Willingale (Inspector of Taxes) v International Commercial Bank Ltd
[1977] 2 All ER 618(Decision by: Sir John Pennycuick)
Between: Willingale (Inspector of Taxes)
And: International Commercial Bank Ltd
Judges:
Stamp LJ
Ormrod LJ
Sir 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
Decision by:
Sir John Pennycuick
The proposition advanced by counsel for the Crown may be summarised as follows. In determining the profit derived in any given year from a discount transaction of this kind carried out in the course of a trade one should take into account the accruing profit from the transaction attributable to that year, provided that the ultimate profit can be foreseen with reasonable certainty. That is the accounting method actually adopted by the bank in the present case and on the accountancy evidence represents the most appropriate method of applying the principles of commercial accountancy. The taxable profit of the bank from its trade should be determined accordingly.
Counsel for the bank formulated his contention under two heads namely:
- (i)
- The bills represent stock of the trade carried on by the bank and on a well established and unchallenged principle their proceeds must for the purpose of tax be brought into account as a receipt of the trade in the year of realisation, ie sale before maturity or discharge on maturity, increases in value pending realisation being left out of account.
- (ii)
- Even if the bills do not represent stock of the bank's trade and the transactions in each bill must be viewed in isolation, its proceeds must likewise for the purposes of tax be brought into account in the year of realisation, increases in value pending realisation being left out of account.
The case was in fact decided before the commissioners and the judge on the second issue and, in the absence of a finding that the bills represented stock of the bank's trade, we should, I think, likewise address ourselves to the second issue. The first issue could not, I think, be determined without a remission to the commissioners.
The characteristic type of transaction in the bills may be analysed in legal terms as follows. Assume a bill with face value £1,500 maturing in year 1975 taken up by the bank in the year 1970 against a payment of £1,000. In year 1970 the bank parts with £1,000 cash and receives in return a chose in action consisting of an obligation to pay £1,500 in 1975. The market value of that obligation on its acquisition in 1970 is the price paid for it by the bank, viz £1,000. Over the years 1971, 1972, 1973 and 1974 the market value of the chose in action increases as the maturity date approaches, but unless there is a sale before maturity there is no realisation. In 1975 the bank receives £1,500 cash in return for the chose in action acquired for £1,000, which chose in action is then realised by discharge. At that point the bank 'realises', in another sense of that word, a profit, ie the excess of £1,500 over £1,000. This profit must admittedly be brought into account for the purpose of tax in some year. The position is the same mutatis mutandis if the bank sells the bill before maturity, say, in 1972, for £1,200. It then 'realises' a chargeable profit of £200.
I do not see any legitimate ground on which the increase in value in such a chose in action over the years intervening between its acquisition, ie 1970, and its realisation, ie 1975, could be brought into charge as a receipt in those intervening years. The basic scheme of tax law is that income is taxable when received. To quote the well-known aphorism of Rowlatt J in Leigh v Inland Revenue Comrs ([1928] 1 KB 73 at 77, 11 Tax Cas 590 at 595) (a different context), '"receivability" without receipt is nothing'. And for a general statement see Simon's Taxes. [Fa] It is of course true that in many sets of circumstances a profit is brought into charge under Case I or Case II of Sch D in the year in which it is earned, although the consideration is not received in that year, for example, the simple case where goods are sold in consideration of a deferred payment. In such a case the payment is related back to the year of sale. But it is quite a different matter to bring into charge as an immediate profit an unrealised accrual in value, however likely it may be, having regard to the nature of the asset, that its realisation will ultimately produce a corresponding profit.
It is important to bear in mind in the present connection that discounts form a separate head of charge under Case III(c) of Sch D, this head of charge being applicable where the discount transactions are not carried out in the course of a trade chargeable under Case I of the same schedule. It is well established that the profit on discount transactions when charged separately under Case III is brought into charge on realisation, ie maturity or earlier sale of the bills: see Brown (Surveyor of Taxes) v National Provident Institution. This decision under Case III is not conclusive on the ascertainment of the profit of a trade as a whole under Case I. But the treatment of discounts under Case III does throw a significant light on the manner in which the profit on such transactions is to be brought into account for the purpose of Case I.
It is worth while to make one or two observations with regard to interest. Plainly, interest has many features in common with discount, but it differs from discount in this critical respect that interest accrues from day to day and is usually payable at periodical intervals in each year, whereas nothing accrues or falls due for payment under a discount transaction before maturity. And even interest is not chargeable under Case III before receipt: see Paton v Inland Revenue Comrs. More directly in point, where interest is brought into charge as an ingoing in the carrying on of a trade, it has been held not to be liable to be so brought into charge before receipt: see Bennett v Ogston ((1930) 15 Tax Cas 374 at 379) and the forceful statement of Rowlatt J:
'When you are dealing with interest it is true that under certain circumstances, in this case among others ... though you may treat the interest as the mere receipts of a trade and not as interest itself, I think it is quite impossible to say that interest which has to be borne next year, although you may have to secure it by a dealing this year, can be treated as a profit of this year. I do not understand that; I do not think that is possible. I think when you deal with interest as a receipt of trade you must deal with it year by year, and the interest, as it comes in in the year as a receipt from the trade, if you like.'
If that statement is good law it must apply a fortiori to discounts.
In the present case there was no profit in the year in which the bank acquired a given bill for cash equal to its then market value. Nor is it contended by the Crown that the profit on subsequent realisation of each bill should be related back to the year of acquisition. Such a contention would raise an entirely different question and it is of the first importance to distinguish the Crown's contention here from such a contention. What is contended is that the increase in value of the bill over the intervening years should be spread over those years and the increase attributable to each year treated as a profit of that year. That contention, as I have indicated, seems to me to be contrary to the basic scheme of tax law and is not supported by any authority which has been cited to us.
Counsel for the Crown rested his contention on the well-established rule that the profit of a trade must be ascertained in accordance with the principles of commercial accountancy. For an application of this principle see Odeon Associated Theatres Ltd v Jones (Inspector of Taxes). But it is likewise well established that the principles of commercial accountancy must yield not only to statutory provisions, in particular the prohibition of specified deductions, but also to any overriding principle of tax law: see the explicit statement of Lord Reid in BSC Footwear Ltd v Ridgway ( [1971] 2 All ER 534 at 536, [1972] AC 544 at 552, 47 Tax Cas 495 at 524, 525) in relation to the anticipation of profit:
'The application of the principles of commercial accounting is, however, subject to one well established though non-statutory principle. Neither profit nor loss may be anticipated. A trader may have made such a good contract in year one that it is virtually certain to produce a large profit in year two. But he cannot be required to pay tax on that profit until it actually accrues. And conversely he may have made such an improvident contract in year one that he will certainly incur a loss in year two, but he cannot use that loss to diminish his liability for tax in year one.'
Lord Reid goes on to state that the principle is subject to an exception as regards stock-in-trade. And the more general statement of Lord Denning MR in Heather (Inspector of Taxes) v P E Consulting Group Ltd ( [1973] 1 All ER 8 at 13, [1973] Ch 189 at 217, 48 Tax Cas 293 at 322):
'The commissioners were entitled to give weight to that evidence of Mr Bailey, but the judge went further. He seems to have thought that, as a result of the decision of this court in Odeon Associated Theatres Ltd v Jones (Inspector of Taxes) the evidence of accountants should be treated as conclusive and that all the commissioners or the court would have to do would be to evaluate their evidence. And counsel for the tax payer company submitted to us that the Odeon case had upgraded the evidence of accountants so that the commissioners and the courts were bound by their evidence to a greater degree than they had been in the past. I cannot agree with that for a moment. It seems to me that that case does not add to or detract from the value of accountancy evidence. The courts have always been assisted greatly by the evidence of accountants. Their practice should be given due weight; but the courts have never regarded themselves as being bound by it. It would be wrong to do so. The question of what is capital and what is revenue is a question of law for the courts. They are not to be deflected from their true course by the evidence of accountants, however eminent.'
In the present case the bank made up its yearly accounts so as to spread the anticipated profit on the bills over the period between acquisition and maturity, thereby giving a fair and realistic picture of its position from year to year. In so making up its accounts the bank by common consent acted in accordance with the principles of commercial accountancy. But the bank's selection of this method does not preclude it from setting up the contention that the anticipated profit thus shown in its accounts is not be be taken into account in determination of the profit of its trade for the purpose of tax. As I have indicated, I think that contention is well founded.
One should add, as junior counsel for the bank pointed out in a valuable footnote to leading counsel's contentions, that on the evidence of Mr Taylor (the bank's accountant) the bank's accounts might properly have been drawn up so as to exclude what was loosely described as 'accrued discount', provided that the procedure was fully explained. There is thus not an outright conflict here between the principles of commercial accountancy and the principles of tax law.
It is also worthwhile to observe that in the present case the transactions in these bills present a number of complications which are not reflected in the simple form of account adopted by the bank and sought to be applied by the Crown. Many of the bills are in foreign currencies; some were sold before maturity; and others resulted in a loss. These complications make the proposition advanced by counsel for the Crown considerably less attractive in its application to the present case. I do not pursue this point in the absence of specific findings by the commissioners.
It is also worth while to observe that while the bank would no doubt not be financially embarrassed by these assessments comparable assessments might render a trader without adequate financial resources insolvent. That is to say, he would have to pay tax on a profit before the realisation of the asset put him in funds to meet the tax. Alternatively he might have to sell the bill before it was commercially expedient to do so.
Counsel for the Crown relied on the decision of the House of Lords in Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Comrs. That case, like several of the excess profits tax cases decided after the 1914-18 war, would be highly relevant if the Crown were seeking to relate the proceeds of those bills on realisation back to their acquisition. But that is not the contention of the Crown.
Counsel for the Crown also relied on the decision of the House of Lords in Southern Railway of Peru Ltd v Owen. That case was concerned with the deduction by a trader of deferred and contingent liabilities respectively attributable to its operations during a succession of given years. But with deference to Stamp LJ, I can find nothing in the speeches in that case, and in particular that of Lord Radcliffe, which supports the view that an advantage expected to fall due in year 5 in consequence of a transaction effected in year 1 can be attributed in part to years 2, 3 and 4. On the contrary, Lord Radcliffe was in terms addressing himself to the attribution to year 1 of disadvantages (the converse of advantages; I will assume that for this purpose advantages and disadvantages are in the same position) expected to fall due in year 2 and subsequent years in consequence of transactions effected in year 1.
Counsel for the bank relied on the statements of principle in BSC Footwear Ltd v Ridgway, per Lord Reid ( [1971] 2 All ER 534 at 536, [1972] AC 544 at 552, 47 Tax Cas 495 at 524), Lord Morris of Borth-y-Gest ( [1971] 2 All ER 534 at 542, [1972] AC 544 at 560, 47 Tax Cas 491 at 531) and Lord Dilhorne ( [1971] 2 All ER 534 at 546, [1972] AC 544 at 565, 47 Tax Cas 495 at 535), with regard to the 'cost or market value whichever is the lower' basis of bringing stock into a trading account. Those statements might be conclusive here if the bills could indeed be treated as stock-in-trade in the ordinary sense of that term. But the bills differ from stock-in-trade in the ordinary sense in a critical respect, namely that they represent firm contractual obligations, and I do not think statements with regard to stock-in-trade are directly in point here.
The contention of the Crown here raises a point which is not, I think, directly covered by any of the authorities and must be decided on first principles. I would dismiss the appeal.