Willingale (Inspector of Taxes) v International Commercial Bank Ltd

[1977] 2 All ER 618

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Between: Willingale (Inspector of Taxes)
And: International Commercial Bank Ltd

Court:

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

Hearing date: 3, 4 February 1977
Judgment date: 15 March 1977

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The taxpayer bank was incorporated in 1967 to provide medium-term finance in world markets to commercial companies. At all material times, its business included the discounting of or the purchase of discounted bills issued by borrowers all over the world. Although the bank usually held the bills to maturity, on many occasions it sold them prior to maturity. The amount of profit the bank might make on the bills was not ascertainable before sale or maturity. Annual accounts of the bank, which were drawn up in the form customary for clearing banks, included a proportion of the profits that the bank expected to make if its bills were held to maturity. The bank did not change the form of its accounts for presentation to the Revenue, although it realised that the profits shown might not accord with those computed according to income tax principles. In assessing the bank to corporation tax for the accounting periods ended 31 December 1967 to 31 December 1970, the Crown claimed that the increase in value of the bills over the years as maturity approached should be spread over those years and the increases attributable to each year should be treated as taxable profit of that year. The General Commissioners allowed an appeal by the bank, holding that the appreciation in the value of the bills was not taxable until it had been realised either on sale or maturity. On appeal, Walton J ( [1976] 2 All ER 468 ) upheld their decision. The Crown appealed.

Held (Stamp LJ dissenting)-The basic scheme of tax law was that income was taxable only when received or when the taxpayer had earned it and thereby become legally entitled to it, either immediately or at a future date. The bank did not become legally entitled to a proportionate amount of the increasing value of the bills as maturity approached. Accordingly there was no legitimate ground on which the appreciation in value of the bills over the years between acquisition and maturity could be brought into charge as a receipt in the intervening years. The appeal would therefore be dismissed (see p 627 h to p 628 a and f to h, p 629 a and p 630 b and j to p 631 a and h, post).

Dicta of Rowlett J in Bennett v Ogston (Inspector of Taxes) (1930) 15 Tax Cas at 379, of Lord Reid in Ostime (Inspector of Taxes) v Duple Motor Bodies Ltd [1961] 2 All ER at 172 and of Lord Reid in BSC Footwear Ltd v Ridgway (Inspector of Taxes) [1971] 2 All ER at 536 applied.

Gardner, Mountain and D'Ambrumenil Ltd v Inland Revenue Comrs [1947] 1 All ER 650 and Southern Railway of Peru Ltd v Owen (Inspector of Taxes) [1956] 2 All ER 728 distinguished.

Decision of Walton J [1976] 2 All ER 468 affirmed.

Notes

For the period to which trade receipts are referable, see 20 Halsbury's Laws (3rd Edn) 140, 141, para 248.

Appeal

The taxpayer, International Commercial Bank Ltd ('the bank'), was incorporated on 19 July 1967 by a consortium of five major banks, namely National Westminster Bank, First National Bank of Chicago, Irving Trust etc of New York, Commerz Bank of Dusseldorf, and Hongkong & Shanghai Banking Corporation. It was formed to provide medium-term finance in world markets to commercial companies by way of loans running from two to seven years. Later the period of the loans was in some instances extended to ten years. Apart from subscribed share capital it had received considerable sums on deposit and current accounts, the deposit accounts consisting mainly of deposits made by banks on behalf of customers. The current accounts were opened and maintained by customers in respect of medium-term loans. In 1967 clearing banks did not transact the kind of business the bank was formed to do otherwise than through fully owned subsidiary companies. The business carried on by the bank was not that of a clearing bank, though as it had a small number of customers' current accounts it qualified for bank status. At all material times the bank's business included the discounting or purchase of bills and similar obligations issued by borrowers (for periods between one year and ten years) all over the world, with an overall limit (fixed internally by the bank) for each country for loans to companies or individuals resident there. Those bills were often issued in sets of six or 12, maturing at regular intervals; some carried a fixed rate of interest, others carried none. Although the bank usually held such bills to maturity, on many occasions it sold them prior to maturity, and also bought them, in the recognised international market in what was called 'medium-term paper'.

Such sales were normally effected when new business offered itself in a country already at its limit; rather than refuse such new business, the bank sold old bills of that country before purchasing fresh bills, thus staying within its limit. Sales and purchases of bills also occurred in the market from time to time when the bank considered them advantageous. There was a large market with a very considerable turnover available to the bank for the buying and discounting of bills which might be sold before maturity or allowed to run to maturity. Current prices of discounted bills were affected by the risk involved in rates of interest which were subject to wide fluctuations. The amount of profit a purchaser or discounter of a bill might make was not ascertainable before the bill (a) was sold or (b) reached maturity. At the end of each year, the bank brought into its accounts a fractional part of the profit expected to be made if its bills were held until maturity. Accounts were drawn up in the normal banking form customary for clearing banks and the bank did not change the form of its accounts for presentation to the Inland Revenue for the accounting periods in question, though it realised that the profits shown by accounts so prepared might not accord with the results of computations of profits or gains made on income tax principles.

Assessments to corporation tax were made on the bank for the accounting periods for the years ending 31 December 1967 to 31 January 1970 in various amounts based on the bank's accounts. The blank appealed against the assessments on the ground that no part of any unrealised profit on maturity of bills should be anticipated by being included in the computation of the bank's profits for corporation tax purpose in the relevant accounting periods. The General Commissioners allowed the bank's appeal but, at the request of the Crown, stated a case for the opinion of the High Court. On 12 March 1976 Walton J ( [1976] 2 All ER 468 , [1976] 1 WLR 657 , [1976] STC 188) dismissed the Crown's appeal and affirmed the decision of the commissioners. The Crown appealed.

Cur adv vult

Appeal dismissed. Leave to appeal to the House of Lords granted.