Scottish Court of Session Decisions

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Cite as: [1880] SLR 17_444, [1880] ScotLR 17_444

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SCOTTISH_SLR_Court_of_Session

Page: 444↓

Court of Session Inner House Second Division.

Tuesday, February 24. 1880.

17 SLR 444

Special Case—Kinloch and Others (Kinloch's Trustees)

v.

Kinloch.

Subject_1Relief
Subject_2Where Testamentary Provision Payable Free from “All Burdens and Deductions”
Subject_3Whether that included Income-Tax.

Revenue
Subject_4Income-Tax Act 1842 (5 and 6 Vict. c. 35), sec. 103 — Is a Testamentary Bequest a “Contract?”
Facts:

A testator left to his widow an annuity “exempted from all burdens and deductions whatsoever,” which was declared to be in full satisfaction of all her legal rights. Held that income-tax upon the annuity fell to be paid by her, it not being a “burden” upon or “deduction” from the amount of the annuity, but a tax which is calculated upon the whole amount of the annual sum.

Observed that the result would have been different if the words had been “free of all taxes.”

The 103d section of the Income-Tax Act 1842 (5 and 6 Vict. c. 35) provides “that all contracts, covenants, and agreements made or entered into, or to be made or entered into, for payment of any interest, rent, or other annual payment aforesaid in full, without allowing such deduction as aforesaid, shall be utterly void.” Held that bequests and testamentary gifts are not included under the words of that section, and that a legacy will not be included in the term “contract” merely because some condition is imposed upon the legatee.

Observations per Lord Gifford upon the case of Rodger's Trustees, 2 R. 294.

Headnote:

By antenuptial contract of marriage between Alexander John Kinloch of Park, Altries, and others, and Mrs Margaret Morison Hutcheon or Kinloch, dated 29th November 1841, Mr Kinloch, proceeding under the Aberdeen Act, inter alia, bound and obliged himself and the heirs of entail succeeding to him in his entailed lands and estate of Park and others, in the counties of Aberdeen and Kincardine, and subsidiarie his heirs and successors whatsoever, duly and validly to infeft his widow in case she should survive him, during her life after his decease, in a free liferent annuity of £750 sterling. Mrs Kinloch accepted of that and certain other provisions, which it is unnecessary to specify, “in full satisfaction of all terce of lands, half or third of moveables, and every other claim or provision” whatever which she could demand through the decease of her husband. On the other hand, she assigned, conveyed, and made over to and in favour of her husband, and his heirs and assignees whomsoever, all lands, estate, effects, debts, and sums of money whatsoever then pertaining and belonging to her, or to which she should succeed during the subsistence of the marriage. Mrs Kinloch was duly infeft in the annuity. The estate of Park and others were disentailed by Mr Kinloch in 1869 with consent of the three next heirs of entail, and were held by him in fee-simple thereafter during his life. On 10th December 1869 he executed a mortis causa bond of annuity and disposition in security in favour of his wife. It was granted on the recital of the above provisions in the contract of marriage, and on the further recital that Mr Kinloch now held the estate of Park and others free from the fetters of the entail, and that he was desirous not only to increase the annuity and other provisions provided to his wife in the contract of marriage, but also to revoke and recal the contract in so far as in certain events it restricted the annuity thereby granted to her. The bond then proceeded as follows:—“Therefore I do hereby provide, and bind and oblige myself, my heirs, executors, and successors whomsoever, to content, pay, and deliver to the said Mrs Margaret Morison Hutcheon or Kinloch, my spouse, in liferent during all the days of her life after my decease, in case she should survive me, a free yearly annuity or liferent provision of £1000, exempted from all burdens and deductions whatsoever, and that by equal portions,” &c. It was further declared that the marriage-contract should remain operative, but that Mrs Kinloch should not be entitled to more than the annuity of £1000 a-year; and various restrictions in the contract were revoked and the provision declared to be in full of all Mrs Kinloch's legal rights.

Mr Kinloch died on 19th July 1879 leaving a trust-disposition and settlement dated 18th December 1878, whereby he conveyed to trustees his whole lands and heritages for the purpose of carrying out his wishes and intentions as they might be expressed in any writings executed by him. Of even date with the trust-disposition he executed a last will and testament, under which he gave directions for the carrying out by his trustees of the provisions above named in favour of his wife.

After Mr Kinloch's death a question arose whether, in virtue of the bond of annuity and disposition in security, Mrs Kinloch was entitled to receive, and the trustees were entitled and bound to pay to her, the liferent annuity of £1000 without deduction of income-tax; and this was a Special Case brought between (1) Robert Kinloch and others, Mr Kinloch's trustees, and (2) Mrs Kinloch, submitting, inter alia, for the opinion of the Court—“Whether the parties of the first part are entitled and bound to pay to the party of the second part her annuity of £1000 without deducting income-tax?”

Argued for first parties—The words “burdens and deductions” did not include income-tax, which was a tax proper, and was not a deduction from the income. Mrs Kinloch got the income whole from the trustees, but they for convenience paid the tax to the revenue. Besides, a contract to pay free of income-tax was illegal under 5 and 6 Vict. cap. 35, secs. 88,102, and 103. Sec. 103 enacts that “All contracts, covenants, and agreements made for payment of any interest, rent, or other annual payment aforesaid in full, without allowing such deductions as aforesaid, shall be utterly void.”

Authorities— Hackie's Trustees v. Mackie and Others, Jan. 15, 1875, 2 R. 312; Rodger's Trustees v. Rodger, Jan. 9, 1875, 2 R. 294; Blair v. Allen, Nov. 17, 1858, 21 D. 15; Robson v. M'Nish, Feb. 2, 1861, 23 D. 429; Turner v. Mullineux, Jan. 16, 1861, 1 John, and Hem. 334; Festing v. Taylor and the Duchess of Somerset, Jan. 14, 1862,
Page: 445↓
3 Best and Smith 217 and 235; Lethbridge v. Thurlow, Dec. 12, 1851, 15 Beavan 334.

Argued for second parties —(1) On the question whether this provision was struck at by the statute, the acceptance by the widow of provisions in her favour would not bring the transaction within the term “contract;” besides, this was a gift in a mortis causa deed. The case of Mackie's Trustees (quoted supra) was conclusive on this point. This case was also an authority on the other point, for there the judgment was not founded on the use of the word “taxes,” but on “deduction.” By the 102d section of the statute income-tax was expressly called a deduction. The income-tax was here given her as a separate legacy ( Festing's case quoted supra)— Bulloch v. Beaton, Feb. 8, 1853, 15 D. 373; Wall v. Wall, 16 L.J., Chan. 305, 15 Simon 513 (and other cases quoted in Festing's case); Turner v. Mullineux, quoted supra. The cases of Wall and Lethbridge were not binding on their Lordships; they were directly in conflict with Mackie's case, which enabled their Lordships to displace them.

Judgment:

At advising—

Lord Justice-Clerk—The main question raised in this Special Case has, I think, been settled by authority, and that so conclusively as to make it unnecessary to go into any detailed citation of precedents. It is also, I think, attended with no difficulty on its merits. The question is, whether when an annuity or rent-charge or yearly payment of any kind is bequeathed by will free, as here, of any burden or deduction whatever, the person in receipt of the funds out of which the charge is payable is bound to pay it over without deduction of the income-tax, which by fiscal regulations he is obliged to account for to the revenue? This tax is neither a burden on or deduction from the amount of the charge. On the contrary, the income-tax is calculated on the whole amount, because all of it is income. The recipient is entitled to the full amount, and is charged with income-tax on it. The obligation on the holder of the funds to pay the tax in the first instance is a mere fiscal arrangement for the convenience of collection, and has no real effect on the benefit received by the legatee or creditor. This was announced by Lord Hatherley as Vice-Chancellor in Turner v. Mullineux, 1 John, and Hem. 335, to be the settled view of the Courts in England, and always acted on, as indeed appears clearly from the argument in the case.

The question is entirely different when, as in the case of Mackie, 2 R. 312, and the above case of Turner, the gift is made “free of all taxes.” These words truly amount to a gift of the tax over and above the annual charge, and the testator's representative is directed both to pay the tax and also to pay the whole sum charged. Apart from the case of Mackie, this point seems conclusively ruled in the case of Festing v. The Duke of Somerset, in 1862, 3 Best and Smith, 217 and 235, in which Seven Judges in the Exchequer Chamber reversed the contrary judgment of Lord Blackburn, and also ruled that the 103d section of the Income-Tax Act had no application to wills or testamentary dispositions.

Lord Ormidale concurred.

Lord Gifford—This Special Case asks a judgment on several questions which have arisen between the trustees of the late Alexander John Kinloch of Park and his widow. The questions depend partly on the construction of the mortis causa deeds left by the truster, and partly upon the meaning and effect of the Income-Tax Statutes now in force.

The leading question is, Whether Mr Kinloch's trustees are entitled and bound to pay Mrs Kinloch her annuity of £1000 a-year without deducting income-tax therefrom? I am of opinion, though not without hesitation, that the trustees are bound to deduct the income-tax on the annuity in the usual way, and that Mrs Kinloch is not entitled to require that her husband's trustees shall pay it.

The first question which was argued was, whether assuming that Mr Kinloch intended to direct his trustees to pay the income-tax effeiring to his widow's annuity, such provision would be struck at as illegal under the 103d section of the Income-Tax Act of 1842 (5 and 6 Vict. cap. 35)? This section, after imposing a penalty of £50 on any person refusing to allow deduction of income-tax on any interest or annual payment or annuity, enacts “that all contracts, covenants, and agreements made or entered into, or to be made or entered into, for payment of any interest, rent, or other annual payment aforesaid in full, with out allowing such deduction as aforesaid, shall be utterly void.” I am of opinion that this provision does not apply to the deeds under which Mrs Kinloch now claims payment of her annuity. No doubt if the right of Mrs Kinloch had stood only upon the original antenuptial marriage-contract of 1841, it might have been held that if there had been a provision therein contained for the non-deduction of income-tax, such provision would have been rendered void by the enactment in question. But the annuity of £1000 sterling is not claimed by Mrs Kinloch under her antenuptial contract, but under her husband's purely testamentary deeds, and in particular under the gratuitous and testamentary bond of annuity of 1869, and I think it clear that bequests or legacies or testamentary gifts are not included in the words of the 103d section of the statute. The object of that clause was to prevent landlords or creditors from stipulating that their tenants or debtors should pay the income-tax which the law intended to impose on the landlord or creditor personally, and the reason of the provision has no application to a gratuitous legacy or bequest or gift, which the testator or donor may make as ample as he pleases. There is nothing illegal in a testator bequeathing legacies free of legacy-duty, although legacy-duty is a tax imposed upon the legatee and paid by being deducted from the legacy. A bequest free of legacy-duty is just a bequest of an additional sum equal to the legacy-duty, and occurs very frequently. It is precisely the same with the income-tax. There is no reason why a testator should be prevented from leaving to an annuitant not only a specified annuity but as much more as will pay the income-tax thereon, provided he really intends to do so, and uses appropriate expressions indicating his intention; and when I find that the words of the 103d section—“contracts, covenants, and agreements”—are carefully selected so as to exclude wills or bequests, or even, as I venture to think,

Page: 446↓

deeds of pure and gratuitous gift, I cannot extend these words so as to make it illegal for a testator to provide for the payment of the income-tax chargeable upon a legatee or annuitant. He might accomplish the same end by leaving instead of a £1000 a-year, a thousand guineas a-year, or such other sum as would cover the tax, and there is no illegality in his doing the same thing directly by providing in his will that his trustees shall pay the annuitant's income-tax. I think this construction of the Act was rightly adopted by this Court in the case of Mackie's Trustees, 2 R. 312, and the same view has been taken in England. See Festing v. Taylor and the Duchess Dowager of Somerset, Jan. 14, 1862, 3 Best and Smith 217, and reversed on appeal Nov. 6, 1862, 3 Best and Smith 235, and cases therein referred to.

It was contended that the mortis causa bond of annuity to Mrs Kinloch, although testamentary in its nature, became a contract on Mrs Kinloch's acceptance thereof by reason of the provision it contains that the annuity of £1000 was to be “in full satisfaction of all terce of lands, half or third of moveables, and every other claim or provision” which Mrs Kinloch could demand through the death of her husband, and reference was made in support of this view to the case of Rodger's Trustees, decided in the other Division, 2 R. 294. I confess I am not quite satisfied with part of the decision in Rodger's case as reported, but it stands clearly distinguished from the present case, inasmuch as in the present case all the wife's legal claims were fully and effectually discharged by her antenuptial marriage-contract in 1841, so that she gave up nothing else and nothing additional by the words contained in the testamentary bond of annuity of 1869. The additional annuity given in 1869—that is, the difference between an annuity of £1000 and an annuity of £750—was purely and exclusively testamentary and gratuitous. For this difference or increase of annuity Mrs Kinloch gave no value or consideration whatever, and she does not take the increased annuity in virtue of any “contract, covenant, or agreement.” Still further, I am of opinion that a bequest or legacy does not become a contract or agreement merely because there is a condition or provision annexed to it. It is no doubt true that what is really a contract may sometimes be disguised under the form of a legacy, but when this is averred it must be shown to be so, and contract must be proved to have been the essence of the transaction. A legacy is not converted into a contract merely because some condition is imposed on the legatee, such as taking the testator's name, or quartering his arms, or erecting his mausoleum, or maintaining some kinsman, or so on, and in the case before us it is quite clear that the additional or enlarged annuity was given without any additional price or counterpart whatever. Indeed, all restrictions in the event of Mrs Kinloch's second marriage and otherwise seem to be taken off.

Assuming, then, the perfect legality of the late Mr Kinloch providing, if he so intended, that his trustees should pay his widow's income-tax, the only remaining question is, has he really made such provision?—Is this the true import of his testamentary settlements? And here, though not without hesitation, I agree with both your Lordships that the words used are not sufficiently broad as to direct the trustees to pay a proper personal tax imposed by law upon the widow herself. In the case of Mackie's Trustees, where the annuity was held to be free of income-tax, the words were “free of all taxes.” In Festing's case, above referred to, the words were—“without any deduction or abatement whatsoever on account of any taxes, charges, impositions, or assessments already or to be thereafter taxed, charged, assessed, or imposed;” and I rather think that in all the other cases where exemption from income-tax has been sustained—that is, where the tax has been found payable in addition to the annuity by the general estate—some reference was made in the deed to taxes, assessment, imposition, or some similar word.—See Wall v. Wall, 15 Simon 513. The difficulty in the present case is that the only words used in the bond are—“a free yearly annuity or liferent provision of £1000 sterling, exempted from all burdens and deductions whatsoever.” There is very high authority for holding that income-tax, though paid by way of deduction, is not in strictness a deduction from an annuity from rents or from interests. The deducting is a mere accident arising from the mode of collection of income-tax, the tax being levied generally from the sources of revenue, and not. where there are such sources, directly from the pocket of the ultimate taxpayer, so that the word “deduction” and also the word “burden” are really not applicable to the case. Income-tax is not in any legal or accurate sense a deduction, and if the testator had intended that his wife's income-tax should be paid he should have said so—a word would have done—“free of income-tax,” or some similar expression; and in the absence of any reference to income-tax, or to any taxes at all, I think it would be unsafe to hold that the testator meant to provide for payment of his widow's income-tax.

Lord Ormidale—In consequence of what has fallen from Lord Gifford, I wish to say that if I had thought it necessary to enter into the part of the case borne upon by the case of Rodger, I should have thought it necessary to suggest that this case should have been heard by Seven Judges, to have it decided whether Rodger's case is to be considered a leading judgment or not, but in the view I take of it the question does not arise, as the wording of the deed is conclusive.

Lord Justice-Clerk—I purposely did not allude to Rodger's case, for the reason Lord Ormidale has stated. It was here not necessary; the question could not arise. The 103d section of the statute cannot be contravened by a provision which in its expression does not refer to “income-tax.”

The Court therefore answered the question in the negative.

Counsel:

Counsel for First Parties— Keir.

Counsel for Second Party— Kinnear. Agents for First and Second Parties— Dundas & Wilson, C.S.
1880