Scottish Court of Session Decisions

The Lord Advocate, for and on behalf of the Commissioners of Inland Revenue, brought this action against the Lord Provost, Magistrates, and Council of the City of Edinburgh for declarator that the defenders were bound “to render to the Commissioners of Inland Revenue a full account of the sums retainable by the defenders in respect of income-tax during the period from 22nd September 1901 to 5th April 1902 upon their payment of interest of moneys borrowed by them on temporary loan by means of bill or promissory-note or simple acknowledgment, and whether such an account be rendered or not,” that the defenders should be decerned “to pay to the pursuer the sum of £1200, or such other sum, more or less, as may be found to be due and payable in respect of income-tax retainable as aforesaid, with interest on the said sum of £1200.”

Under various Acts the Corporation of Edinburgh are empowered to borrow upon the security of the burgh assessments in order to meet capital expenditure, and, in particular, under section 40 of the Edinburgh Corporation Act 1899 they are empowered to raise at any time temporarily, by the issue and renewal of Edinburgh Corporation bills or promissory-notes any moneys which the Corporation are or may be authorised by Parliament to borrow, provided that the total amount of such bills or promissory-notes issued and outstanding shall not at any time exceed £250,000, except bills or promissory-notes issued in order to pay off other bills or promissory-notes matured..

Since the date of the Act of 1899 the Corporation had been in the practice of borrowing money temporarily by the issue

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of bills and promissory-notes, and by simple acknowledgments granted to lenders. The holders of bills and promissory-notes, and of simple acknowledgments for temporary loans, had under the Acts the security of the rates and assessments leviable under the Acts.

The Commissioners of Inland Revenue by letter of September 21st 1901 required the Corporation, upon making payment of interest on the temporary loans, to deduct income-tax at the rate in force at the time of payment, and to render an account of the amount deducted and to pay over the same to the Revenue. The Corporation declined to do so. The pursuer averred that between September 22nd 1901 and April 5th 1902 the interest paid by the Corporation on temporary loans raised by bill or note or acknowledgment amounted to over £20,000, and the tax retainable in respect of that interest to at least £1200.

The defenders, in a statement of facts, averred, inter alia, that none of the promissory-notes, by the issue of which money was temporarily borrowed, were issued to or discounted with private individuals. These notes were discounted with bankers or other financial traders, who are assessed as traders upon their profits from the discounts as part of the income derived from their trade or business. The Corporation also borrowed money temporarily by means of short loans or overdrafts from banks. In the case of the said discounts and interest to banks the Corporation were not bound or entitled to deduct income-tax. “(Stat. 5) The temporary loans received by the Corporation from individuals or companies other than banks do not bear annual interest. The whole of said loans are for periods less than a year.… Many of the lenders are trading firms or companies who keep regular business books. The interest paid to such firms or companies is included in their income in calculating their profits, and the defenders aver that the income-tax exigible in respect thereof during the period libelled has been duly paid by said firms or companies. No further income-tax is chargeable in respect of said interest. The Corporation are not bound to deduct income-tax from interest not being annual interest paid by them, and in point of fact they have not done so.”

The pursuer in answer stated (Ans. 4)—“It is the case that in practice bankers are assessed as traders upon their profits from interest on short loans, and if information be supplied by the defenders showing that the parties to whom promissory-notes were issued or acknowledgments were granted within the period libelled were bankers, the Corporation will not be required to deduct tax from the discount or interest in these cases. Though the recipient of discount or interest may be assessed directly, that does not prevent the recovery of duty in the way expressly provided by section 24 of the Customs and Inland Revenue Act 1888.”

With reference to temporary loans received by the Corporation from lenders other than banks the pursuer stated (Ans. 5)—“The interest in question is taxable as interest, and it was not included in the returns submitted to the Revenue by trading firms or companies or others, excepting bankers, lending money to the Corporation. Under the Customs and Inland Revenue Act 1888 the defenders were bound to deduct from the interest a proportionate amount of tax on payment, whether the interest arose from a loan for a year or from a loan for a shorter period.”

The pursuer pleaded, inter alia, as follows—“(1) The defence being irrelevant ought to be repelled. (2) The interest payable by the Corporation in respect of moneys borrowed by them on temporary loan is chargeable to income-tax. (3) The Corporation, when paying interest on moneys so borrowed, ought to deduct income-tax at the rate in force at the time of payment, and are bound to account therefor to the Commissioners of Inland Revenue.”

The defenders pleaded, inter alia, as follows—“(3) The defenders should be assoilzied from the conclusions of the summons in respect that—( a) The defenders are not bound or entitled to deduct income-tax from discounts on bills or promissory-notes discounted with banks or financial traders, or from interest paid on short loans or overdrafts from bankers. ( b) Income-tax on interest, not being annual interest, falls to be accounted for by the recipients of such interest under section 100 of the Act 5 and 6 Victoria, cap. 35, second rule of third case of Schedule D, and the defenders are not bound to deduct the income-tax from such interest. ( c) The income-tax sued for, in so far as the same was due or payable, has been already duly accounted for and paid over to the Inland Revenue.”

On July 9, 1903, the Lord Ordinary ( Stormonth Darling) pronounced the following interlocutor—“Finds that, under the Customs and Inland Revenue Act 1888, section 24, sub-section 3, the defenders are bound, upon payment by them of any interest on money, whether yearly interest or not, or of annuities charged with income-tax under Schedule D, and not payable or not wholly payable out of profits or gains brought into charge to such tax, to deduct out of such interest or annuities the rate of income-tax in force at the time of such payment, and forthwith to render an account to the Commissioners of Inland Revenue of the amount so deducted, or of the amount deducted out of so much of the interest or annuities as is not paid out of profits or gains brought into charge, as the case may be: Appoints the defenders, within one calendar month, to render such an account for the period from 22nd September 1901 to 5th April 1902, and decerns: Quoad ultra continues the cause: Grants leave to reclaim.”

Opinion.—“This case wears an aspect of complication, as most cases do which turn on the construction of the income-tax statutes. But the actual point for decision at the present stage is simple enough.

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The Corporation of Edinburgh have by statute extensive powers for borrowing money on the security of their rates and revenues. These powers are exercised not merely by the issue of stock and annuities of a more or less permanent nature, but temporarily, by granting promissory-notes and simple acknowledgments for advances of money. So far as these temporary loans are obtained from banks, the Crown authorities are satisfied that they have no interest to insist on deduction of income-tax on the sums of discount and interest paid by the Corporation, because these sums are included by banks in their general returns of profit for income-tax purposes. But as regards sums paid to other lenders, the Crown authorities say that they have an interest to insist on their full rights under the Customs and Inland Revenue Act 1888, section 24 (3). And the question is whether this enactment requires deduction of income-tax by the person making payment of any interest of money, even for a period of less than a year, or whether it is only the tax on annual interest which has to be deducted.

Now, it has been decided that interest on money lent for less than a year is chargeable with income-tax in the hands of the recipient of such interest. That is the result of the case of Leeds Benefit Building Society v. Mallandaine (1897), 2 Q.B. 402, which was a decision on section 2 of the Income-Tax Act of 1853. The section charges tax on ‘all interest of money,’ and although these words are followed by the words ‘annuities and other annual profits and gains not charged by virtue of any of the other schedules contained in this Act,’ the Court of Appeal held that the general words ‘all interest of money’ were not controlled by the words which followed.

So much for the liability of the recipient of interest on short loans to pay income-tax. Is the person paying such interest bound to deduct the tax and account for it to the Crown?

The principle of deduction of income-tax at its source has been in operation since an early period of income-tax legislation, and an interesting review of it will be found in the judgment of Lord Macnaghten in the London County Council case (1901), App. Ca. 37–40. Prior to 1888 the person making payment of rent or yearly interest of money (for as late as 1853 the clause about deduction referred to ‘yearly interest’) was not bound to make deduction of income-tax. It was optional on his part; and I suppose he only did it when it was his interest to do it, i.e., when the statutes allowed him to retain for his own benefit the tax so deducted on the ground that he had already paid tax on the interest as part of his own income. But, as Lord Macnaghten points out, the Revenue Act of 1888 by section 24 (3) alters that, and renders it obligatory to make the deduction and to account for it to the Crown, unless the payment comes out of income which has already paid the duty. And what is especially noteworthy for the purposes of the present question is that this Act, unlike the prior Act when dealing with deduction of tax, does not speak merely of the ‘yearly interest of money’ but of ‘any interest of money.’

Now, that is what, I think, distinguishes the present case from the case of Goslings v. Sharpe (1889), 23 QBD 324, which the defenders found on, and which was a decision on the Act of 1853, section 40. That section, as I have indicated, allows the person liable to the payment of ‘any rent, or any yearly interest of money, or any annuity or other annual payment’ to deduct and retain for his own benefit the amount of duty payable at the time; and the only question in Gosling's case was whether interest calculated at a yearly rate, though for periods less than a year, could come within the description of ‘yearly interest.’ The Court held not. But that does not govern a case under a later statute, where the language is different, and where the purpose is not to confer a privilege on the subject, but to provide greater security to the Crown for the recovery of its revenue.

The defenders suggest that the principle contended for by the Crown would lead to great practical inconvenience, particularly in the case of short loans obtained from bankers. That may be; but it cannot affect the construction of the statute, nor does it follow that the Revenue authorities will always insist on their full rights. Indeed, their concession in Answer 4 shows a desire to avoid causing unnecessary trouble. The defenders also suggest that, as regards by much the larger proportion of the claim, the Crown is seeking to exact payment of income-tax a second time. That, of course, depends on facts and figures which are not before me, and nothing which I now decide can form any warrant for so inequitable a result. What I shall do, therefore, is to find that, under the Customs and Inland Revenue Act 1888, section 24, sub-section 3, the defenders are bound, upon payment by them of any interest of money, whether yearly interest or not, or of annuities charged with income-tax under Schedule D, and not payable or not wholly payable out of profits or gains brought into charge to such tax, to deduct out of such interest or annuities the rate of income-tax in force at the time of such payment, and forthwith to render an account to the Commissioners of Inland Revenue of the amount so deducted, or of the amount deducted out of so much of the interest or annuities as is not paid out of profits or gains brought into charge, as the case may be; and I shall appoint the defenders within one calendar month to render such an account for the period from 22nd September 1901 to 5th April 1902.”

The defenders reclaimed, and argued—The pursuer's claim was based on section 24 of the Customs and Inland Revenue Act 1888. That Act was an amending Act, and section 24 must be construed in connection with the provisions of the earlier Acts, and in particular in the light of the provisions of section 40 of the Income-tax Act 1853. The purpose and effect of section 24 of the

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Act of 1888 was simply to make it compulsory on debtors paying interest to deduct income-tax, in the circumstances in which they were entitled to do so under section 40 of the Act of 1853. Section 40 of the Act of 1853 only applied to persons liable to “the payment of any rent or any yearly interest of money or any annuity or other annual payment.” … Accordingly bankers lending money to customers for a specified time less than a year, to be repaid at that time with interest accrued due, were not bound to allow a deduction for income-tax, on the ground that such interest was not “yearly interest”— Goslings & Sharpe v. Blake, 1889, 23 QBD 324. If, then, it were held that income-tax had to be deducted by the city in case of short loans to it, and not by the banks in the case of short loans to them, the city would be prejudiced as borrowers on short loan compared with banks. Section 24 of the Act of 1888 did not make a radical change in the income-tax law, but was to be construed in pari materia with, and as complementary to, the earlier enactments—per Lord Macnaghten and Lord Davey in The London County Council v. Attorney General [1901], A.C. 26. On this principle the words in section 24 of the Act of 1888—“any interest of money”—must be read as being limited to any yearly interest. The contention of the pursuer if upheld would cause grave practical inconvenience, e.g., in the case of loansfrom banks, and in other cases it might even cause hardship, in respect that it might involve the payment of income-tax twice over by some of the receivers of interest.

Counsel for the respondent were not called upon.