Lord Chetwode v Inland Revenue Commissioners

COURT OF APPEAL

[1976] 1 ALL ER 641, [1976] 1 WLR 310, [1976] STC 54, 51 Tax Cas 647, 54 ATC 322, [1975] TR 281

HEARING-DATES: 5, 8, 9, 10, 11 DECEMBER 1975

11 October 1975

CATCHWORDS:
Income tax - Avoidance - Transfer of assets abroad - Prevention of avoidance of liability to tax - Income of transferee deemed to be income of transferor - Meaning of 'income' - Revenue or profit - Computation of income - Taxpayer resident in United Kingdom - Taxpayer transferring assets to investment company resident outside United Kingdom - Investment company incurring expenses in collecting dividends and managing portfolio - Whether management expenses deductible in computing income of company - Income Tax Act 1952, s 412(1).

Income tax - Avoidance - Transfer of assets abroad - Prevention of avoidance of liability to tax - Income of transferee deemed to be income of transferor - Gains accruing from acquisition and disposal of chargeable assets - Short-term capital gains tax - Taxpayer transferring assets to investment company resident outside United Kingdom - Company selling certain assets and making gain - Abolition of short-term capital gains tax on companies - Whether company's gain deemed to be income of taxpayer - Whether gain to be computed in the same way as profits - Income Tax Act 1952, s 412(1) - Finance Act 1962, s 16(8), Sch 10 - Finance Act 1968, s 82(2).

HEADNOTE:
In 1967 the taxpayer, who was ordinarily resident in the United Kingdom, transferred to TCB Ltd, a foreign trust company, a certain sum on trust to pay the income to himself for life with remainder, subject to a power of appointment in favour of a surviving widow, to his issue. Soon after the settlement was constituted TCB Ltd acquired the entire share capital in A Ltd, an investment company incorporated in the Bahamas, and transferred to it all the assets of the trust fund, part in consideration of the issue of the shares and part on interest-free loans. A Ltd used those assets to acquire land in the Bahamas and securities in the United States.In 1967 and 1968 A Ltd sold some of those securities making a gain on the sales. At no time did A Ltd carry on a trade. The taxpayer was assessed to income tax for the years 1967-68 and 1968-69 in respect of the income payable to A Ltd by virtue of the transfer of assets, on the basis that, under s 412 na of the Income Tax Act 1952, that income was deemed to be his income. In arriving at the income of A Ltd for the purpose of the assessments, the commissioners refused to allow any deduction in respect of A Ltd's management expenses (which consisted of an investment advisory fee, management fees, safekeeping charges, security handling fees and bank charges, and registered and executive office fees), on the ground that the expression 'income' in s 412(1) had the same meaning as the phrase in the preamble to s 412 'income payable to' and, in relation to an investment company, should be construed as referring to dividends and interest immediately payable as they arose. The taxpayer appealed, contending (i) that for the purposes of s 412(1), A Ltd's income was to be ascertained by deducting its management expenses from its receipts; (ii) that the taxpayer could not be charged in respect of A Ltd's shortterm gains since s 82(2) nb of the Finance Act 1965 had removed A Ltd's liability to tax on such gains, which by virtue of s 16(8) nc of, and Sch 10 nd to, the Finance Act 1962 had thitherto been included in the references to income in s 412(1) of the 1952 Act; and (iii) that in any event, even if A Ltd's short-term gains were deemed to be the {55} income of the taxpayer, those gains were, by virtue of Sch 10, to be treated as though they were the notional profits of a trade and therefore the tax had to be computed by reference to the difference between the sale price and the open market value of the asset disposed of at the time of the disposal.



na Section 412, so far as material, is set out at p 56 h to 57 b, post

nb Section 82(2) is set out at p 65 e, post

nc Section 16(8), so far as material, is set out at p 65 b, post

nd Schedule 10, so far as material, is set out at p 65 c and d, post

Held - (i) On the true construction of s 412(1) and the preamble to s 412, the word 'income' in the expressions 'income of' and 'income becomes payable to' was to be treated as denoting profit, i e the excess of receipts properly attributable to revenue account over outgoings similarly attributable, as ascertained from year to year. It followed that, in determining the amount of A Ltd's income which was to be treated as income of the taxpayer under s 412(1), it was proper to deduct A Ltd's management expenses and the taxpayer's appeal on that point would therefore be allowed (see p 60 f to j, p 62 h to p 63 c, p 68 e, p 70 f to j and p 71 f, post); Lord Howard de Walden v Inland Revenue Comrs (1941) 25 Tax Cas 121 distinguished.

(ii) The taxpayer's appeal on the other points would, however, be dismissed for the following reasons -

(a) The abolition of tax on a company's short-term gains by s 82(2) of the 1965 Act had no relevance to A Ltd for, being a foreign company, it had never been within the charge to short-term capital gains tax under the 1962 Act. Accordingly, by virtue of s 16(8) of and Sch 10 to the 1962 Act, the taxpayer was liable to tax on the gains which fell to be treated as the income of A Ltd (see p 66 e to g, p 67 b c and j and p 71 g , post).

(b) The effect of Sch 10 to the 1962 Act was not that a foreign company was, for the purposes of s 412(1), to be deemed to be carrying on a trade, but that the gains were to be ascertained as if it were carrying on a trade. Accordingly, there were no grounds for introducing the concept of notional trading in computing the gains. The actual gains were to be computed in accordance with the 1962 Act and, having been so computed, were then to be treated for the purpose of s 412(1) as though they were the profits from a trade (see p 66 h to p 67 d and j and p 71 g, post); Sharkey (Inspector of Taxes) v Wernher (1955) 36 Tax Cas 275 distinguished.

Decision of Megarry J [1974] STC 474 reversed in part, affirmed in part.

NOTES:
For avoidance of tax by means of transfer of assets abroad, see Simon's Taxes E1 352-365, and for cases on the subject, see 28(1) Digest (Reissue) 439-445, 1579-1592 .

For the Income Tax Act 1952, s 412, see 4 Simon's Income Tax (2nd Edn) 333. For the Finance Act 1962, s 16(8), Sch 10, see ibid 716, 734. For the Finance Act 1965, s 82, see ibid 701.

For 1970-71 and subsequent years of assessment, s 412(1) of the 1952 Act has been replaced by s 478(1) of the Income and Corporation Taxes Act 1970. Section 16(8) of and Sch 10 to the 1962 Act were replaced by s 478(8) of the 1970 Act, and s 82(2) of the 1965 Act was replaced by ss 160(1) and 250(6) of the 1970 Act. Section 160, and the relevant parts of ss 250(6) and 478(8), of the 1970 Act were repealed with effect from 6th April 1971 by the Finance Act 1971, s 56 and Sch 14, Part IV.

CASES-REF-TO:
Congreve v Inland Revenue Comrs [1948] 1 All ER 948, 30 Tax Cas 163, 27 ATC 102, 41 R & IT 319, HL; affg [1947] 1 All ER 168, CA; rvsg [1946] 2 All ER 170, 28(1) Digest (Reissue) 443, 1590 .

Howard de Walden (Lord) v Inland Revenue Comrs [1942] 1 All ER 287, [1942] 1 KB 389, 25 Tax Cas 121, 111 LJKB 273, CA, 28(1) Digest (Reissue) 442, 1586.

Latilla v Inland Revenue Comrs [1943] 1 All ER 265, [1943] AC 377, 25 Tax Cas 107, 22 ATC 23, 112 LJKB 158, 168 LT 411, 59 TLR 163, HL, 28(1) Digest (Reissue) 442, 1587 .

Mangin v Inland Revenue Comr [1971] 1 All ER 179, [1971] AC 739, [1971] 2 WLR 39, sub nom Mangin v New Zealand Inland Revenue Comr 49 ATC 272, [1970] TR 249, PC, 28(1) Digest (Reissue) 543, 1322 . {56}

Mapp (Inspector of Taxes) v Oram [1969] 3 All ER 215, [1970] AC 362, [1969] 3 WLR 557, 45 Tax Cas 651, sub nom Oram v Mapp 48 ATC 270, [1969] TR 269, HL, 28(1) Digest (Reissue) 448, 1606 .

Philippi v Inland Revenue Comrs [1971] 3 All ER 61, [1971] 1 WLR 1272, 47 Tax Cas 75, 50 ATC 37, [1971] TR 167, CA.

Sharkey (Inspector of Taxes) v Wernher [1955] 3 All ER 493, [1956] AC 58, [1955] 3 WLR 671, 36 Tax Cas 275, 34 ATC 263, [1955] TR 277, 48 R & IT 739, HL, 28(1) Digest (Reissue) 123, 363 .

Simpson v Grange Trust Ltd [1935] AC 422, [1935] All ER Rep 671, 19 Tax Cas 231, 14 ATC 16, 104 LJKB 276, 152, LT 517, 51 TLR 320, HL, 28(1) Digest (Reissue) 222, 667 .

CASES-CITED:
Cape Brandy Syndicate v Inland Revenue Comrs [1921] 2 KB 403, 12 Tax Cas 358, CA.

Fattorini (Thomas) (Lancashire) Ltd v Inland Revenue Comrs [1942] 1 All ER 619, 1942] AC 643, 24 Tax Cas 328, HL.

Inland Revenue Comrs v Wood Bros (Birkenhead) Ltd (in liquidation ) [1959] 1 All ER 53, [1959] AC 487, 38 Tax Cas 275, HL.

Odeon Associated Theatres v Jones (Inspector of Taxes ) [1972] 1 All ER 681, [1973] Ch 288, 48 Tax Cas 257, CA.

Taylor v Good (Inspector of Taxes ) [1974] 1 All ER 1137, [1974] 1 WLR 556, [1974] STC 148, 49 Tax Cas 237, CA.

Union Trustee Co of Australia Ltd v Bartlam [1948] AC 495, PC.

INTRODUCTION:
Appeal

The taxpayer, Lord Chetwode, appealed against an order of Megarry J n1 made on 18th July 1974, whereby, on a case stated n2 by the Commissioners for the Special Purposes of the Income Tax Acts, he dismissed an appeal by the taxpayer against the decision of the Special Commissioners confirming the assessments to income tax made on him for the years 1967-68 and 1968-69 by the respondents, the Inland Revenue Commissioners ('the commissioners'). The facts are set out in the judgment of Sir John Pennycuick.



n1 [1974] 3 All ER 625, [1975] 1 WLR 34, [1974] STC 474

n2 The case stated is set out at [1974] STC 476-479

COUNSEL:
Desmond Miller QC, Peter Whiteman and Ian Richards for the taxpayer.

Leonard Bromley QC and Brian Davenport for the commissioners.

PANEL: BUCKLEY, JAMES LJJ AND SIR JOHN PENNYCUICK

JUDGMENTBY-1: PENNYCUICK

JUDGMENT-1:
SIR JOHN PENNYCUICK delivered the first judgment at the invitation of Buckley LJ. This is an appeal from an order of Megarry J n1 made on 18th July 1974. The appellant ('the taxpayer') is Lord Chetwode; the respondents are the Inland Revenue Commissioners ('the commissioners'). Summarily, the principal question is whether, in computing the income of a foreign company for the purpose of s 412 of the Income Tax Act 1952, it is proper to take expenses of management into account. There is a secondary question relating to capital gains tax, which I will deal with altogether separately after the first question.



n1 [1974] 3 All ER 625, [1975] 1 WLR 34, [1974] STC 474

Dealing then with the first question I will, in order to make it intelligible, read the preamble to and the first sub-section of s 412:

'For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows: - (1) Where such an individual has by means of any such transfer, either alone or in conjunction with associated operations, acquired any rights by virtue of which he has, within the meaning {57} of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all the purposes of this Act.'

The only other relevant subsection in s 412 is sub-s (5), which defines and expands the scope of the expression 'deemed to have power to enjoy income'. I will come back to that subsection at a later stage.

The facts of the case are relatively simple. I will take them from the case stated by the Special Commissioners.

'5(a) On the 9th May, 1967, the [taxpayer] who at all material times was ordinarily resident in the United Kingdom executed a Deed of Settlement... By the Settlement the Trust Corporation of Bahamas Limited, a Company incorporated and existing under the Law of the Bahama Islands, was appointed the first Trustee thereof. By the terms of the Settlement the Trustees were to pay the income of the Trust Fund to the [taxpayer] during his life and subject to a power of appointment in favour of a surviving widow the capital and income of the Trust Fund was to be held for the benefit of the [taxpayer's] issue.'

I interpose that the settlement contained a proviso that, notwithstanding anything to the contrary, the settlor should have power to revest in himself title to all or any part of the capital and unpaid income. To return to the case stated, the amount of the fund transferred by the taxpayer to the trustee was some 167,000.

'(b) Immediately after the establishment of the Settlement the Trust Corporation of Bahamas Limited as trustee thereof acquired the entire share capital of Attleborough. Attleborough was a Company incorporated on the 21st March 1967 under the Laws of the Bahama Islands. All the assets of the Trust Fund were transferred by the Trustee to Attleborough (part in payment for the said share capital and the remainder upon interest-free loans) and were used by Attleborough to acquire land and securities. Attleborough was at all material times an investment company and did not at any such time carry on a trade. It was common ground that the [taxpayer] had power to enjoy the income of Attleborough within the meaning of section 412(1) of the Income Tax Act 1952. (d) Attleborough invested the sums transferred to it by the Trustee in the purchase of United States stocks and land in the Bahamas. [Then a schedule of the stocks was exhibited.] (e) In connection with the acquisition and management of its portfolio and purchases and sales of stocks, Attleborough incurred the following expenses and charges.'

There are then set out, under the two respective years with which the appeal is concerned, namely 1967 and 1968, the expenses and charges incurred by Attleborough. Those consist of an investment advisory fee, management fees, safekeeping charges, security handling fees and bank charges, registered office and executive office fees. The largest items were, in each year, the investment advisory fee and the management fees. The total sterling equivalent of the expenses and charges is 878 for 1967 and 1,243 for 1968. I mention in passing that certain other expenses were included in the accounts of Attleborough, but those items have (I think by agreement between the parties) been omitted from the expenses in respect of which deduction is sought. The case stated then set out a trifling sum in each year representing collection costs.

The case stated then referred to evidence of accountancy practice given by Mr Hobson on behalf of the taxpayer, Mr Hobson being a partner in the firm of Messrs Cooper & Lybrand, chartered accountants, and by Mr Lawson on behalf of the commissioners. {58} The Special Commissioners said: 'We took the view that the questions we had to decide were questions of law and not of accountancy practice. We accordingly made no findings with regard to their evidence.' They did, however, set out the evidence in an appendix. I agree that this appeal turns wholly on questions of law, and that accountancy evidence takes the matter no further, except possibly on a matter of detail to which I will refer right at the end of this judgment.

They then referred to a considerable number of cases which were cited before them, and proceeded to set out the contentions of the parties:

'It was contended on behalf of the [taxpayer]: (a) The accounts of Attleborough were prepared in accordance with the normal principles of commercial accountancy. (b) Attleborough's income was the balance shown by the receipts and expenditure account. Section 412 did not authorise any attribution to the [taxpayer] of sums in excess of the said balance... It was contended on behalf of the [commissioners]: (a) The income of Attleborough which by Section 412 was deemed to be the [taxpayer's] was the investment income which he would have received if the investment income actually received by Attleborough had instead been received by him. (b) The "income of a person resident out of the United Kingdom" referred to in Section 412(1) was, in these appeals, the dividends and interest received by Attleborough undiminished by any of the "expenses and charges" itemised in paragraph 5(e) above, and diminished only by the conceded costs of collection mentioned in paragraph 5(g). Attleborough did not carry on a trade and accordingly for tax purposes it had no profit consisting of the balance of receipts over expenditure. If it had been a United Kingdom investment company Attleborough would have been taxable by deduction on its receipts. Any claim for relief in respect of "expenses of management" - as which some or all of the expenses itemised in paragraph 5(e) above might qualify - would require a computation for the purposes only of section 57(1) Finance Act 1965: but for the purposes of Section 412 they were irrelevant. (d) The [taxpayer] was therefore in exactly the same position, vis-a-vis expenses, as if Attleborough's role had been played by an individual instead of a company.'

They gave their decision as follows:

'It is common ground that Section 412 of the Income Tax Act, 1952 applies to the transactions in question and accordingly that income of [Attleborough] is deemed to be income of the [taxpayer]. Dealing first with the submission on behalf of the [taxpayer] that the income deemed to be his is the "net" income of Attleborough (i.e. receipts less expenses), we think that a distinction is to be made between the income of an investment company and the profits of a trading company. The receipts of the latter are normally not "pure" income, whereas the receipts of the former usually are. Section 412(1) deems income "which would be chargeable to income tax by deduction or otherwise" to be income of the individual concerned. Section 413(2) gives him the same reliefs as if the income deemed to be his had actually been received by him. Read in conjunction with the preamble to Section 412, and taking Chapter IV of Part 18 as a whole, the language appears to us to be apt to treat the "pure" income of the non-resident person as income of the individual. We are fortified in this conclusion by a similar view expressed by our colleagues in Philippi v Inland Revenue Comrs n1. Accordingly we reject the submission.'



n1 [1971] 3 All ER 61, [1971] 1 WLR 1272, 47 Tax Cas 75

The taxpayer appealed to the High Court. The case was heard by Megarry J n2, who gave a full judgment upholding the decision of the commissioners. I will cite a few {59} passages from this judgment, confining myself to those which seem to me to set out the reasoning on which the judge came to his conclusion. He said n1:



n2 [1974] 3 All ER 625, [1975] 1 WLR 34, [1974] STC 474

n1 [1974] 3 All ER at 631, 632, [1975] 1 WLR at 37, 38, [1974] STC at 480, 481

'At the centre of the dispute are the words "income" that appear in s 412(1), and in particular, "any income of a person resident or domiciled out of the United Kingdom", here, Attleborough: for it is that income which under the subsection is to be deemed the taxpayer's income. Counsel for the taxpayer contends that since Attleborough is admittedly an investment company, it is impossible to ascertain what is the "income of" Attleborough until one has set Attleborough's management expenses against Attleborough's receipts, and struck a balance: and Attleborough's income is that balance. On the other hand, counsel for the Crown contends that although this would be appropriate if Attleborough were carrying on a trade, it would be quite wrong to do so in the present case, where Attleborough has been found not to be trading. "Income", he said, meant "income arising", or "income as it arises". In the case of dividends from investments the income arising consisted of the whole of the dividends with no deductions save for the cost of collection. Apart from the cost of collection, Attleborough's income consisted of the dividends as they arrived on Attleborough's threshold. If Attleborough had been trading, its income as it arose would have been the profits emerging on taking the proper accounts. I propose to refer to counsel for the taxpayer's construction of "income" as "net income" and that of counsel for the Crown as "gross income", for although neither expression is particularly explicit or accurate, each is sufficiently indicative of the meaning and has the great merit of brevity.'

He then referred to the authorities put before him by counsel for the taxpayer, and read the preamble to s 412. He said n2:



n2 [1974] 3 All ER at 632, 633, [1975] 1 WLR at 38, 39, [1974] STC at 481, 482

'The preamble is of assistance here because it states the purpose of the section as being to prevent individuals resident in the United Kingdom from avoiding liability to income tax by transferring assets whereby "income becomes payable to" persons resident or domiciled outside the United Kingdom. That is a phrase which seems to me to be compatible with "income" meaning "gross income" rather than with "income" meaning "net income". I shall discuss this further in due course... The initial phrase "income becomes payable to" a person is not, of course, verbally identical with the expressions "income of" a person, or "income" simpliciter, which occur later in the subsection. The question then arises whether the verbal contrast indicates a difference in meaning. I do not think that it does. For one thing, I find it difficult to imagine that a draftsman who had any intention that the meanings of the expressions should differ would entrust his intention to so frail a craft as this. For another thing, when the subsection is stripped down to its essentials, it sufficiently appears that there is at least identity of nature between the various mentions of "income" in the subsection.'

He then illustrated this by a simplified example, and continued n3:



n3 [1974] 3 All ER at 633, [1975] 1 WLR at 39, [1974] STC at 482

'The question, of course, is whether the words "income of" a foreigner under [in the example] can mean net income while the phrase the "income becomes payable to" foreigners in (b) is referring to gross income. It would, I think, be very remarkable if it could, for both are linked to the self-same transfer by A: it is by virtue or in consequence of that transfer that income becomes payable to foreigners under (b), and it is by means of that transfer that A has acquired rights by virtue of which he has power to enjoy any income of a foreigner under . {60}

That is not all. I accept to the full that great care must be exercised in relying on statements made by judges, however great, in cases in which a point did not arise and so the judges' minds may well have not been directed to that point. But I cannot regard it as wholly irrelevant that in the Congreve case n1 Lord Simonds (with whose speech the other law lords simply concurred) set out the section and then referred repeatedly n2 to "income payable to" certain companies resident outside the United Kingdom, rather than, in the statutory phrase, the "income of" those companies. In my judgment, therefore, the various references in s 412(1) to "income" are all to be construed as referring to gross income and not net income, in the sense in which I am using thse expressions in this judgment; and I do not think that this construction is affected by any of the authorities cited by counsel for the taxpayer on the meaning of "income" in the taxing statutes generally.'



n1 [1948] 1 All ER 948, 30 Tax Cas 163

n2 [1948] 1 All ER at 951, 954, 30 Tax Cas at 202, 203, 207

He then dealt with an argument by counsel for the taxpayer that s 412 was fiscally 'restorative' in its effect, restoring the fiscal state by making the taxpayer liable in the same way as if he had not made the transfer. I do not think I need refer separately to that argument, because the question turns on the construction of the section read in its context. Then Megarry J said n3: 'A further question that arose was that of accountancy practice... I think that the Special Commissioners were right in their view.' Then he referred to Latilla v Inland Revenue Comrs n4 and to one or two other cases, and at greater length to Lord Howard de Walden v Inland Revenue Comrs n5, and quoted the words of Lord Greene MR n6: 'It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers.' He concluded n7: 'In the result, therefore, I think that the Special Commissioners were right on this branch of the case, and that the appeal on this accordingly fails.'



n3 [1974] 3 All ER at 634, [1975] 1 WLR at 40, 41, [1974] STC at 483

n4 [1943] 1 All ER 265, [1943] AC 377, 25 Tax Cas 107

n5 [1942] 1 All ER 287, [1942] 1 KB 389, 25 Tax Cas 121

n6 [1942] 1 All ER at 289, [1942] 1 KB at 397, 25 Tax Cas at 134

n7 [1974] 3 All ER at 635, [1975] 1 WLR at 42, [1974] STC at 484

The grounds of appeal perhaps slightly mask the true issue in this case. The relevant ground is: 'That in the absence of any statutory rules governing its computation, that income must necessarily be ascertained in accordance with the normal principles of commercial accounting.' The question, as is not in dispute, is whether 'income' in s 412 denotes profit in the sense of the balance of receipts over outgoings, or simply dividends and interest.

I have reached a different conclusion on this question from that of the Special Commissioners and Megarry J. It seems to me that on the natural construction of s 412(1), read in conjuction with the preamble, the word 'income' should be treated as denoting profit, i e the excess of receipts over outgoings.That means, of course, receipts and outgoings properly attributable to revenue account.

I observe first, for what it is worth, that the subject-matter of the charge to income tax under the Income Tax Act 1952 is profits or gains: see s 1 and ss 122 and 123, which latter sections impose the charge under Sch D. The income of an investment company, in the true sense, consists of profit; that is to say, the excess of receipts over outgoings. That is nonetheless so because in the case of a United Kingdom company dividends and interest are charged separately as such normally by deduction, the expenses being set off by way of allowance against the tax chargeable in respect of the dividends and interest: see on this point the Income Tax Act 1952, s 425, which I need not read, and Simpson v Grange Trust Ltd n8. But, as a matter of reality and substance, it seems to me really clear that the income of an investment company is profit in the sense of excess of receipts over outgoings.



n8 [1935] AC 422, 19 Tax Cas 231 {61}

The conclusion expressed above is supported by a number of considerations.

(i) The income attributed to an individual under s 412 indisputably includes trading income as well as investment income: see the Latilla case n1. Trading income is admittedly ascertained by reference to profit over a period of account. One might expect investment income to be treated in the same way. I doubt whether there is much weight in this point by itself, but it leads up to what I think is a very important point, to which I will refer below.



n1 [1943] 1 All ER 265, [1943] AC 377, 25 Tax Cas 107

(ii) Where the foreign company concerned is subject to foreign tax, or where it has liabilities of a revenue character - forinstance, mortgage interest - it is quite impossible to determine its income for any period without taking these into account. Counsel for the commissioners sought to meet this point by referring to s 413(2) of the 1952 Act, which runs as follows:

'In computing the liability to income tax of an individual chargeable by virtue of the provisions of the last preceding section, the same deductions and reliefs shall be allowed as would have been allowed if the income deemed to be his by virtue of that section had actually been received by him.'

That section, however, does not fit the position; for if indeed the income deemed to be his by virtue of the section, i e the income of Attleborough, had actually been received by the taxpayer, he would not have been entitled to any relief by reference to the liabilities of Attleborough in respect of foreign tax or mortgage interest. We were told that, by way of concession, that subsection is treated as permitting an allowance from the tax payable under s 412 of these liabilities of the foreign company. That concession is not relevant on the construction of the section.

(iii) Those considerations to which I have been referring lead up to this consideration, which seems to me to be of very great importance. Section 412 applies to persons resident or domiciled anywhere in the world other than in the United Kingdom. I mention in passing that the word 'persons' of course includes individuals or partnerships as well as companies; but it is convenient to refer to foreign companies. Now if, as must be the fact, the tax structure of many foreign countries is different from that of the United Kingdom, it is extremely difficult to see how, in computing the income of a company in such a country, one could apply the United Kingdom tax structure. If, for instance, one takes an investment company in any foreign country - say Ruritania - the tax law of which is entirely different from that of this country, then it seems to me that there is no justification for treating the income of that company as what it would be if (contrary to the fact) the English tax structure were applicable. It seems to me that one can only compute the income of the Ruritanian company by reference to the law of Ruritania.

(iv) Finally, the result seems to me to be fair. I cannot myself see any reason why it should be just to charge an individual resident in this country with a notional income greater than the income which in fact arises in favour of the foreign resident to whom he has transferred his assets. I appreciate that this section has been described as a penal section; but I do not think that is any reason, as far as fairness is concerned, for attributing to the English resident income which he never in any sense of the word had power to enjoy.

I should at this stage refer to s 412(5). That subsection runs as follows:

'An individual shall, for the purposes of this section, be deemed to have power to enjoy income of a person resident or domiciled out of the United Kingdom if - (a) the income is in fact so dealt with by any person as to be calculated, at some point of time, and whether in the form of income or not, to enure for the benefit of the individual; or (b) the receipt or accrual of the income operates to increase the value to the individual of any assets held by him or for his benefit; {62} or (c) the individual receives or is entitled to receive, at any time, any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income; or (d) the individual has power, by means of the exercise of any power of appointment or power of revocation or otherwise, to obtain for himself, whether with or without the consent of any other person, the beneficial enjoyment of the income, or may, in the event of the exercise of any power vested in any other person, become entitled to the beneficial enjoyment of the income; or (e) the individual is able in any manner whatsoever, and whether directly or indirectly, to control the application of the income.'

That subsection defines by way of enlargement the meaning of the expression 'power to enjoy income'. The subsection is in a form familiar in deeming provisions in taxing Acts, the effect being that the words 'power to enjoy income' have a much wider scope than would be covered by the words in their unexpanded sense. I do not think, however, that sub-s (5) has any bearing on what is meant by the expression 'income' in the peamble and sub-s (1). Subsection (5) is concerned only with the circumstances in which someone is deemed to have power to enjoy income when that income has been ascertained.

Counsel for the commissioners stressed the purpose of s 412 as set out in the preamble. He contended that one should construe the operative provision, sub-s (1), so as to give effect to the purpose set out in the preamble. I agree with that contention so far as the terms of the operative provision permit. But it is not, I think, legitimate to distort the natural meaning of the operative provision in order to achieve this result.

We were referred to a statement of principle on construction by Lord Donovan in Mangin v Inland Revenue Comr n1, which appears to me to be exactly in point here. Lord Donovan said this:



n1 [1971] 1 All ER 179 at 182, [1971] AC 739 at 746

'These contentions pose the question of the true construction of [a certain section]. It may be useful to recall at the outset some of the rules of interpretation which fall to be applied. First, the words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices... Secondly, "... one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax.There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used"... Thirdly, the object of the construction of a statute being to ascertain the will of the legislature it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted. Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction.'

So here one must certainly, insofar as it is possible to do so, construe the operative provision in sub-s (1) so as to give effect to the intention declared by the preamble; but one cannot go outside the natural meaning of the words contained in sub-s (1).

On the question of construction, counsel for the commissioners contended that the expression 'income becomes payable' in the preamble, and the expression 'income of' in sub-s (1), bear the same meaning. I meaning. I agree with that contention, as I have already indicated. He then contended that the expression 'income becomes payable' in the preamble indicates immediate payability of dividends and interest as they arise, and that the expression 'income of' in sub-s(1) must bear the same meaning. It seems {63} to me, however, that it is impossible to put that construction on the expression 'income becomes payable to' in the preamble without more ado, because the words so construed are wholly inapplicable to the income of a trade, which is likewise covered by the preamble and sub-s (1). One is left then with these two expressions differently worded but bearing the same meaning, namely 'income becomes payable to' and 'any income of'. The problem is to determine their scope in their context. For the reasons I have given, I think that in both expressions the word 'income' should be construed as meaning 'profit'.

Counsel for the commissioners summarised his contentions under ten heads. It will be convenient to deal with his contentions under those heads, which, if I may say so, clearly and admirably express the purport of his argument. (1) The time to ascertain income from investments is the time when the income arises. That is to say, on his contention, the relevant time is from day to day as the dividend or interest is payable. I agree that the relevant time is when the income arises, in the sense that one must ascertain the income from year to year in the same way as one ascertains the income from a trade. I do not agree that the proper time is from day to day. (2) 'Income of' in sub-s (1) bears the same sense as 'income becomes payable to' in the preamble. I agree with this point; but, as I have already said, it seems to me that in both expressions the word 'income' means 'profit' and it is not possible to construe the expression 'income' in relation to an investment company as income arising from day to day. (3) The purpose of s 412 is to prevent the avoidance by an individual resident in the United Kingdom of liability to income tax by means of transfers abroad. With that I agree. (4) This purpose fails if deductions are permitted which would not be available to the individual. I do not know whether it can be truly said that, by allowing deductions to a foreign company which would not be available to a United Kingdom individual, the purpose of the section can be said to fail. However that may be, the purpose of the section is effectuated, so far as it is effectuated, by the operative provision and if that provision fails in any respect to effectuate the purpose, then I think it must be accepted that to that extent the section has misfired, and one must not distort the operative provision. (5) The Income Tax Act 1952 requires the balancing of receipts and expenditure in relation to a trade but not in relation to the holding of investments. (6) Section 425 recognises a limited balancing in the case of an investment company. Generally speaking on these two points, it is true that the scheme of the Income Tax Acts is to charge investment income as such, leaving expenses in the case of a company to be repaid by way of allowance. But here one is concerned with the meaning of 'income in relation to a foreign resident. It seems to me, as I have already indicated, that different considerations must apply. (7) Section 412 does not affect the foreign recipient. Indeed, it does not do so; but one has to measure the income of the foreign recipient. (8) Dividends are 'income' for the purpose of the Income Tax Act 1952. That, I think, is the same point as under (5) above. (9) On the taxpayer's construction, 'power to enjoy' under sub-s (5) has a limited operation defeating the purpose of the preamble. It seems to me that the construction of 'income' as meaning 'profit' does not of itself in any way limit the operation of sub-s (5). That sub-section is concerned only with the circumstances in which the income is deemed to be enjoyed, and not with the ascertainment of the income.(10) Section 413(1) does not apply to earned surplus, but does apply to dividends. I have not read s 413(1), which is in these terms:

'Tax at the standard rate shall not be charged by virtue of the last preceding section in respect of income which has borne tax at the standard rate by deduction or otherwise but, save as aforesaid, tax chargeable at the standard rate by virtue of that section shall be charged under Case VI of Schedule D and all assessments in respect thereof shall be made by the Special Commissioners.'

With great respect, I do not follow the bearing of this point. So far as I can see, s 413(1) saves from double taxation United Kingdom income received by the foreign {64} resident which has already borne English tax, e g a dividend, and goes on to provide that with this exception the income chargeable on the United Kingdom taxpayer by reference to the income of the foreign resident shall be chargeable under Case VI.

We were referred to a number of cases of high authority, including Latilla v Inland Revenue Comrs n1 in the House of Lords; Lord Howard de Walden v Inland Revenue Comrs n2 in the Court of Appeal; Congreve v Inland Revenue Comrs n3 in the House of Lords; and Mapp (Inspector of Taxes) v Oram n4 in the House of Lords. In none of these cases did the present point arise for decision, and I think it unlikely that it was in the mind of any of those who gave the judgments in those cases. I have not myself found any help from reference to occasional words or phrases used in those cases in connection with some quite different issue. That comment applies in particular to the words or expressions used by Lord Simonds in the Congreve case n3. I do not think it would be useful to go through the judgments or speeches in those cases in order to show that they do not throw any light on the issue in the present case. I observe in passing that the decision of this court in the Howard de Walden case n2 seems to me a strikingly harsh one; and, although we are bound, of course, to apply it in proper circumstances, I do not find it a very easy decision.



n1 [1943] 1 All ER 265, [1943] AC 377, 25 Tax Cas 107

n2 [1942] 1 All ER 287, [1942] 1 KB 389, 25 Tax Cas 121

n3 [1948] 1 All ER 948, 30 Tax Cas 163

n4 [1969] 3 All ER 215, [1970] AC 362, 45 Tax Cas 651

I should perhaps mention Philippi v Inland Revenue Comrs n5. In that case, the present point did arise before the Special Commissioners, and they gave a decision to the same effect as the Special Commissioners and Megarry J n6 did in the present case. The case went to the High Court and the Court of Appeal; but, for some good reason, this Court of Appeal n7 throw no light on the point.



n5 [1971] 3 All ER 61, [1971] 1 WLR 684, 47 Tax Cas 75

n6 [1974] 3 All ER 625, [1975] 1 WLR 34, [1974] STC 474

n7 [1971] 3 All ER 61, [1971] 1 WLR 1272, 47 Tax Cas 75

I conclude that on this first question the appeal should be allowed.

I turn to the second question, which can be much more shortly dealt with. There, summarily, the question is whether the taxpayer is liable in respect of short-term capital gains made by Attleborough. Turning back to the case stated, the facts are set out as follows: 'In the years 1967 and 1968 Attleborough sold the following securities'. There follow particulars showing in respect of two securities a gain and in respect of the other a loss.

I will next read, in order that the point may be intelligible, the relevant statutory provision dealing with this point. The Finance Act 1962 imposed a charge in respect of gains from acquisition and disposal of assets. Section 10 provides:

'(1) Without prejudice to any other provision of the Income Tax Acts directing income tax to be charged under Schedule D, tax under that Schedule for the year 1962-63 or any subsequent year of assessment shall be charged, subject to and in accordance with the rules contained in this Chapter, in respect of all gains accruing to any person resident and ordinarily resident for the year in the United Kingdom from his acquisition and disposal of any chargeable assets, not being gains which accrue as profits of a trade...

'(3) Tax charged under Schedule D by virtue of this section shall be charged under a new Case VII of that Schedule...'

Section 13(1) provides:

'Subject to the provisions of this Chapter the gain accruing to a person from his acquisition and dispoal of any asset shall be computed for purposes of Case VII {65} in the like manner as it would fall to be computed for purposes of Case I of Schedule D if the acquisition and disposal (together with anything done by him to or in relation to the asset in connection with the acquisition and disposal or with a view to the disposal) had been an adventure in the nature of trade...'

Section 16(8) provides:

'... the enactments mentioned in the first column in the Tenth Schedule to this Act shall, for the purpose of adapting or applying them in relation to the provisions of this Chapter, have effect subject to and in accordance with the provision made in respect thereto in the second column in that Schedule.'

Then, turning to Sch 10, one finds it is headed 'MODIFICATION OF ENACTMENTS FOR CASE VII OF SCHEDULE D'. Then, in the left-hand column: 'Enactment and subjectmatter ... Chapter IV of Part XVIII (Avoidance of tax by transfers of income to persons abroad)'. (That is s 412.) Then, in the right-hand column:

'Adaptation ... References to income shall apply in the case of gains accruing from the acquisition and disposal of chargeable assets as they would apply if the gains were profits from a trade of dealing in the assets, and any such gains shall be treated as payable in the first instance to the person to whom they accrue.'

Pausing there, the effect of the Schedule is that where the foreign company makes a gain accruing from the acquisition or disposal of chargeable assets, that gain is treated payable in the first instance to the foreign company, and then by virtue of s 412 it is to be treated as an element in computing the income which is deemed to be the income of the United Kingdom resident.

Then the Finance Act 1965, s 82(2), provides: 'Income Tax shall not be charged by virtue of section 10 or section 14 of the Finance Act 1962 (short-term gains) in respect of an acquisition and disposal of any chargeable assets by a company.' That provision is part of a code of new provisions relating to the charge of income tax on companies. There is no repeal by the Finance Act 1965 of Sch 10 to the Finance Act 1962.

In that state of affairs and on the facts of the present case, the following contentions were advanced on behalf of the taxpayer:

'By reason of the partial recall of short-term gains by section 82 of the Finance Act 1965, Attleborough was not liable to tax under Case VII on its short-term gains. The 10th Schedule, Finance Act 1962, provided that short-term gains should be treated as payable in the first instance to the person to whom they accrued. In the present case, that person was Attleborough, which was never liable to tax on short-term gains. Accordingly the [taxpayer] was not taxable in respect of Attleborough's short-term gains.'

Then there is an alternative contention:

'Tax on short-term gains should be computed by reference to the difference between the sale price and the open market value of the asset disposed of at the time of disposal on the principle of Sharkey (Inspector of Taxes) v Wernher n1.'



n1 [1955] 3 All ER 493, [1956] AC 58, 36 Tax Cas 275

The contention on this point of the commissioners was as follows:

'By section 16(8) and the 10th Schedule, Finance Act 1962, references to income in section 412 include short-term gains. The abolition of tax on a company's short-term gains by section 82(2) Finance Act 1965 did not affect Attleborough which being a foreign company had never, whether before or after the enactment of Finance Act 1965, been liable to United Kingdom tax on short-term gains. The principle in Sharkey v Wernher n1 did not apply to the deeming provisions mentioned in the last sub-paragraph.'



n1 [1955] 3 All ER 493, [1956] AC 58, 36 Tax Cas 275 {66}

The commissioners dealt with this as follows:

'The next question is whether the short-term gains of Attleborough are deemed to be the [taxpayer's] income, and, if so, the amount thereof. In our view the answer turns on the effect of the 10th Schedule to the Finance Act 1962 whereby references to income in the said Chapter IV apply to short-term gains as if the gains were trading profits. We do not think that the impact of this provision is affected by Section 82 of the Finance Act 1965 (or the subsequent amendments thereof), which abolished a company's liability to short-term gains [tax]. Those gains were never chargeable in the hands of Attleborough, and, as we have indicated above, it is the trading and investment income of Attleborough, as the case may be, which is deemed to be the [taxpayer's] income. The [taxpayer] sought to apply the principle in Sharkey v Wernher n1 to the computation of the gains. The gains to which the 10th Schedule refers are the gains accruing from an acquisition and disposal of an asset and, in our view, such acquisition and disposal fall to be taken together and there is no room for the substitution of the market value for the price.'



n1 [1955] 3 All ER 493, [1956] AC 58, 36 Tax Cas 275

The learned judge came to the same conclusion, his reasoning being expressed as follows n2:



n2 [1974] 3 All ER 625 at 636, 637, [1975] 1 WLR 34 at 43, 44, [1974] STC 474 at 485, 486

'Now the contention of counsel for the taxpayer is, putting it shortly, that s 82 removed the foundation on which rested any liability of the taxpayer to shortterm capital gains tax. Since under s 82(2) the charge of tax under Case VII of Sch D ceased to apply to any company, there could thereafter be no avoidance of such tax, and so no basis for applying s 412 to chargeable gains. Alternatively, he said, as the expressed object of s 16(8) of the Finance Act 1962 was to apply s 412 for the purposes of Case VII of Sch D, the repeal of that tax as respect any company involved that application ceasing to have effect in the case of any company. If these contentions failed, counsel for the taxpayer had an alternative contention based on Sharkey v Wernher n1, to which I shall turn in due course... The short answer to these contentions seems to me to be that, as counsel for the Crown pointed out, the charge to short-term capital gains tax is imposed by s 10(1) of the Finance Act 1962 onl0 on those resident and ordinarily resident in the United Kingdom. Others, such as Attleborough, were never within the charge. There was thus never any question of s 82 of the Finance Act 1965 taking Attleborough out of the charge, for Attleborough was never within it, and so the section did nothing that is relevant to this case... The Sharkey (Inspector of Taxes) v Wernher n1 point is this. On the footing that Case VII of Sch D is still applied, counsel for the taxpayer said that its application involved a deemed or notional trade of dealing with the assets from which the gain or surplus arose. As the transactions consisted of dealings in shares, the value to be attributed to them, and to be set against the sale price, was the open market value at the date when the relevant decision to deal in them was taken and implemented. In effect that, I think, meant that the open market value would be taken at the time of disposal, and so there would be no profit on the transaction. Counsel for the Crown, on the other hand, said that there was nothing to support any concept of deemed or notional trading, and that the gain was to be computed in accordance with the general provisions of the Finance Act 1962, s 13. For the purposes of s 412 of the Income Tax Act 1952, references to income, by virtue of the Finance Act 1962, Sch 10, apply in the case of gains "as they would apply if the gains were profits from a trade of dealing in the assets": but that does not seem to me to introduce any concept of notional trading in computing the gains. What s 412 says about income is to {67} apply to gains, computed in accordance with the general provisions of the Act, in the same way as it would apply to profits from a trade: but that is very far from saying that the gains are to be computed in the same way as profits, or that there is to be any deemed trading. I can therefore see no basis for any application of the Sharkey (Inspector of Taxes) v Wernher n1 principle.'



n1 [1955] 3 All ER 493, [1956] AC 58, 36 Tax Cas 275

On this question I am in complete agreement with what was said by the Special Commissioners and by Megarry J n2, and really there is nothing which can usefully be added. So far as the first part of the question is concerned, Attleborough is a foreign company to which the charge under the 1962 Act has never applied. One is concerned only with the ascertainment of its income for the purpose of making a charge on the United Kingdom resident. That was dealt with by Sch 10 to the 1962 Act. The position of Attleborough itself is in no way affected by the 1965 Act. The provision in the Sch 10 to the 1962 Act stands unaffected, and there is no reason why by implication one should treat that provision as having been in some way superseded by the 1965 Act.



n2 [1974] 3 All ER 625 at 636, 637, [1975] 1 WLR 34 at 43, 44, [1974] STC 474 at 485, 486

So far as the Sharkey v Wernher n1 point is concerned, it is quite clear that the effect of the 1962 Act is not that the person concerned (including, as regards Sch 10, the foreign company) is deemed to be carrying on a trade, but that the gains are to be ascertained as if it were carrying on a trade. The principle of Sharkey v Wernher n1 has no application in such a case. I would only add that if this argument were well founded, it would, as far as I can see, knock the bottom out of the whole of the capital gains provisions except possibly in respect of somebody who was in truth carrying on a trade. So, on this question, I would dismiss the appeal.



n1 [1955] 3 All ER 493, [1956] AC 58, 36 Tax Cas 275

There is only one further matter which I should mention. I referred to it earlier in this judgment and said I would come back to it. The expenses shown by the accounts of Attleborough include an investment advisory fee and management fee as the two largest expenses. There is a finding by the Special Commissioners that Attleborough incurred those expenses. There is no finding that the expenses were properly attributable to revenue account. This matter is left in the air. Evidence was given by the accountants concerning these items on either side. Mr Hobson, the accountant called on behalf of the taxpayer, said he did not know to whom and for what purpose the investment advisory fee had been paid, and he had not seen a breakdown of the expenses in the accounts. Mr Lawson, for the commissioners, said he would require an explanation of the item 'Investment Advisory Fee' before approving it; he would also require to know what services the management fee covered, and for what purpose the 'Registered Office and Executive Office Fees' were included.

As I have said, the Special Commissioners made no finding on this point. So it remains open to the commissioners, if they are so minded, to challenge these two times of expenditure in the account, not on the ground that they were not incurred, because we have the Special Commissioners' finding on that, but on the ground that they are not properly chargeable to revenue. We can perhaps come back to this point after the judgments. So far as I can see, the case must, if necessary, be remitted to the Special Commissioners on this particular point.

JUDGMENTBY-2: JAMES

JUDGMENT-2:
JAMES LJ. I do not wish to add anything to what has been said in the judgment just delivered on the short-term gains point, save to say I find myself in agreement with the learned judge and with the Special Commissioners, whose conclusions are set out in the case stated n3.



n3 [1974] 3 All ER at 629-630, [1974] STC at 478, 479

The question whether the amount of income deemed by s 412 of the Income Tax Act 1952 to be the taxpayer's income is the investment income of Attleborough {68} without deduction save for minor expense of collection, or that investment income less deductions of management and other expenses incurred by Attleborough, is one which, to one coming from a less sophisticated field in the common law, can I think be answered on a narrow basis. The answer surely must depend in the end on the construction of the word 'income' in the expression 'that income shall... be deemed to be income of that individual' in s 412(1). I apply, I hope correctly, the principles of construction stated by Lord Donovan in Mangin v Inland Revenue Comr n1. There is no definition of 'income' in the 1952 Act itself. There is a presumption that where the section of a statute uses the same word in different places, then, unless the context clearly indicates that contrary, the word shall be given the same meaning in each place it is used. The preamble to s 412 includes the words 'income becomes payable to persons'. In the operative part of the section there are some 24 references to 'income', and I find nothing in the context in which the word is used in those places to indicate that it should not be given the same meaning wherever it is used. Contrast the position in s 413, a section dealing with double taxation, where the words appear 'income which has borne tax at the standard rate by deduction or otherwise', where a particular type of income is by the context defined, namely that income which has so borne that tax. The words 'payable to' in the preamble to s 412, and the words 'income arising from any such assets' in s 412(4), on which some reliance has been placed in the course of the argument, do not in my judgment help to define the word 'income'. They merely describe respectively for the purposes of the preamble and sub-s (4) the destination of and the source of the income that is there referred to. In the absence of any definition of 'income', I think it is right (as we have been invited to do) to have regard to the charging provisions of the 1952 Act, and there in s 1 and again in s 123 one finds the reference to profits or gains as the basis for the liability to tax.In the absence of any authority compelling a different construction to be placed on the word 'income' in s 412, in my judgment that word should be given the meaning of 'profit' in accordance with the meaning, as I see it, to be derived by way of assistance from the charging provisions.



n1 [1971] 1 All ER 179 at 182, [1971] AC 739 at 746

I find some support for this construction of the word 'income' in the association of that word with the expression 'power to enjoy'. I agree with what has already been said, that s 412(5) provides for the circumstances in which a person shall be deemed to have the power to enjoy, and does not in any way define the word 'income' in s 412(1). Nevertheless, the argument addressed to us by junior counsel for the taxpayer on the wording of sub-s(5), stressing the aspect of income in the sense of something capable of enjoyment, was a powerful one. If the construction for which the commissioners contend is adopted, it follows in my judgment that a taxpayer may be taxed on something which could never be his to enjoy. To adopt that construction would be to use the section for a purpose beyond the undoubted purpose of the section, of preventing the avoidance of liability to pay tax.

I have so far dealt with the question - I will not say untrammelled by authority - but without such assistance as can be derived from authority. In the numerous cases which have been cited in the course of argument, I find no principle which leads me to a different conclusion. It is difficult, and often dangerous I think, to seek to derive help from isolated passages in the speeches or judgments in other cases in which the present point was not in issue. But I do find some support for the views I have formed, in particular, in Mapp v Oram n2, in the opening words of the judgment of Salmon LJ n3, and in the passage in the speech of Lord Upjohn n4 in the House of Lords. Lord Upjohn was considering a different section, s 212, but his words n4: 'It [i e the income] cannot mean gross receipts, for every person earning an income has expenses' are telling words, and I think they are relevant to a consideration of s 412.



n2 [1968] 3 All ER 1, [1969] 1 Ch 293, 45 Tax Cas 651

n3 [1968] 3 All ER at 6, [1969] 1 Ch at 312, 45 Tax Cas at 665

n4 [1969] 3 All ER 215 at 222, [1970] AC 362 at 376, 45 Tax Cas at 681 {69}

I agree with the reasoning and the conclusion expressed in the judgment delivered; and, for those reasons, I would allow the appeal on that one point.

Before parting with it, may I add my feeling of unease at the decision in Lord Howard de Walden v Inland Revenue Comrs n1, which decision is of course binding on us and to which one must loyally adhere, though it makes no difference to my reasoning in the present case.



n1 [1942] 1 All ER 287, [1942] 1 KB 389, 25 Tax Cas 121

JUDGMENTBY-3: BUCKLEY

JUDGMENT-3:
BUCKLEY LJ. I agree with both the judgments which have been delivered, and I do not propose to cover the general ground again. But I would say something about Lord Howard de Walden v Inland Revenue Comrs n1, which was relied on strenuously by counsel for the commissioners in support of his contention that the relevant income here was the income of Attleborough consisting of the dividends and interest received by Attleborough from the investments held by that company without deduction for expenses incurred in the management of the company. Lord Howard de Walden had transferred assets of very considerable value to four Canadian companies. The Canadian companies had no other assets. At the relevant time the only relevant interests of Lord Howard de Walden in the Canadian companies consisted of a life interest in certain promissory notes of the companies, a share of certain sums of money on deposit with the companies payable on demand, a very small number of shares in the Canadian companies, and certain annuities payable by one or other of those companies. He had divested himself of all other interests in the companies. The transfers in question were admittedly within the terms of the preamble to the Finance Act 1936, s 18, which was the precursor of s 412 of the Income Tax Act 1952. Lord Howard de Walden was assessed on the basis that the whole income of the Canadian companies would be chargeable to income tax as if it were his income received by him in the United Kingdom. The argument presented on behalf of Lord Howard de Walden was to the effect that he could only be taxed under s 18 on so much of the income of the Canadian companies as he had power to enjoy or should be deemed to have power to enjoy. Accordingly, it was contended n2, only so much of the Canadian companies' income as should remain after giving effect to all other rights in those companies should be taxed. Lord Greene MR n3, delivering the judgment of this court, said that the only question was whether the assessment should be based on that part only of the Canadian companies' income which Lord Howard de Walden was actually in a position to enjoy - a very small part of the companies' income - or on the whole income. The grounds relied on in that case for saying that Lord Howard de Walden had power to enjoy income for the purposes of the section were paras (b ) and (c ) of s 18(3), now replaced by paras (b ) and (c ) of s 412(5). Because the receipt by each company of its income was regarded as operating to increase the value of the notes in which Lord Howard de Walden had a life interest and to enhance the value of the debts due to him on account of the deposits, and because the payments made in respect of these obligations and the annuities out of the companies' income were benefits received by Lord Howard de Walden out of that income, all of that income was held to be deemed to be Lord Howard de Walden's income for the purposes of the charge under the section. Lord Greene MR n4 said that an examination of the language of s 18(3), in conjunction with s 18(1), made it clear that the power to enjoy income with which sub-s (1) was dealing need not by any means necessarily extend to the whole of the income of the non-resident person, but that the court was unable to accept the argument that the income which was caught by sub-s (1) was limited to the income which the taxpayer was in fact entitled or able to receive. Lord Howard de Walden had in that case no reserve {70} powers enabling him to undo the transactions and to recover the Canadian companies' assets into his own possession as the taxpayer has in the present case. His interest in the Canadian companies was irrevocably confined to the limits I have stated. The rival arguments were that, on the true construction of the section, (a) the extent to which he should be treated as having a power to enjoy income of the Canadian companies should be ascertained by reference to the limited extent of his actual interest in the companies, and (b) that the extent to which he should be treated as having such a power should be treated as extending to the whole of the income of the companies. No question appears to have been raised or debated as to what constituted the whole income of the companies for this purpose. No one could, I think, deny that the consequence of the decision of this court in that case was extremely harsh. The court justified this on the ground that the section is a penal section. To tax a taxpayer on income he does not in fact receive may perhaps properly be described as penal; but I am sure that none of the distinguished members of that court would have considered that the fact that a statutory provision was of a penal character could justify adopting a harsher construction than the language required. One cannot tell from the report how far and in what way the question of construction was developed, but I can see no sign in either the report of the argument n1 or in the judgment n2 that certain considerations which seem to me to arise on the language of the section were taken into account. In any case, however, I do not think that that decision can be treated as authority for the proposition that where the non-resident recipient of income is a non-trading company the gross receipts of that company must be treated as the income of a United Kingdom resident who has or is to be treated as having power to enjoy the income of that company.



n1 [1942] 1 All ER 287, [1942] 1 KB 389, 25 Tax Cas 121

n2 See [1942] 1 KB at 393

n3 [1942] 1 All ER at 288, [1942] 1 KB at 394, 25 Tax Cas at 132

n4 [1942] 1 All ER at 288, [1942] 1 KB at 395, 25 Tax Cas at 133

n1 [1942] 1 KB at 392, 393

n2 [1942] 1 All ER 288, [1942] 1 KB 389, 25 Tax Cas 132

Section 412, stated shortly, provides that where a United Kingdom resident has, by means of a transfer of assets whereby income becomes payable to a non-resident, acquired any rights by virtue of which he has power to enjoy any income of a non-resident which, if it were his income received in the United Kingdom, would be chargeable to income tax, that income - and I italicise the word 'that' - shall be deemed to be his income. The relevant income is, in my judgment, any income of the non-resident which the United Kingdom resident had, within the meaning of the section, power to enjoy. One must then turn tosub-s(5) to discover what amounts to a power to enjoy within the meaning of the section. I will not read the subsection again. The paragraph directly applicable here is para (d ). Of what income of Attleborough had the taxpayer at the relevant date (which I will discuss in a moment) power to obtain for himself the beneficial enjoyment? Clearly he could not obtain the beneficial enjoyment of any income which before the relevant date had been properly spent by Attleborough; nor, in my opinion, could he be properly regarded as having power to obtain the beneficial enjoyment of any income which on proper accounting principles Attleborough ought to set aside to provide for any expenditure properly chargeable against revenue already incurred before the relevant date but not then yet discharged.

What, then, is the relevant date for this purpose? I apprehend that, as a practical matter at any rate, the earliest date would be the end of the fiscal year or other period in respect of which the assessment is made. Until that date, the total income of the company for that period could not be known and no assessment could be raised. By that date the company's expenditure for that period would all have been incurred, if not actually paid.

Counsel for the commissioners has submitted that the date at which it must be determined whether the section applied is the date when the income becomes payable to the non-resident party. He relies on Congreve v Inland Revenue Comrs n3, and in {71} particular on what was said by Cohen LJ n1, delivering the judgment of the court. Cohen LJ was there considering the date at which it must be shown that the person to whom income becomes payable in consequence of a transfer of assets and associated operations is a non-resident. The answer to that question must be the date when the income becomes payable, for if the recipient is not then a non-resident, the transfer is not, so far as that income is concerned, a transfer such as is described in the preamble to the section. The question when it must be determined whether a United Kingdom resident has 'power to enjoy' is a different question. In the case of a trading company, this obviously could not be the date at which each trade receipt occurs, for such a receipt is not income and the company's income for the period cannot be ascertained until the end of the accounting period, when there might turn out to have been no profit and so no income. I can see no good reason why in this respect a non-trading company should be treated differently from a trading company. It might, I think, be suggested that the date for determining the existence or want of a 'power to enjoy' is the date of assessment; but whether this rate or the end of the relevant accounting period be selected the consequence is, I think, the same. The United Kingdom resident could not, by the exercise of any such powers as are referred to in sub-s (5)(d ), obtain for himself the beneficial enjoyment of any income of the non-resident company which had then been expended or incurred for any such purpose that it is proper to be charged against the company's revenue account.



n3 [1947] 1 All ER 168, 30 Tax Cas 163

n1 [1947] 1 All ER at 173, 30 Tax Cas at 197

Counsel for the commissioners has suggested that paras (a ) and (b ) of s 412(5), might also apply in this case. But, on the construction which I, in common with Sir John Pennycuick and James LJ, think should be put on the word 'income', expenditure on the management of the company's affairs would not be an application of income; and therefore it seems to me that those paragraphs cannot apply. In any case, for my part, I think that I should feel great difficulty in agreeing to the proposition that income spent by Attleborough on ordinary management expenses, or it may be in paying foreign taxes relative to the dividends or interest received by the company, could properly be described as being so dealt with as to be calculated to enure to the taxpayer's benefit within the meaning of para (a ), or that the receipt or accrual of income which is so spent could be properly said to operate to increase the value of any asset held by the taxpayer or for his benefit within the meaning of para (b ).

These considerations reinforce me in the view that Attleborough's income for any year for the purpose of the section consists of its receipts of an income character less the amount of any expenditure properly chargeable against its revenue account.

For these reasons, and for those which have been developed in the judgments delivered by Sir John Pennycuick and James LJ, I agree that this appeal should be allowed on the first and perhaps major point, but should be dismissed as regards that part of it which relates to short-term capital gains.

DISPOSITION:
Appeal allowed in part; the taxpayer to have three-quarters of his costs in the Court of Appeal and below. Case remitted to the Special Commissioners to determine the amount of Attleborough's income. Leave to appeal to the House of Lords granted to the Crown on terms that the Crown do not seek to vary the order of the Court of Appeal as to costs.

SOLICITORS:
Withers (for the taxpayer); Solicitor of Inland Revenue.