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

[1959] 3 All ER 703

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(Judgment by: Lord Radcliffe)

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 RadcliffeLord 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

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Judgment by:
Lord Radcliffe

My Lords, these appeals raise two questions as to the determination of income for the purposes of the Income Tax Acts. One seems to me to be mainly of technical or administrative significance; the other is of considerable general importance. The first question is whether the various sums of money paid to the appellants under the Coal Industry Nationalisation Act, 1946, s 22(2)(a) or s 22(3), or the Coal Industry (No 2) Act, 1949, s 1(2), were assessable under Case III or Case VI of Sch D. It is not in dispute that they are taxable income under one or other of those heads. Following on a decision between these two cases, certain arguments are developed for or against the substantial question in issue, whether, for the purposes of the surtax direction which has been made under s 21 of the Finance Act, 1922, as extended by s 14 of the Finance Act, 1939, the income of the appellants is to be computed on the basis that each payment forms part of the income of the revenue year in which it was received or, alternatively, is to be written back, when received, over the years in respect of which it was paid.

Under r 1 of the Rules applicable to Case III, the subject of charge is "any interest of money, whether yearly or otherwise, or any annuity, or other annual payment". The payments with which we are concerned are payments of what the statute calls "interim income"; they take the form either (i) of a "revenue payment" for each of the calendar years 1947 and 1948 equal to one half of the comparable ascertained revenue of the concern before nationalisation, or (ii) of a payment for 1949 and subsequent years of a further calculated sum based on the amount by which one-third of the comparable ascertained revenue might exceed interest on any sum of compensation satisfied before the end of the year, or (iii) of a sum "equal to interest" from the vesting date (1 January 1947) to the date on which any compensation was paid or satisfied, so far as not covered by the other two forms of interim income. I do not think it necessary or useful to dwell on the details of these complicated and barely intelligible provisions. It is sufficient to say that all the payments made represented some form of compensation, in the form of interim income, for the fact that, as from 1 January 1947, the concern had been dispossessed of its assets, the use and benefit of which passed to the Crown, and, until compensation in money or stock was provided had been left without the means of earning an equivalent income from the employment of the compensation. Nor do I think it useful to distinguish between the various forms which these payments of interim income took according to the different statutory rules which were their warrant. None of them, in my view, constituted "interest of money" or an "annuity" for the purpose of Case III of Sch D. It is much more difficult to say whether any of them constituted an "other annual payment" under this Case.

Neither the Acts nor the courts have supplied any definition of these words, "other annual payment". There is authority for saying that "the category is quite a limited one" (Re Hanbury, Coniskey v Hanbury). There is ample authority for saying that not all payments that are made annually are annual payments under Case III (Earl Howe v Inland Revenue Comrs; Hill v Gregory). The reason for limitation lies in the fact that, for the courts, Case III annual payments have been inseparably associated with payments from which tax is deductible in accordance with General Rules 19 or 21, and it has been thought to be inconsistent with the idea of tax being deducted at the source at the standard rate to allow within the Case payments that are likely to be gross receipts of the payee and not "pure income profit". Although this distinction may be a good general guide in determining the scope of Case III, it does not in all circumstances throw a very certain light on the duty of the payer, who is not necessarily in a position to know whether or not the sum he pays will be treated as "pure income" or a gross receipt in the computation of the payee's tax. That, in itself, perhaps, argues for a restricted interpretation of the words "annual payment". The word "annual" has not been found to admit of any significant interpretation. To the courts it means no more than "recurrent"-see,, eg, Moss' Empires Ltd v Inland Revenue Comrs-or even "capable of recurrence". That may be so; but I think that it would be both bad logic and bad law to deduce that, merely because a payment is in fact recurrent or capable of recurrence, it is, therefore, to be treated as an annual payment.

In the end, the question what is or is not such a payment is a question of judgment formed in the light of the considerations that I have alluded to. On the whole, I should not regard these payments as coming within the description. Although they could and were, indeed, likely to recur in the sense that several payments might well be so called for before full compensation was provided, they were essentially the temporary product of an exceptional measure of state expropriation. The income provided was in that respect casual. Such temporary and casual incomes appear to me to fit less naturally into Case III, with its interest of money, annuities and other annual payments, than into Case VI, which has always been regarded as the Case that covers what I may call the oddities of Sch D. To my mind, this interim income presents itself as just one of these oddities; and in any choice between the claims of Case III and Case VI, I would favour the latter.

There is another independent reason for preferring Case VI. That is the reason which determined the judgment of the Court of Appeal on this point. Your Lordships are at one, I believe, in holding that neither r 19 nor r 21 of the General Rules is so expressed as to be capable of requiring or authorising the deduction of tax from these payments made by the Crown. I agree with that, and I need not recite my reasons separately. If so, not only are the payments not income "chargeable with income tax by way of deduction", with the consequence that s 39(2) of the Finance Act, 1927, has no application at all and provides no rule to determine the year to which they are to belong as income; but also there is at any rate strong prima facie ground for saying that payments for which the tax scheme provides no deduction at source are not annual payments within the meaning of Case III. For, as is indicated by the decisions to which I have referred, the courts have tended to treat liability to deduction at source as affording a distinguishing mark of a Case III annual payment; and if, here, the freedom from deduction would be due not so much to the nature of the payment as to the accident that it is made by the Crown itself and not by a subject, that circumstance serves only to reinforce the point already made that these interim payments are an exceptional form of income for which the regular scheme of the Income Tax Acts has made no provision.

I turn now to the important question whether the sums paid are bound by law to be treated as income of the revenue year in which they were received, regardless of the fact that some or all of them were avowedly paid by the Crown as income of periods preceding the revenue year of receipt. It is sufficient to take as an illustration payments 1, 2 and 9 itemised in para 4(1) of the Case Stated. ^[F2] These payments cover the interim income to which the appellants were entitled in respect of the calendar years 1947 and 1948; they were made under s 22(3)(a) of the Act of 1946 which itself describes the payments as due "in respect of" those two years; and in each case they were accompanied by an official letter identifying the period to which they related. In the most obvious sense they represented income of the three revenue years 1946-47, 1947-48 and 1948-49, and were due to be apportioned between those years accordingly. Yet because the first payment (in respect of the eighteen months to 30 June 1948) was not made until 7 August 1948, nor the second payment (in respect of the half year ended 31 December 1948) until 26 January 1949, the Crown claims that these two payments must be allocated wholly to the revenue year 1948-49; and because the third payment was made on 25 May 1951 (as a further payment in respect of the two years ended 31 December 1948), it is similarly claimed as income of the revenue year 1951-52, with which, if I may be pardoned for begging the question, it has nothing in the world to do.

Only one or two further points need to be noticed. Neither the Act of 1946 nor the Act of 1949 fixed a date of payment for the compensation due by way of interim income. It was left to the Crown to make its payments as and when it could or would, due allowance being made for the vast administrative task involved in ascertaining and checking the multifarious compensation claims to which nationalisation gave rise. Secondly, if the argument of the Revenue on this appeal is well founded, the dates actually selected for payment have led to the most unfortunate "bunching" of assessable income for the purposes of surtax, no income at all, for instance, being attributable to the revenue year 1947-48.

Surtax is a steeply progressive tax and in connexion with it bunching of income is always to be regretted, since it is much to the detriment of any taxpayer with a high marginal rate. I do not make any apology, therefore, for saying that I should be sorry if I thought that the Revenue's claim was well-founded in law. I am of opinion that it is not. I think that it is both right in principle and in accordance with previous authority to attribute these various payments to the years or parts of years in respect of which they were paid. To take one instance, I think that the first payment of £9,068 (wrongly paid net of income tax) should be distributed between the three years 1946-47, 1947-48 and 1948-49.

It is not easy to give an account of my reasons for this conclusion without burdening the House with an opinion of altogether immoderate length. I believe, however, that the substance of them can be conveyed by the following propositions, for whose brevity of statement I apologise.

(i)

In computing profits or gains or other income chargeable under Sch D for any year the basis of computation is the income that "arose or accrued" during that year. The year in which a payment is actually received is not necessarily the year in which the income which it represents arose or accrued.

(ii)

There is no fundamental or general principle of income tax law that the year in which a payment is made must be taken to be the year to which the assessable income belongs. On the other hand, there may be special statutory rules that do secure just this result, as, for instance, the provision made by s 39(2) of the Finance Act, 1927, that, in estimating total income, income chargeable with tax by way of deduction at the standard rate in force for any year is to be deemed to be income of that year. This rule could be very injurious to the taxpayer, but it was evidently intended that it should not operate to the injury of the payer of supertax or surtax, since, by s 34 of the same Finance Act (see, now, s 238 of the Income Tax Act, 1952) he is allowed to spread any income affected by the rule as if it accrued from day to day; nevertheless, where the rule applies, cadit quaestio. But then there arises this dilemma; if this would have been the legal result anyway according to general principle, why introduce the rule in 1927 with regard to the special class of payments made under deduction? And why, if there was such a principle, had r 19 of the General Rules provided until s 39(1) was enacted that tax was to be deducted "at the rate or rates of tax in force during the period through which the payment was accruing due"? Lastly, does s 34 of the Act of 1927 represent a principle or an exception from a principle?

(iii)

Subject to the operation of any such special rules, when a payment is received in one year and it can be clearly seen that it ought to be treated as income arising in another year, the law not only permits but requires that it should be attributed to that other year. This principle has been frequently acted on in the case of traders-see Isaac Holden & Sons Ltd v Inland Revenue Comrs; Lambert Bros Ltd v Inland Revenue Comrs; Ensign Shipping Co Ltd v Inland Revenue Comrs-and has twice received the indorsement of this House-see Newcastle Breweries, Ltd v Inland Revenue Comrs; Gardner, Mountain & D'Ambrumenil Ltd v Inland Revenue Comrs.

(iv)

In the case of trading income the ordinary test for determining the year to which a payment "belongs" is to ascertain the year in which it was "earned" or in which entitlement to the payment arose. As Viscount Cave LC, said in the Newcastle Breweries case ([1927] All ER Rep at p 292; 12 Tax Cas at p 953):

"The rum was taken in 1918, and the right to some payment arose at once, though there was delay in ascertaining the amount to be paid."

The present case reproduces that situation precisely; but it is so much the clearer as to the date of entitlement in that the Nationalisation Act itself prescribed the date from which the right to payment arose and the periods of time to which each payment of income was to relate.

(v)

The principle applied in the cases I have just mentioned is not attributable to any special quality of trading income or other income chargeable under Case I or Case II. There is no relevant distinction involved in the fact that Case I income is computed on the "balance" of the profits or gains. What distinction could that be? To put it in its simplest form, the balance is merely the cross receipts less the expenses, and it is the excess of those receipts that is brought to charge. Case II income is not described as computable on the "balance". Yet if a professional income is computed on the basis that debts are receipts, as nearly all such incomes are today, is not the same principle to be applied?

(vi)

Neither is it a relevant distinction that, in computing Case I income, trade debts are habitually treated as receipts. The suggestion which appears in Try Ltd v Johnson ([1946] 1 All ER at p 539; 27 Tax Cas at p 181) that this practice, which governs a very considerable slice of the total tax yield, is somehow an anomaly because a departure from a fundamental conception of income tax legislation that profits are ascertained in reference to receipts, is, with great respect to the learned Master of the Rolls who made it, a misconception. For this purpose, trade debts are receipts. The truth, as I understand it, is that very long ago it was accepted by traders that to measure receipts by trade debts rather than by cash incomings gave a truer measure of the year's profit income. I hope that it is not pedantic to point out that in our economy there are few payments that amount to anything more than transfers of debts. I do not think that appreciation of the fact that some debts are equivalent to receipts need be confined to traders or professionsal men, but obviously such a method of computation can have only a limited application to other forms of income-see, eg, Lambe v Inland Revenue Comrs. I should myself have thought that Crown debts created by statute were a sufficiently solid category and that we need not look for an allowance for bad debts. But no part of this interesting question is directly in point here.

(vii)

The proof of what I have said lies, I think, in the fact that in none of the cases in which the principle of "writing back" was applied was this principle based by the court on any practice of computing income that was peculiar to traders or even on the supposition that, at the close of the year in which the profit was held to have arisen, anything could have been entered as a receipt in respect of the right to, or the expectation of, the future payment which ultimately matured. Such a point is simply not noticed as relevant. It was relevant, of course, that the payment made had its origin in a trading transaction or a transaction analogous to trade, because otherwise the receipt would not have been taxable at all. But that is a different point. In fact, in two of the cases, there was no debt-merely an uncovenanted payment-see, eg, Rowlatt J, in the Isaac Holden case ((1924), 24 Tax Cas at p 772): "It was uncertain whether they would ever receive more at that time: they certainly had no right to demand more", and the remarks of Viscount Simon in the Gardner, Mountain case ([1947] 1 All ER at p 653; 29 Tax Cas at p 93). In my opinion, therefore, it is not only safe but necessary to treat these decisions as directed wholly on the general principle of relating back payments made in one year to the year or years in which the income which they represent can be seen to have arisen. They are decisions on the meaning or rather on the application of the word "arising" in connexion with Sch D.

(viii)

There have been other decisions which have more or less bearing on the present issue. In Hawley v Inland Revenue Comrs, Rowlatt J decided a supertax appeal relating to two payments covering several years' income in accordance with the principle of "spreading"; in Grey v Tiley, he decided a case, not obviously distinguishable, in accordance with the principle of "bunching". The latter case was settled by the Crown before it was heard by the Court of Appeal. His decision in Grey v Tiley was, he thought, required by his own earlier decision in Leigh v Inland Revenue Comrs, a case which in fact turned on the meaning of the word "receivable" in the Income Tax Act, 1918, s 5(3)(c), the section which was repealed to make way for new provisions in 1927. But Leigh's case contains a passage ((1927), 11 Tax Cas at p 595) about "receivability without receipt for the purpose of income tax" being "nothing at all", which is, in my view, too widely expressed. In any event, the proposition is of no assistance when the situation is reached that money has been received and the question has then to be answered in which revenue year it should be treated as arising. It is not then of any significance to ask whether there could have been an assessment on some debt or estimated claim at the close of the earlier year. Lastly, in Inland Revenue Comrs v Earl of Haddington, the converse case of a single deductible payment out of income was treated by the Court of Session as due to be "spread" over the two years to which it related. This, too, was a decision which turned primarily on the meaning of the word "payable" in the tax legislation relating to Scotland.

(ix)

It is evident to me that in some cases the argument against spreading has been thought to rest on or be supported by a supposed principle of income tax law that, at the close of the year of charge, the taxpayer is entitled to "know where he is" and to expect a final clearance of tax according to the ascertained results of the year-see Try Ltd v Johnson; Grey v Tiley. I can make little of this general principle anyway under a system which allows additional assessments and less of it in relation to the realities of current practice in dealing with the complexities of industrial, commercial and personal incomes in the modern economy. But, however that may be, I imagine that this solicitude would readily be foregone by a taxpayer in favour of getting his true income fairly distributed over the appropriate tax years, and he would think his peace of mind bought at altogether too dear a price, if the cost of it proved to be a quite fortuitous surcharge on his tax bill.

I am in favour of allowing the appeals.