Scottish Court of Session Decisions

The Scottish Provident Institution, Edinburgh, which is a mutual life assurance society, appealed to the Commissioners of Income Tax for the County of Midlothian against an assessment for the year 1893–4 on the sum of £90,359, being the amount of interests unaccounted for to the Revenue.

The Commissioners sustained the appeal, and at the request of Mr R. S. Forbes, Surveyor of Taxes, on 9th July 1895 stated a case for the opinion of the Court of Exchequer, in terms of the Taxes Management Act 1880 (43 and 44 Vict. cap. 19), section 59.

The case recited a joint-minute of admissions of facts, adjusted and signed by the agent of the institution and Surveyor of Taxes, from which the following is extracted

1. The Scottish Provident Institution was established in the year 1837 on the principle of mutual assurance, and it was incorporated in the year 1848 by its private Act, 11 and 12 Vict. cap. 106.

Its head office is in Edinburgh, and its ordinary management and administration are wholly vested in a board of directors established there.

… The institution's life assurance business is as yet entirely a home business, and it has no agencies outside the United Kingdom other than those employed in the investment of portions of its funds.

4. At the beginning of the year 1892 the institution's common fund amounted to £7,801,431, 8s. 2d., and at the end of that year it was increased to £8,126,375, 8s. 9d.—the difference (£324,944, 0s. 7d.) being the excess of the receipts on account of premiums, interests, &c., over the amount of claims paid and other expenses, as shown in the revenue account hereinafter mentioned.

The institution has no shareholders to whom dividends are payable, and there is no discrimination between its capital and income. Surpluses are divisible septennially among the participating members, as after mentioned.

5. The directors have lent out considerable sums in Australia and elsewhere out of the United Kingdom by virtue of the powers in this behalf conferred upon them by ‘The Scottish Provident Institution Act 1884.’ The interest derived from these loans in the year 1892 amounted to £90,359, 8s. 9d. That interest was wholly deposited with the company's bankers in the country where it was collected, and, not being required to meet charges against the common fund in the United Kingdom, it was not remitted to this country in forma specifica, but in terms of the institution's powers it was lent out as opportunity offered in the name of the corporation. It forms part of the ‘interests’ which appear in the revenue account mentioned in the next article.”

6. This article of the minute contained a copy of the institution's revenue account and balance-sheet for the year ending 31st December 1892, as given up to the Board of Trade in terms of the Life Assurance Companies Act 1876 (33 and 34 Vict. cap. 61), sec. 5. On the charge side of the revenue account appeared the item “interests, dividends, and rents, £342,032,” which was stated to include the before-mentioned sum of £90,359 of foreign interests not received in the United Kingdom in forma specifica.

7. The septennial investigation into the affairs of the institution is appointed by the laws to take place at the end of every seventh year. The last investigation took place as at 31st December 1887, and the next will take place as at 31st December 1894. Although there was thus no distribution of surplus in the year 1892 there are now submitted on behalf of the institution the following facts relating to these distributions:—Law 27 provides that the surplus, ‘under deduction of such proportion as the directors shall consider necessary and proper in the circumstances to be retained as a guarantee, shall be made available to the members entitled thereto as after provided, and that by additions to the capital sums that will certainly—unless the policies be forfeited or surrendered—become payable on the death of the members or others on whose lives the assurances were effected; but no share of the said surplus shall be apportioned to any assurance which depends on the contingency of one life surviving another, or of the life assured predeceasing or surviving any assigned period. Members may have their shares of surplus applied in diminution of their annual contributions, or in periodical or annual additions to their policies; or they may at any time surrender their vested additions for cash.’ It is provided by law 28 that ‘the surplus shall eventually belong to those policies only on which

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there has been paid into the Common Fund, either by single payment or annual contributions, a sum which, when accumulated with interest at the rate of 4 per centum per annum, shall be equal in amount to the sum originally assured.’

8. The surplus ascertained at the last investigation (31st December 1887) amounted to £1,051,035, 8s. Of that the sum of £350,345 was retained, and the remainder £700,690 was directed to be apportioned ‘among the several policies entitled to participate therein according to the value of the policies respectively as the same are fixed by the foresaid states,’ prepared by the actuary;’ and the directors appropriate the said sum accordingly, and order that the sums expressed in the said policies respectively shall be increased in conformity therewith.’ [Here follows the following note,—‘Members may have their share of surplus applied in diminution of their annual contributions’].—See report of proceedings of annual meeting 1888.”

9. This, the final article of the minute, set forth the consolidated revenue account of the institution for the septennium 1881-1887, as returned to the Board of Trade in terms of the said Life Assurance Companies Act.

The case then proceeded to state the ground of appeal and the contentions of the Surveyor, which appear sufficiently from the argument below; and, after setting forth that the Commissioners had sustained the appeal as regards the interests in question “in respect (1) that it had not been remitted to this country in forma specifica, (2) that the facts were not sufficient to prove constructive remittance,” concluded by stating the following questions of law for the decision of the Court:—“(1) Whether the institution is liable to pay income tax upon the full amount of the interest from investments either under Case 1 of Schedule D in section 100 of the Income Tax Act 1842, or under section 102 of same Act? (2) Whether, if, on the other hand, the institution is assessable under the 4th Case of Schedule D, the facts amount to constructive remittance?”

The same question was raised in another case staled by the Income Tax Commissioners on an appeal made to and sustained by them on behalf of the Scottish Widows' Fund and Life Assurance Society, Edinburgh, another mutual life assurance society.

The amount of interest assessed upon was £119,909, and of this sum £3441 represented the amount applied in defraying the expenses of the society's office at Sydney, New South Wales.

The case contained the following joint admission of facts:—

“1. The society is a corporation for mutual life assurance and the sale of annuities, which has no share capital, the only members being the policyholders.…

2. The society has an office at Sydney, in the colony of New South Wales, for the sole purpose of making investments in Australasia, collecting interests falling due there upon these investments, and receiving payment of principal sums as they fall due. This office is under the charge of a responsible officer of the society, who is assisted and controlled by a committee of advice at Sydney.

The funds for investment arise from its above-mentioned business and the revenue from investments, and, along with the other funds of the society, are applied or are available only to meet claims and charges against it. Subject to the foregoing explanation concerning the Sydney office, the society does not carry on any separate business of investing money.

3. In September 1893 a sum of £102,000 was remitted to the Sydney office. Part of this sum was remitted under a misapprehension, and to correct this the Sydney office remitted bills for £80,000, which were received in London on 15th January 1894, and were cashed and credited in the books of the society on 15th March 1894. This cross remittance of £80,000 is the only sum which has been received or remitted from the Sydney office since the time of its establishment up to the close of the year of assessment on 5th April 1894. The interests received at the Sydney office have been applied in payment of the expenses connected with the office and the business there carried on, and the surplus, along with any principal sums repaid, has regularly been re-invested in the colonies.

The following statement shows the gross interest received at the Sydney office, the expenses connected with that office, and the sums remitted to Sydney for the three years noted below

Year	Gross Interest Received.	Expenses.	Sums Remitted 10 Sydney.
1891	£106, 319 2 11	£3,991 16 11	£100,318 4 7
1892	119,909 9 1	3,441 6 6	819 4 7
1893,	123,433 2 9	3,725 19 10	230,277 17 0

These expenses are charged in the revenue accounts under the head of “Expenses of Management.” They were deducted from the society's return for assessment of untaxed interest.

The investments made by the society in Australia are of the nature of loans, and although a considerable part of the expenses of the Sydney office are attributable to the work connected with inquiries necessary to lead to a selection of suitable investments, these expenses have always been regarded by the society as wholly forming a charge against the interest received at Sydney, on the ground that the investments being loans, a loss of principal would arise if the expenses were not entirely defrayed out of interest.

The society also makes investments in New Zealand, the interest upon which is received in London, and income-tax has been regularly paid in respect of the interest so received.

In order to comply with the provisions of the Life Assurance Companies Act 1870 (33 and 34 Vict. cap. 61), the whole interest and dividends arising from the society's investments, and the whole of their annual outgoing and yearly expenses, are entered in the society's yearly accounts, but the revenue account, in which these appear, expressly bears to have been made up in

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pursuance of the statute referred to, the title being as follows:—‘Revenue account and balance-sheet in the forms prescribed by “The Life Assurance Companies Act 1870.”’ It has no other revenue account for submission to members, and no separate account of investments. A printed copy of the accounts for the year 1892 is produced.

The interest received at Sydney, though liable along with the other funds of the society to meet annual charges against the society's business, has not been required for that purpose.

If the interest received at the Sydney office, and the expenses of management connected with that office, are eliminated from the receipts and payments respectively appearing in the revenue account of the society, it will be found that the sums received in the United Kingdom have always been more than sufficient to provide for the whole payments made by the society.—[Here followed certain figures showing a large excess of sums received over payments, even when the interests received at Sydney were excluded.]

The legal questions submitted for the decision of the Court were the same as in the case of the Scottish Provident Institution, with the addition of a third, viz.—“(3) Whether in any case the expenses of the office at Sydney are a legitimate deduction from the amount of untaxed interest liable to assessment.”

The Income-Tax Act 1842 (5 and 6 Vict. cap. 35), sec. 100, enacts that the duties imposed by the Act shall be levied under certain rules which it proceeds to enumerate under the head of numbered cases. Case 3 is “the duty to be charged in respect of profits of an uncertain annual value not charged in Schedule A,” and the first rule applicable thereto is, “the duty to be charged in respect thereof shall be computed at a sum not less than the full amount of the profits or gains arising therefrom within the preceding year … without any deduction.” Case 4 is “the duty to be charged in respect of interest arising from securities in Ireland, or the British plantations in America, or in any other of Her Majesty's dominions out of Great Britain, or foreign securities,” except such annuities, &c., as are directed to be charged under Schedule C. The rule applicable to it is as follows—“The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the sums (so far as the same can be computed) which have been or will be received in Great Britain in the current year without any deduction or abatement.”

Section 102 of the same statute enacts that “upon all annuities, yearly interest of money, or other annual payments, whether such payments shall be payable within or out of Great Britain, either as a charge on any property of the person paying the same by virtue of any deed, or will, or otherwise, or as a reservation thereout, or as a personal debt, or obligation by virtue of any contract, or whether the same shall be received and payable half-yearly, or at any shorter or more distant period,” income-tax shall be charged. It provides that interest from profits charged shall be liable to deduction, but enacts that all other interest shall be charged according to and under and subject to the provisions for charging the duty in Schedule D, Case 3.

The Income-Tax Act 1853 (16 and 17 Vict. cap. 34), sec. 5, enacts that the duties granted by it shall be levied under the regulations and provisions of the Income-Tax Act 1842, and certain subsequent statutes, and that “for this purpose” these Acts shall be revived.

The Customs and Inland Revenue Act 1893 (56 Vict. cap. 7), sec. 5, sub-sec. (1), grants certain duties of income-tax “in respect of all property, profits, and gains mentioned or described as chargeable in the Income-Tax Act 1853, namely, the annual value of property, profits, and gains chargeable under Schedules A, C, D, and E, of that Act, and the annual value of occupation of lands, &c., under Schedule B of that Act. Sub-section (2) enacts that “all such provisions contained in any Act relating to income-tax as were in force on the 5th day of April 1893 … shall have full force and effect with respect to the duties of income-tax hereby granted so far as the same are consistent with this Act.”

Argued for the appellant the Surveyor of Taxes—(1) These interests were taxable under sec. 102 of the Income-Tax Act of 1842, and that section made reference to a case which does not impose actual reception in this country as a condition of taxation. The Inland Revenue was entitled to tax such interests either under Case 4 of Schedule D, or under section 102, and Case 3 of Schedule D, whichever might be most convenient. (2) In any event the interests were taxable under Case 4, because they were constructively remitted home— Scottish Mortgage Company of New Mexico v. Inland Revenue, November 19, 1886, 14 R. 98. The moment they entered the accounts of the society they came to this country. They were duly included in the statutory accounts rendered by the insurance companies, and no bonus was paid or declared without their being taken into account. (3) The appellant ultimately gave up his contention that the interests in question were taxable under Case 1 in Schedule D, though he refused to concede that such mutual assurance companies did not earn profits. In connection with this point the following cases were cited— Colquhoun v. Brooks, L.R., 14 A.C. 493; London Bank of Mexico v. Apthorpe, L.R. (1891), 2 Q.B. 378; San Paulo Railway Company v. Carter, L.R. (1895), 1 Q.B. 580; Last v. London Assurance Corporation, L.R., 14 QBD 239, 10 A.C. 438; New York Life Insurance Company v. Styles, L.R., 14 A.C. 381; Clerical, &c. Life Assurance Society v. Carter, L.R., 22 QBD 444; Scottish Union and National Insurance Company v. Inland Revenue, February 8, 1889, 16 R. 461.

Argued for the respondents—(1) The subjects liable to the tax were all embraced in Schedules A, B, C, D, and E of the Act of

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1842, which were republished with an addition to D in the Act of 1853. Sec. 102 was consequently not a charging section at all— Clerical, &c. Life Assurance Society v. Carter, L.R., 21 Q.B.D. 339. It was merely supplementary, and should have been introduced among the rules of sec. 100. It was probably framed with reference to public bodies like parochial boards, who are not assessed to the duty, and yet have to pay interest on bonds and the like— Bell v. Bunny, 1 Kay & Johnson, 218, per V.C. Sir W. Page Wood, p. 219. The Inland Revenue claimed to be entitled to choose whether it should tax under Case 4 of Sched. D, or under sec. 102 and Case 3 of Sched. D. But if such an interpretation of sec. 102 were correct, the Inland Revenue would really have no alternative but to charge under sec. 102, which was much more sweeping. If any such power was given under sec. 102, the whole scheme of the Income-Tax Acts disappeared, for that section could never be worked out consistently with Schedule D, Case 4. (2) There was no remittance, actual or constructive. This case therefore was easily distinguishable from the Scottish Mortgage Company of New Mexico, ut sup., and fell within the category of Smiles v. Australasian Mortgage and Agency Company, July 12, 1888, 15 R. 872; and Bartholomay Brewery Company v. Wyatt, L.R. (1893), 2 Q.B.D. 499. (3) On the point raised and abandoned under Case 1, the respondents cited Gresham Life Assurance Society v. Styles, L.R. (1892), A.C. 309.

The respondents, the Scottish Widows' Fund Society, further argued on the third question submitted to the Court—At all events, there could be no constructive remittance of money actually spent abroad. The fact that the money was so spent distinguished the case from that of Aikin v. Macdonald, November 27, 1894, 22 R. 88. The expenses of the society's office at Sydney consequently fell to be deducted from the amount of the interest if they were chargeable.

At advising—