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 Wright)
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 MacMillan
Lord WrightLord 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 Wright
My Lords, I have had the advantage of reading in print the opinion just delivered of my noble and learned friend, Viscount Simon LC. I agree with it, and only add a few words of my own to explain my position out of respect to the distinguished lawyers in the Court of Appeal and in this House who take a different view.
The difficulties in deciding this case result from the extreme parcimony in language practised by the legislature in formulating the Income Tax Act 1918, Sched D, cases I and II, r 9. I confess that for some time I was impressed by the close logic of Clauson LJ, who, agreeing with Scott LJ, has proceeded on the narrow interpretation of the words of the rule. The material words of r 9(1) are:
'If a person charged under this Schedule 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 ...'
That is the condition upon which the machinery provided by the rule in order to secure a fair apportionment of the tax between the former person and the successor is to operate. This certainly seems simple enough. It appears to contemplate merely a transfer of the undertaking from one person to another. Before this provision was introduced by the Taxes Management Act 1880, s 62, which was headed "Changes" and was substantially identical with the present r 9, there was nothing to mitigate the effect of the provision now embodied in r 11, which replaced the corresponding provision of s 100 of the 1842 Act. Notwithstanding the change, it was there enacted that there was to be only one assessment for the year and only a limited right to claim a reduction of the assessment was given to the successor in the event of there being a reduction of profits consequent on the change. However, the position is not quite so simple. It is a familiar rule of construction that the singular includes the plural. Hence r 9 is to be read in law as signifying "if a person or persons ceases or cease" and "is or are succeeded by another person or other persons, etc." If persons carry on a business, they do so jointly, and thus the idea of partnership is introduced. Where several persons jointly carry on business, some may retire and others take their place, or a new partner may be admitted by the old partners without any other change in the firm. These and similar questions were, it is clear, present to the mind of the framers of the Act because r 11 provides for a change in a partnership "by reason of death or of dissolution of the partnership as to all or any of the partners or by the admission of a new partner." It also provides for a case where a person succeeds to a trade or profession which, on ordinary principles of interpretation, includes a case where several persons succeed. R 11 provides that, in all these cases, the tax is to be computed as if there had been no change or succession "notwithstanding the change or succession." Under r 10, where there is a partnership, the tax is to be computed jointly and in one sum, and a joint assessment is to be made in the partnership name, which means that any partner can be called upon to pay the whole. This rule shows that, while revenue Acts do not deal specifically with partnerships (save exceptionally as in the Finance Act 1926, s 32(2)), they do, in some respects, treat them in a sense as special entities for taxation, though it is still true that the partners, not the firm as an entity, are taxed.
The result is that where a new partner is admitted under r 11, say, at whatever period of the year, he is liable in solido to income tax for the whole assessment, which is a single assessment on the profits of the entire year, before the new partner joined the firm, though no doubt the old and new partners may provide for some adjustment of the burden inter se. That this seemed to the legislature to be an unjust burden to place upon the new partner is shown by the terms of r 9, particularly when it is realised that the rule refers to persons trading in partnership. It is in r 9 that the provision (if any) is to be found in the Act of 1918 for a more equitable adjustment of the direct liability for the year's tax, apart, that is, from the limited relief possible under r 11. However, on the literal construction of the word "ceases," adopted by the Court of Appeal, there is nothing directed to the case, at least where the existing partners remain but a new partner is admitted. Clauson LJ can only say that there is a casus omissus, which the partners, new and old, can deal with by the agreement under which the new partner is admitted, though clearly their domestic agreement could not affect the statutory incidence of the tax liability. The principles of construction abhor, if it can be avoided, a casus omissus, especially one so obvious as this. I do not find the words "cease to carry on the trade" etc so precise and unambiguous as to be incapable of the meaning for which the appellants contend, when read in their surroundings. Construction ex vi termini involves a fitting together of words with their context. Words in most cases take their colour from their environment. We must indeed exclude certain words which are so precise and distinctive as to admit of only one meaning. Such words are generally technical or scientific. Other words are so various in their connotation that without the context they cannot be understood, as, for instance, "quarter." The majority of words and phrases depend on the context, and hence the familiar phrase that they must be construed secundum subjectam materiam.
Rule 9, like s (62) of the 1880 Act, is a slipshod piece of draftsmanship. It must, it seems, have been intended to cover the types of case mentioned in r 11 of the 1918 Act. The framers of r 9 may fairly be held to have taken the view that, if four partners admit a new partner and continue the business as a partnership of five, there is a change. The four old partners do not carry on the business on the same footing as before, even if the actual business operations are unchanged. There is on any view a cessation of the old partnership business and the starting of a new partnership business. Even if the business remains the same and the name remains the same as before the change, still the five who carry it on succeed to the four who did so before the change, and the five can only succeed to the four if the four cease to carry it on, which is the fact, because five partners carrying on a business jointly are different from four. Thus, a change in the persons jointly carrying on a business by the admission of a new partner may fairly be held to come within the very general words of r 9, even though in one sense the previous partners may not cease to carry on the business. However, the business is not the old business. The old business is superseded by a new business, with a different division of property ownership, of powers of agency and representative capacity, of rights on dissolution and of all the incidents of partnership, including joint liability. The draftsman may have had in mind that by English law the admission of a new partner involves a dissolution of the partnership and the starting of a new partnership, which succeeds to the old firm. In that sense, the old partners may be said to cease to carry on the business. It is a joint business. A joint business carried on by four is different from a joint business carried on by five, even if the five include the original four. The addition of the new partner changes the constitution of the firm.
As Viscount Simon LC has pointed out in his speech, this view brings the English way of looking at a partnership into line with the Scottish way, for practical purposes of the revenue Acts which apply both to England and Scotland, and prevents a difference between the effect of the Acts in England as compared with their effect in Scotland, which would otherwise result from the fact that by the English law a firm is not, whereas by Scots law a firm is, a legal persona.
I have so far ignored the Finance Act 1926, s 32, because I do not see how the Act of 1918 can be construed in the light of the later Act of 1926. S 32 of the 1926 Act did indeed give a new machinery to effect an equitable adjustment of tax where a change has taken place in a firm during the year of charge, but there was no complete change of identity in the partners because at least one partner remained throughout. That machinery is optional, and where the option is not exercised, because, for instance, all the partners before and all the partners after the change, would not agree to avail themselves of the machinery, r 9 is as necessary as it ever was, and, indeed, is the only machinery to effect the readjustment. It was clearly not repealed by the Act of 1926, which, indeed, in s 35, expressly refers to it.
I am conscious, like Viscount Simon LC, that the question raised in this case does not admit of an entirely satisfactory solution, whichever view is taken. It can never be satisfactory to a court of construction to have to deal with words such as these. I agree with him also in thinking that, on the whole, it is more correct to give the wider meaning to r 9 than to leave so obvious an anomaly, even though in practice the revenue authorities may not exercise their powers inequitably. The language of r 9 is vague and obscure, and, although in ordinary parlance it would not, at first sight, be natural to describe the four partners in a case like the present as ceasing to carry on the business merely because they take in a new partner, yet, in my opinion, when the words are read in their immediate context, in their general setting in the revenue system, and in the light of partnership law, the meaning which I adopt is the true construction. That meaning achieves a practical and reasonable result, which is what the rule must, as it seems to me, have intended. I concur in the motion proposed.