Sterling Trust Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 03 July 1925 |
| Date | 03 July 1925 |
| Court | Court of Appeal |
NO. 56*.-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).-
COURT OF APPEAL.-
Corporation Profits Tax - Restriction of amount of tax payable - Deduction of debenture interest from profits - Investment company with income partly assessable, and partly non-assessable, to Corporation Profits Tax - Finance Act, 1920 (10 & 11 Geo. V, c. 18), Section 52 (1) (b) and Section 53 (2) (a).
The profits of an investment company consisted of:-
(a) profits which were assessable to Corporation Profits Tax in its hands; and
(b) profits which were not so assessable, being dividends received from other companies which were themselves liable to Corporation Profits Tax.
Prior to the 23rd May, 1921, the total income of the company under (a) and (b) was paid into one banking account, and out of that mixed fund its management expenses and the interest on its debentures were paid. On that date, however, a separate
banking account was opened, and thereafter the whole of the receipts under (a), but no part of the receipts under (b), were paid into that account, and out of that account alone all payments in respect of management expenses and debenture interest were madeThe company, in claiming relief under Section 52 (1) (b) of the Finance Act, 1920, contended that the whole of its debenture interest should be regarded as having been actually paid out of its profits under (a) (i.e., its profits assessable to Corporation Profits Tax) for the years 1920, 1921 and 1922.
The Special Commissioners, on appeal, accepted the company's contention as regards the period subsequent to the 23rd May, 1921, but decided that up to that date the debenture interest was paid rateably out of assessable and non-assessable profits.
Held, that, following the principle laid down by the House of Lords in the case of the Edinburgh Life Assurance Co. v. Lord Advocate (5 T.C. 472), the company was entitled, both before and after the 23rd May, 1921, to treat the debenture interest as paid out of the profits assessable to Corporation Profits Tax in the Company's own hands.
Stated under the Finance Act, 1920, Section 56 (6), 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.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 22nd November, 1923, for the purpose of hearing appeals, The Sterling Trust, Limited, hereinafter called "the Company," appealed against assessments to Corporation Profits Tax in the sums of £8,442 6s. 0d., £5,909 18s. 0d. and £5,764 9s. 0d. for the accounting periods ended 31st December, 1920, 31st December, 1921, and 31st December, 1922, respectively, made upon it by the Commissioners of Inland Revenue under the provisions of the Finance Act, 1920.
1. The Company was incorporated on the 18th day of June, 1881, under the name of the Alabama New Orleans Texas and Pacific Junction Railways Company, Limited, and changed such name to the Sterling Trust, Limited, in 1917, the Certificate of change of name bearing date the 14th day of April, 1917, and since that date the Company has carried on an investment business. The Company is a British company within the meaning of the Finance Act, 1920, Section 52 (2) (a) and (3).
2. The Company's gross income is derived from three sources as set out below:-
3. The Company has issued debentures and the principal and interest due thereunder are secured by a floating charge on the assets and undertaking of the Company.
Prior to 23rd May, 1921, the total income received by the Company, composed of profits assessable and non-assessable to Corporation Profits Tax, was paid into one account at the Bank out of which account were paid the management expenses and debenture interest referred to in Paragraph 4 below. On 23rd May, 1921, the Company opened a separate account, called a special income account, at the same bank. Into this special income account were paid dividends received from "public "utility companies" referred to in Paragraph 2 (a) and the other income referred to in Paragraph 2 (c) above. Income received under (b) was not paid into this account. Out of this special income account alone all payments in respect of management expenses and debenture interest were in fact made by the Company as from 23rd May, 1921. No money was at any time paid into the special income account except the dividends and income referred to in Paragraph 2 (a) and (c) nor was any money ever transferred from any other account to the special income account which at times was overdrawn.
4. Proviso (b) to Section 52 (1) of the Finance Act, 1920, provides as follows:-
(b) The amount of tax payable in respect of the profits of a British company for any accounting period shall in no case exceed the amount represented by ten per cent. of the balance of the profits of that period estimated in accordance with the provisions of this Part of this Act, after deducting from the amount of those profits any interest or dividends actually paid out of those profits at a fixed rate on any debentures, debenture stock, preference shares (so far as the dividend paid thereon is at a fixed rate), or permanent loan issued before the commencement of this Act, or on any debentures, debenture stock, or permanent loan issued after that date for the purpose of replacing an equal amount of any debentures, debenture stock or permanent loan issued before that date.
It was admitted that the Company paid debenture interest of the character described in the said proviso and incurred management expenses in the following amounts:-
5. The Company claimed: (1) that in the computation of the assessments the dividends received from public utility companies should in any event be excluded in ascertaining the profits; (2) that prior to 23rd May, 1921, by reason of proviso (b) to Section 52 (1) of the Finance Act, 1920, which provides that the debenture interest to be deducted from the Company's profits as estimated for the purpose of Corporation Profits Tax is the interest "actually paid out of those profits," the debenture interest must be deemed in law to have paid solely out of the assessable profits; (3) that inasmuch as subsequent to 23rd May, 1921, the debenture interest was in fact "actually paid out of "those profits," i.e., the Company's assessable profits, the whole of the debenture interest paid by the Company should be deducted from those profits for the purposes of proviso (b).
6. It was contended on behalf of the Crown (inter alia):-
(2) That in arriving at the profits assessable to Corporation Profits Tax the dividends received by the Company from "public utility companies" should not be excluded;
(3) That on the proper construction of proviso (b) to Section 52 (1) of the Finance Act, 1920, and in view of the fact that the debenture interest was paid prior to 23rd May, 1921, out of a mixed fund composed of profits assessable and non-assessable to Corporation Profits Tax the Company's claim to deduct the whole of the interest paid by it from its assessable profits only was incorrect in law and could not be substantiated and that the Company was entitled to deduct from its assessable profits only a part of the interest paid which should bear the same proportion to the total interest paid as the assessable profits of the Company bears to the total income of the Company;
(4) That the creation of the special income account on 23rd May, 1921, did not affect the Company's liability to taxation and was a mere book-keeping transaction;
(5) That the said assessments are correct and should be confirmed.
7. We the Commissioners who heard the appeal gave our decision as follows:-
In the first place the Company contends that dividends received from public utility companies should be excluded from its profits both in arriving at the assessable profits to Corporation Profits Tax and in calculating the tax payable under proviso (b) of Section 52 (1) of the Finance Act, 1920.
We decide against the Company on this point, holding ourselves bound by the decision of the Court of Session in Scotland in the case of The Investors' Mortgage Security Company, Limited v. J.W. Sinton.(1)
The Company further claims to deduct from the amount of its profits for the purposes of Section 52 (1) (b) of the Act, interest actually paid out of those profits at a fixed rate on debentures. The Company's profits are composed of dividends received from public utility companies (which dividends, as stated above, we hold to be assessable to Corporation Profits Tax in the hands of the Company), dividends received from companies liable to be assessed to Corporation Profits Tax and consequently nonassessable in the hands of the Company under proviso (a) of Section 53, and other income admittedly assessable to the tax in the hands of the Company.
Prior to 23rd May, 1921, the total profits received by the Company were paid into one account at the Bank, out of which account interest was paid on the debentures and management expenses.
It was contended on behalf of the Company that the profits referred to in Section 52 (1) (b) of the Act mean profits assessable
to Corporation Profits Tax only and that in law the debenture interest must be deemed to have been paid out of the assessable profits.While we agree that the expression in Section 52 (1) (b)"profits of that period estimated" means the profits assessable to Corporation Profits Tax, we are of the opinion, though not without considerable doubt, that the Company's claim that the debenture interest was "actually paid" out of profits assessable to Corporation Profits Tax cannot be maintained bearing in mind the fact that the said interest was paid out of a mixed fund composed of assessable and non-assessable profits. In expressing this...
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