Willingale (Inspector of Taxes) v International Commercial Bank Ltd
[1977] 2 All ER 618(Judgment by: Ormrod LJ)
Between: Willingale (Inspector of Taxes)
And: International Commercial Bank Ltd
Judges:
Stamp LJ
Ormrod LJSir John Pennycuick
Subject References:
Income tax
Computation of profits
Discounting bills of exchange
Anticipated profits
Increase in value of bills as maturity approaches
Apportioned part of increase for each year preceding maturity treated as profit attributable to that year
Bank discounting or purchasing discounted bills
Bills sold or held to maturity
Provision made in annual accounts including proportion of anticipated profits
Profits realised on sale or maturity
Whether proportion of profits anticipated on sale or maturity to be included in bank's taxable profits for accounting years preceding sale or maturity
Case References:
Absalom v Talbot (Inspector of Taxes) - [1944] 1 All ER 642; [1944] AC 204; 26 Tax Cas 166; 113 LJCh 369; 171 LT 53, HL; 28(1) Digest (Reissue) 86, 258
BSC Footwear Ltd (formerly Freeman, Hardy & Willis Ltd) v Ridgway (Inspector of Taxes) - [1971] 2 All ER 534; [1972] AC 544; [1971] 2 WLR 1313; 47 Tax Cas 495; 50 ATC 153; [1971] TR 121, HL; Digest (Cont Vol D) 447, 365
Bennett v Ogston (Inspector of Taxes) - (1930) 15 Tax Cas 374; 28(1) Digest (Reissue) 276, 915
Brown (Surveyor of Taxes) v National Provident Institution - [1921] AC 222; 8 Tax Cas 57; 90 LJKB 1009; 125 LT 417, HL; 28(1) Digest (Reissue) 250, 787
Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Comrs - [1947] 1 All ER 650; 29 Tax Cas 69; 177 LT 16, HL; 28(1) Digest (Reissue) 532, 1945
Harrison (Inspector of Taxes) v John Cronk & Sons Ltd - [1936] 3 AllER 747; [1937] AC 185; 20 Tax Cas 612; 106 LJKB 70; 156 LT 20, HL; 28(1) Digest (Reissue) 85, 254
Heather (Inspector of Taxes) v P-E Consulting Group Ltd - [1973] 1 All ER 8; [1973] Ch 189; [1972] 3 WLR 833; 48 Tax Cas 293; 51 ATC 255; [1972] TR 237, CA; Digest (Cont Vol D) 449, 439a
Inland Revenue Comrs v Nelson & Sons Ltd - [1938] SC 816; 22 Tax Cas 175, CS; 28(1) Digest (Reissue) 255, *821
Lomax (Inspector of Taxes) v Peter Dixon & Son Ltd - [1943] 2 All ER 255; [1943] 1 KB 671; 25 Tax Cas 353; 112 LJKB 593; 169 LT 145, CA; 28(1) Digest (Reissue) 300, 1028
Leigh v Inland Revenue Comrs - [1928] 1 KB 73; 11 Tax Cas 590; 96 LJKB 853; 137 LT 303; 28(1) Digest (Reissue) 502, 1822
Odeon Associated Theatres Ltd v Jones (Inspector of Taxes) - [1971] 2 All ER 407; [1971] 1 WLR 442; 48 Tax Cas 257; 50 ATC 398; [1971] TR 373, CA; 28(1) Digest (Reissue) 170, 517
Ostime (Inspector of Taxes) v Duple Motor Bodies Ltd - [1961] 2 All ER 167; [1961] 1 WLR 739; 39 Tax Cas 537; 40 ATC 21; [1961] TR 29, HL; 28(1) Digest (Reissue) 125, 371
Paton (Fenton's Trustee) v Inland Revenue Comrs - [1938] 1 All ER 786; [1938] AC 341; 107 LJKB 354; 158 LT 426; 21 Tax Cas 626, HL; 28(1) Digest (Reissue) 286, 958
Southern Railway of Peru Ltd v Owen (Inspector of Taxes) - [1956] 2 All ER 728; [1957] AC 334; [1956] 3 WLR 389; 36 Tax Cas 602; 32 ATC 147; [1956] TR 197; 49 R & IT 468, HL; 28(1) Digest (Reissue) 124, 369
Sun Insurance Office v Clark (Surveyor of Taxes) - [1912] AC 443; [1911-13] All ER Rep 495; 6 Tax Cas 59; 81 LJKB 488; 106 LT 438, HL; 28(1) Digest (Reissue) 134, 398
Try Ltd v Johnson (Inspector of Taxes) - [1946] 1 All ER 532; 27 Tax Cas 167; 174 LT 399, CA; 28(1) Digest (Reissue) 43, 179
Judgment date: 15 March 1977
Judgment by:
Ormrod LJ
The question of law in this case is whether, in the words of para 12 of the case, 'there was evidence upon which we could properly arrive at our decision and whether upon such facts our decision was correct in law'. The decision ( [1976] 2 All ER 468 at 470, [1976] STC 188 at 190) was that-
'the inclusion by the Bank in its accounts of the unrealised appreciation in the value of bills and promissory notes is not in accordance with the principles of income tax law for the computation of profits and that no part of the anticipated profit on maturity falls to be included in the computation of the profits of the Bank for Corporation Tax purposes for the years of assessment before us.'
Counsel for the Crown contended that, prima facie, the annual profits and gains of a taxpayer are the profits shown in the taxpayer's annual accounts if, as in the present case, these have been prepared in accordance with the ordinary principles of commercial accountancy. He conceded, however, that if these principles conflict with any principle of income tax law then, of course, the income tax principle must be applied. He accepted, as a general principle of income tax law, the rule that 'profit shall not be taxed until realised' (per Lord Reid in Ostime (Inspector of Taxes) v Duple Motor Bodies Ltd ( [1961] 2 All ER 167 at 172, [1961] 1 WLR 739 at 751, 39 Tax Cas 537 at 569, 570)) or, as is sometimes expressed, neither profits nor losses may for tax purposes be 'anticipated', but argued that on the facts of the present case this principle had not been infringed in preparing the bank's ordinary commercial accounts. Counsel for the bank maintained that these accounts did infringe this rule.
The answer to the question raised in the case therefore depends not on the existence or otherwise of this so-called 'cardinal' rule, but on its meaning. It is unfortunate that both the alternative formulations should employ such ambiguous words as 'anticipate' and 'realised', not to mention the word 'profit'. At first sight, one might suppose that, for tax purposes, 'realised' was equivalent to 'received' and that 'anticipate' was used in its proper sense of 'to take before' or 'forestall', since income or corporation tax is intended to be paid annually out of income. But this simplistic construction, as counsel for the bank concedes, cannot be supported; if it were correct it would undermine the system which is in general use, namely the earnings basis of assessment. He accepts, to take the simplest case, that a sale of goods during the accounting period, for a price to be paid in the following year, must be brought into account in the year of the sale, not of the receipt. 'Realised' cannot, therefore, be the equivalent of 'received'; for the purposes of the rule this profit must be regarded as 'realised' when the contract of sale is made, that is, when the goods are replaced in the taxpayer's books by a debt. In the case of work or services, the value of the work must be brought into the accounts for the year in which the work is done, or the services rendered, but, presumably, only if the taxpayer has completed the work, or done enough under the contract to entitle him in law to receive payment at some future time. If this reasoning is correct the profit is realised when the taxpayer becomes legally entitled to payment, either immediately or at some future date. It seems to me, although I may be wrong, that only in this way can the earnings basis of assessment be reconciled with the 'cardinal rule'. The more I reflect on counsel for the Crown's submissions in this case, the firmer becomes my impression that the Crown's real case is that the 'cardinal rule' has been overtaken and rendered, perhaps not yet wholly, obsolete by the evolution of modern, so-called scientific, principles of accountancy. At any rate, if he is right there will not be much left of it, notwithstanding its recent restatement by the House of Lords in BSC Footwear Ltd v Ridgway.
The construction of the rule which I am suggesting finds some support from Viscount Simon's speech in Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Comrs in which he referred to 'services completely' rendered or goods supplied, which are not to be paid for until a 'subsequent year'. The use of the word 'completely' in this sentence must, I think, be significant; it implies that the consideration for the future payment has been given and the contract on the taxpayer's part has been performed during the accounting year. Some indirect support for it can be collected from the unquestioned rule that a trader cannot be required to bring into his accounts stock-in-trade at a value above cost when the market price at the date of the account exceeds the cost of acquisition. If the word 'realised' is to be given a more elastic meaning, for example, to include contingent 'profits' (as I think Stamp LJ contemplates), with allowances in future years if the profits do not in fact materialise, I am unable to see any way of rationalising this way of treating stock-in-trade. Provision for bad debts is different; this takes care of actual debts which are not paid.
I will now try to apply this construction of the rule to the facts of this case. The commissioners have found as a fact that the relevant part of the bank's business consists of the buying or discounting of bills with a view to holding until redemption or selling during the currency of the bills; they did not find that the business was one of lending money on the security of bills; and there was clearly evidence to support this finding. Taking the specimen transaction which was used in argument, the bank buys for £1,000 a bill of the face value at £1,500 payable in five years' time. On one view the profit on this transaction is undoubtedly 'realised' when the bill is redeemed or sold and should be brought into account in the year of sale or redemption (the bank's contention). On another view, when the bill is acquired or purchased for £1,000 the bank becomes entitled in law, to payment of £1,500 in five years' time, so the bank might be required to bring into account, in the year of acquisition, the profit it makes on this transaction, but, presumably, deferred over the five years. Whether or not in the circumstances of this case there would be any difference between the price and the deferred value of the bill I do not know. But the case for the Crown calls for a third alternative, namely the bringing into account for each of the five years of a proportionate amount of the increasing value of the bill as maturity approaches. I am unable to see how it can be argued that the bank becomes legally entitled as a matter of contract to those separate increments in each of the five accounting years. The obligation of the person signing the bill is simply to pay £1,500 in five years' time to the then holder of the bill. This seems to be an obligation which is different in kind from a contract to borrow money at annual interest even if the interest is not payable until the end of the five year period.
The argument for the Crown is ultimately reduced to the proposition that just as the money earns interest in the latter case, so in the former it earns discount. This is like saying that because two roads run from A to B, they are the same road. Money 'earns' interest because the lender becomes legally entitled to it during the year of account; in the instant case the bill appreciates in value in the bank's safe, very much as stock-in-trade may increase in value in the trader's stores. The bank holds a single large debt, not a succession of five small ones. On this view the difference is ultimately one of fact, which may account for the difficulties in expressing it in terms of legal principles.
For these reasons, the bank, in my judgment, cannot as a matter of law, be required for tax purposes to bring into account aliquot parts of its ultimate profit in each of the years during which the bill is maturing, for this is what counsel for the Crown's argument comes to; although if it preferred to spread its liabilities to tax more evenly over the years, the bank could presumably accept the Crown's method of assessment. I would therefore answer the question raised by the case in the affirmative.
There are a number of other reasons which suggest that this conclusion is the right one. The division of the total increase in value over five years into equal annual amounts is purely artificial.
The value of the bills does not in fact increase in a strictly linear manner; it varies with interest rates and with exchange rates, and indeed in some cases may show substantial losses over the five year period. Furthermore, even if it is not strictly correct to regard these bills as stock-in-trade, this way of dealing with the appreciation in their value is consistent, whereas the Crown's proposal introduces an apparent anomaly. Finally, I have had an opportunity of reading the judgment of Sir John Pennycuick, with which I agree and from which I have derived much needed assistance. I would dismiss this appeal.