from day to day by taking a fraction of so much per cent. per annum of the amount on which interest is ordered, and by the payment of which further growth is stopped, should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment.
I move that the Appeal be dismissed with costs.
This appeal raises the question whether a sum of £10,028 awarded to the appellant as interest pursuant to Section 3 (1) of the Law Reform (Miscellaneous Provisions) Act, 1934, (herein-after called the Act) and included pursuant to that section in the total sum for which judgment in the King's Bench Division was given in favour of the appellant, is "interest of money" within the meaning of paragraph 1 (b) of Schedule D to the Income Tax Act, 1918, which enacts (inter alia) that "Tax under this Schedule shall be charged in respect of … (b) all interest of money".
The appellant brought the action against the Judicial Trustee of one Ridsdel claiming one half of the profits realised by Ridsdel by the sale on joint account with the appellant of certain shares in 1936. The action was commenced in 1939 when the appellant discovered that Ridsdel had not disclosed the true amount of the profit realised. The Judge at the trial by his judgment given on the 17th May, 1943, found in favour of the appellant, holding that £36,255 was due on balance to him and in addition awarded him £10,028 in exercise of his discretion under the Act, as being interest at 4 per cent. per annum on £36,255 from the 14th June, 1936, when the profits were realised by Ridsdel, to the 14th May, 1943. The Court of Appeal affirmed that judgment. The respondent claimed that he had satisfied the judgment by a payment of £41,451 11s. 11d. which was arrived at after deduction of £5,014 representing income tax on the sum of £10,028 pursuant to Rule 21 of the Income Tax Act, 1918. The appellant claimed that income tax was not deductible and the respondent then brought the action out of which this appeal arises, claiming that the payments made by the respondent satisfied the judgment. The dispute involved the question whether the sum of £10,028 was interest under the Act. It clearly affected the rights of the Revenue. The House accordingly gave the Revenue authorities the opportunity of intervening in the proceedings, but they disclaimed any desire to take...
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