Willingale v International Commercial Bank Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Diplock,Lord Salmon,Lord Fraser of Tullybelton,Lord Russell of Killowen,Lord Keith of Kinkel |
| Judgment Date | 02 February 1978 |
| Judgment citation (vLex) | [1978] UKHL J0202-1 |
| Date | 02 February 1978 |
| Court | House of Lords |
[1978] UKHL J0202-1
House of Lords
Lord Diplock
Lord Salmon
Lord Fraser of Tullybelton
Lord Russell of Killowen
Lord Keith of Kinkel
Upon Report from the Appellate Committee, to whom was referred the Cause Willingale (Inspector of Taxes) against International Commercial Bank Limited, That the Committee had heard Counsel, as well on Wednesday the 7th as on Thursday the 8th days of December last, upon the Petition and Appeal of Alan Edward Willingale, one of Her Majesty's Inspector of Taxes, of Somerset House, The Strand, London W.C.2, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 15th of March 1977, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament, might seem meet; as also upon the Case of International Commercial Bank Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal of the 15th day of March 1977, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
For reasons given in the Court of Appeal by Lord Justice Stamp and those to be given shortly in this House by my noble and learned friend. Lord Russell of Killowen. I would have allowed this appeal. The question seems to me to turn upon whether in its commercial nature, the transaction entered into by the bank was a loan of money repayable by a larger sum at a future date, or whether it was the acquisition of an asset similar to any chattel. I think it was the former; the bank's accountants treated it as such.
My Lords,
I have had the advantage of reading the speeches which are about to be delivered by my noble and learned friends, Lords Fraser of Tullybelton and Keith of Kinkel. I agree that for the reasons which they give and also for the reasons stated in the judgements of Walton J. and the majority of the Court of Appeal that this appeal should be dismissed.
I wish to add only a very few observations of my own. Take the case of a bank which buys for the equivalent of £10,000 a foreign bill of exchange with a face value equivalent to £15,000, maturing 5 years after the date of its purchase. The bank in calculating the price which it was prepared to pay for the bill, on which it expected to make a profit, may well have taken into consideration the interest it would be losing on the purchase price. This, however, would be only one factor in arriving at the price which the bank was prepared to pay. Some of the other factors taken into account would no doubt be the estimated strength of the currency in which the bill was made out and the standing of the commercial house which issued it. None of these factors can alter the nature of the transaction which is the purchase of a bill at a price considered by the bank to be its market value at the date of purchase. The bank would have the option of holding the bill until it matures or selling it at any time before it reaches maturity. In the instant case, the bank usually held the bills until they matured but it sold many of the bills before maturity, often at a profit but sometimes at a loss. The bill being bought in foreign currency whose rate of exchange fluctuates considerably, the profit the bills might yield would be unpredictable. If the rate went against sterling at the date of maturity or at the date when the bill was sold, the profit made by the bank would be diminished and indeed the transaction might, as it sometimes did, result in the bank making a loss. If the rate went in favour of sterling at the material date, the bank would make a larger profit than it had expected.
It is well settled by the authorities cited by my noble and learned friends that a profit may not be taxed until it is realised. This does not mean until it has been received in cash but it does mean until it has been ascertained and earned. It follows in my view that corporation tax cannot be levied in respect of the bank's transactions until the fiscal year in which the bank sells the bill or if the bank holds it until maturity, until the fiscal year in which it matures. The tax is leviable even if the bank does not receive the cash in that fiscal year. If the bank's customer defaults, an adjustment would be made for the bad debt in the following year.
The difference between the price at which the bank buys the bill, and the bill's face value is something referred to as "a discount". A discount however is different from interest: it is not earned nor does it accrue from day to day. Even, if contrary to my view, the profit on a bill could be taxed before it is sold or matures, the profit could not, for tax purposes, be spread over the years elapsing between the date of purchase and the date of maturity or of the sale of the bill. I agree, however, that it is arguable although the Crown does not rely on the argument, that the bank on entering into the transaction which I have postulated acquires the right to be paid the £5,000 in five years' time and that accordingly the bank earns that sum in the fiscal year in which the transaction is made. It follows, so the argument runs, that the bank can be taxed on the £5,000 in that fiscal year subject to a suitable adjustment for the deferment of the payment. The rate of corporation tax does not vary according to the amount of profit upon which it is assessed, but the rate of income tax does. If an individual was carrying on the same kind of business as does the bank, I cannot imagine that the Inland Revenue would contend that a substantial profit accruing in years 1 or in year 5 should be spread over the intervening years for tax purposes.
If I understand him correctly, my noble and learned friend, Lord Russell of Killowen, considers that the bank's transactions are no different from loans of money at compound interest made in this country. My noble and learned friend equates compound interest on a loan with discount on a bill because he considers that compound interest is the content of the discount. I am afraid I cannot agree. As I have already pointed out, in my view, particularly so far as foreign bills are concerned, the interest on the purchase price is only one of the factors taken into account by the bank in deciding the price which it is prepared to pay for the bill.
Although there may be some superficial similarity between ( a) lending £10,000 for 5 years at a rate of interest of X per cent. per annum on the terms that none of the interest amounting in all to £5,000 shall be payable until the principal becomes repayable and ( b) buying a foreign bill of exchange with a face value equivalent to £15,000 for a price equivalent to £10,000, the two transactions are, in my view, essentially different from each other in character.
The lender is entitled to be paid £15,000 at the end of 5 years; no more and no less. The purchaser of the bill is entitled to sell the bill when he likes, or keep it until maturity. The amount he receives for it will depend upon the currency rate of exchange at the material time. I would also point out that to imagine a bank or any other commercial institution lending money at interest none of which is payable until the principal is repayable is a very bizarre conception. I doubt whether any such a loan has ever been made or ever will be. If it were, corporation tax would, I think, be exigible on the £5,000 for the fiscal year in which the loan agreement was made with an allowance for the deferment of the payment of interest. That would be the year in which the bank earned the right to be paid the £5,000 in 5 years' time. The other alternative may be that the bank might be taxable on the £5,000 in the year in which it fell due for payment. I do not think that the bank could have been taxed in respect of interest in any of the intervening years, for the bank would not have been entitled to be paid any interest in any of them.
Accordingly, if, contrary to my opinion, it is possible in the circumstances of the instant case, to equate the profit made on a bill with compound interest due and payable on a loan but only payable when the loan itself becomes repayable, still no tax would be exigible in respect of any fiscal years other than the years in which the bill was issued to the bank or in which it matured or was sold by the bank.
My Lords, I would dismiss the appeal.
My Lords,
This appeal is concerned with the question of how gains accruing to the respondent bank ("the Bank") from the discounting and purchase of bills and notes in the course of its business should be taken into account in computing its profits for purposes of corporation tax. The bank's accounts prepared for commercial purposes take account of such gains by bringing into the profit and loss account for each year a proportionate part of the difference between the price paid for each bill and its value at maturity. But the bank maintains, at first sight perhaps rather surprisingly, that accounts prepared in that way conflict with the principle of income tax...
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