THE SCOTTISH NORTH AMERICAN TRUST, Ltd, v FARMER (Surveyor of Taxes)
| Jurisdiction | Scotland |
| Judgment Date | 14 December 1911 |
| Date | 14 December 1911 |
| Court | Court of Session |
NO. 323.-COURT OF SESSION (SCOTLAND).-LORD CULLEN.-
COURT OF SESSION (SCOTLAND).-FIRST DIVISION.-
HOUSE OF LORDS.-
Income Tax. - Schedule D. - Interest. - Deduction. - The Appellants are a Company, whose main business it is to buy and sell investments. Owing to the value of their purchase of investments abroad exceeding the amount of their available cash, they pledged certain of their securities with their bankers in New York to obtain a fluctuating overdraft, on which interest was charged at current rates from day to day. Subsequently, in addition to the overdraft, the Bank granted the Company a loan with a fixed maximum for six months at 6 per cent., which was renewed for a further six months, and then terminated. The Bank collected the interest of the pledged securities, and after charging the interest due to themselves, credited or debited the balance to the Company.
Held, that the borrowings were not sums employed as capital within the meaning of the 3rd Rule of the First Case of Schedule D, and that the interest paid to the bankers in New York was deductible, as an outgoing for the purposes of the business, in computing the liability of the Company for assessment.
At a Meeting of the Commissioners for the General Purposes of the Income Tax Acts and for executing the Acts relating to the Inhabited House Duties for the County of Edinburgh, held at Edinburgh on the 22nd day of December, 1908, the Scottish North American Trust Ltd. (hereinafter referred to as the Company) appealed against an assessment for the year ending 5th April, 1909, on the sum of £2,404 (duty £120 4s.)made upon it under the Income Tax Acts in respect of the profits of the business carried on by it, based upon the average yearly profit during the twenty-seven months from the date of the Company's incorporation to 31st October, 1907. The ground of appeal was that in arriving at the assessable profits deduction had not been allowed of the interest paid by it to bankers in America.
The assessment was made under 5 & 6 Vict., c. 35, s. 100; Schedule D, First Case; 16 & 17 Vict., c. 34, s. 2, Schedule D; and 8 Ed. 7, c. 16, s. 7; and the sum assessed was arrived at as follows:-
Year to |
15 months to |
|||||
31st Oct., |
31st Oct., |
|||||
1907. |
1906. |
|||||
£ |
s. |
d. |
£ |
s. |
d. |
|
Balance of Profit as per P. & L. |
||||||
Account |
4911 |
7 |
11 |
6119 |
2 |
5 |
Less balance brought forward from |
||||||
previous account |
1,119 |
2 |
5 |
|||
3792 |
5 |
6 |
||||
Add sums debited as expenses and |
||||||
not allowable as deductions:- |
||||||
Suspense Account |
414 |
15 |
4 |
|||
Income Tax |
108 |
18 |
11 |
378 |
2 |
2 |
Interest paid to bankers in America |
||||||
on loans by them to the Company |
4,576 |
13 |
4 |
80 |
5 |
4 |
Deduct taxed dividends received by |
||||||
Company |
2,179 |
0 |
5 |
7,882 |
8 |
5 |
Profit for year to 31st October, 1907 |
6298 |
17 |
4 |
|||
Loss for 15 months to 31st October, |
||||||
1906 |
890 |
3 |
2 |
|||
Total profit for 2¼ years |
5,408 |
14 |
2 |
|||
Average yearly rate of profit |
2,404 |
0 |
0 |
I. The following facts were admitted or proved:-
1. The Company was incorporated on 27th July, 1905, under the Companies Acts as a Company limited by shares. The capital (authorised, subscribed, and paid up) of the Company is £100,000, divided into 100,000 shares of £1 each. The registered office of the Company is in Edinburgh, where the directors and shareholders meet, whence the affairs of the Company are managed, and where all the profits are assessable.
-
2. The objects of the Company as set forth in the third article of its Memorandum of Association are, inter alia, as follows,:-
(1) To carry on investment, financial and banking business in the United Kingdom of Great Britain and Ireland, India, the British Colonies and Dependencies, the United States of America, and in any other foreign countries or states.
(2) To purchase, invest in or upon, or otherwise to acquire, hold, sell, pledge, charge, dispose of and deal in all or any securities or investments of all classes and descriptions . . . . of any company, person, firm, corporation or trust, carrying on or formed to carry on business in the United Kingdom of Great Britain and Ireland, or India, or any British Colony or Dependency, or in the United States of America, or any other foreign country or state, or in the shares, stocks, bonds, debentures, obligations, scrip or securities of any British, Colonial or Foreign Government or authority supreme, municipal, local, or otherwise.
(8) To borrow and raise any sum or sums of money by way of loan, discount, cash credit, overdraft or guarantee, or upon bills of exchange, promissory notes, bonds and dispositions in security, cash credit bonds, debentures, debenture stock, mortgages, deposit receipts, or in any other manner: and to grant security for all or any of the sums so borrowed, or for which the Company may be or may become liable, and by way of such security, to dispose, mortgage, pledge or charge the whole or any part of the property, assets or revenue of the Company, including uncalled or unpaid Capital, or to dispose, transfer, or convey same absolutely, or in trust, and to give to lenders or creditors powers of sale and other usual and necessary powers.
(9) To deal with any bank, bankers or others, in the way of placing money on current account or deposit, or to borrow money from such banks, or others, either with or without the deposit, pledge or assignment of securities.
To procure the Company to be registered or recognised in any British Colony, Dependency or Possession, or in any foreign country or State.
3. In the course of its business the Company purchased in New York certain bonds, stocks, and other securities of American Railroad and other Companies. The value of the purchases exceeded the amount of the Company's available cash, and certain of the securities which were lying in New York were pledged to Messrs. Ladenburg, Thalman & Co., the Company's bankers in New York, in consideration of which the bankers allowed the Company's bank account in New York to be overdrawn. The amount of the overdraft fluctuated from time to time as the Company bought and sold securities, and the Company was charged periodic interest at current rates from day to day. In September, 1906, Messrs. Ladenburg, Thalman & Co. opened a loan account in addition to the ordinary overdraft with the Company in New York on which they granted a loan not exceeding $200,000 to the Company for a period of six months at 6 per cent, When this loan fell due it was renewed for a further six months, after which the loan account was terminated, and the balance was transferred to current account. Messrs. Ladenburg, Thalman & Co. collected all the dividends and coupons upon the securities in their hands paying the interest due to themselves out of the sums so collected, the difference or net amount being credited to the Company. In the event of the dividends and coupons collected not equalling the amount of the interest payable in any month, the interest was debited to the overdraft on the current account.
II. For the Company it was contended that the item of interest paid to bankers in New York is not liable to tax, and should therefore be deducted before arriving at the net profits assessable for income tax. The interest in question is not annual interest payable out of the Company's profits or gains within the meaning of Rule 4 to Case I., of Schedule D. It is a disbursement or expense incurred by the Company in the Company's business, and allowable by Rule 1 to Cases I. and II. of Schedule D. It is contrary to the whole scope of the Income Tax Acts to treat the interest accruing to an American citizen from advances over property in America as taxable merely because the owner of the property is resident in the United Kingdom. The assessment also is entirely opposed to the principle of taxation at the source. That principle presupposes the right of the person paying the tax in the first instance to recoup himself from some other person. In this case the Company maintains that there is no liability upon it to tax, as the interest is deducted by the lenders from dividends on securities in their own hands, and the Company has no opportunity of deducting the tax on paying the interest. The case of the Anglo-Continental Guano Works v.Bell, 1894, 70 L.T.R. 670, is not a parallel, as in that case money was advanced by the Company, whose head office was in Hamburg, to their London Branch, and the profits assessed were all earned in the United Kingdom, and on that account were liable to British income tax. The present case is different, the loan being made in America on the security of the property there, and the interest paid to the American bankers is outwith the scope of the Income Tax Acts. The case of theAlexandria Water Co., Ltd., v. Musgrave, 1883, L.R. 11, Q.B.D. 174, 49 L.T.R. 287; 1.T.C. 521, is not analogous to the present.
III. The Surveyor of Taxes (Mr. Richard Farmer) maintained:-(1) That the interest in question was interest upon capital employed in the business of the Company, and that, therefore, by reason of 5 & 6 Vict. c. 35, s. 100, Case I., Rule 3, it could not be set against or deducted from the profits of the said business; and (2) that the present case is governed by the decisions in the cases of the Anglo-Continental Guano Works v. Bell, 1894, 70 L.T.R. 670, 3 T.C. 239; andAlexandria Water Co., Ltd. v. Musgrave, 1883, L.R., 11 Q.B.D., 174, 49 L.T.R., 287; 1 T.C., 521.
IV. The Commissioners, on consideration of the facts and arguments submitted to them, were of opinion that the interest paid to bankers in America was not a legal deduction for income tax purposes, and accordingly they refused the appeal and confirmed the assessment.
The Commissioners were also of opinion that the sums of money raised by loan and overdraft, as shown in I. were utilised as additional capital.
V. Whereupon the Company declared its dissatisfaction...
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