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: Viscount Simon LC)
Between: Commissioners for the General Purposes of the Income Tax for the City of London
And: Gibbs and Others
Judges:
Viscount Simon LCLord Russell of Killowen
Lord MacMillan
Lord 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:
Viscount Simon LC
VISCOUNT SIMON LC (read by Lord Russell of Killowen). My Lords, by a document dated 5 Nov 1937, the Commissioners for the General Purposes of Income Tax for the City of London gave notice to the stockbroking firm of Sir RW Carden & Co of an assessment under Sched D, for the year ending 5 April 1938. The assessment was in respect of the profits of the partnership, and by Sched D, cases I and II, r 10, the assessment was a joint assessment made in the partnership name, and the tax was "computed and stated jointly and in one sum." The total figure upon which tax was to be charged was fixed, in the ordinary way, upon the profits made in the previous year 1936-7, and after adjustment was agreed at £ 69,355.
The firm of Sir R W Carden & Co at the time when the assessment was made, consisted of four partners who for the present purpose may be designated A, B, C and D, and this continued to be the composition of the firm on 1 January 1938, when the first half of the income tax resulting from the assessment became due. On 7 February 1938, however, the composition of the firm changed owing to the taking in of a fifth partner, who may be called E. On 27 July 1938, the inspector of taxes, purporting to act in accordance with Sched D, cases I and II, r 9(1), certified to the general commissioners particulars of the change which had taken place, and the commissioners thereupon purported to adjust the assessment by charging to the firm of five persons, out of the total assessment of £ 69,355, the apportioned amount of £ 11,078, with the result that the firm of four persons would be relieved of liability for tax on this latter figure but would be left answerable for tax on the balance of £ 58,277. As a matter of mathematical calculation there is no dispute that these figures are correct. They represent the fair apportionment of the total between that part of the year of assessment which lies before 7 February 1938, and that portion which remains from that date. Though the apportionment is correctly worked out, the respondents have throughout insisted that no such apportionment under r 9 could lawfully be made, since, according to them, the change during the year of assessment in the composition of a firm does not constitute a cesser in carrying on the trade by A, B, C and D, and the succession "by another person," viz, A, B, C, D and E in that trade. It is as to the validity of this contention, and as to the proper construction and application of r 9, that the House has now to pronounce.
The respondents applied, on 17 January 1940, to a Divisional Court of the King's Bench Division for an order to prohibit the commissioners from adjusting under r 9 the assessment made upon them. On 10 May 1940, a Divisional Court, consisting of Hawke, Charles and Hilbery JJ, dismissed the application, but the Court of Appeal (Scott, Clauson and Goddard LJJ), on 2 August 1940, reversed this decision and directed that the order of prohibition should be made, taking the view, as Clauson LJ expressed it, that "the condition precedent to the operation of r. 9-namely, that a person has ceased to carry on a business and has been succeeded therein by another person-is not fulfilled by the circumstances of the case."
It may contribute to a just appreciation of the reality involved in this highly technical question if I add at this point what is the practical reason why the respondents challenge the Crown's right to proceed under r 9. This was frankly stated to the Divisional Court by counsel when he applied for the rule and was further explained to this House. The actual profits of this stockbroking business made in the year 1937-8 were less than its profits in the preceding year, by reference to which the total assessment was made. Just before the end of the fiscal year 1937-8, viz, on 25 March 1938, a sixth partner, who may be called F, was taken into the firm, and on 1 April all the partners joined, under the proviso to r 11(1)-which was first enacted by the Finance Act 1926, s 32-in sending to the surveyor of taxes a signed notice claiming that, in consequence of this change in the partnership, income tax should be computed as if the trade had been discontinued on 25 March, and a new trade had then been set up. The result of this would be that the old trade would be treated as coming to an end in the course of the fiscal year, and the assessment in respect of this broken period would be based, not on the greater profits of the year before, but on the actual profits of the final period. There would, however, also be a revision of the figure for the previous year. Similarly, if a new trade is to be deemed to be set up on 25 March 1938, income tax in respect of the opening period could not be ascertained by reference to past profits. Apart from these considerations, which may explain the action taken by the respondents, the Crown naturally wishes to secure a final and authoritative interpretation of r 9, especially in view of the difficulties which now arise from comparing it with r 11.
The Income Tax Act 1918, Sched D, cases I and II, r 9 reads as follows:
- (1)
- 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, the surveyor shall, within four months from the fifth day of April next after any such change, certify to the general commissioners for the division in which the assessment is made the particulars thereof, and the full name and residence of the person charged and of his successor and the date of the change, if the same be known to the surveyor.
- (2)
- On receipt of the certificate the commissioners shall cause notice to be given to the respective persons of a meeting of the commissioners to consider it, and after examination of the said persons, if they attend, or on other satisfactory proof of the facts, the commissioners shall adjust 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.
- (3)
- The determination of the commissioners on any such certificate shall 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.
- (4)
- If either of the said persons has paid in respect of an assessment so certified more than the proportion which appears by the determination of the commissioners to be chargeable on him, the amount overpaid shall, when recovered from the person liable, be paid to the person by whom the overpayment was made.
The word "assessment" is used in our income tax code in more than one sense. Sometimes, by "assessment" is meant the fixing of the sum taken to represent the actual profit for the purpose of charging tax upon it. In another context the "assessment" may mean the actual sum in tax which the taxpayer is liable to pay on his profits. These two things are, of course, not the same, or at any rate will not become the same unless and until income tax is charged at the rate of 20s in the pound. It is remarkable that these two separate meanings of the word "assessment" may occasionally be found within the bounds of a single section, eg, r 9(1) and (2) appear to contemplate the splitting of the assessment in the first sense (and this is the practice that was followed when an assessment of £ 69,355, being the amount of profits assessed, was apportioned as above stated), whereas in r 9(3) the words "the sum apportioned to each such person shall be recoverable from him" obviously mean the amount of tax due in respect of the apportioned fraction of profits.
Rule 9 deals with the persistence of a trade, profession or vocation, notwithstanding a change in the persons carrying it on. Such a situation cannot arise in the case of some professions or vocations, eg, in that of a barrister or of a portrait painter. There are other branches of activity where the persistence of the same enterprise, notwithstanding a change of personnel, may be to some extent possible, eg, on the sale of a country doctor's practice; and then there is the large and important class of an established business capable of transfer as a going concern. It may be worth observing, in passing, that the preservation of the identity and continuity of a business, notwithstanding a change in those who carry it on, is probably most completely illustrated by changes which may occur from time to time in a partnership firm.
The question in the present case is whether, if a stockbroker's business is carried on for part of the year by A, B, C, and D in partnership and for the next part of the year by A, B, C, D, and E, this change can be described, within the meaning of r 9, as a case in which a person charged "ceases" to carry on the trade and "is succeeded therein by another person." It cannot be disputed that the language of the rule would apply if an individual A ceases to trade and is succeeded in the business by an individual B, and the same result follows if a corporation, limited or unlimited, is substituted for A or B, or both. There would also be no difficulty in treating the rule as applying to the transfer of a business from a partnership consisting of A, B, C, and D to another partnership consisting of W, X, Y, and Z, for "person" includes "persons." The difficulty is to construe and apply the rule if the new partnership contains a member or members of the old. In the present case none of the former partners has retired and the new combination is the result of an addition. It seems to me-and, indeed, this is admitted by counsel for the respondents-that no distinction, in principle, can be drawn between this case and the case in which all the previous partners, except one, have retired and a large number of new partners are added. The crucial case always is one in which there is one individual at least who is a partner throughout.
If we were concerned with nothing more than the strict legal construction of r 9 without regard to its setting in the income tax code, I should have no difficulty in agreeing with the view of the Court of Appeal. That view is crystallised in the closely reasoned judgment of Clauson LJ, insisting that it is not a partnership firm which carries on trade, but its individual members who carry it on in partnership, and that the old partnership is not to be regarded as ceasing to carry on trade, and the new partnership is not to be regarded as succeeding when new members of the old partnership are also some of the members of the new and thus do not individually cease to carry on the trade at all.
It seems to me, however, that regarded in its historical setting this interpretation of r 9 involves difficulties which must be examined. The scheme of income tax imposed under Sched D in respect of annual profits or gains arising in respect of any trade etc. provides that the figure taken to represent profits in the year of assessment shall be arrived at by reference to the results of former trading (originally the average of profits of the three previous years, and now, under the Finance Act 1926, the previous year's profits). It is obvious that this feature of the system, if not modified, might operate with special hardship in the event of a change in the composition of a partnership in the course of the year of assessment, and indeed in the case of any change in the personnel of those carrying on the business in the year for which the tax is being collected. In the case of a partnership, the tax is to be computed and stated jointly and in one sum, separately from any other income tax chargeable on any of the partners, and the joint assessment is to be made in the partnership name (Income Tax Act of 1918, Sched D, cases I and II, r 10). The liability, therefore, is joint and, unless the income tax code provides some mitigation, the Crown would be entitled (though we are told this is not what in fact is ordinarily done) to demand the whole amount of tax from a new partner who has only joined towards the end of the year. Moreover, the very fact that there has been a change in the composition of the partnership during the year may, owing, for example, to the dropping out of a partner who has been chiefly instrumental in making the business a success, cause a fall in profits. Again, the same result might follow where the carrying on of a trade passes from a single individual to another individual, and this remains true if a corporation, limited or unlimited, is substituted for the individual in either or both cases.
In the Income Tax Act 1842, Sched D, cases I and II, r 4 Parliament dealt with this situation as follows:
'If amongst any persons engaged in any trade, manufacture, adventure, or concern, or in any profession, in partnership together, any change shall take place in any such partnership, either by death, or dissolution of partnership as to all or any of the partners, or by admitting any other partner therein, before the time of making the assessment, or within the period for which the assessment ought to be made under this Act or if any person shall have succeeded to any trade, manufacture, adventure, or concern, or any profession, within such respective periods as aforesaid, the duty payable in respect of such partnership, or any of such partners, or any person succeeding to such profession, trade, manufacture, adventure, or concern, shall be computed and ascertained according to the profits and gains of such business derived during the respective periods herein mentioned, notwithstanding such change therein or succession to such business as aforesaid, unless such partners or such person succeeding to such business as aforesaid shall prove, to the satisfaction of the respective commissioners, that the profits and gains of such business have fallen short or will fall short from some specific cause, to be alleged to them, since such change or succession took place, or by reason thereof.'
It will be observed that in this rule a "change" is regarded as taking place, not only if some one or more members of a partnership drop out, but also if there is a dissolution of partnership as to all the partners. Yet, if the partnership is completely dissolved, and the trade goes on in new hands, this seems to involve a change which amounts to a succession. On the other hand, the rule goes on to speak of the case in which any person shall have "succeeded" to the trade etc, and it is not easy to give a confident application to the phrase "such partners" which follows the word "unless", for there is no expressed antecedent to the word "such." Yet the reason of the thing strongly suggests that the partners who can secure relief by alleging a falling short of profits from a specific cause would be the partners who are left after the change has taken place. These obscurities would be more important if the Act of 1842 had not been repealed in 1918 and if the existing provisions on the subject were not differently expressed.
In 1880, a new and more effective method was adopted for providing against the hardship which might otherwise be suffered from a change in the carrying on of a concern during the year of assessment. The Taxes Management Act 1880, is described in its full title and in its preamble as a consolidating Act but in fact the provision under the head of "Changes" in s 62 was new. The provision was in almost the same terms as the present r 9 and provided that, if a "person" ceases within the year of assessment to carry on the concern in respect of which the assessment is made, and is succeeded therein by another "person" there shall be a splitting of the assessment by the commissioners so that the predecessor and the successor shall each be liable for a fair proportion of the resulting tax. The proof, therefore, that as the result of the change some specific cause had operated to reduce the profits was no longer necessary in the cases to which s 62 applied for the purpose of getting an adjustment. S 62 manifestly applied, and its substitute, r 9 now manifestly applies, to every case where a business during the year of assessment passes from the hand of one person or set of persons to another person or another completely different set of persons. The question is whether it applies in a case where the new set of persons is not completely different, because, though there is a change in the composition of the partnership, there is a common element of one or more partners in each combination.
I now turn to the Income Tax Act 1918, where r 9 is immediately followed by rr 10 and 11. Rule 10 merely carries forward the provision for making a joint assessment in the partnership name in the case of a concern carried on by two or more persons jointly, and making it separately from any other assessment on the individuals who are partners. Rule 11 reproduced in substance r 4 in the Act of 1842 above set out. The Finance Act of 1926, s 32(1), however, substituted in place of the former r 11, the following:
- 11.(1)
- If at any time after the fifth day of April, nineteen hundred and twenty-eight, a change occurs in a partnership of persons engaged in any trade, profession, or vocation, by reason of retirement or death, or the dissolution of the partnership as to one or more of the partners, or the admission of a new partner, in such circumstances that one or more of the persons who until that time were engaged in the trade, profession, or vocation continue to be engaged therein, or a person who until that time was engaged in any trade, profession or vocation on his own account continues to be engaged in it, but as a partner in a partnership, the tax payable by the person or persons who carry on the trade, profession or vocation after that time shall, notwithstanding the change, be computed according to the profits or gains of the trade, profession or vocation, during the period prescribed by the Income Tax Acts:
- Provided that, where all the persons who were engaged in the trade, profession or vocation, both immediately before and immediately after the change require, by notice signed by all of them or, in the case of a deceased person, by his legal representatives, and sent to the surveyor within three months after the change took place, that the tax payable for all years of assessment shall be computed as if the trade, profession or vocation had been discontinued at the date of the change, and a new trade, profession or vocation had been set up or commenced, and that the tax so computed for any year shall be charged on and paid by such of them as would have been charged if such discontinuance and setting up or commencement had actually taken place, the tax shall be computed, charged, collected and paid accordingly.
- (2)
- If at any time after the said fifth day of April any person succeeds to any trade, profession or vocation which until that time was carried on by another person and the case is not one to which paragraph (1) of this rule applies, the tax payable for all years of assessment by the person succeeding as aforesaid shall be computed as if he had set up or commenced the trade, profession or vocation at that time, and the tax payable for all years of assessment by the person who until that time carried on the trade, profession or vocation shall be computed as if it had then been discontinued.
- In this paragraph references to a person include references to a partnership.
- (3)
- In the case of the death of a person who, if he had not died, would, under the provisions of this rule, have become chargeable to income tax for any year, the tax which would have been so chargeable shall be assessed and charged upon his executors or administrators, and shall be a debt due from and payable out of his estate.
Reading rr 9 and 10 and the amended r 11 together, a puzzle is disclosed to which, as it seems to me, no entirely satisfactory solution can be found. One effect of r 11(2) is that, if there is a complete change in the persons or person carrying on the trade during the year of assessment, the tax in respect of the trade carried on down to the change shall be computed as if the trade had then been discontinued, ie, the actual profit in the broken period is the basis of tax, with the possibility of consequential adjustments in respect of the previous completed year; and the trade as from the date of the change shall be treated as the setting up of a new trade from that date. Consequently, r 9 is no longer needed and can have no operation in such cases. To what then can r 9 have any application, unless it be when there is a change in the composition of the partnership during the year of assessment, such that there is not a complete substitution of new partners for old, but some partner or partners remain in the partnership throughout?
It was pointed out during the argument that the amended r 11, though enacted in 1926, did not operate until two years later, and, therefore, there was a field in which r 9 could apply to complete changes in personnel during the intervening two years. That is true; but this only amounts to saying that the difficulty in finding any usefulness in r 9 did not arise till two years later. Certainly, we cannot attribute to the legislature the mistake, as Clauson LJ is inclined to do, of overlooking the fact that r 9 was useless, for the Finance Act 1926, s 35, contains a reference to the power of the commissioners to adjust the assessment under that very rule. In the case of a provision in the Finance Act in connection with which there is an annual review for purposes of amendment in every session of the House of Commons, I find it very difficult to suppose that the existence of r 9 as part of the existing code has been forgotten, or that it would be deliberately left, year after year, as a piece of dead wood without any possible usefulness or effect in the ramifications of the everspreading income tax tree.
There is, indeed, another indication that Parliament regards the transfer of a business from one partnership to another as a "succession," even though some of the partners remain in the firm throughout. Rule 11(2), in which it is expressly stated that references to a person include references to a partnership, provides that, if after 5 April 1928, any person succeeds to any trade which until that time was carried on by another person, and the case is not one to which para 1 of this rule applies, tax shall be calculated as though there had been the discontinuance of one trade and the commencement of another. What is the case to which para (1) of the rule applies? It is the very case under discussion, where there is a persistence of certain partners while other partners have changed. This, then, assumes that such a change in partnership amounts, in the language of the income tax code, to a succession.
Moreover, if r 9 is not left to operate in the only case conceivably remaining for its operation, this curious result follows. If there is a change in a partnership such as is described in r 11(1) and, if all the partners, old and new, combine to give the notice therein referred to, then there will follow a division of responsibility for the tax, the old partners being liable on the basis that the trade was discontinued at the date of the change, and the new combination being liable for a new trade thenceforward. What happens, however, if the whole body of partners do not make this unanimous application, perhaps because one of them objects to do so, or because it is not in their interest to do so? If r 9 has no application in such a case, then, as above pointed out, the Crown could call upon a single partner, even one who had only joined the firm at the time of the change, to pay the whole tax. This, to say the least of it, appears to be quite contrary to the trend of the efforts which the legislature has made for a century past to limit the rights of the Crown in this respect. It would be very extraordinary if the legislature, while enacting in r 11(1) what would happen on the hypothesis that all the partners agreed to act together, has never asked itself what would happen if all the partners did not so agree. Construing this bundle of rules as a whole, I feel forced to the conclusion that it was the intention of the legislature to leave r 9 to apply in such a case. It was suggested by counsel for the respondents that rr 9 and 11 could not live together. I do not think that this is so. If we imagine a case in which the profits of the trade actually made in the year of assessment greatly exceed the assessed profits derived from the past, it might not at all suit the partners to make use of r 11(1), for they would thereby bring upon themselves much heavier claims for tax at once. In such a case the partners would much prefer to have the smaller total divided by the machinery of r 9.
I concede without any doubt or qualification the proposition relating to the English law of partnership upon which the judgment of the Court of Appeal is largely based. Strictly speaking, it is certainly true that an old partnership cannot be regarded as "ceasing" to carry on the trade, and the new partnership cannot be regarded as "succeeding" to it when some members of the old partnership are also members of the new, and thus do not individually cease to carry on the trade at all. A, B, C and D are carrying on the trade throughout the year. How, then, can it be said that they, or any of them, have in the course of the year ceased to carry it on? If language is accurately used, a partnership firm does not carry on a trade at all. It is the individuals in the firm who carry on the trade in partnership. It is not the firm which is liable to income tax. The individuals composing the firm are so liable, though by r 10 when a trade is carried on by two or more persons jointly the tax is computed and stated jointly and in one sum and is separate and distinct from any other tax chargeable to those persons or any of them, and a joint assessment is made in the partnership name. If, therefore, (it is argued) r 9 is applied to a partnership, it applies not because a partnership is "a person charged under this schedule," but because the singular includes the plural, and instead of a single person the case is one of a number of persons who are jointly so charged.
So far as English law is concerned, it is indisputable that a partnership firm is not a single persona, though a different view obtains in Scotland, and in construing a taxing statute which applies to England and Scotland alike, it is desirable to adopt a construction of statutory words which avoids differences of interpretation of a technical character such as are calculated to produce inequalities in taxation as between citizens of the two countries. Lord Halsbury affirmed this principle in Income Tax Special Purpose Comrs v Pemsel, at p 548, when he adopted the canon of construction laid down by the Court of Session in Baird's Trustees v Lord Advocate, and quoted the general principle of common sense which Gros J laid down in a rating case (R v Hogg, a universal law cannot receive different constructions in different towns. In Pemsel's case, at p 557, Lord Watson deduces from the Scottish decision of Lord Saltoun v Advocate-General, the principle, which he there applies, that the Income Tax Act 1842, must, if possible, be so interpreted as to make the incidence of its taxation the same in both countries.
It is these considerations which have made it necessary for me to look further into the statutory history and possible application of r 9, not because I have any doubt as to the correctness of the proposition of English law as to the nature of a partnership firm, but because our duty in construing a statute such as this is to find out what the legislature must be taken really to have meant by the expressions which it has used, without necessarily attributing to the legislature a precise appreciation of the technical appropriateness of its language. In Caledonian Ry Co v North British Ry Co Lord Selborne LC said, at p 122:
'The more literal construction ought not to prevail if ... it is opposed to the intentions of the legislature, as apparent by the statute; and if the words are sufficiently flexible to admit of some other construction by which that intention will be better effectuated.'
As a strict proposition of English law, there is no doubt at all that a partnership is not, as such, a single juristic person. As Farwell LJ said in Sadler v Whiteman, at p 889:
'In English law a firm, as such, has no existence; partners carry on business both as principals and as agents for each other within the scope of the partnership business; the firm name is a mere expression, not a legal entity, although for convenience under R.S.C., Ord. 48A, it may be used for the sake of suing and being sued. ... It is not correct to say that a firm carries on business; the members of the firm carry on business in partnership under the name or style of the firm.'
In the end, the House has to choose between two views, neither of which is entirely satisfactory. For the reasons I have given, I think that we must in this case be prepared to construe the rule under discussion in a popular rather than in a technical sense, and I am not greatly shocked to find that when dealing with a joint assessment of trade carried on by a partnership, the legislature has proceeded on the view that, when the trade was first carried on by A, B, C and D in partnership and was subsequently carried on by A, X, Y and Z, in partnership, this is to be regarded as though the first partnership ceased and the second partnership succeeded to the first. At the same time, this result, though in my opinion preferable to treating r 9 as obsolete lumber, is only reached by giving to the rule an application which is difficult to reconcile with the aptest use of legal terminology, and it is to be hoped that Parliament, in a future Finance Act may by the use of amending language think fit to illuminate the obscurity in which the judiciary for the time being has to grope.
In my view, therefore, this appeal should be allowed. I must point out, however, that, in substance, the respondents do not appear to lose anything by this reversal. The claim made on 1 April 1938, under the proviso to r 11(1) remains valid, with the consequences that the business carried on down to 25 March must be regarded as discontinued at that date and a new trade must be regarded as having been set up thenceforeward. In the circumstances, I think that there should be no costs in this House; the decision of the Court of Appeal except as to costs should be reversed, but its order as to costs must stand, as that was the agreement when leave to appeal to this House was given.