Sun Life Assurance Society v Davidson
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 July 1957 |
| Court | House of Lords |
| Date | 04 July 1957 |
| Year | 1954 |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax - Life assurance company - Brokerage and stamp duties on changes of investments - Claim for relief in respect of expenses of management - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Section 33.
The Appellants carried on life assurance business. They made claims to relief from Income Tax in respect of expenses of management and included in these claims sums representing brokerage and stamp duties disbursed in connection with purchases and sales of investments. The Special Commissioners held that these sums were not admissible as expenses of management.
Held, that the decision of the Special Commissioners was correct.
CASE
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 1st and 8th February, 1954, Sun Life Assurance Society (hereinafter called "the Society") claimed under Section 33 of the Income Tax Act, 1918 (hereinafter called "Section 33") repayment of so much of the Income Tax paid by it for the year of assessment 1949-50
as was equal to the amount of tax on the sums disbursed as expenses of management for the year ended 31st December, 1949. The claim was objected to by the Respondent to the extent and on the ground that included in the expenses of management claimed there were sums which the Society disbursed by way of brokerage and stamp duties as hereinafter appears. The claim accordingly fell to be heard and determined by the Special Commissioners in like manner as in the case of an appeal against an assessment under Schedule D of the Income Tax Act, 1918.2. The sole question raised by the appeal was whether sums paid or suffered by the Society in respect of brokerage and stamp duties amounting to £40,773 in the year ended 31st December, 1949, are expenses of management within the meaning of Section 33.
3. Evidence was given at the hearing before us by Mr. Reginald Murrell (general manager of and actuary of the Society), Mr. Stephen Lawrence Mears (secretary to the Society), Mr. William Guthrie Wardrop (one of Her Majesty's Senior Principal Inspectors of Taxes) and Mr. Frederick William Gower (a chartered accountant and the senior advisory accountant to the Board of Inland Revenue). The facts admitted or proved at the hearing are set out in paragraphs 4 to 11 inclusive of this Case.
4. The Society was constituted by a deed of settlement in 1810. The Sun Life Assurance Act, 1889, repealed the provisions of the deed of settlement and substituted laws and regulations of the Society. The Society was registered under the provisions of the Companies (Consolidation) Act, 1908, as an unlimited company.
5. The Society is a proprietary assurance company carrying on life assurance business within the meaning of Section 33. The business of life assurance consists of the granting of policies on human life under which, in return for premiums, either single or annual, a sum of money, with or without participation in the profits of the Society, is payable on the death of the life assured or, in certain cases, at the expiration of a fixed period of time. For the purposes of the Income Tax Acts life assurance is a trade, and the profits therefrom (including the profits, if any, on realisation of investments) are assessable under Case I of Schedule D of the Income Tax Act, 1918. No assessments have in fact been made upon the Society under Case I, as the Crown has elected to charge the Society upon its income from investments and not on its trading profits. In common with all assurance companies the Society is governed by the Assurance Companies Acts, 1909 and 1946. In accordance with the provisions of Section 3 of the Assurance Companies Act, 1909, the Society has kept a separate account of all receipts of its life assurance business and the receipts in respect of this business have been carried to and form a separate fund known as the life assurance fund.
6. The annual premiums payable on the policies issued by the Society are fixed at the date of issue of the policies and are unalterable throughout the life of the policies. The premiums are calculated on the basis that the Society will invest them at interest and continue to invest its income from investments. In fixing the premiums payable on its policies the Society assumes a net rate of interest or dividend after deduction of Income Tax and takes into account other factors such as mortality rates and the proportion of the expenses of management of its business which will have to be borne out of the premiums, less the Income Tax recoverable under Section 33 in respect of these expenses. The business of life assurance is highly competitive. It is therefore essential that, in order to keep its premiums as low as possible, the Society should invest its premiums to the best advantage and, as necessary, change the investments from time to time. Moreover, it is necessary that the premiums should be invested to earn a rate of interest sufficient to meet the Society's obligations under its policies as well as to provide profits for the benefit of participating policy holders and of shareholders. A constant watch must also be kept on the Society's investments to avoid excessive depreciation which might jeopardise the security of the life assurance fund. Thus in the ordinary course of carrying on its business it is necessary for the Society to purchase investments and from time to time to sell or change such investments. The investments made by the Society are part of its circulating capital and do not constitute part of its fixed capital assets.
7. In order to carry out the day-to-day work in respect of the investment and reinvestment of its moneys in the life assurance fund the Society has a special staff of employees in the investment department. This department is concerned with buying investments quoted on the Stock Exchange and also with investing the Society's money privately, that is, not through the agency of members of the Stock Exchange. In addition the Society makes investments by advancing moneys at interest to policy holders on the security of their policies.
8. The amount of the salaries paid for the year ended 31st December, 1949, to all employees of the Society including the staff of the investment department and those dealing with advances to policy holders was included as part of the expenses of management in the Society's claim under Section 33 for the year of assessment 1949-50. No objection to any part of the amount so included was made by the Respondent. In addition to salaries of staff, which amounted to £513,678, no objection was raised by the Respondent to the inclusion among management expenses of the following amounts disbursed by the Society in the year ended 31st December, 1949, which management expenses were the subject of the claim under Section 33 for the year of assessment 1949-50:
£ |
|
Travelling allowances |
30,835 |
Staff catering |
32,335 |
Rents, rates and taxes |
43,536 |
Inland Revenue stamps on policies |
22,901 |
Law charges for investigation of title to property mortgaged to the Society under a scheme for the purchase of houses by policy holders |
20,213 |
Printing and stationery |
20,695 |
9. The Respondent did, however, object to the inclusion in the claim under Section 33 of the sum of £40,773, being the amount included therein in respect of commission to stockbrokers and stamp duties disbursed by the Society in connection with the purchases and sales of investments such as are referred to in paragraph 6 above. Moreover, the Society had each year since the passing of the 1915 Finance Act, up to and including the year of assessment 1948-49, claimed and been allowed relief under Section 33 in respect of expenses which included similar amounts disbursed by way of brokerage and stamp duties, the Respondent not having objected to their inclusion as part of the expenses of management for such years.
10. In the books of the Society the sums paid or suffered as brokerage and stamp duties on the purchase or sale of investments in the year ended 31st December, 1949, were charged to a general expenses account. In the revenue account of the life assurance business of the Society for that year drawn up in the form prescribed by Section 4 (a) and the First Schedule to the Assurance Companies Act, 1909, the said sums are included in the amount debited for expenses of management. Any profits arising on the realisation of investments are passed to inner reserves and by virtue of a directors' resolution are reserved for policy holders. A copy of the Society's accounts for the year ended 31st December, 1949, marked "A", is attached to and forms part of this Case(1). The accounts of 56 assurance companies had been examined by Mr. Wardrop, who ascertained that in the case of 48 of them the amounts expended on brokerage and stamp duties in connection with purchases and sales of investments were, in the case of purchases, treated as part of the costs of acquiring the investments in question and, in the case of sales, were treated as deductions from the proceeds of sales. Nevertheless, when computing their claim under Section 33 all such 48 companies included such brokerage and duties as part of their expenses of management. In the case of the remaining eight companies the amounts so expended were from the beginning charged as expenses in the revenue accounts of the respective life assurance businesses.
11. The following is a statement setting out particulars of the Society's claim under Section 33 for the year of assessment 1949-50 relating to its life assurance...
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