Whitworth Park Coal Co Ltd (in liq) and Ors v. Inland Revenue Commissioners

[1959] 3 All ER 703

---

(Decision by: Lord Keith of Avonholm)

Between: Whitworth Park Coal Co Ltd (in liq)
And: Inland Revenue Commissioners
Between: Ramshaw Coal Co Ltd (in liq)
And: Inland Revenue Commissioners
Between: Brancepeth Coal Co Ltd (in liq)
And: Inland Revenue Commissioners

Court:

Judges: Viscount Simonds
Lord Reid
Lord Radcliffe
Lord Tucker

Lord Keith of Avonholm

Subject References:
TAXATION
INDUSTRY
INCOME TAX
PROFITS
Computation of profits
Year of assessment
Interim income payments in respect of compensation on nationalisation of coal industry
Payments in respect of specified periods
Whether income of those periods or of years of receipt
COAL MINING
Nationalisation of industry
Colliery company
Interim income

Legislative References:
Income Tax Act, 1918 (8 & 9 Geo 5 c 40) - Shc D, Case VI, r 2
Coal Industry Nationalisation Act, 1946 (9 & 10 Geo 6 c 59) - s 22(2), (3)
Coal Industry (No 2) Act, 1949 (12, 13 & 14 Geo 6 c 79) - s 1(2)

Case References:
Dewar v Inland Revenue Comrs - [1935] All ER Rep 568; [1935] 2 KB 351; 104 LJKB 645; 153 LT 357; 19 Tax Cas 561; 28 Digest (Repl) 333, 1475
Ensign Shipping Co Ltd v Inland Revenue Comrs - (1928) 139 LT 111; 12 Tax Cas 1169; 28 Digest (Repl) 414, 1836
Forth Conservancy Board v Inland Revenue Comrs - [1931] All ER Rep 679; [1931] AC 540; 100 LJPC 193; 145 LT 121; 95 JP 160; sub nom Inland Revenue Comrs v Forth Conservancy Board, 16 Tax Cas 103; 28 Digest (Repl) 48, 181
Gardner, Mountain & D'Ambrumenil Ltd v Inland Revenue Comrs - [1947] 1 All ER 650; 177 LT 16; 29 Tax Cas 69; 2nd Digest Supp
Grey v Tiley - (1932), 16 Tax Cas 414; 28 Digest (Repl) 219, 941
Hanbury, Re, Coniskey v Hanbury - (1939) 20 ATC 333
Hawley v Inland Revenue Comrs - (1925), 134 LT 502; 9 Tax Cas 331; 28 Digest (Repl) 332, 1470
Hill v Gregory - [1912] 2 KB 61; 81 LJKB 730; 106 LT 603; 6 Tax Cas 39; 28 Digest (Repl) 159, 625
Holden (Isaac) & Sons Ltd v Inland Revenue Comrs - (1924), 12 Tax Cas 768; 28 Digest (Repl) 417, 1851
Howe (Earl) v Inland Revenue Comrs - [1919] 2 KB 336; 88 LJKB 821; 121 LT 161; 7 Tax Cas 289; 28 Digest (Repl) 350, 1549
Inland Revenue Comrs v Butterley Co Ltd - [1956] 2 All ER 197; [1957] AC 32; 36 Tax Cas 411; [1956] 2 WLR 1101; 28 Digest (Repl) 377, 1645
Inland Revenue Comrs v City of London Corpn (as the Conservators of Epping Forest) - [1953] 1 All ER 1075; 117 JP 280; 34 Tax Cas 293, 315; [1953] 1 WLR 652; 28 Digest (Repl) 171, 690
Inland Revenue Comrs v Haddington (Earl) - 1924 SC 456; 8 Tax Cas 711; 28 Digest (Repl) 356, 803
Lambe v Inland Revenue Comrs - [1933] All ER Rep 417; [1934] 1 KB 178; 103 LJKB 69; 150 LT 190; 18 Tax Cas 212; 28 Digest (Repl) 333, 1474
Lambert Bros Ltd v Inland Revenue Comrs - (1927), 12 Tax Cas 1053; 28 Digest (Repl) 413, 1834
Leigh v Inland Revenue Comrs - [1928] 1 KB 73; 96 LJKB 853; 137 LT 303; 11 Tax Cas 590; 28 Digest (Repl) 334, 1482
LCC v A-G - [1901] AC 26; 70 LJQB 77; 83 LT 605; 65 JP 227; 4 Tax Cas 265; 28 Digest (Repl) 191, 790
Moss' Empires Ltd v Inland Revenue Comrs - [1937] 3 All ER 381; [1937] AC 785; 1937 SC (HL) 35; 106 LJPC 138; 157 LT 396; 21 Tax Cas 264; 28 Digest (Repl) 170, 688
Newcastle Breweries Ltd v Inland Revenue Comrs - [1927] All ER Rep 287; 96 LJKB 735; 137 LT 426; sub nom Inland Revenue Comrs v Newcastle Breweries, Ltd 12 Tax Cas 927; 28 Digest (Repl) 413, 1833
St Lucia Usines & Estates Co Ltd v St Lucia (Colonial Treasurer) - [1924] AC 508; 93 LJPC 212; 131 LT 267; 28 Digest (Repl) 167, 486
Simpson v Maurice's Exors - (1929) 14 Tax Cas 580; 28 Digest (Repl) 203, 850
Smith v Smith (No 2) - [1923] P 191; 92 LJP 132; 130 LT 8; 28 Digest (Repl) 178, 721
Try Ltd v Johnson - [1946] 1 All ER 532; sub nom Johnson v Try, Ltd 174 LT 399; 27 Tax Cas 167; 28 Digest (Repl) 36, 164

Hearing date: 15-16, 20-22 July 1959
Judgment date: 5 November 1959

---

Decision by:
Lord Keith of Avonholm

My Lords, I would place the payments here in question within Case III of Sch D to the Income Tax Act, 1918, as coming under the description of "other annual payment" in r 1(a) of that Case. The fact that they owe their origin to statutory enactment, which is not a source specifically recognised by the rule, does not, for the reasons stated by Harman J and the Court of Appeal, exclude them from coming within the rule (Smith v Smith (No 2); Inland Revenue Comrs v City of London Corpn (as the Conservators of Epping Forest)). The nature of the payments as prescribed by s 19 and s 22 of the Coal Industry Nationalisation Act, 1946, and s 1 of the Coal Industry (No 2) Act, 1949, brings them, I think, easily under the rule. They are expressly described in s 19 of the Act of 1946 as "interim income". Section 22 fixes the measure by which that interim income is to be quantified. It is clear that that income was going to be paid for at least two years. Its complete and final quantification and so its full satisfaction might have to be postponed, but there would at least be substantial payments to account. I can draw no distinction between the payments under sub-s (2) and sub-s (3) of s 22. They are complementary to one another, and in certain events sub-s (2) may not be invoked at all. Where both are invoked, each makes its respective contribution to the interim income provided for by s 19 of the Act. The "revenue payments" under s 22(3)(a) of the Act of 1946 may be regarded as an instalment to account of the money payment calculated under s 22(2)(a), although for the years 1947 and 1948 there was to be no recoupment in the event of the "revenue payments" being found to have exceeded the sum calculated, under that subsection, as satisfying the right to interim income. It may be true to say, as the Court of Appeal have said ([1958] 2 All ER at p 106; [1958] Ch at p 821), that it is difficult to discern the quality of recurrence in the payment made under sub-s (2)(a), but as the subsection is part of the machinery for fixing the "interim income" and filling any deficiencies of amount resulting after payment of the "revenue payments" under sub-s (3), I think the payment made under it should be regarded as part of an annual payment. The circumstances here seem to me to be every bit as potent to bring these payments under the words of r 1(a) of Case Iii as were the circumstances in Moss' Empires Ltd v Inland Revenue Comrs to make the payments under guarantee in that case so chargeable. With this qualification I would agree with the Court of Appeal that these payments have the characteristics required of "other annual payments" under r 1 of Case III. There is nothing, in my opinion, in the decision of this House in Inland Revenue Comrs v Butterley Co Ltd to preclude that conclusion.

If, then, these payments came under r 21 of the General Rules of the Income Tax Act there would be a simple end to this case. Tax would be deducted from the payments at the rate of tax in force at the time of the payments as being annual payments charged with tax under Sch D and not payable out of profits or gains brought into charge. By s 38 of the Finance Act, 1927, the tax deducted would be tax at the standard rate, and by s 39(2) of the same Act the payments would be treated as income of the year in which the deduction was made, ie, of the year in which the payments were received by the appellants. The appeal of the appellants would be dismissed and the order of Harman J reversing the determination of the Special Commissioners would stand affirmed.

The contention, however, of the appellants is that r 21 does not apply to the Crown and that, accordingly the payments being payments by the Crown do not come under the rule. Rule 21 stems from s 40 of the Income Tax Act, 1853, which "entitled" and "authorised" the payer to deduct the tax at the time of payment. Had the rule continued in this form, I can see no reason why the Crown equally with the subject should not have deducted tax from such payments. The section did not, however, compel the deduction of tax, and Lord MacNaghten in LCC v A-G ((1900), 4 Tax Cas at pp 296, 299), also thought that it did not compel the payer to account to the Crown for the tax if deducted, though Lord Davey in the same case took, I think, a different view on this point. Section 40, though not expressly repealed, was, in effect, replaced by s 24(3) of the Customs and Inland Revenue Act, 1888, which directed that

"... to person by or through whom such interest or annuities shall be paid shall deduct thereout the rate of income tax in force at the time of such payment, and shall forthwith render an account to the Commissioners of Inland Revenue of the amount so deducted ... ; and such amount shall be a debt from such person to Her Majesty, and recoverable as such accordingly ..."

The rule as so modified was carried into the Income Tax Act, 1918 (which also repealed the Act of 1953 and s 24 of the Act of 1888). The Finance Act, 1927, made certain amendments for reinforcing the machinery for recovery of tax so deducted and, in its amended form, is the rule now under consideration. One, if not the main, reason for the amendment, was to place a direct assessment on the payment and so secure priority of ranking in bankruptcy or liquidation which would not have been available to a mere debt due to the Crown. My Lords, it seems strange that a rule, which in its original form would, I think, have entitled the Crown to deduct tax, should, when strengthened for the protection of the Crown, by improving the machinery for the recovery of the tax, cease to apply to the Crown. Much, I think, might be said for the view that what was compulsory on the subject was permissive to the Crown and that, if the Crown deducted tax, the other directives of the rule became clearly inoperative, because the circumstances for their operation could never arise. But I find it unnecessary to pursue this line further as your Lordships take the view that r 21 cannot be invoked by the Crown. I am content to proceed on this view.

It is then contended by the company, r 21 being out of the way, that the payments fall to be attributed to the years in respect of which they were paid. As the commissioners made no direction in respect of the year 1947-48 no question in respect of that year now arises. The directions in issue are directions in respect of payments in the years 1948-49, 1949-50 and 1950-51, with reference to which the dispute is whether the year of receipt or the period of accrual is to count. By r 2 of the Rules applicable to Case III in its original form under the Act of 1918 and in its form as amended by the Finance Act, 1922, tax is to be computed on the amount of income "arising" in a particular year. The word "arising" is to be found in various contexts in the Income Tax Acts. By Sch C to the Act of 1918 tax is charged "in respect of all profits arising from interest, annuities, dividends, and shares of annuities payable out of any public revenue". It is difficult to see how this can mean anything other than that tax shall be charged on profits from the receipts of interest, etc. If interest is not received there can be no profits. Passing over for the moment the opening paragraph of Sch D, we find in the Rule applicable to Case II of that schedule that the tax shall extend, inter alia, to "all profits and earnings of whatever value arising from employments". "Arising" here might reasonably be taken as referring to the source of the profits and earnings, as also in r 2, the proviso to r 4(1) and r 5 of the Rules applicable to Cases I and II. Under Case III, which is the material Case here, r 2 originally provided that the tax should be computed "on the full amount arising" within a particular year. As amended in 1922, the rule provides that the tax shall be computed "on the full amount of the profits or income arising within" certain specified years. As we are concerned here only with tax on item 1 (a) of the Case "any interest of money, whether yearly or otherwise, or any annuity, or other annual payment", I think that, as in Sch C, the natural reading of r 2 is to apply it, in the case of income, to income received in the specified years. Rule 1 of Case IV, as amended by the Finance Act, 1926, yields, I think, a similar inference. It is suggested that the rule shows a clear differentiation between income arising and income received. I can see no such distinction. We are faced here again with a computation

"on the full amount [of the income] arising in the year preceding the year of assessment, whether the income has been or will be received in the United Kingdom or not, subject in the case of income not received in the United Kingdom"

to certain deductions and allowances. Here, also, I think income arising means income received, which in this case means received abroad, and that income received in the United Kingdom is income remitted in some form to the United Kingdom, which could only be from income already received abroad. The same construction falls, in my opinion, to be given under Case V to "income arising from stocks, shares or rents" and "income arising from possessions". More careful consideration, I think, must be given to the words in r 2 of Case VI, which does not refer to "income arising" but to "the profits or gains arising in the year of assessment". This is a sweeping-up Case charging tax

"in respect of any annual profits or gains not falling under any of [Cases I to V] and not charged by virtue of any other schedule."

(Schedule D, para 2.) It is frequently applied to what are called casual profits, or to isolated transactions, but is not necessarily so confined (see Forth Conservancy Board v Inland Revenue Comrs). While it does not cover the profits of any concern "in the nature of trade" which come under Case I (see definition of "trade" in s 237), it can be invoked to cover the profits of transactions analogous to trade and other transactions which require the striking of a balance of profits and gains. In such cases the method of assessment may differ from that applied in the case of receipt of a pure income profit. Under Case VI, the words "profits or gains arising in the year of assessment" will be apt to cover both. Reference was made for the appellants to s 35 of the Finance Act, 1926. This section provides for apportionments of profits or gains chargeable under Case I, Case II, r 4 of Case III or Case VI. The purpose of this section is, I think, clear. It is to provide for the apportionment of profit over a series of years when that has been earned not by activities conducted in one year, but by activities continued over a number of years. This may happen in the exercise of a trade or profession, or business of cattle or milk dealers curiously brought under Case III by r 4. By association it would seem reasonably clear that the profits and gains under Case VI covered by the section are similar profits and gains of analogous activities assessed under this Case.

The word "accruing" with reference to income or profits and gains is of infrequent use in the Act of 1918. Paragraph 1(a) of Sch D provides that tax shall be charged in respect of annual profits or gains arising or accruing to persons "from any kind of property whatever" and "from any trade, profession, employment, or vocation". Paragraph 1(b) makes no reference to profits or gains arising or accruing. It charges tax directly on

"All interest of money, annuities, and other annual profits or gains not charged under Sch. A, B, C or E, and not specially exempted from tax."

In this respect it follows closely s 2, Sch D, of the Income Tax Act, 1853. To take up at once the matter of taxation of the profits of a trade or vocation, it is familiar law that, under Cases I and II, with which I think may be classed some instances under Case VI, where profits and gains are ascertained on an earnings basis, a receipt can be related back, for purposes of assessment to tax, to a year prior to the year of receipt. In such case, the receipt is itself not income subject to tax, but a payment to be brought into computation for the purpose of striking a balance of profits and gains of the earlier year. It may in effect result in a pure profit to the trader or professional or other earner, but that is only if all his expenses have already been allowed for in assessing the profits and gains brought into charge for tax. This practice is not, I think, based in any way on the use of the word "accruing" in para 1 of Sch D, which it may be noted is not used in Cases I and II of that schedule, but on a recognition of the method by which traders and others are accustomed to ascertain their profits for any year. This is no argument for applying such a rule to receipt of a pure income profit. The only other references in the Act of 1918 to accrual of income are in s 5(3)(c) dealing with supertax and r 19 of the General Rules. Section 5(3)(c) may have been introduced to avoid any difficulties arising from the language of r 19 in the matter of assessments to supertax. It does not apply any principle of accrual, but rather supersedes it. It has been considered in some cases to which I refer later, and for the moment I pass to r 19. This rule in the Act of 1918 authorised deductions from payments of any yearly interest of money, annuity or other annual payment

"at the rate or rates of tax in force during the period through which the said payment was accruing due."

That does not help the appellants. The deduction is not an assessment of tax. The rule expressly says so. The rule has an ancient origin dating back to 1803 (43 Geo III, c 122, s 208) when there was only one rate of deduction. The deduction authorised by the Act of 1918 dates from the Customs and Inland Revenue Act, 1864, and remained until changed by s 39(1) of the Finance Act, 1927, to the form which at present obtains authorising deduction "at the standard rate for the year in which the amount payable becomes due". In either form it is, in my opinion, of no assistance to the appellants and is in contrast with r 21 which requires deduction of tax at the rate in force at the time of payment.

Counsel for the appellants submitted that the general principle (if any) of the Income Tax Acts is to charge income when received in the period in which it was earned or arising. It is for that reason that I have examined in some detail any provisions of the Act of 1918 that may be thought relevant. I have been unable to extract from them any such principle. The inferences, indeed, I think point in the opposite direction. The appellants would seem to be in something of a dilemma. Either they must say that income arising means "income accruing", in which case it should be taxed during each year of accrual, whether received or not; or that it only arises when received and thereafter should be taxed for the years in which it has accrued. The first alternative might be productive in many cases of great hardship and injustice to the taxpayer. The second alternative ignores the twofold difficulty that, if receipt fixes the date of the income arising, the Act says it shall be charged with tax on the amount of the income in the following year and that there is no statutory provision for spreading the income received over the years of accrual. Special provision was made by s 34 of the Finance Act, 1927, in a case of assessment to supertax, now to surtax, for relief in such a case, but that does not touch the present issue and no reference was made to this section in the course of the argument.

Several cases were cited touching the meaning of "income arising" under the Income Tax Acts. The one decision which is directly in point on the issue here is the decision of Rowlatt J, in Grey v Tiley, a case of commission earned in one year and partly paid in two instalments in subsequent years. The learned judge held in a case of assessment under Case VI that the instalments fell to be charged in the years of receipt as profits or gains arising in the years. In so holding, he applied the reasoning expressed by him in the earlier case of Leigh v Inland Revenue Comrs. The question there was a different one, being concerned with the measure of liability to supertax under s 5(3)(c) of the Act of 1918. The ratio of these judgments was followed in Lambe v Inland Revenue Comrs, by Finlay J and in Dewar v Inland Revenue Comrs, by the Court of Appeal. While these latter cases merely decided that interest which was accruing but had not been received could not be charged to tax, the necessary correlative follows that income assessable to tax only arose when it was received. Against this view some reliance was placed on the judgments in Simpson v Maurice's Exors and Inland Revenue Comrs v Earl of Haddington. The first of these cases creates, in my opinion, no difficulty. The assessments were there made under Case IV and Case V on the income arising from securities and stocks and shares, belonging to a naturalised and domiciled British subject, which had been paid into certain German banks during the 1914-18 war. None of this income was received in England till 1923. It was held by the Special Commissioner, Rowlatt J and the Court of Appeal that the income arose when it was received by the German banks on behalf of the stockholder or his representatives.

The Earl of Haddington's case calls for rather more consideration. Rowlatt J thought it was in conflict with his decision in Leigh's case, as did Finlay J, in Lambe's case. Some of the expressions of opinion by the judges in the case could lead to that conclusion. But the case was a very special case. The Earl had succeeded his grandfather as heir of entail in possession to the estate of Tynninghame. His father (Lord Binning) who would have succeeded to the estate had died some five months earlier, on 12 January 1917. On the occasion of his marriage, Lord Binning had, by virtue of the Entail Acts, burdened the entailed estates with a liferent annuity of £2,125 in favour of his widow and also with a provision in favour of the younger children of the marriage. On Lord Binning's death, it was found that the estate was burdened by these provisions to a greater extent than was permissible under the Entail Acts and after his succession to the entailed estate the Earl brought a petition to restrict the annuity of Lord Binning's widow to the sum of £1,627 14s 1d and the younger children's provisions to £7,234 5s. This application was granted by an interlocutor of the court dated 27 November 1918, and a bond and disposition in security to secure the children's provisions was granted by the Earl. The position thus was that there had been, since the death of Lord Binning on 12 January 1917, an effective liferent annuity belonging to his widow and secured on the rents of the entailed estate and provisions to the children secured by bond and disposition in security as from the same date. There was no question of Lord Binning's widow or children having waived their rights or of the Earl being unable to satisfy them. The widow and children were in possession of their provisions from the death of Lord Binning with all the rights attached to them by statute. As Lord Ormidale put it ((1924), 8 Tax Cas at p 723) the right to the provisions had vested at the death of the heirapparent. The widow and children might be said to be domini of the sums in question as they became due, to use an expression used by Lord Hanworth MR and Maugham LJ in Dewar's case ([1935] All ER Rep at pp 573, 578; 19 Tax Cas at pp 573, 580). The question in the case was whether, under s 66(2) of the Finance (1909-10) Act, 1910 (the precursor of the original s 5(3)(c) of the Income Tax Act, 1918), the sums in question were payable in each year as they accrued or in the year in which they were in fact paid. Owing to the proceedings for restriction which had been taken by the Earl, the first two years' payments were not made till the second fiscal year after Lord Binning's death. He sought to deduct the whole of these payments from his income of that year in order to reduce the supertax exigible from him in that year. The court held that he could only deduct one-half of the payments as the other half must be held to have been payable in the previous year. Rowlatt J's view in Leigh's case was that "payable" was the correlative of "receivable" in the same section of the Act and that, as there was no receivability without receipt, there could be no payability without payment. The case is no direct authority on the meaning of "income arising" under any of the Cases, but in Grey v Tiley he clearly regarded the principle of that case as applicable to the meaning of "profits or gains arising" under Case VI. For the reasons I have given, it may be possible to reconcile the Earl of Haddington's case with Leigh's case. But in any event, looking to its specialties, I could not regard it as an apt precedent in support of the appellants' case. Reliance was also placed by counsel for the appellants on Hawley v Inland Revenue Comrs. I find difficulty in discovering the ratio of the decision of Rowlatt J, in that case. But as the same learned judge in Grey v Tiley had his previous decision in Hawley before him, which he found himself able to distinguish, I must assume there is no conflict between the two decisions. His reasoning and decision in Grey v Tiley are perfectly clear and, in my opinion, entirely applicable to the case now under appeal.

Other cases were cited but, except for the decision of the Privey Council in St Lucia Usines & Estates Co Ltd v St Lucia (Colonial Treasurer), I find them of little help on the point at issue here. The St Lucia case was decided on the words "income arising or accruing" in a Colonial Ordinance. It was held that no income arose or accrued until receipt. This decision is in line with the reasoning of Rowlatt J, Finlay J and the Court of Appeal in the cases already cited.

In the result, I have come to the opinion that the payments received by the appellants were income of the year in which they were received and as such were subject to direction and apportionment under s 21 of the Finance Act, 1922.

The Court of Appeal took the view that the payments fell within Case VI of Sch D. That was mainly because they thought that the only annual payments to which Case III, r 1(a), could apply were payments from which deduction of tax could be made under r 19 or r 21. They also pointed out that certain payments from public funds were separately provided for in Case III. I do not find these considerations compelling. If the payments are of the character that would bring them under r 19 or r 21 if made by any person or body other than the Crown, I do not see how they lose their character by the accident that the person liable to pay happens to be the Crown. The payments from public funds dealt with in Case III are small payments not exceeding fifty shillings and interest on exchequer bonds and other securities issued under the authority of the Treasury or under the War Loan Acts during the 1914-18 war, from which tax was not deducted at the source. Special considerations applying to such payments which have put them into Case III and not into Sch C seem to me to have no bearing on the question of what is the appropriate Case for the payments here under the Coal Industry Nationalisation Act. But this difference of view is, in my opinion, immaterial. Treated as coming under Case VI they would still, in my opinion, for the reasons I have tried to express, be income arising in the year of payment. ^[F3]

It is said, however, that, as the appellants have not received the tax deducted, the deductions cannot, on the view that income only arises when received, be held to be the income of the appellants. This submission is more ingenious than sound. Income for the purpose of the Income Tax Acts is gross income whether paid with or without deduction of tax. If r 21 had applied to the tax deducted here the income that arose would still have been the gross income. It is because it is the taxpayer's income that tax is deducted from it. The same, in my opinion, applies here. This contention was rejected and, I consider, rightly rejected by the Court of Appeal.

I would dismiss these appeals.

Appeals dismissed.

Solicitors: Tamplin, Joseph & Flux agents for Darling, Heslop & Forster, Darlington (for the appellants); Solicitor of Inland Revenue.