Willingale (HM Inspector of Taxes) v International Commercial Bank Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 02 February 1978 |
| Date | 02 February 1978 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax, Schedule D, Case I - Profits - Computation - Accountancy practice - Bank holding discounted bills until maturity or sale - Whether assessable on proportion of anticipated profits in accounting years prior to maturity or sale.
The Respondent Company was a bank incorporated in 1967 to provide medium term finance in world markets to commercial companies. At all material times its business included both the discounting and the purchase of bills issued by world-wide borrowers (for periods of between one and ten years), which the Company usually held to maturity. The Company's profit and loss accounts (prepared in the same manner as those of the clearing banks) included a time-based proportion of the profit which the Company expected to receive in respect of each bill if it were held to maturity. The Inspector raised corporation tax assessments on the Company for the accounting years ended 31 December 1967 to 31 December 1970 inclusive based on the accounts so prepared. All sales prior to maturity of bills were made in the last of such years. The Company, appealing against the assessments, contended (i) that the assessments infringed the principle that a profit is not to be taxed until it has been realised; (ii) that in ascertaining the assessable profits neither profit nor loss should be anticipated; (iii) that in commercial accounting anticipation of profits should be avoided, but that provision for expected losses should be made; (iv) that, if the principles and practices of commercial accounting conflicted with the principles of income tax law, they should be disregarded for the purposes of computing profits assessable to tax; (v) that no part of any such time-based proportion of expected profit on maturity of bills could be included in computing assessable profits for corporation tax purposes. On behalf of the Crown it was contended (i) that the Company's accounts, prepared according to accepted standard banking practice, correctly showed the assessable profit for corporation tax purposes for the relevant years; (ii) that there was no distinction between earning interest and earning discount throughout a period; (iii) that in respect of neither was it proper to complain that profit had been "anticipated". The Commissioners upheld the Company's contentions and reduced the assessments.
The Chancery Division, dismissing the Crown's appeal, held that the Company's profits from bills discounted or purchased only arose and became taxable when the bills were sold or reached maturity. Accordingly no part of the time-based proportion of expected profits fell to be included in the Company's assessable profits for corporation tax purposes in the relevant years of assessment.
The Court of Appeal (Stamp L.J. dissenting), dismissing the Crown's appeal, held that although the Company had, in making up its yearly accounts so as to spread increments of the profit it would eventually receive over the intervening periods of account, acted in accordance with the principles of commercial accountancy (and thereby given a fair and realistic picture of the profits of each period), such spreading infringed the well-established (though non-statutory) overriding principle of tax law, that "neither profit nor loss may be anticipated".
Held, in the House of Lords (Lords Diplock and Russell of Killowen dissenting), dismissing the Crown's appeal,
(1) that Lord Reid's dictum, "It is a cardinal principle that profit shall not be taxed until realised", represents a rule of law of general application;
(2) that the bills discounted and bought by the Company were analogous to a commodity bought and held by a trader;
(3) that the Company "realised" no profit in respect of its holding any such bill and within the above dictum, until it matured or was sold.
Per Curiam: Per Lords Salmon, Fraser of Tullybelton and Keith of Kinkel: it is arguable that the Company could have been charged, in the year in which it discounted or bought a bill, in respect of a receipt of the whole discount, less an allowance to reflect the fact that actual payment would be deferred.
Stated under s 56 of the Taxes Management Act 1970 by the Commissioners for the General Purposes of the Income Tax for London, the City Division, for the opinion of the High Court of Justice.
1. At meetings of the said General Commissioners held at Gresham College, Basinghall Street in the City of London on 15 and 16 February 1973, International Commercial Bank Ltd., (hereinafter referred to as "I.C.B.") appealed against corporation tax assessments made on it for the accounting periods for the years ended 31 December 1967 to 31 December 1970 inclusive in the amounts following:
£ |
|
From 30 July to 31 December 1967 |
170,000 |
Year ended 31 December 1968 |
880,000 |
Year ended 31 December 1969 |
1400,000 |
Year ended 31 December 1970 |
2000,000. |
2. The question for our determination was whether in ascertaining the profits of I.C.B. for corporation tax purposes, in the case of bills (including promissory notes) discounted or bought by I.C.B. and held until maturity or sale a proportionate part of the expected profit on maturity or sale referable to the accounting periods in question fell to be included in the computation of the assessable profit of I.C.B. for those periods within Case I of Schedule D by virtue of ss 238, 108, 109 and 129 of the Income and Corporation Taxes Act 1970. Corresponding provisions were earlier to be found in ss 46 and 51, Finance Act 1965, and ss 122 and 123, Income Tax Act 1952.
3. The following documents were produced to us and put in evidence at the hearing of the appeal and are exhibited hereto(1):
Exhibit 1. Summary of balance sheets of I.C.B. as at 31 December 1968, 1969 and 1970 prepared on behalf of the Inland Revenue.
Exhibit 2. Summary of profit and loss accounts for the period 19 July 1967 to 20 December 1968 and years ended 31 December 1969 and 31 December 1970 prepared on behalf of the Inland Revenue.
Exhibit 3. Report and accounts of I.C.B. for the period 20 July 1967 to 31 December 1968 and for the years ended 31 December 1969 and 31 December 1970.
Exhibit 4. Information requested by the Solicitor of Inland Revenue in his letter of 23 January 1973.
Exhibit 5. Table of U.S. Dollar deposit rates and schedule of typical transactions involving the sale of promissory notes by I.C.B. at a loss in the relevant accounting periods.
Exhibit 6. Example of the method of calculation by I.C.B. of discount on notes for the preparation of the accounts.
Exhibit 7. Letter 1 October 1970 from Touche Ross & Co., chartered accountants, the auditors of I.C.B., to H.M. Inspector of Taxes, City 3 District.
Exhibit 8. Statement of Standard Accounting Practice: No. 2 issued by the Institute of Chartered Accountants in December 1971.
Exhibit 9. Exposure draft ED. 6 being a Proposed Statement of Standard Accounting Practice-Stocks and work in progress-issued by the Institute of Chartered Accountants on 16 May 1972.
4. The following witnesses gave evidence before us: Mr. D. Robson, manager of I.C.B. from its inception and managing director since November 1968, formerly a general manager of the Westminster Bank; Mr. Anthony Biggins managing director of Singer & Friedlander Ltd., bankers; Mr. J.F. Taylor and Mr. A.D. Wardle, both partners in the firm of Touche Ross & Co., chartered accountants, and Mr. E. Lawson, chartered accountant, principal advisory accountant to the Board of Inland Revenue.
5. From the documentary evidence and the oral evidence of the witnesses we found the facts set out in sub-paras (1) to (6) below, and in sub-paras (7) to (9) we have recorded the effect of the evidence of the expert witnesses.
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(2) I.C.B. was incorporated on 19 July 1967 by a consortium of five major national banks, namely National Westminster Bank, First National Bank of Chicago, Irving Trust, etc., of New York, Commerz Bank of Dusseldorf, and Hongkong & Shanghai Banking Corporation. It was formed to provide medium term finance in world markets to commercial companies by way of loans running from two to seven years. Later the period of the loans was in some instances extended to ten years. Apart from subscribed share capital it had received considerable sums on deposit and current accounts, the deposit accounts consisting mainly of deposits made by banks on behalf of customers. The current accounts were opened and maintained by customers in respect of medium term loans. In 1967 clearing banks did not transact the kind of business I.C.B. was
formed to do otherwise than through fully owned subsidiary companies. The business carried on by I.C.B. was not that of a clearing bank, though as it had a small number of customers' current accounts it qualified for bank status. (3) At all material times I.C.B.'s business included the discounting or purchase of bills and similar obligations issued by borrowers (for periods between one year and ten years) all over the world-with an overall limit for each country for loans to companies or individuals resident there. These bills were often issued in sets of six or twelve, maturing at regular intervals: some carried a fixed rate of interest, others carried none. Although I.C.B. usually held such bills to maturity, on many occasions it sold them prior to maturity, and also bought them, in the recognised international market in what was called "medium-term paper". Such sales were normally effected when new business offered itself in a country already at its limit; rather than refuse such new business, I.C.B. sold old bills of that country before purchasing fresh bills, thus staying within its limit. Sales and purchases of bills also occurred in the market from time to time when I.C.B. considered them advantageous.
(4) There was a large market with a very considerable turnover available to...
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