Dr Barnardo's Homes National Incorporated Association v Commissioners for Special Purposes of the Income Tax Acts
[1921] 2 A.C. 1(Judgment by: Viscount Finlay (including background))
Between: Dr Barnado's Homes National Incorporated Association - Appellant
And: Commissioner for Special Purposes of the Income Tax Acts - Respondents
Judges:
Viscount FinlayViscount Cave
Lord Atkinson
Lord Sumner
Subject References:
REVENUE
INCOME TAX
EXEMPTION OF CHARITIES
Residuary Bequest
Ascertainment of Residue
Income Tax on Interim Dividends
Legislative References:
Income Tax Act, 1842 (5 & 6 Vict. c. 35) - s. 88, Sch. C, r. 3; s. 105
Judgment date: 14 March 1921
Judgment by:
Viscount Finlay (including background)
By s. 88, Sch. C, r. 3, of the Income Tax Act, 1842, coupled with s. 105 of the Act, charitable institutions are exempted from the duties on any yearly interest or other annual payment chargeable under Sch. D, in so far as the same shall be applied to charitable purposes only, and the exemption is to be allowed by the Commissioners for Special Purposes on due proof before them.
A testator who died on November 14, 1914, by his will bequeathed the residue of his property, which consisted of stocks and shares, to a charitable institution absolutely. Between the date of the testator's death and December 4, 1916, when the residue was finally ascertained and distributed, the executors received income of the estate from which income tax had been deducted at the source. The income so received by the executors was part of the fund handed over in due course by them to the charitable institution. The institution claimed the return of the income tax deducted on the ground that the deduction was contrary to s. 105 of the Income Tax Act, 1842:-
Held, that until the date when the residue was ascertained the institution had no property in any specific investment forming part of the estate, or in the income therefrom, that the payment by deduction of income tax made by the executors in respect of the income was not made on behalf of the institution, and that the institution was therefore not entitled to repayment of the income tax so paid.
Lord Sudeley v. Attorney-General [1897] A.C. 11 applied.
Decision of the Court of Appeal [1920] 1 K.B. 468 affirmed.
Appeal from an order of the Court of Appeal [F1] reversing an order of the Divisional Court. [F2]
The question for determination was whether the exemption from income tax allowed by the Income Tax Act, 1842, s. 88, Sch. C, r. 3, and s. 105, on dividends of stocks and shares belonging to trustees for charitable purposes operated to relieve from income tax dividends accruing to the estate of a testator and paid to his executors in the course of the administration of the estate and before the ascertainment of the residue, in a case where the residue was bequeathed to trustees for charitable purposes.
The Divisional Court (Earl of Reading C.J. and Darling and Bray JJ.) answered this question in the affirmative and made absolute a rule for a mandamus against the respondents, the Commissioners for Special Purposes of the Income Tax Acts, commanding them to allow the exemption and to issue an order for repayment of the amount deducted for such income tax; but this order was discharged by the Court of Appeal (Lord Sterndale M.R., and Atkin and Younger L.JJ.).
The facts are stated in the report of the case before the Court of Appeal and in the judgment of Viscount Finlay.
1921. Feb. 18, 21. Clauson K.C. and Disturnal K.C. (with them Dighton Pollock) for the appellants. For the purposes of distinguishing between income and capital the residue exists before the quantum can be ascertained. It is admitted that the appellants are within the provisions of the Income Tax Act, 1842, by which the exemption is granted - namely, s. 88, Sch. C, r. 3, as extended by s. 105. If then the Legislature has exempted the appellants' income the question to be determined is what is in substance and in fact the income to which the appellants are entitled.
The Court of Appeal have proceeded on the basis that until the residue is ascertained it cannot be said that the residuary legatees are entitled to anything and Trethewy v. Helyar [F3] was relied on in support of that proposition; but that decision was directed to another point and has no bearing on the present case. The appellants had a present right to the residue when ascertained. Subject to adjustment, they were entitled to the residue from the death of the testator, and the income which that residue earned, although the exact amount could not be ascertained till later. The tax deducted from the income in the hands of the executors was deducted from income which belonged to the appellants, subject to the right of the executors to apply it for purposes of administration, payment of debts, etc. The method by which the adjustment is to be made is explained in In re McEuen [F4] and In re Wills. [F5] The principle of Allhusen v. Whittell [F6] applies by analogy. For the purpose of applying the exemption the crucial question is who in the events which have occurred turns out to be the real owner of the dividends from which the deduction is made? In determining who is to bear the burden of the income tax and who is entitled to the exemption the Legislature always regards the person who actually receives the benefit of the income: Williams v. Singer. [F7]
Clayton K.C. and Sheldon (Sir Gordon Hewart A.-G. and Reginald Hills with them) for the respondents. The question is not whether this charity ought to have this exemption in respect of these dividends but whether upon the language used in the Income Tax Acts the exemption has been granted to it. In order to succeed, the charity must prove that during the relevant period: 1. these dividends belong to the charity, 2. are applicable to charitable purposes only, and 3. are so applied in fact. None of these conditions has been complied with. As to 1: Until the residue is ascertained the personal estate is vested in the executors, not as trustees for the beneficiaries, but for the payment of debts and for the purposes of administration.
There is an essential distinction between an executor and a trustee. For example, an executor can plead the Statute of Limitations; a trustee cannot. This distinction is illustrated by Phillipo v. Munnings [F8] and Dix v. Burford. [F9] Executors do not become trustees for the beneficiary, in the case of a specific bequest, until assent, and, in the case of a residuary bequest, until the residue is ascertained. In the case of a specific bequest the beneficiary acquires title by relation back, but that doctrine does not apply in the case of a residuary bequest. During the relevant period the executors held these dividends, not for the appellants, but for the general purposes of the testator's estate. It is not until his executorial duties are discharged that an executor converts himself into a trustee.
As to 2, that is really another way of looking at the first point. During the relevant period these dividends were not applicable to charitable purposes only, because debts might be paid out of them and debts are not charity.
As to 3, that is covered by the preceding observations. There is no fund available for the charity until ascertainment of the residue. It is not put by the appellants that these dividends were the property of the charity, but their case is put on some sort of equitable accounting applicable to an estate settled on tenant for life and remaindermen on the analogy of Allhusen v. Whittell. [F10] The House is asked to apply the doctrine of that case, which is applicable solely as between beneficiaries inter se where the testator has limited successive interests to be enjoyed, to a case of an absolute legatee, and as between the legatee and the executors. Up to the time of the final distribution the appellants were entitled to nothing except so far as the executors chose to pay them on account.
A residuary legatee has no right to any specific item of property at all, and until the executors have discharged all payments there is nothing which can be regarded as residue. No action at law lies against an executor for a general legacy or share of residue: Deeks v. Strutt; [F11] In re West. [F12] The rights of a residuary legatee before distribution are defined by this House in Lord Sudeley v. Attorney-General, [F13] which is directly in point. The exemption is designed to relieve a charity which has an endowment and an income from that endowment. Until the residue was ascertained there was no title in the appellants to these dividends and they were never received by them as income.
Disturnal K.C. in reply. These stocks and the dividends arising therefrom belong to the charity. If an executor has property of the testator in his hands he may be compelled in a Court of equity to administer that estate according to the ordinary rules applicable to administration. The executor is in a fiduciary position qua such property. The fact that these appellants could not sue the executor at law does not solve the question whether the exemption applies.
To determine that question it is necessary to distinguish between what is the corpus of the estate of the testator and what is the fruit of that corpus after his death and to see to whom the fruit of that corpus belongs. The question of the incidence of income tax and of the application of the exemption does not depend upon the manner in which the executors keep their accounts. The words in r. 3 "in so far as the same shall be applied to charitable purposes only" cannot be referred either to the date of the payment of the dividends or to the date when the tax is assessed. The question to what purposes these dividends are applied is to be determined by looking at the ultimate destination of the fruit of the property.
The House took time for consideration.
1921. March 14. Viscount Finlay -
My Lords, this is an appeal from the decision of the Court of Appeal reversing the Court of King's Bench. The claim of the appellant is to a return of income tax on the ground that as a charity the appellant is entitled to exemption. The appellant is a corporation for charitable purposes. The Court of King's Bench (the Lord Chief Justice and Darling and Bray JJ.) made absolute a rule for mandamus to the Commissioners for Special Purposes of Income Tax to repay 338l. 0s. 7d., which had been deducted for income tax on the income of the securities forming the estate of the testator, the appellant being the residuary legatee. The Court of Appeal reversed the Court of King's Bench and discharged the rule.
The testator died on November 15, 1914. His will made certain bequests and left the whole residue of his estate to the charity. The will, proved on December 21, 1914, was disputed by the next of kin, and an action was commenced by the executors in April, 1915, to have the will established. This action was settled on March 9, 1916, on the terms that the executors should hand over to the next of kin one-third of the capital of the testator's estate and one-third of the accrued income. The testator's debts were small and had been paid by the executors soon after probate was granted. During the period which elapsed before the settlement of the litigation with the next of kin, the executors received the dividends and interest on the stocks, shares, and securities which formed the testator's estate. Income tax was deducted at the source. The residue was ascertained on December 4, 1916, and the balance paid over to the next of kin and the appellant. Considerable payments had already been made on account, beginning on April 13, 1916, after the settlement of the action with the next of kin. These payments are set out on p. 73 of the Appendix.
On March 23, 1917, the appellant made a claim for repayment of the income tax which had been deducted from the income paid to the executors, on the footing that as to two-thirds the income must be taken to be income of the charity in accordance with the terms on which the probate action had been settled and was, therefore, entitled to exemption. The Court of King's Bench issued a mandamus to the Commissioners to pay over these moneys, but this mandamus was recalled by the Court of Appeal, from whose decision the present appeal has been brought.
Provision is made for exemption from the duties in Schs. C and D in the case of charities (Income Tax Act, 1842, ss. 88 and 105). The third rule, under Sch. C, which is applied also to Sch. D, defines the exemption as being in the case of:
"Third.
The stock or dividends of any corporation, fraternity, or society of persons, or of any trust established for charitable purposes only, or which, according to the rules or regulations established by Act of Parliament, charter, decree, deed of trust, or will, shall be applicable by the said corporation, fraternity or soecity, or by any trustee, to charitable purposes only, and in so far as the same shall be applied to charitable purposes only; or the stock or dividends in the names of any trustees applicable solely to the repairs of any cathedral, college, church, or chapel, or any building used solely for the purpose of divine worship, and in so far as the same shall be applied to such purposes; provided the application thereof to such purposes shall be duly proved before the said commissioners for special purposes by any agent or factor on the behalf of any such corporation, fraternity, or society, or by any of the members or trustees."
The exemption is to be granted on application to the Commissioners for Special Purposes, and they may be compelled by mandamus to return to the applicant any sum in respect of which exemption is properly claimed.
The exemption is granted by r. 3 in respect of the stock or dividends of any charity applicable to charitable purposes only, "in so far as the same shall be applied to charitable purposes only," provided the application to such purposes shall be duly proved before the said Commissioners. It is claimed for the charity that in substance the income to the extent of two-thirds must be taken to have been their own at the time the deduction was made. Under the compromise, it is said, the charity got this share, and although the residue had not been ascertained at the date of the deduction the amount coming to the charity ultimately was diminished by these deductions in respect of income tax. For the Crown it is contended that the charity never received the income in question as such. The charity received, it is said, a lump sum, arrived at by adding to the amount of the share of the capital two-thirds of the amount of the income which had been received by the executors while the estate was in course of administration.
The King's Bench decided in favour of the charity on the ground that the executors had assented to the bequest of the residue and that this assent related back to the death of the testator, so that the dividends were by such relation the dividends of the charity when the deduction was made. The doctrine of relation, however, which applies to specific legacies, is not applicable to the bequest of a residue as the residue only comes into existence when the administration is completed. No attempt has been made in your Lordships' House to support the claim of the charity upon this ground.
It appears to me that the present case is really decided by the decision of this House in Lord Sudeley's Case. [F14] It was pointed out in that case that the legatee of a share in a residue has no interest in any of the property of the testator until the residue has been ascertained. His right is to have the estate properly administered and applied for his benefit when the administration is complete. The income from which this income tax was deducted was not the income of the charity. It was the income of the executors. They were, of course, bound to apply it in a due course of administration but they were not trustees of any part of it for the charity. There had been no creation of a trust in favour of the charity in respect of this income, it was never paid over to the charity as income. What was ultimately paid over on the close of the administration was the share of the whole estate, consisting of capital and accumulated income, which fell to the charity. The executors, not the charity, were the recipients of this income, and there is no relation back in the case of the bequest of a residue. If no right of deduction at the source had existed it is the executors and the executors only who could have been made liable for the tax.
In my opinion, the decision of the Court of Appeal was right and this appeal should be dismissed.