[HOUSE OF LORDS.]

AND

Revenue - Surtax - Total income - Short-term interest payments - Whether admissible deduction from total income for surtax purposes - Income Tax Act, 1842 (5 & 6 Vict. c. 35), ss. 163, 164, 190 and Sch. (G.), No. XVII (3) - Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 2 (2), 200 (1), 524, Sch. 24.

Revenue - Income tax - Interest - Short-term interest - Principles applicable.

In each of the tax years 1957-58 and 1958-59 the taxpayer borrowed substantial sums from an unlimited company, which did not satisfy the description of a "banker," for periods of less than

one year. The special commissioners decided in his favour that the short-term interest paid on those loans was deductible by him in computing his total income for surtax purposes for the years in question. The Crown appealed. Wilberforce J. held in favour of the Crown that the right to deduct from the computation of total income for surtax purposes depended in all cases on a right to deduct income tax from the payment at the standard rate and that no such right existed in respect of these interest payments under the provisions of the Income Tax Act, 1952.¹ On appeal by the taxpayer it was agreed that if, under the relevant provisions of the Income Tax Act, 1842,² and the Finance (1909-10) Act, 1910,

1 Income Tax Act, 1952, s. 2 (2): "Where, for a year for which income tax is charged in the manner specified in subsection (1) of this section, a person is required to be assessed and charged with income tax in respect of any property, profits or gains out of which he makes any payment in respect of - (a) any annual interest ... he shall, in respect of so much of the property, profits or gains as is equal to the said payment, and may be deducted in computing his total income, be charged at the standard rate only."

S. 200: "(1) Where interest payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom is paid to the bank without deduction of tax out of profits or gains brought into charge to tax, the person by whom the interest is paid shall be entitled, on proof of the facts to the satisfaction of the Commissioners of Inland Revenue, to repayment of income tax on the amount of the interest. (2) A like repayment shall on the like proof be made in the case of interest (not being yearly interest) payable in the United Kingdom on an advance from a person who in the opinion of the Commissioners of Inland Revenue is bona fide carrying on business as a member of a stock exchange in the United Kingdom, or from any person who in the opinion of the said Commissioners is bona fide carrying on the business of a discount house in the United Kingdom: ..."

S. 524: "(1) In this Act, 'total income', in relation to any person, means the total income of that person from all sources estimated, as the case may be, either in accordance with the provisions of this Act as they apply to income tax chargeable at the standard rate or in accordance with those provisions as they apply to surtax. (2) Any person who, on his own behalf or on behalf of another person, delivers a statement of the amount of his or that other person's total income shall observe the rules and directions contained in the Twenty-fourth Schedule to this Act. ..."

Sch. 24: "Section 524. Declarations and statements of total income. ... Third. - Declaration of the amount of interest, annuities or other annual payments to be made out of the property or profits or gains assessed on the person in question, distinguishing each source. ... Fifth. - Statement of any tax which the person in question may be entitled to deduct, retain or charge against any other person."

2 Income Tax Act, 1842, s. 163: "... any person charged or chargeable to the duties granted by this Act, either by assessment, or by way of deduction from any rent, annuity, interest, or other annual payment to which he may be entitled, who shall prove before the commissioners for general purposes ... that the aggregate annual amount of his income, estimated according to the several rules and directions of this Act, is less than one hundred and fifty pounds, shall be exempted from the said duties ..."

S. 164: "every person claiming to

short-term interest was deductible in computing total income for super-tax purposes, the taxpayer would, on the similar language of the consolidating Act of 1952, be entitled to the deductions he claimed. The Court of Appeal, by a majority, held, on the construction of sections 163 and 190 of the Act of 1842 and Rule XVII of Schedule (G) to that Act, that "interest" in the third head of the latter rule meant all interest and was not limited to annual interest, and therefore since all interest, including short interest, was deductible in computing total income for the purposes of exemption from tax, it was also deductible in computing total income for the purposes of surtax. On the Crown's appeal:-

Held, that there were no grounds, either as a matter of principle or as a matter of construction, for holding that "interest" in the provisions relating to the permissible deductions in computing total income for tax purposes included short interest as opposed to annual or yearly interest and, accordingly, the taxpayer was not entitled to deduct the interest in computing his total income for surtax purposes.

Howe (Earl) v. Inland Revenue Commissioners [1919] 2 K.B. 336; 35 T.L.R. 461; 7 T.C. 289, C.A. and Bingham v. Inland Revenue Commissioners [1956] Ch. 95; [1955] 3 W.L.R. 663; [1955] 3 All E.R. 321; 36 T.C. 254 applied.

Lord Advocate v. Edinburgh Corpn. (1903) 4 T.C. 627 doubted.

Per curiam. The relief given by section 200 of the Act of 1952 for the repayment of income tax on short interest when paid out of taxable income to a banker, stockbroker or discount house created an anomalous position, for if short interest was to be the subject of tax relief at all, there could be no relevant difference between interest paid to one category of recipient and the same interest paid to another.

Decision of the Court of Appeal [1964] Ch. 359; [1964] 2 W.L.R. 405; [1964] 1 All E.R. 73, C.A. reversed.

be entitled to such exemption as last aforesaid shall ... deliver or cause to be delivered to the assessor of the parish or place where such claimant shall reside a notice of his claim for such exemption, together with a declaration and statement signed by such claimant, and in such form as may be provided under the authority of this Act, declaring and setting forth therein all the particular sources from whence the income of such claimant shall arise, and the particular amount arising from each source, and also every sum of annual interest or other annual payment reserved or charged thereon, whereby the income shall or may be diminished ..."

S. 190: "the Schedule marked (G), with the rules and directions therein contained, shall, in making returns of the amount of annual value or profits on which any duty is chargeable under this Act, ... be observed ..."

Sch. (G): "... XVII. - Lists, declarations, and statements of discharge, or in order to obtain exemptions. ... Third. - Declaration of the amount of interest, annuities, or other annual payments to be made out of the property or profits assessed on the claimant, distinguishing each source: ..."

APPEAL from the Court of Appeal (Lord Denning M.R. and Donovan L.J., Russell L.J. dissenting).

This was an appeal by the Crown from an order of the Court of Appeal dated November 29, 1963, allowing an appeal by the taxpayer from an order of Wilberforce J. dated July 17, 1963, whereby he allowed the Crown's appeal by way of case stated by Commissioners for the Special Purposes of the Income Tax Acts relating to the taxpayer's claim for relief from surtax for the year 1957-58 under section 66 of the Income Tax Act, 1952, and assessment to surtax made on the taxpayer for the year 1958-59.

The following facts are taken from the case stated by the special commissioners.

On March 20, 1962, the taxpayer appealed against (1) the refusal of the Inland Revenue Commissioners to allow his claim for relief from surtax for the year 1957-58 under section 66 of the Income Tax Act, 1952, as extended by section 229 (5) of that Act; and (2) an assessment made on him to surtax for the year 1958-59 in the sum of £11,000. The only question for the commissioners' determination on both appeals was whether certain "short" loan interest paid by the taxpayer to Model Roland and Stone Co. was an admissible deduction from the taxpayer's total income for surtax purposes.

The following facts were agreed or proved:

1. The taxpayer was at all material times a partner in the firm of Wigram & Co., solicitors.

2. On March 28, 1957, the taxpayer borrowed a sum of £50,000 from an unlimited company called Model Roland and Stone Co. under an oral agreement that the money should be repaid not later than January 31, 1958, together with interest thereon from the date of borrowing to the date of repayment at a rate equal to ½ per cent. per annum above bank rate, with a minimum rate of 6 per cent. per annum.

3. On December 3, 1957, the taxpayer repaid the sum of £50,000. Interest at the agreed rate, amounting to £2,210 19s. 2d., was paid by him to Model Roland and Stone Co. without deduction of income tax on December 17, 1957.

4. On July 11, 1958, Model Roland and Stone Co., having been informed by the inspector of taxes that they were not carrying on a banking business within the meaning of section 200 of the Income Tax Act, 1952, paid the taxpayer a sum of £939 13s. 2d., representing income tax at 8s. 6d. in the pound on the sum of £2,210 19s. 2d.

5. On December 23, 1958, the taxpayer made a return of income for the year ended April 5, 1958. By inadvertence he omitted to include the said interest paid amounting to £2,210 19s. 2d. in the charges on income shown in that return. For the year 1957-58 he was assessed to and paid surtax on a total income of £17,020 computed without deducting the said sum of £2,210 19s. 2d.

6. On April 28, 1961, the taxpayer applied to the Inland Revenue Commissioners (under sections 66 and 229 (5) of the Income Tax Act, 1952) for relief in respect of such surtax paid, on the ground that the assessment was excessive by reason of an error or mistake in the said return of income made by him in that he omitted to show the said sum of £2,210 19s. 2d. as a charge on his income. The Inland Revenue Commissioners refused to grant relief.

7. On August 14, 1958, the taxpayer borrowed a sum of £40,000 from Model Roland and Stone Co. under an oral agreement that the money should be repaid within approximately one month together with interest thereon from the date of borrowing to the date of repayment at a rate equal to ½ per cent. per annum above bank rate.

8. On September 17, 1958, he repaid the sum of £40,000. Interest at the agreed rate, amounting to £186 2s. 9d., was paid by him to Model Roland and Stone Co. on September 23, 1958, less income tax at 8s. 6d. in the pound.

9. The taxpayer immediately after borrowing the sum of £40,000 lent the sum of £40,000 to a valued client of his firm of Wigram & Co., and received repayment from that client within one month, together with interest at 6 per cent. computed for one month, amounting to £200 less tax.

10. It was common ground between the parties that neither section 169 nor section 170 of the Income Tax Act, 1952, applied to the two payments of interest mentioned in paragraphs 3 and 8 above.

It was contended for the taxpayer that the two amounts of interest of £2,210 19s. 2d. and £186 2s. 9d. were deductible in computing the taxpayer's total income for the years 1957-58 and 1958-59 respectively. It was contended for the Inland Revenue Commissioners that the said two payments of interest were not deductible in computing the taxpayer's total income for the purposes of surtax.

The commissioners who heard the appeal took time to consider

their decision which they gave in writing and which, so far as material, was as follows:

"It was admitted on behalf of the taxpayer that the interest in question in this appeal was interest on 'short' loans and, as such, did not fall within the term 'yearly interest' as used in section 169 of the Income Tax Act, 1952, or paragraph 1 (1) (b) of the 6th Schedule to the Act. The question then arises whether short' loan interest is deductible in arriving at the payer's total income for surtax purposes. The Act does not expressly say how total income should be computed but it seems to us to be implicit in the definition of 'total income' in section 524 (1) of the Act that the total income estimated in accordance with the provisions of the Act as they apply to income tax may differ from the total income estimated in accordance with these provisions as they apply to surtax.

"Section 524 (2) specifically refers to the 24th Schedule to the Act and in our view paragraph 3 of this schedule indicates that in estimating a person's total income all interest (whether 'short' or 'yearly') may be deducted. In contradistinction to section 169 and the 6th Schedule, the said paragraph 3 refers to 'interest' without the qualification of the word 'yearly' and we consider that the words 'other annual payments' in that paragraph should not, in these circumstances, govern the word 'interest' under the ejusdem generis rule. The phrase in paragraph 3 is substantially the same as in section 170 of the Act which admittedly includes 'short' loan interest: see Lord Advocate v. Edinburgh Corpn.³ In section 122 the words 'interest of money' are used and in section 123 the words are 'interest of money, whether yearly or otherwise ...' and accordingly, the recipient of loan interest, whether 'short' or 'yearly' is clearly liable to income tax and surtax in respect of the amount received: see Leeds Benefit Building Society v. Mallandaine.⁴ It appears to us, therefore, that it would be contrary to principle to charge surtax, in effect, on two persons in respect of the same 'short' loan interest. Some guidance on this aspect of the case is to be found in Lawrence L.J.'s judgment in the case of Solomon v. Inland Revenue Commissioners,⁵ where emphasis is laid on the fact that the payment in both that case and the case of Howe (Earl) v. Inland Revenue

3 (1903) 4 T.C. 627.

4 [1897] 2 Q.B. 402; 13 T.L.R. 535; 3 T.C. 577, C.A.

5 (1933) 18 T.C. 227, 233, 234, C.A.

Commissioners⁶ was not treated for taxation purposes as income of the recipient.

"In our view the interest in the present case is deductible in arriving at the appellant's total income for surtax purposes and accordingly the appeal succeeds for both years. We leave the figures to be agreed."

Agreement of the figures having been later reported to the commissioners who heard the appeal, they determined the appeal by (1) allowing relief under section 66 of the Income Tax Act, 1952, for the year 1957-58 in the amount of £1,091 7s. 0d. tax, and (2) increasing the assessment for 1958-59 to £12,374.

After their decision had been given, the attention of the commissioners who heard the appeal was drawn, on behalf of the Inland Revenue Commissioners, to the statement in the first sentence of their decision that it was admitted that the interest in question did not fall within paragraph 1 (1) (b) of Schedule 6 to the Act. On referring to their notes they found that no such admission was expressly made at the hearing of the appeal.

The Inland Revenue Commissioners, immediately after the hearing of the appeal, expressed to the commissioners who heard it their dissatisfaction therewith as being erroneous in point of law and in due course required them to state a case for the opinion of the High Court pursuant to sections 229 (4) and 64 of the Income Tax Act, 1952, which case one of them stated and signed accordingly. The other with whom he had heard and determined the appeal had since retired from the public service.

The question of law for the opinion of the High Court was whether, on the facts set out in the case stated, the decision allowing relief for the year 1957-58 and increasing the assessment for the year 1958-59 was correct in law.

Wilberforce J.⁷ allowed the Crown's appeal, but the Court of Appeal⁸ by a majority reversed his decision.

The Crown appealed.

F. Heyworth Talbot Q.C. and J. R. Phillips for the Crown. It is common ground (a) that "short interest" is not annual interest or yearly interest within the meaning of the Income Tax Acts and therefore income tax is not deductible; and (b) that subject to express provisions, the payer of short interest is entitled to

6 [1919] 2 K.B. 336; 35 T.L.R. 461; 7 T.C. 289, C.A.

7 [1964] Ch. 359; [1963] 3 W.L.R. 854; [1963] 3 All E.R. 243.

8 [1964] Ch. 359; [1964] 2 W.L.R. 405; [1964] 1 All E.R. 73, C.A.

no relief from tax at the standard rate. The Crown's case depends on three propositions: (1) In computing total income for surtax purposes no deduction from the aggregate of income estimated in the way provided by the Income Tax Acts is permissible unless expressly authorised. (2) Those outgoings that constitute for tax purposes a diminution of income as distinguished from an application of income are identified by the statutory right to deduct tax: see Howe (Earl) v. Inland Revenue Commissioners⁹ and Bingham v. Inland Revenue Commissioners.¹⁰ (3) Short interest satisfies neither of these two tests. Tax is not deductible and, on a proper construction of the statutes, there is no express provision for deduction.

The present law is to be found in the Income Tax Act, 1952, a consolidating Act. Section 2 gives the surtax payer relief from tax on payments which fall within one or other of the grounds there set out. He gets relief on the gross sum paid. In making payment he will deduct tax so that his actual disbursement will be the gross sum less tax, but he will deduct the full amount from surtax. The authority is clearly limited to annual interest; it does not extend to the deduction of interest other than annual interest and therefore is not authority for deducting short interest. Section 169 so far as it relates to interest only relates to annual interest. The provisions of section 170 derived from section 24 (3) of the Customs and Inland Revenue Act, 1888, are peremptory and not permissive; had the taxpayer paid the interest out of a capital sum he would have been bound to deduct tax, but section 170 has no application to the facts of the present case.

Section 200, which contains provisions originally enacted in section 22 of the Finance Act, 1915, and section 15 of the Finance Act, 1917, and re-enacted in section 36 of the Income Tax Act, 1918, allows repayment of income tax to payers of short interest where the lender is a banker, stockbroker or discount house, but the lender in the present case does not fall within any of those descriptions, and so, as is common ground, the taxpayer has no relief from the standard rate of income tax. The words "income tax" in section 200 do not, in the view of the Inland Revenue Commissioners, include surtax as a matter of law, but as a matter of concession they do allow a similar claim in respect of surtax. [Reference was made to sections 208, 221, 224, 511 and 524 of the Act of 1952.] Schedule 6, para. 1 (1) (b), shows the basic

9 [1919] 2 K.B. 336.

10 [1956] Ch. 95; [1955] 3 W.L.R. 663; [1955] 3 All E.R. 321; 36 T.C. 254.

concept of the scheme, which is the distinction between an outgoing to be regarded as diminishing incoming income and a disbursement which must be regarded as an application of income. In paying short interest, it is submitted, the taxpayer disposes of part of his income in the sense that it is not an application of income but a disposition of income arising.

The Crown's answer to the taxpayer's proposition that the words of Schedule 24, part 3, are apt to import statutory authority is that this is not a substantive enactment, but machinery for the form in which the return is to be made. Construing part 3 in its context and in the light of the history of the matter, "interest" therein must mean annual interest.

The taxpayer's second argument, that if short interest were not deducted double taxation would be involved, although sought to be supported by reference to earlier enactments, rests upon a fallacy. The mere fact that a taxpayer applies a part of his income in such a way that someone else becomes taxable does not involve double taxation in any relevant sense.

There was much discussion in the Court of Appeal on the words "aggregate annual amount of his income, estimated according to the several rules and directions of this Act ..." in section 163 of the Income Tax Act, 1842. The Act prescribes many rules for estimating income from various sources: see section 60 and Schedule A and section 100 and Schedule D. Clearly those are the rules for estimating to which section 163 refers. Aggregation does not take place until after the estimation has been completed. Section 190 introduces Schedule (G), of which rules I to XVI contain a number of directions repeating in a shortened form matters dealt with in the body of the Act. Rule XVII, the third head of which is relied on by the taxpayer, must be read in context with particular reference to sections 163 and 164. The reference to "interest" in head 3 must mean annual interest. The concept has been sufficiently indicated in section 164: "whereby the income shall be diminished." It is that kind of outgoing that constitutes a deduction because it diminishes rather than applies it. [Reference was made to sections 102 and 159 of the Act of 1842, section 8 of the Customs and Inland Revenue Act, 1876, and section 24 (3) of the Customs and Inland Revenue Act, 1888.]

Super-tax, introduced by the Finance (1909-1910) Act, 1910, is in broad principle the same as surtax, and section 66 of the Act of 1910 provided that total income for the purposes of supertax should be estimated in the same manner as total income

for the purposes of income tax. [Reference was made to sections 4, 5, 9, 10, 17, 27, 28, 207, 209, rules 19 and 20 of the General Rules applicable to Schedules A, B, C, D and E and Schedule 5, rule XVII of the Income Tax Act, 1918, sections 38 and 39 of the Finance Act, 1927, and sections 122 and 123 of the Act of 1952.]

Goslings and Sharpe v. Blake¹¹ is accepted as a right decision and therefore it is agreed between the parties that annual interest does not include short interest. Had the matter been res integra the position might have been different. Reliance is placed on the judgments in the present case of Russell L.J. in the Court of Appeal and Wilberforce J. [Reference was made to London County Council v. Attorney-General¹²; Inland Revenue Commissioners v. Hay¹³; Paton v. Inland Revenue Commissioners¹⁴ and Allchin v. Coulthard.¹⁵]

C. N. Beattie Q.C. and Peter Rees for the taxpayer. It is not disputed that annual payments are deductible for surtax. But section 2 (2) of the Income Tax Act, 1952, on which the Crown relies, is not authority for such a deduction either on its wording or having regard to the section's history. The subsection merely indicates that one cannot make deductions unless one is satisfied that payments may be deducted in computing total income, so that one must look elsewhere for the authority. The Finance Act, 1927, converted super-tax into surtax, and made it a deferred instalment of income tax, section 38 providing the machinery for so doing. At that time, the payer of an annual payment had to pay income tax on his whole income without deducting annual payments. Had nothing been said, it might have been thought that a similar rule would apply to surtax. It was to clarify that situation that section 39 (3) (the origin of section 2 (2)) was inserted ex abundanti cautela to show that the law regarding surtax remained unchanged. If the Crown were right that section 2 (2) was the authority for deducting annual payments, then a vast change was made in the law in 1927 by section 39 (3), in that for the first timeeannual payments would have become deductible in computing total income.

11 (1889) 23 Q.B.D. 324; 5 T.L.R. 605; 2 T.C. 450, C.A.

12 [1901] A.C. 26; 17 T.L.R. 131; 4 T.C. 265, H.L.

13 1924 S.C. 521; 8 T.C. 636.

14 [1938] A.C. 341; 54 T.L.R. 504, H.L.(E.); sub nom. Fenton's Trustee v. Inland Revenue Comrs. [1936] 2 K.B. 59, C.A.; sub nom. Paton (as Fenton's Trustee) v. Inland Revenue Comrs., 21 T.C. 626.

15 [1943] A.C. 607; 59 T.L.R. 396; [1943] 2 All E.R. 352; sub nom. Allchin v. South Shields County Borough, 25 T.C. 445, H.L.(E.).

It is submitted that the authority for deducting annual interest is to be found in section 524 and Schedule 24 of the Act of 1952. To find their true meaning one has to consider the provisions of the Income Tax Act, 1842. Total income for super-tax was to be estimated in the same manner as for income tax (section 66 (2) of the Act of 1910) and since there was no material change in the levying of income tax between 1842 and 1910, the Act of 1842 is the appropriate one to consider. Section 163 of the Act of 1842 provides for exemption if a person can Prove. "in the manner hereinafter mentioned that the aggregate annual amount of his income estimated according to the several rules and directions of this Act, is less than £150." "The manner hereinafter mentioned" is to be found in section 164, the side-note to which clearly indicates that it is the mode of claiming exemption as does the context of the section: see Howe's case.¹⁶ It is a machinery section¹⁷ and is not authority for deducting annual interest in computing total income; it provides that if annual payments are made, the Revenue must be informed. If the annual payments did not diminish income they would not have to be declared. It is section 163 which confers the rights, not section 164: see Howe's case.¹⁸

One then has to consider to what the words "rules and directions of this Act" refer. They must refer to something other than section 164 which had already come into operation by virtue of the words "in the manner hereinafter mentioned." Clearly one has to look at Schedules A, B, C, D and E, but they do not allow the deduction of annual interest. Section 190, in referring to "the Schedule marked (G) with the rules and directions therein contained" relates back to section 163, which is the only relevant authority for making deductions. Although "rules" are to be found throughout the Schedules, it is only in Schedule (G), which sets out the directions by which one builds up one's aggregate income, that one finds "rules and directions."

The taxpayer's case turns principally on Schedule (G), rule XVII. The first sub-rule covers income subject to direct assessment in the hands of the recipient; the second sub-rule covers the income of the claimant subject to deductions at source; the third sub-rule is the authority for deducting annual interest in computing total income, and that is the only place where authority for such a deduction is to be found. The word "interest" therein is not confined to yearly or annual interest

16 7 T.C. 289, 302.

17 Ibid. 301.

18 Ibid. 298.

and therefore the sub-rule gives a right to deduct short interest. The fourth sub-rule indicates how to ascertain the aggregate annual amount of income referred to in section 163, which is by adding together the first and second amounts and deducting the third. It has been suggested that the fifth sub-rule presents a difficulty because it is the same as the third sub-rule, but on the taxpayer's case short interest is not within the fifth sub-rule, but it is deductible under the third. The fifth sub-rule singles out items on which the recipient has suffered tax by deduction and therefore does not include short interest.

The Act of 1842 distinguishes clearly between the two types of interest: see section 102 and by contrast Schedule D, third case, item 7. With that clear distinction made elsewhere in the Act, one does not read "interest" in Schedule (G), rule XVII, as limited to "annual interest." "Interest" includes short interest except where subsequent words limit the meaning, as in the second rule which is confined to cases in which tax is deductible at source and thus can only refer to annual interest.

In Lord Advocate v. Edinburgh Corporation¹⁹ "interest" in section 24 (3) of the Act of 1888 (now section 170 of the Act of 1952) was interpreted to include short interest, and the courts would certainly have interpreted "interest" in the Act of 1842 in the same way. A similar expression to that in section 24 (3) is used again in section 122 of the Act of 1952. [Reference was made to Leeds Benefit Building Society v. Mallandaine.²⁰] "Annual" is used in conjunction with "interest" in various parts of Howe's case²¹ because it was concerned with insurance premiums which were annual payments, but the observations were not confined to annual interest. The words of Scrutton L.J.²² are adopted as indicating that interest can be deducted in computing income. But where he says²² that, "If no tax can be deducted on behalf of the recipient, ... they cannot be treated as profits of the recipient" that is correct in respect of annual interest but not in respect of short interest because that is treated as profit in the hands of the recipient. When interest is received by a trader he can be assessed on that interest as interest notwithstanding that it is part of the trading receipts: Clerical, Medical and General Life Assurance Society v. Carter.²³

Income tax relief was granted on bank interest prior to 1915

19 4 T.C. 627.

20 [1897] 2 Q.B. 402; 13 T.L.R. 535; 3 T.C. 577, C.A.

21 7 T.C. 289.

22 Ibid. 303.

23 (1889) 22 Q.B.D. 444; 5 T.L.R. 291; 2 T.C. 437, C.A.

as a concession. One assumes that a similar so-called concession applied to super-tax since it is allowed today in respect of surtax, although it is submitted that on the construction of the Acts it should be allowed as of right. The present section 200 is substantially unchanged from the original section 22 of the Finance Act, 1915, which could only refer to income tax and not to super-tax which, being paid in steps on total income, could not be computed at any particular "amount." Bank interest was always deductible in computing total income. The problem of obtaining income tax relief in respect of short interest was the absence of machinery. Parliament must have been fully aware of the position in 1915 and would have legislated in respect of super-tax had it been necessary.

If short interest is not deductible, the position would be that there is relief in respect of bank interest for income tax but not for surtax. To offer a concession to surtax payers in respect of bank interest but not to the present taxpayer because he did not borrow from a bank creates an anomalous situation. In fact there is no such dilemma if, as is submitted, all short interest is deductible.

The distinction between diminution of income as distinct from application of income is not an arbitrary one and can be determined as a matter of principle. A payment represents a diminution of the payer's income when it is an augmentation of the payee's income. If the payment is chargeable to income tax in the hands of the payee, as when it is received by the payee without any obligation to incur expenses or perform services in return for the payment, it diminishes the income of the payer. Short interest represents diminution of income: see Paton's case.²⁴.

On the authority of Hay's case²⁵ the principle against double taxation can be invoked. It is unnecessary for the taxpayer to rest his case on that principle but any ambiguity in the Acts should be resolved so as to avoid double taxation.

Regarding the Crown's three propositions, the first one is accepted, authority being found in Schedule 24 to the Act of 1952. There is no authority for the second proposition in the Income Tax Acts. It is merely a judicial gloss placed on the wording of the Acts. It is chargeability, and not deductibility, which is the test. On the third proposition, short interest satisfied the first proposition because there is express authority

24 21 T.C. 626, 648.

25 1924 S.C. 521.

and it would satisfy the second proposition if chargeability were the test. [Reference was made to Inland Revenue Commissioners v. Brooks.²⁶]

Peter Rees following. There are categories of short interest from which the payer is entitled to deduct tax: compare sections 169 and 170. It was conceded by the Crown, and so held in the Edinburgh case,²⁷ that the words in section 170 are apt to cover short interest. A person might not have sufficient taxed income to support payments of short interest for which he is liable, so that section 170 would apply, and yet be assessable to surtax. Thus there may be payments from which the payer is obliged to deduct tax and which he may not deduct for surtax purposes. The test of deductibility cannot therefore be of universal validity and some other test must be substituted. The true test is whether the interest is pure profit income in the hands of the recipient.

Heyworth Talbot Q.C. in reply. The language of the Crown's second proposition should have read "deduct and retain tax," which would have excluded references to section 170 which deals with the Crown's right to tax on someone else's income. Section 170 does not deal with the case where the income is diminished. Under section 169 the payer is entitled to deduct tax because one is dealing with diminution; under section 170 he is bound to deduct tax. Section 2 (2) of the Act of 1952 authorises the deduction of annual interest; it is because it is annual interest that "it may be deducted" in computing total income. Those words are not an additional condition to be satisfied but a description of what may be included. If one looks beyond section 2 (2) for justification in deducting annual interest, one should not confine oneself to Schedule 24, but should also look at Schedule 6. All claims for relief have to be accompanied by a statement of total income. The words "whereby income is diminished" in section 164 of the Act of 1842 do not imply the existence of a second condition as is suggested by the taxpayer in relation to section 2 (2) of the Act. Quite clearly the words are in an explanatory parenthesis and one does not have to demonstrate that the outgoings diminish income. The legislature have adopted a conception of outgoings that diminish rather than an application of income: where one finds an outgoing of the

26 [1915] A.C. 478; 31 T.L.R. 89; sub nom. Brooks v. Inland Revenue Comrs., 7 T.C. 236, H.L.; [1914] 1 K.B. 579, C.A.

27 4 T.C. 627.

character of annual interest, payments of which are capable of being made from incomings, they can be deducted. If that is right that is the end of the case because short term interest does not satisfy those requirements.

Their Lordships took time for consideration.

1964. November 19. VISCOUNT RADCLIFFE. My Lords, Mr. Frere, the respondent, on two occasions borrowed large sums of money for short periods On March 28, 1957, he borrowed £50,000 at interest on the terms that the loan should be repaid by January 31, 1958: it was repaid on December 3, 1957, together with £2,210 19s. 2d. by way of interest. On August 14, 1958, he borrowed £40,000 at interest for one month and repaid it on September 17 of the same year. The interest cost of the borrowing was £186 2s. 9d. The concern which made these loans to him was an unlimited company which, it is common ground, did not satisfy the description of a "banker," whatever that description may be.

The respondent's claim is that in computing his total income for assessment to surtax the moneys which he paid by way of interest on these loans ought to be deducted from the assessable figure. It is, again, common ground that the payments that he made were, in each case, "short interest." This is a technical phrase, significant to those who administer income tax law; but what it means for the present purpose is that the payments were not "annual interest" and are not, therefore, interest payments of the class that is, for instance, recognised or dealt with by section 2 (2), section 169 ("yearly" interest), section 511 of, or Schedule 6 ("yearly" interest) to the Income Tax Act, 1952.

His claim was allowed by the special commissioners. They found their authority to do so in a construction which they placed upon the joint effect of section 524 (2) of the Act (which requires a person making a return of "total income" to observe the rules and directions contained in Schedule 24 to the Act) and of the third sub-head of that Schedule (which calls for a declaration of the "amount of interest, annuities or other annual payments to be made out of the property or profits or gains assessed on the person in question"). In their view the "interest" referred to in that sub-head is all interest, annual, yearly or short, and they concluded that, since the return had to cover all such interest, the total income as computable for surtax must somehow be treated as diminished by an amount equal to

"short," as well as "annual," interest. This view of the operative significance of the wording of Schedule 24, subhead (3), though it did not prevail with Wilberforce J. in the High Court or with Russell L.J. in the Court of Appeal, is, I think, accepted by the majority of the members of the Court of Appeal (Denning M.R. and Donovan L.J.), and constitutes the ground of their decision, which has allowed to the respondent the deduction that he claims. With great respect to their view, I think it mistaken. In my opinion, the wide construction that it places upon the meaning of "interest" in this sub-head is unwarranted: even if, semantically, it were the right construction, I should still think that it was insufficient to support the deduction claimed, when the claim is set in the context of the Income Tax Act and the scheme of assessment which, however dimly, can be observed as that proposed and regulated by the Act. But, before I come to this in detail, I must say something about the question of principle which appears to have been the foundation of the special commissioners' decision and which, as I read it, was also influential in the opinion expressed by Donovan L.J. and given effect to in his judgment.

"It appears to us, therefore," says the case stated, "that it would be contrary to principle to charge surtax, in effect, on two persons in respect of the same 'short' loan interest." Now I have two difficulties in seeing what principle is envisaged as threatened by a refusal to allow the respondent to deduct short interest from his surtax assessment. First, if one uses ordinary language uncoloured by income tax conceptions, no one, I believe, would imagine that this refusal did involve charging two persons to tax in respect of the same interest. There is only one item of interest, that which arises out of the respondent's transaction with the lenders, and there is only one payment of this, that which the respondent makes to them. No one is surprised if they are charged to tax on that payment as being part of their income, but in the practical sense, again, no one is concerned to ask out of what resources the payer finds the money that constitutes the payment. He draws on his bankers, and that closes the transaction. The idea that the respondent somehow has all along had this amount of interest embedded as such not merely in his personal resources but in his own taxable income of the year in which he pays it and that all he does when he pays it is to transfer the item from his income to that of the recipient is an esoteric idea which belongs to the mystique of tax doctrine, not to the realities of ordinary dealing. But then, if the case is to

stand or fall by the special doctrines of the tax system, one has to establish that those who framed that system did in fact hold a doctrine about short interest that supports the respondent's case and, moreover, made legislative provisions that would give effect to its allowance in the computation of total income.

So I turn to my second difficulty about this supposed principle, which is to see what indications there are in the tax code that the payment of short interest is to be treated as a diminution of the payer's taxable income. One can start with some safe generalisations on this subject. Income that is assessed to tax is neither measured by expenditure nor is it the residual income that lies after expenditure of an income nature. It is not the savings of income. In principle it is gross income as reduced for the purposes of assessment by such deductions only as are actually specified in the tax code or are granted by way of reliefs, usually in the form of fixed sums or proportions. No doubt the assessment of profits under Schedule D has come to require a rather different approach, since in that case the basic figure for assessment is the balance between receipts and expenditure: but even there it is plain that the code is intended to keep a control over the forms of expenditure that can appear in the profit account. It follows from this general conception that in principle it is irrelevant to the determination of a person's taxable income that some part of it has been expended by him on what would normally be regarded as his own income account, in paying rent, wages, mortgage interest, rates, insurance, for example, or that the payments that he makes for such purposes will themselves constitute or contribute to assessable income in the recipient's hands. Under our system payments may run to and fro many times in the course of a single tax year, creating new taxable income at each separate point of receipt. The idea of double taxation does not even arise in these multiple assessments. The mere fact, then, that part of a taxpayer's income has been used to pay interest on a loan during a year, even assuming that you visualise "income" as a separate spending fund, would not in itself set up a reason for reducing the assessment of his taxable income. The payment of the interest, whether long or short, would be no more, for this purpose, than an "application" of his income.

On the other hand, it is notorious that, quite apart from fixed reliefs for such kinds of expenditure as support of dependants or life assurance premiums, the code does make provision for certain "charges" on income being treated for tax purposes as if the income of the payer was, to the extent of the charge, not his

income but the income of the recipient. To take the crudest case, that of the income received by a trustee for his beneficiary, probably the holder of a life interest under a settlement. If you wanted to calculate the "total income" of those two persons for the purpose of working out their rights to tax relief, as individuals, you would not, nor does the tax code, stop at the bare fact that the income payments received by the trustee were actually charged to tax in his hands either by direct assessment or by the machinery of deduction. You would say that, when it came to arriving at a "total income" under the tax scheme, such payments must not be attributed to the trustee, through whose hands they passed, but must on the contrary be attributed to the beneficiary, whose hands they were from the beginning destined to reach. That is straightforward. But now take the next most straightforward case, that of the annuity which is by legal right charged upon property, income primarily, capital by way of resort. A man comes in to the right to that income subject to the charge of the annuity. Under the tax system, as in ordinary thinking, his own income is reduced by the amount of the charge. The gross income accruing to him is divided in ownership right, a part equal to the annuity figure belonging to the annuitant, the balance to him. The reality of this situation was recognised and allowed for by the tax system, because, while the payer of the annuity was assessed and charged on the gross income, he was from the earliest days allowed to deduct from his payments a proportionate part of the tax which he had borne or was to bear on the total. By this means his true taxable income was treated as being the residue left after the charge of the annuity, the burden of the tax being shifted from payer to recipient by the former's statutory right to recoup himself out of the payment due to the latter.

This recognition of a division of ownership between two or more persons entitled to rights in a single "fund" of income was not, however, confined to such cases as those where there was trust income or an annuity charge. There was also the case of "annual" or "yearly" interest - I do not distinguish between the two adjectives - payable under a mortgage, the characteristic feature of which seems to have been that, in setting up the mortgage situation, the borrower had in effect divided the gross income of his estate between himself and the mortgagee. Up to this point it could fairly be said that the division corresponded with and followed the lines of enforceable legal rights in an identifiable fund of property, the accruing income. But the tax

system can be seen to go further than this, for it applied the same idea of division of proprietary right to situations in which legal distinctions draw no dividing line. Thus an annual payment secured by personal covenant only, involving no charge on any actual security, whether income or capital, was treated in the same way for tax purposes. It had to be "annual," and it had also to be payable "out of profits or gains brought into charge" in order to rank as income of payee not of payer, because it was the division of taxable income with which the code was dealing; and it may well be asked what at this stage is the significance of the words "out of" as applied to a payment, the obligation for which was merely the personal one to find the money required out of whatever resources the payer might mobilise for the purpose. The answer was provided by the application of what is in truth an accountant's, not a lawyer's, conception, for it was accepted that, so far as the payer was found to have in the relevant year a taxable income larger than the gross amount required to make the payment, to that extent he was entitled to claim that he had made the payment "out of profits or gains brought into charge" and to deduct and retain for his own account tax at what in due course (after 1927) became the "standard rate."

This system of charging tax at source and then setting up machinery for distributing the burden of that tax between the source holder and the person who was regarded, pro tanto, as the real owner of the source was evolved for the purposes of income tax, which was assessed and collected under the various Schedules, item by item. The problem of exempting those with incomes below a statutory minimum was that which first raised in a practical form the question what was a person's total income from all sources (as we should now call it) or, to use the words of section 163 of the Act of 1842, what was the "aggregate annual amount of his income, estimated according to the several rules and directions of this Act." It was section 164 of that Act which, as I read it, laid down explicitly the range of matters that were to be taken into account in determining whether or not a person had an aggregate income within the exemption. He was to deliver to the assessor a notice of his claim, together with a declaration "setting forth therein all the particular sources from whence the income of such claimant shall arise, and the particular amount arising from each source, and also every sum of annual interest or other annual payment reserved or charged thereon, whereby the income shall or may be diminished. ..."

On the basis of a claim made out in this way, if not objected to by the inspector or surveyor, the commissioners were authorised to "allow such claim of exemption." Nothing, I agree, is ever plain when one comes to deal with the income tax code, but I would, with respect, have thought it reasonably clear that, when the makers of the Act of 1842 wished to prescribe what was to be taken as the "aggregate annual amount" of a man's income for the purposes of their Act, they allowed the amount to be reduced by the sum of any annual interest payable out of his income but not by the sum of any interest that did not qualify as "annual." If you like to put it that way, they thought that annual interest and other annual payments "diminished" the income or that the amount required to pay them was not the payer's income at all: they do not seem to have thought of other kinds of payment as having this effect.

I must note in passing that it is at this point that I find myself directly at variance with the opinion formed by the majority of the Court of Appeal. They thought that under the Act of 1842 aggregate annual income could be reduced by the figure of any short interest paid, and they found warrant for that in the interpretation they placed on the words used in Schedule (G) of the Act to describe one of the statutory declarations there called for. I must return later to this point. For the moment I will only say that to extract this consequence from the use of that Schedule appears to me to involve a straight contradiction of what section 164 had enacted, without any supporting provisions in the Act which would even make the contradiction effective.

The first statutory use of our current phrase "total income from all sources" seems to have been in section 8 of the Customs and Inland revenue Act, 1876, and this, significantly, occurs in an exemption section. When super-tax was introduced in 1910, its basis of charge was, as we know, the total income of an individual from all sources "estimated in the same manner as the total income from all sources is estimated for the purposes of exemptions or abatements under the Income Tax Acts" (see Finance (1909-1910) Act, 1910, section 66 (2)). It is not in dispute, therefore, that, though we are now dealing with a claim to make deductions from or reductions of total income for the purposes of surtax, the test of what is to be brought into that computation is derived from the test of what formed aggregate or total income for the purposes of exemption, relief or abatement under the original income tax system. This assumption is the basis of the decision of the Court of Appeal in Earl Howe v.

Inland Revenue Commissioners¹ and there is no need to enlarge upon it further.

It was also the basis of the court's decision in that case that, in arriving at the figure of total income, only those annual payments could be allowed as deductions which were themselves payable under deduction and retention of tax as between payer and payee. The decision itself is very well known, and I must say that until this case I had never heard it questioned that the principle the court had proceeded upon was the correct one. It is, after all, "yearly interest of money annuity or other annual payment" that the income tax code identified as forming the taxable income of the recipient and not of the payer, and it seems to me correct, therefore, to assume that it is only payments so identified that are to be taken as reducing the payer's "total income" under the code. The same principle was resorted to and applied by Harman J. in deciding Bingham v. Inland Revenue Commissioners² and by, at any rate, two of the three members of the court which decided Inland Revenue Commissioners v. Hay.³ In my opinion, the principle so applied is the correct one. It is, plainly, that which is recognised by the wording of section 2 (2) of the Income Tax Act, 1952, and no other principle that I can envisage would be consistent with that wording. I have done what I can to attend to the argument which I understand the respondent to propound us being the true and alternative principle, that all payments are deductible in arriving at the payer's total income which represent what is called "pure income" in the hands of the payee. The conception of "pure income" as a significant category of income under the tax code is, I think, a recent discovery which might have surprised, for instance, the makers of the Income Tax Act, 1842. All I can say is that, apart from the argument founded upon the wording of Schedule (G) of that Act, to which I must come, I cannot find any trace of an intention to treat part of a person's income as not being taxable income merely because he uses it to make payments to another person which are themselves taxable directly as part of the income of the recipient. Nor can I see any principle which would support such a deduction, once it is accepted that the making of a payment out of one person's income does not in itself operate to frank that payment for purposes of tax when it reaches

1 [1919] 2 K.B. 336; 35 T.L.R. 461; 7 T.C. 289, C.A.

2 [1956] Ch. 95; [1955] 3 W.L.R. 663; [1955] 3 All E.R. 321; 36 T.C. 254.

3 1924 S.C. 521; 8 T.C. 636.

the hands of the recipient. Conversely, the fact that a receipt will be taxed as an element of the payee's income is not, without more, a ground for holding that the taxable income of the payer is less by the amount of the payment. To think that, unless some such principle can be imported into the tax system, there is an anomalous case of double taxation is, with great respect to those who may have said otherwise, a begging of the question, for everything depends upon just that question whether there is involved in the payment one single income which is merely transferred or two separate elements of income which have independent sources of origin.

If Earl Howe v. Inland Revenue Commissioners⁴ is followed out, the respondent's claim must fail, since it is not suggested that a payer of short interest is entitled to deduct and retain tax against the payee, even if his payment can be treated as made out of profits or gains brought into charge. What he will get will be the measure of relief now to be found in section 200 of the Income Tax Act, 1952, if he is dealing with banker, stockbroker or discount house: but that relief, which is not operated through deduction at source, is beside the point of the present argument. As was decided in 1889 in Goslings and Sharpe v. Blake⁵ short interest is not subject to the procedure of tax deduction and retention under what used to be Rule 19 of the General Rules and is now section 169 of the Act of 1952. Unless, therefore, it is possible to support the opinion of the majority of the Court of Appeal that all interest, including short interest, is and always has been deductible in the computation of a taxpayer's total income, the appeal must, I think, succeed.

The argument for deducting short interest proceeds as follows. It has been worked out in terms of the Act of 1842, and there is no objection to this, for I agree that, if such interest can be shown to have been deductible under that Act, it can safely be assumed that a similar line of reasoning would carry it through the Acts of 1918 and 1952 and would produce a similar result. One must, of course, turn the old section 190 into the present section 524 (2) and the old Schedule (G) into Schedule 24 and make other necessary transpositions, but the essential argument remains the same. It is said then that, if one reads section 163 of the Act of 1842, one finds that the "aggregate annual amount" of a person's income is to be "estimated according to the several rules and directions of this Act." These rules and directions, it is said,

4 [1919] 2 K.B. 336.

5 (1889) 23 Q.B.D. 324; 5 T.L.R. 605; 2 T.C. 450, C.A.

are laid down by section 190 of the same Act, a section which requires the observance of "the Schedule marked (G), with the rules and directions therein contained" by any person who is making returns of the "amount of annual value or profits on which any duty is chargeable under this Act." Then, when Schedule (G) is resorted to, it is seen to contain a considerable number of rules which prescribe forms of returns and declarations relating to different kinds of income under the various taxing Schedules, and there is among them Rule XVII, entitled: "Lists, Declarations, and Statements of Discharge, or in order to obtain Exemptions." This rule starts with four sub-headings which run:-

"First. - Declaration of the amount of value or property or profits returned, or for which the claimant hath been or is liable to be assessed:

"Second. - Declaration of the amount of rents, interests, annuities, or other annual payments, for which the party is liable to allow and deduct the duty, with the names of the respective persons by whom such payments are to be made, distinguishing the amount of each payment:

"Third. - Declaration of the amount of interest, annuities, or other annual payments, to be made out of the property or profits assessed on the claimant, distinguishing each source:

"Fourth. - Statement of the amount of income derived according to the three preceding declarations."

The argument, then, concentrates upon the wording of the third declaration in this rule. "Interest" here, it is said, means interest of any kind, not merely what is called "annual interest." If that is so, the legislature is calling for a declaration to be made, inter alia, for the purposes of claiming exemption, which requires the showing in the return of all interest payments that are to be made out of the property or profits of the claimant. The conclusion is that, notwithstanding the provisions of section 164 and the reference to "annual interest" which is found there, all interest is to be regarded as impliedly authorised as a permissible deduction when aggregate annual income is being computed for the purpose of exemption.

I hope that I have not omitted any step in an argument which is to me an elusive one. With sincere respect for those who have propounded it, I find it unconvincing as well as elusive. And this for a number of reasons. For instance, I do not think that it is

correct to say that the rules and directions for estimating aggregate annual income which are referred to in section 163 are in any special sense the rules and directions which are found in Schedule (G). On the contrary, what are referred to are the "Rules and Directions of this Act"; and the Act, of course, contains a great many sets of rules and directions for estimating different types of income, none of which has any connection with deductions or exemptions at all. There is, therefore, no real link between section 163 and Schedule (G). That schedule is in fact brought into operation by a separate section, section 190, which requires the observance of the schedule and its rules and directions for the administrative purpose of the making of returns of income: but investigation shows that the rules and directions which are to be found in Schedule (G) with reference to its forms are not in any case (unless, exceptionally, in the third heading of Rule XVII) original and independent rules, but are merely repetitions of rules and directions which have been laid down in other, and what I think I must call substantive, parts of the Act. That is what one would expect. One would not look to find in a Schedule describing the forms of returns required for the implementing of the taxing provisions of the Act the introduction of a special rule allowing certain deductions from assessable income which are not mentioned or, it would seem, envisaged in any preceding part of the legislative scheme. And no one, I think, suggests that there is any other part of the whole Act in which interest not being annual interest is contemplated or spoken of as an allowable deduction from aggregate or total income.

I do not, however, wish to elaborate my criticisms of the process by which the argument is constructed because, in my opinion, the conclusion upon which it all depends, the comprehensive meaning attached to the word "Interest" in the third heading of Rule XVII. is wrong in itself. I do not think that it can be taken as referring to anything more than annual interest. To read it otherwise is to ignore the very definite instruction that the legislature has already given in section 164 in the body of the Act. There it has been laid down that, when a claim of exemption is to be submitted for proof and allowance, the sum total of the income from various sources may have put against it "every sum of annual interest or other annual payment reserved or charged thereon, whereby the income shall or may be diminished." There is no mention of allowing any other kind of interest. When one comes, therefore, to the reading of Rule XVII in Schedule (G), which is prescribing the contents of a declaration "in order

to obtain exemption," it seems to me that it would be capricious not to construe the word "interest" in the third heading, which evidently relates to deductions, so as to make it congruous with the kind of interest which the Act has already said is to be allowed in the computation of total income for the purpose of exemption.

The context of the words in Rule XVII appears to me to indicate exactly the same meaning. The first heading covers income upon which the claimant is directly assessable. The second heading relates to income to which he is taxable by deduction and retention on the part of the payer, in other words the kinds of payment which the Act treats as being the taxable income of payee, not payer. These payments are described in the words "Rents, interests, annuities or other annual payments." The word "interests" is not qualified by any adjective, but I think it inescapable that one must read it here, either because of its collocation with "other annual payments" or for common sense, as meaning annual interest only, because it is only for that kind of interest that the Act has allowed deduction and retention of tax by the payer. Then there comes the third heading, described as "Declaration of the amount of interest, annuities, or other annual payments, to be made out of the property or profits assessed on the claimant. ..." The collocation of interest with annuities and other annual payments is the same as in the preceding heading, and as a straightforward question of construction alone I think that any reader would naturally suppose that the word "interest" was being used in the same sense in each of the two successive headings, and would never guess that in the second one it was being used with a different meaning from that which he had attributed to it in the first. In my opinion, there is no change in the meaning that is intended.

It seems to me useless to seek to interpret the word "interest" in this heading with reference to the meaning of "interest" in other unrelated parts of the Act of 1842 or later Acts, for instance, in contexts where it is being dealt with as a chargeable subject or as an element of taxable income, not as a deduction from such income. The relative considerations are different in these respective cases. References to section 100 of the Act of 1842 or to the current form of the charge under Case III of Schedule D are, therefore, beside the point for the purposes of interpretation: indeed, the phrase used in the Act of 1952 "any interest of money, whether yearly or otherwise and any annuity or other annual payment" shows a plain intention to exclude the doubts that might otherwise arise from the collocation of

"interest" with "other annual payments." It is equally wrong, in my opinion, to found any argument upon the meaning to be attributed to "interest" in what is now section 190 of the current Act, the former Rule 21, which obliges a person who is paying interest not out of profits or gains brought into charge to deduct tax at the standard rate and, in this case, to account for it to the Revenue. This rule, incidentally, had no place in the Act of 1842, and did not enter the tax code until 1888. The use of it as an analogy in aid of construction appears, however, to have appealed to the special commissioners, but I think that it is no analogy at all. It is true that in Lord Advocate v. Edinburgh Corporation⁶ the Court of Session decided that "interest" here covered short interest. The decision itself has stood for a long time and had better therefore be left alone, but I am bound to say that I think it a singularly ill-judged one, for how in practice can anyone paying short interest on, say, 24 hours or 7 day money detect at the time of payment whether he is paying it out of profits or gains brought into charge (in which case he has neither right nor duty to deduct) or out of a source which is not such a profit (in which case he is under a statutory duty to deduct and account)? But it is sufficient to say of this decision that it is neither so persuasive in itself as to be a guide to the interpretation of other parts of the Act nor, even if it were impeccable in its own context, could it throw any light on the meaning of the words used in Rule XVII of Schedule (G).

I have come to the conclusion, therefore, that the Crown's argument in this case is right and that the appeal ought to be allowed. There is a special arrangement about costs which will be embodied in the order made by the House.

I will add one word, if I may, about the general proposition that the distinction which I have recognised between the tax treatment of annual interest and the tax treatment of short interest represents an unjustifiable anomaly, only mitigated in certain respects by the provisions now contained in section 200 of the present Act. I have already spoken of the argument that such treatment involves double taxation of short interest. I cannot see that it does. But if there is here an anomaly, to which the attention of the legislature ought to be directed, I think that we ought to be clear what the anomaly is. The long maintenance of the tax scheme that produces this difference of treatment does, I think, suggest that there may be less

6 (1903) 4 T.C. 627.

similarity between the nature of annual interest and the nature of short interest than is sometimes allowed for. Of course, if you take the distinction between interest on a 13 months' loan and interest on an 11 months' loan (assuming those to be true examples) the distinction is meaningless. But then that is true wherever differences of degree are allowed to constitute differences of category. If you take, on the other hand, what are perhaps more representative examples of the two categories and set interest on a long term mortgage or the charge of a life annuity against the interest on 24 hours money, 7 day money or a 3 months' bill, it is possible to see a real difference between their respective impacts on the payer's true taxable income. In the first place, there is something like a permanent set-up under which the man's income accrues to him each year subject to a fixed and recurring charge for this outgoing. In the second, the short interest can be regarded as merely part of the cost of getting, using and returning money, and is often accounted for as a discount only, and its relation to the payer's annual income is much less direct. If he is borrowing professionally on short loan to get the turn by lending pro tanto longer, it is only the difference on the incoming and outgoing that he would think of as his income. If he is borrowing short to finance a purchase transaction, the interest, as I have said, is part of the cost which has to be set against the final gross return.

It is no more than speculation to ask whether these differences, which I believe to be real, are the historical basis of the difference in treatment for purposes of tax. Of the maker of the tax code, as of another inscrutable author, "we ask and ask: Thou smilest and art still, Out-topping knowledge."^* I have merely thought it worthwhile to put on record a possible explanation of this "anomaly."

On the other hand, while it is possible to think that there is no true anomaly in principle in recognising these differences, I do think that there is by now a clear anomaly in practice, which has been created by the statutory allowance of repayment of income tax on short interest, when paid out of taxable income to a banker or stockbroker or discount house. This allowance was started with the 1915 section that dealt with bank interest only. It is all now contained in section 200 of the Act of 1952. The allowance is given by way of relief, not of deduction and retention. It authorises a claim for repayment of income tax. Being given

* Matthew Arnold on Shakespeare.

as a relief against income tax it does not by any means necessarily justify a claim for repayment of surtax, since income tax reliefs are not automatically reliefs against surtax. We are told, however, that the Revenue recognise the claim against surtax as an "extra-statutory concession." I have never understood the procedure of extra-statutory concessions in the case of a body to whom at least the door of Parliament is opened every year for adjustment of the tax code. But however that may be, if short interest is to be the subject of tax relief at all, there can be no relevant difference, so far as I can see, between such interest paid to one category of recipient in this country and the same interest paid to another. It is an anomaly to give a relief in the one case and not in the other.

LORD MORRIS OF BORTH-Y-GEST. My Lords, I have had the privilege of reading and considering the speech which has been prepared by my noble and learned friend, Viscount Radcliffe, and I am in agreement with his reasoning and his conclusion.

LORD GUEST. My Lords, I have had the opportunity of reading the speech of my noble and learned friend, Viscount Radcliffe, with which I concur. There is nothing I can usefully add. I agree that the appeal should be allowed.

LORD PEARCE. My Lords, I have had the privilege of reading the speech which has been prepared by my noble and learned friend, Viscount Radcliffe, and I am in agreement with it.

LORD UPJOHN. My Lords, I have had the opportunity of reading the speech of my noble and learned friend, Viscount Radcliffe, and entirely agree with it.

Solicitors: Solicitor, Inland Revenue; Frere, Cholmeley and Nicholsons.

C. J. E.