Scottish Union and National Insurance Company v Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 08 February 1889 |
| Docket Number | No. 82. |
| Date | 08 February 1889 |
| Court | Court of Session |
Lord President, Lord Mure, Lord Shand, Lord Adam.
Revenue — Income-tax — Fire and Life Insurance Company — Profits or gains — Property and Income-Tax Act, 1842 (Act 5 and 6 Vict. cap. 35), schedule D, First Case.—
In a question as to the assessment of income-tax, under the Income-Tax Act, 1842, schedule D,* on the profits or gains of a company carrying on the businesses both of fire and life insurance, held (1) that the nett profits and gains from the two branches of the business must be massed together as one undivided income assessable according to the rules applicable to the First Case under schedule D; (2) that in estimating profits and gains there fell to be taken into account interest on investments which had not suffered deduction of income-tax at its source; (3) that as fire insurance policies are contracts for one year only, the premiums received for the year of assessment, or on an average of three years, deducting losses by fire during the same period, and ordinary expenses, may be fairly taken as the profits and gains of the company without making any allowance for the balance of annual risks unexpired at the end of the financial year; (4) that the profits or gains upon the life business could be ascertained by actuarial calculation only, and that this actuarial calculation might be obtained by taking the result of the quinquennial investigation prescribed by statute, or of the periodical investigation in use in companies established before the statute, or by an investigation covering the three years prescribed by schedule D of the Income-Tax Acts; and (5) that where a gain is made by the company (within the year of assessment or the three years prescribed by the Income-Tax Act, Schedule D) by realising an investment at a larger price than was paid for it, the difference is to be reckoned among the profits and gains of the company.
The Scottish Union and National Insurance Company, incorporated under a special Act of Parliament (41 Vict. cap. 53), appealed to the Commissioners of Income-tax for the county of Midlothian against an assessment under schedule D of the Income-Tax Acts for the year 1885-86 upon the following amount:—
| Fire profits on an average of seven years, | £24,373 |
| Fees and untaxed interest, &c., estimated, | 5,000 |
| In all, | £29,373 |
| Upon which the duty was £979, 2s. |
On 1st February 1887 the Commissioners issued the following deliverance:—‘The Commissioners are of opinion that the insurance companies should be assessed on their nett revenue, including therein premiums, untaxed interests, and profit from investments, and giving credit for all payments under policies, expenses, and losses, such revenue to be determined on the average of three years, if that be the only legal course, but the Commissioners would suggest that the parties and the Crown should arrange that the average should be determined by the number of years adopted by each respective office as the period of its investigation, and they remit to the surveyors and insurance companies to adjust the figures on this basis. The result to be reported to the Commissioners. In the event of its being found that the profits of life assurance companies must be determined by actuarial valuation, the Commissioners are of opinion that the Crown ought not to be bound by the rate of interest or other elements arbitrarily adopted by the companies themselves to the effect of reserving profits for future distribution.’
Thereafter a statement upon the basis prescribed by the Commissioners was drawn up, the summary of which was as follows:—
| Fire profits for 1882-83-84, | £112,113 | |
| Life profits for 1882-83-84, | 324,727 | |
| 3)436,840 | ||
| Average for one year, | £145,613 |
| Less taxed interest—Fire, | £13,816 | |
| Less taxed interest—Life, | 91,866 | |
| 105,682 | ||
| £39,931 | ||
| Balance of annuities paid by the company in the year ended 31st December 1884, from which income-tax was retained by the company, and for which they are accountable to the revenue, | 7,290 | |
| Total estimated liability, | £47,221 |
The Commissioners accordingly, on 20th May 1887, found that the sum assessable to income-tax for 1885-86 was £47,221, and they assessed accordingly, having power on appeal to increase an assessment under the Taxes Management Act, 1880 (43 and 44 Vict. cap. 19), sec. 57 (8).
The Insurance Company then took a case for the opinion of the Court of Exchequer, in which the following were the facts as stated by the Commissioners;—‘1. The appellants carry on the business of fire and life insurance, including the sale of annuities and other ordinary branches of the said businesses within the limits defined by their special Act, which is referred to. They have a common seal and one body of shareholders, with a paid-up capital of £282,571. Their central office is in Edinburgh, and all the branches of their business are managed by the same directorate. The results of their business in all departments, so far as their shareholders are concerned, are thrown together into one account, called the profit and loss account, and dividends to the shareholders are declared out of the balance of profit shewn upon this account, and not out of profits made in any particular department.
‘2. The profits of the appellants' fire insurance business are ascertained from year to year. In respect of the premiums in hand at the end of each year, risks are still running under existing policies, which risks may be taken as equivalent on an average to one-third of the premiums received during the preceding year. It has been the custom for many years to reckon the profits of fire insurance business with reference to income-tax upon a seven years' average, but the appellants are satisfied to accept the ruling of the Commissioners, and reckon these profits upon a three years' average.
‘3. The whole interest, dividends, rents, and other revenue from invested funds received by the appellants, are divided into two portions, one of which, being the proportion of the whole which is earned from the investment of the paid-up capital and reserves belonging to the shareholders, passes to the credit of their profit and loss account, and forms a portion of their yearly profits. The remainder of the interest, dividends, and other revenue from invested funds, is earned from the investment of the accumulated life and annuity premiums, and goes to provide for the company's obligations under its life assurance and annuity policies.
‘4. In carrying on the business of life insurance the appellants issue policies upon lives in return for payment of a premium or premiums. Such payments are made in one sum, or in sums spread over a few years, or in sums spread over a whole lifetime, and by the said policies the appellants undertake to pay certain sums upon the death of the person assured, or on his attaining a certain age, or on the happening of other contingencies connected with human life.
‘5. The liabilities of the appellants to the holders of their life and annuity policies are discharged partly out of the premiums received and partly out of the interest or other annual returns arising from the investment of the premiums. These liabilities embrace an obligation not only to pay the specific sums named in the policies but to account to the policy-holders for any surplus that may arise in the business, and to appropriate nine-tenths of that surplus by way of bonus to the policy-holders. This surplus, ascertained in the matter hereafter explained, is popularly known as “profits,” but as regards the application of nine-tenths of it, it forms, so far as the appellants are concerned, a debt due by the company to its policy-holders, equally with the sums named in their policies. The appellants, however, admit, for the purposes of this case, that income-tax falls to be calculated on all such “profits.”’*
The Insurance Company contended*;—‘(1) That they are only liable to pay income-tax under schedule D on the actual gains and profits arising
| really | £1050 |
| of which it has paid tax by way of retention made by its debtors, | 50 |
| Leaving its profit | £1000 |
| From interest on capital and reserve, | £20,228 |
| From fire profits, calculated upon an average of three years, and carrying forward each year one-third of the premiums to provide for unexpired risks, | 16,028 |
| From life profits, ascertained upon the valuation made at the statutory quinquennial investigation of 1884, | 57,878 |
| £94,134 |
‘The whole interest, dividends, rents, &c., received during the three years ending 31st December 1884 were as follows, including the interest in the foregoing statement:—
| Year 1882, | £115,107 |
| Year 1883, | 117,883 |
| Year 1884, | 123,027 |
| Together, | £356,017 |
| Yearly average, | £118,672 |
| Deduct for interest on which income-tax has not been paid by way of retention, taken at the amount charged by the Crown, | £5,000 |
Deduct also the amount of annuities paid from which income-tax was retained by the company, viz.:—
| Year 1882, | £6,545 |
| Year 1883, | 8,037 |
| Year 1884, | 10,207 |
| £24,789 | |
| Yearly average, | £8,263 8,263† |
| 13,263 | |
| £105,409 |
‘Abstract of the foregoing.
| 1st. | Average of the total yearly profits, | £94,134 per annum. |
| 2d. | Average nett amount on which income-tax has already been paid at its source, | £105,409 per annum.’ |
to them from the whole departments of their business, including therein their life business, their fire business, and the interest on invested funds so far as belonging to shareholders.
‘(2) That the amount of said profits falls to be calculated and ascertained—(a) As regards interest, by taking the average of the amount of interest belonging to the shareholders on capital and reserve as appearing in the appellants' profit and loss...
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