Commissioners for the General Purposes of the Income Tax for the City of London v Gibbs and Others
[1942] 1 All ER 415(Judgment by: Lord MacMillan)
Between: Commissioners for the General Purposes of the Income Tax for the City of London
And: Gibbs and Others
Judges:
Viscount Simon LC
Lord Russell of Killowen
Lord MacMillanLord Wright
Lord Porter
Subject References:
INCOME TAX
Partnership
Admission of new partner
Assessment of profits
'Succession'
Continuance of business
Legislative References:
Income Tax Act 1918 (c 40) - Sched D, Cases I and II, rr 8, 9, 10, 11
Finance Act 1926 (c 22) - s 32
Case References:
Income Tax Special Purposes Comrs v Pemsel - [1891] AC 531; 28 Digest 10, 51, 61 LJQB 265; 65 LT 621
Baird's Trustees v Lord Advocate - (1888) 15 R (Ct of Sess) 682; 28 Digest 10, g
R v Hogg - (1787) 1 Term Rep 721; Cald Mag Cas 266; 42 Digest 671, 818
Saltoun (Lord) v Advocate General - (1860) 3 Macq 659; 42 Digest 675, 868; 3 LT 40
Caledonian Ry Co v North British Ry Co - (1881) 6 App Cas 114; 42 Digest 638, 410
Sadler v Whiteman - [1910] 1 KB 868; 36 Digest 319, 21; 79 LJKB 786; 102 LT 472; on appeal sub nom Whiteman v Sadler [1910] AC 514
Watson & Everitt v Blunden - (1933) 18 Tax Cas 402; Digest Supp
Brace v Calder - [1895] 2 QB 253; 36 Digest 392, 652; 64 LJQB 582; 72 LT 829
Kensington Income Tax Comrs v Aramayo - [1916] 1 AC 215; 28 Digest 102, 622; 84 LJKB 2169; 113 LT 1083
Judgment date: 20 FEBRUARY 1942
Judgment by:
Lord MacMillan
My Lords, on 5 November 1937, the commissioners of income tax issued to Sir RW Carden & Co, a firm of London stockbrokers, a notice of assessment to income tax under Sched D, for the year ending 5 April 1938. In the annexed particulars the assessed amount of the profits of the firm's business for the year 1937-38 was stated at £ 70,000, based on the profits of the preceding year. The amount was subsequently adjusted at £ 69,355, and is not in dispute. When the notice of assessment was issued the firm consisted of four partners. On 7 February 1938, the four partners assumed a fifth. Thus, for approximately five-sixths of the year of charge, the business was carried on by four partners and for approximately one-sixth of the year by five partners. The name of the firm remained the same throughout.
The question for decision is whether the Income Tax Act 1918, Sched D, cases I and II, r 9, applies to the circumstances which I have stated. That rule provides that, if a person charged under Sched D "ceases within the year of assessment to carry on the trade, profession or vocation in respect of which the assessment is made, and is succeeded therein by another person," then certain procedure shall be set in motion within four months from 5 April next "after any such change," having for its object and effect an adjustment by the general commissioners of the assessment "by charging the successor with a fair proportion thereof from the time of his succeeding to the trade, profession or vocation and relieving the person originally charged from a like amount." The determination of the general commissioners is to be final and "the sum apportioned to each such person shall be recoverable from him in like manner as if he had been charged under the original assessment." It was common ground that, if r 9 does not apply to the circumstances of the present case, there is no other provision in the income tax statutes for the apportionment of liability for the total tax payable under the assessment for the year 1937-38, and the new partner in a question with the Crown must remain under liability for the whole amount of the tax jointly with the original partners, although he participated for less than two months in the year 1937-38 in the carrying on of the business. It was also common ground that, if r 9 does not apply to such a case as the present, it has no application to any case and is entirely inoperative.
These considerations are argumentatively impressive and ought not to be left out of account; but the real question is whether the present case falls within the language of r 9 when soundly construed. I propose, therefore, to begin by examining the terms of r 9 as it stands by itself, apart from its history.
In order that the rule may be applicable there must first of all be "a person charged." The word "person" is in the singular, but it includes the plural and also any body of persons corporate or unincorporate. (Interpretation Act 1889, ss 1(1)(b), 19). In considering whether a partnership or a group of persons associated in partnership constitutes "a person charged" within the meaning of the rule, I think it right to lay aside any preconceptions derived either from the law of England or from the law of Scotland as to the technical legal nature of a partnership. In Scotland a firm is "a legal person distinct from the partners of whom it is composed" (Partnership Act 1890, s 4(2)), but this is not so under English law. For the present purpose this distinction should, in my opinion, be disregarded. The Income Tax Acts are Imperial statutes equally applicable on both sides of the border, and the language which they employ ought to be construed so as to have, as far as possible, uniform effect in England and in Scotland alike. (Income Tax Special Purposes Commissioners v Pemsel, per Lord Halsbury LC, at p 548). The important thing to ascertain is the meaning of the word "person" in the vocabulary of the Income Tax Acts. The word constantly occurs throughout the Acts and I think that it is most generally used to denote what may be termed an entity of assessment, ie the possessor or recipient of an income which the Acts require to be separately assessed for tax purposes. Now r 10(1) provides that:
'Where a trade or profession is carried on by two or more persons jointly, the tax in respect thereof shall be computed and stated jointly and in one sum, and shall be separate and distinct from any other tax chargeable on those persons or any of them, and a joint assessment shall be made in the partnership name.'
The profits of a business carried on by a partnership are thus treated as a separate subject of assessment, and the assessment is made in the partnership name. The personification of partnerships is even more manifest in r 12, by which, in certain circumstances, a "partnership shall be deemed to reside outside the United Kingdom, notwithstanding that some of the members of the said partnership are resident in the United Kingdom." That rule uses the expressions "the trade or business of a partnership firm," "the said firm shall be chargeable," "an assessment may be made on the said firm in respect of the Justification is thus not wanting for the view expressed by Romer LJ, in Watson & Everitt v Blunden, at p 409, that for taxing purposes:
'A partnership firm is treated as an entity distinct from the persons who constitute the firm.'
Having regard to the special vocabulary of the income tax legislation, I find no difficulty in interpreting the words "a person charged" in r 9 to include the case of several persons associated together in partnership for the purpose of carrying on a trade in common, whose profits are, by the Acts made the subject of separate assessment and separate charge.
In order that r 9 may apply, it is necessary, next, that there should be a "change" in the year of charge in consequence of which one person "ceases" to carry on the trade and is "succeeded" by another person. Both Scott and Clauson LJJ find it unnatural to describe in these terms what has happened in the present instance. Scott LJ says:
'I do not think it is a natural use of language to say that a firm ceases to carry on its business and that another firm succeeds to the business when all that happens is, for instance, that a young managing clerk has become a very junior partner with a tiny percentage of the firm's profits added to his salary.'
The matter is put thus by Clauson LJ:
'The four original partners do not cease to carry on the trade; they continue to carry it on with the co-operation of a fifth person. That person in no sense succeeds to the trade; he joins in carrying on the trade.'
With all respect, I am not convinced of the soundness of this reasoning. It is not a question whether the four original partners cease individually to be engaged in the business, or the new partner as an individual succeeds to the business. There has undoubtedly been a change in the person charged, as I construe this expression. The trade has ceased to be carried on by four persons in partnership and has become a trade carried on by five persons in partnership. Whereas four persons were jointly chargeable, there are now five persons jointly chargeable by reason of the change in the "person charged." It does not seem forced to say of this change that four persons jointly have ceased to carry on the trade and that five persons jointly have succeeded to it.
I agree with Scott LJ, that, the Attorney-General's contention being one of law, it is fair to test it by an extreme case. Let it then be supposed, to take a case at the opposite extreme, that what has happened is that, in the case of a business carried on originally by four partners, A, B, C, and D, three new partners E, F and G are assumed, and A, B and C resign. It seems quite natural in such a case to say that A, B, C and D have ceased to carry on the business and have been succeeded by D, E, F and G, although D has throughout had a share, possibly different shares, in carrying on the business. In ordinary parlance, one firm would be said to have succeeded to another. B, C and D have certainly ceased to share in carrying it on; E, F and G have certainly succeeded to shares in it. That the terminology of r 9 is not inapt to describe what happens when a change in the persons constituting a partnership takes place, is illustrated in the case of Brace v Calder. That was the case of a firm composed originally of four partners. Two of them retired and the business was continued by the two remaining partners. An employee of the original firm declined to serve the two continuing partners, and was held entitled to nominal damages for wrongful dismissal. I am concerned not with the soundness of the decision, but with the language judicially employed. Lord Esher MR described what had happened thus, at p 258:
'What they did was to alter the constitution of the firm. The old firm ceased to carry on its business, and the business became that of the new firm. For the present purpose it is just the same as if the firm had simply ceased to carry on business.'
In that case Lord Esher was a dissentient from the decision, but that does not affect the passage which I have quoted, for his colleagues in the majority said much the same. Thus, Rigby LJ at p 262, said that:
'... the partnership between the four defendants was put an end to and the business transferred to two of them, who continued to carry on a business under the same firm name.'
Similar language was used by Lopes LJ. So, if the draftsman of r 9 intended to include the case of a change in the composition of a firm, but used language inapt for the purpose, he at least erred in good company. I should add that it was agreed on all hands that the language of r 9 would cover a case in which a firm composed of one set of partners transferred its business to another firm composed of entirely different partners.
Taking r 9, then, as it stands, I should be of opinion that the present case falls within it. I must turn now to the history and the context of the rule, which the Lords Justices have closely examined, and on which their contrary conclusion is largely based. The tax under Sched D extends to "every trade carried on in the United Kingdom or elsewhere," with one specific exception. The rules prescribe how the profits or gains of the trade are to be computed. However, a trade does not pay taxes; persons do. Therefore, the tax is charged on and levied from the persons carrying on the trade in respect of the profits or gains arising or accruing to them therefrom, computed in the manner directed. In the case of a trade carried on continuously by the same person or persons from year to year, no difficulty as regards either computation or charge arises. However, there are various special cases to be considered. Thus (a) a trade may be begun or set up for the first time within the year or years forming the basis of assessment or within the year of assessment itself; (b) a trade may entirely come to an end in the course of the year of assessment; (c) a trade may be carried on continuously, but there may be changes in the persons conducting it. Such cases present difficulties both of computation and of charge. Special provision was made for (a), new trades, in the 1842 Act, Sched D, case I, r 1, in the 1918 Act, Sched D, cases I and II, rr 1(2) and 8(1), and in the 1926 Act s 29(1). For (b), discontinued trades, provision was made in the 1842 Act s 134, in the 1918 Act Sched D, cases I and II, r 8(2), and the in 1926 Act s 31(1). It is not necessary to say anything more about these special provisions relating to the commencement and the discontinuance of a trade, for they do not apply directly to the case in hand, which is an example of my class (c), ie, where a trade has been continuous, but there have been alterations in the persons carrying it on.
A survey of the legislation applicable to continuing businesses discloses two main features. First, as regards computation, a consistent disregard (down at least to 1926) of changes of personnel, the object being to secure that the whole profits of the trade, by whomsoever carried on, shall be duly taxed. Second, as regards charge, inasmuch as the tax once computed has to be recovered from "persons," a progressive recognition of the propriety of apportioning liability where different persons have been concerned in the making of the profits brought into charge. The Act of 1842 showed little compunction in the matter. Sched D, cases I and II, r 4, provided that, if amongst any persons engaged in any trade in partnership together any change shall take place "either by death or dissolution of partnership as to all or any of the partners, or by admitting any other partner," or "if any person shall have succeeded to any trade," within the relevant periods, the duty payable in respect of such partnership or any person succeeding shall be computed irrespective of such changes therein or succession to such business unless such partners or such person succeeding are able to prove that since such change or succession took place or by reason thereof there was a falling off in profits or gains from some specific cause. S 134 also dealt with the case where a person "succeeded" to the trade or business of another person and imposed on such person "so succeeding" liability for the full duties without any new assessment unless he could show a falling off of profits due to some specific cause.
It is noteworthy that, in 1842, r 4, which I have above summarised, makes provision for the computation of the duty in two cases (a) the case of a change among the persons carrying on a trade in partnership, including a change as to "all" the partners, and (b) the case of a person succeeding to a trade. The classification is not very logical, for where there has been a change in all the partners, there would seem clearly to be a succession. Then, in s 134, which is concerned with liability to charge, the Act deals with persons ceasing to carry on a trade and being succeeded by other persons, but says nothing expressly about partnership changes. Perhaps this may have been because r 3 had already made provision for all partners being charged jointly, though it would seem that, if an assessment made on four partners jointly was to affect five partners jointly, an enactment providing that this should be so without any new assessment would have been appropriate, if s 134 did not cover such a case.
The Taxes Management Act 1880, s 62, made provision for the first time, in terms almost identical with those of the present r 9, for the apportionment of the charge of tax in the case of a person ceasing to carry on a trade and being succeeded therein by another person. The section is comprehensively headed with the word "Changes," and refers to such a case as a "change in the carrying on of the concern."
Now it is said, and fairly said, that, in endeavouring to ascertain the true import of the present r 9, it is relevant to consider how the case now before the House would have stood after the coming into force of the 1880 Act, containing as it did the progrenitor of r 9, but without the present r 11. The draftsman of s 62 of the 1880 Act, it is suggested, with the provisions of r 4 of the 1842 Act before him, deliberately elected to deal with one only of the two cases covered by that rule, viz, the case of a person ceasing to carry on a business and being succeeded in it by another person, and deliberately refrained from dealing with the other case also covered by that rule, viz, the case of a change among the persons engaged in a trade in partnership. The conclusion is sought to be drawn that s 62 of the 1880 Act, and so the present r 9, cannot have been intended to apply to a change in the personnel of a partnership. This is a formidable logical argument, but it not, in my opinion, conclusive. The scheme of legislation in the matter in hand has been far from logical. It has been a case of makeshift patches by different hands, and verbal consistency is the last virtue that can be attributed to a code which uses so vital a term as "assessment" in no less than eight differing senses. (Report of Committee on Income Tax Codification 1936, Cmd 5131, para 31), Lord Wrenbury, in Kensington Income Tax Comrs v Aramayo, at p 228, went so far as to say that
'... no reliance can be placed upon an assumption of accuracy in the use of language in these Acts.'
S 62 of the 1880 Act does not profess to be an amendment of the previous law. It is a new departure, and I have offered reasons to show that its language (repeated in r 9) may fairly be held to cover the case of changes in the persons carrying on a partnership concern. The draftsman of s 62 may have taken that view and have regarded a change in partnership personnel as a ceasing by one set of persons to carry it on and a succeeding of it of another set of persons, notwithstanding, or perhaps without due regard to, the distinction drawn in r 4 of the 1842 Act.
The next stage is reached in 1918, when the consolidation Act was passed. With minor alterations, it reproduced as Sched D, cases I and II, r 9, the provisions of s 62 of the 1880 Act, and it reproduced as r 11 the provisions of r 4 in the 1842 Act. Being a consolidation statute, it made no attempt to reconcile rr 9 and 11 or to bridge the gap (if there was one), which, according to the respondents, left partnership changes with no machinery for apportionment. The 1842 distinction between partnership changes and successions may have been brought into more prominence by the new juxtaposition of rr 9 and 11, but the law remained as it was after 1880 and, if s 62 of the 1880 Act was intended to cover changes in partnership personnel, the Act of 1918 did not alter the position.
Finally, in the progressive development of the law, came the Finance Act 1926, s 32, which substituted for the previous r 11 an entirely new rule. It introduced a new refinement by recognising explicitly in para (1) for the first time that, in the case of a continuing trade, changes in the persons carrying it on in partnership might occur which left one or more of the persons who previously carried it on still engaged in it, though in a new association. In such a case, the rule reasserts the principle of the 1842 Act that the computation of the profits of the trade shall remain unaffected by the change in personnel. Nothing is said about apportionment. There is a proviso, however, to the effect that all concerned may, by notice within three months (subsequently altered to twelve months) after the change, require the surveyor to treat the case as one of a discontinuance of one trade and the commencement of another, and to charge the tax on the several parties as if there had been an actual discontinuance and commencement. The proviso has quite a different effect from what is directed to be done under r 9. That rule apportions the assessment computed for the whole year among the different persons who carried on the trade during the year. The proviso to r 11 requires two separate computations, one applicable to the notionally discontinued trade, the other applicable to the trade notionally commenced. Then, in para (2), the new rule goes on to deal with the case where a person "succeeds" to a trade previously carried on by another person, "and the case is not one to which para. (1) of this rule applies." In such a case, the tax payable is to be computed as if at the time of the change the predecessor had discontinued the trade and the successor had commenced it. It is expressly provided that in this paragraph references to a person include references to a partnership. S 35(1) of the 1926 Act provides, inter alia, that where in the case of any profits or gains chargeable under Sched D, cases I and II, it is necessary to effect an apportionment thereof to specific periods, it shall be lawful to make such an apportionment:
'Provided that nothing in this section shall be construed as limiting the power of the general commissioners with respect to the adjustment of an assessment under r. 9 of the Rules applicable to Sched. D, cases I and II.'
The provisions of Part IV of the 1926 Act (which includes ss 32 and 35) are, by s 37, to come into operation on 6 April 1927, till which time the existing enactments are to continue to have effect: thereafter any provisions inconsistent with Part IV are to cease to have effect.
Having examined the history of r 9 and set out its context, I now return to the question of the interpretation of the rule with such light as my investigation has afforded. I cannot say that it has afforded much. One thing is clear-namely, that the existence of r 9 was not overlooked when the new r 11 was introduced, and that there was no inadvertent omission to repeal it, as suggested by Clauson LJ, whose attention was apparently not drawn to s 35 of the 1926 Act. The operation of r 9 was not safeguarded merely for the time intervening till the 1926 Act came into effect: that would have been secured by the general saving in s 37. Accordingly, in the view of the draftsman of the new r 11, r 9 had still a part to play. It may be that he misconstrued the effect of r 9, as Clauson LJ alternatively suggests, but that does not afford an escape from the fact that Parliament has reaffirmed r 9 as part of the existing code and must be presumed to have intended that it should have some effect. In view of r 11, the only case left in which it can operate is the case where there has been a change in the personnel of a partnership with a common element continuing, and where no notice has been given to the surveyor under the proviso to para (1) of r 11. I agree with Clauson LJ, that that by itself would be "a very poor ground for giving an entirely unnatural meaning to reasonably plain words," but it is not a circumstance to be disregarded, if the words may be reasonably read in a sense which would not only render r 9 an effective part of the code, but also supply means of apportionment of tax in a case otherwise not covered.
It will have been observed that the new r 9(2), which deals with succession to a trade, is to be applicable only if "the case is not one to which para. (1) of this rule applies," and para (1) deals with changes in partnership personnel. If, in the income tax vocabulary, a partnership change is never regarded as a succession, it was superfluous to except from the operation of para (2) cases falling within para (1). This time logic tells in favour of the Attorney-General's interpretation of r 9. If the excepting words were introduced ob majorem cautelam, it was surely an excessive precaution to except a case which could only on an entirely unnatural reading of para (1) be thought to be included.
After this long and tedious marshalling of all the relevant considerations, I have now to come to a decision, and my decision is that the arguments in favour of the applicability of r 9 to the case in hand ought to prevail. I cannot, however, take leave of the case without expressing my regret that so much time and money has had to be spent in unravelling a tangle which could easily have been straightened out by the revenue authorities in one of their annual applications to the legislature and my hope that an early opportunity will be taken of doing so. My vote is in favour of allowing the appeal and restoring the order of the Divisional Court.