Scottish Court of Session Decisions

This was an appeal by case stated under The Taxes Management Act 1880, for the opinion of the Court of Exchequer. The appellant was James Walker, of Messrs R. & J. Dick, Glasgow; the respondent was James Reith, Surveyor of Taxes, Glasgow.

The Finance Act 1898 (61 and 62 Vict. cap. 10), sec. 8, provides:—“Any individual who having been assessed or charged to income-tax or having paid income-tax either by deduction or otherwise claims and proves in manner prescribed by the Income-Tax Acts that his total income from all sources, although exceeding £160, does not exceed £700, shall be entitled to relief from income-tax equal… ( c) if his total income exceeds £500 and does not exceed £600, to the amount of the income-tax upon £120 … and such relief shall be given either by reduction of the assessment or by repayment of the excess which has been paid, or by both of those means, as the case may require.”

At meetings of the Commissioners for the General Purposes of the Income-Tax Acts held at Glasgow on the 16th day of December 1904 and the 23rd day of March 1905—James Walker, of Messrs R. & J. Dick, 3 M'Phail Street, Glasgow, appealed against an assessment of £316 (duty £15, 16s.) made under Schedule D of the Income-Tax Acts for the year ending 5th April 1905, in respect that he had not been allowed an abatement of £120. The assessment was made under 5 and 6 Vict. c. 35, sec. 100; 16 and 17 Vict. c. 34, sec. 2; and 4 Edw. VII, c. 7, sec. 7. The abatement was claimed under 61 and 62 Vict. c. 10 sec. 8 (cit. sup.) on the ground that the appellant's total income from all sources did not exceed £600.

The following facts are taken from the case stated:—James Dick, manufacturer, Glasgow, died on the 7th March 1902 leaving a general trust-disposition and settlement appointing testamentary trustees and regulating the succession to his whole means and estate after his death, and also a deed of arrangement regarding the business of boot and shoe and belt manufacturer carried on by him. The deed of arrangement (vide its last article infra) was incorporated in the trust-disposition and settlement. The said deed of arrangement, which was dated 4th and recorded in the Books of Council and Session 11th March 1902, formed part of the case, and was as follows:—

“I, James Dick, manufacturer in Glasgow, considering it is desirable I should make arrangements to take effect after my decease regarding my business of boot and shoe and belt manufacturer, presently carried on by me at Greenhead, Glasgow, and elsewhere, under the designation of R. & J. Dick, and considering that the best method which has suggested itself to me of continuing the business is by giving the heads of the various departments and others in my employment a prospective interest in the profits and power to acquire

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the business after my decease, I have determined and do now make the following arrangements, videlicet:—

(First)—The parties hereinafter named, presently in my employment (and hereafter termed the employees), shall from and after my death have each, on the terms and conditions herein set forth, a prospective interest in the profits of the business and in the business itself if acquired by them in proportion to the number of shares hereinafter set forth against their names respectively, videlicet:—

John Edward Audsley, Green-head Factory,	Ten shares.
Andrew Barclay, Greenhead Factory,	Ten shares.
Adam Hay, Greenhead Factory,	Ten shares.
Andrew McAllister, London.	Ten shares.
Peter Dennistoun, Greenhead Factory,	Ten shares.
Peter Brock, Greenhead Factory,	Ten shares.
Thomas Traill,	Ten shares.
David Kennedy, Belfast,	Ten shares.
Robert Burns,	Four shares.
Walter Reid,	Four shares.
James Walker, Birmingham,	Four shares.
John Linn, London belt shop,	Two shares.
Robert Lockhart, Argyle Street shop,	Two shares.
Allan Mair, shop, 12 Gallowgate,	Two shares.
David Galbraith, shop, 18 Gallowgate,	Two shares.

Total number of shares, One hundred. But it is understood that I shall be entitled to add to or take from the number of employees, and to allot to any new employees such number of shares as I may consider proper, or vary the said allotment in such manner as I may consider proper; and it is hereby specially provided and declared that the provisions under these presents in favour of the employees shall not become vested interests until the whole of my capital and interest has been paid out as after mentioned, and it shall not be competent on any ground or pretext whatever for any employee to sell, convey, or dispose of his interest in the profits or in the business itself under these presents to any person, and any act done in contravention of this stipulation shall be, and is hereby declared to be, ipso facto void and null. In the event of any of said persons ceasing to be an employee or leaving the business, the share of the profits of the business allotted to him and his interest therein shall, unless I otherwise direct, from and after the date of his so ceasing or leaving, accresce to and be divided amongst the other remaining employees in proportion to their said shares.

“(Second)—At the date of my death the books of the said business shall be brought to a balance, and my capital in the business ascertained, and interest at the rate of three per centum per annum shall be paid thereafter to my trustees in cash on the thirty-first day of December in each year after my decease, on the total amount at my credit in the books of the business, or so much thereof as may remain unpaid, and at the annual balances, which shall take place as at the thirty-first day of December in each year after my death, the whole profits of the business, after deducting (first) the said interest on my capital account, (second) the sum of eight hundred and fifty pounds sterling yearly as the rent of the factory, and (third) such provision for bad debts, depreciation on plant, stock, etcetera, as may be considered necessary by my trustees, shall be divided amongst the surviving employees in proportion to the number of shares allotted to them, or to which they may acquire right under these presents, and ten per centum of such profits shall be paid over to them in cash, and the remaining profits shall not be drawn by the employees, but credited to their respective accounts, to be opened in the names of the several employees in the books of R. & J. Dick, until the whole of my capital and interest in the said business is paid out, and the said remaining profits, allotted to the employees as aforesaid, shall be accumulated, without adding interest, and form a fund available for the paying out of my capital in the said business. In the event of a loss arising upon the working of the business in any one year, such loss shall be carried forward until the same shall be wiped out from the profits of succeeding years. It is hereby further provided and declared that the whole of the stocks of balata lying in the factory at Greenhead, or stored outside or abroad, shall be retained by my trustees, and shall remain under their sole control and custody. And further, they shall have power from time to time, as may be required by the business, to sell to the employees such portions of said stocks as they may deem proper, and that at the invoice prices at which said stocks were purchased.

(Third)—In the event of the death or bankruptcy of any employee prior to or after my death, I hereby provide and declare that his said interest in the profits of the business and in the business itself shall cease as from the commencement of the year in which he may die or become bankrupt, provided he die or become bankrupt after my decease, and his representatives shall only be entitled to be paid the amount standing to his credit in the account in his name in the said books at the balance previous to his death, but such payment shall not be made before all my capital and interest in the business is paid out as hereinbefore provided, and the remaining employees, unless I shall otherwise direct, shall be entitled amongst them to the interest and prospective share of profits which would have fallen to the deceasing or bankrupt employee pro rata, according to the respective number of shares they each hold.

(Fourth)—Upon my death the employees who may then survive and be capable of acting shall carry on the said business as it is carried on by me at the time of my death, and my trustees are hereby empowered to appoint capable managers for conducting the business, and

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I recommend my trustees to appoint the said John Edward Audsley to have charge of the counting house and financial part of the business, and to appoint David Kennedy, Belfast, as superintendent of the industrial departments of the business, and my trustees shall have power to depute and grant authority to the said John Edward Audsley, or to any other person or persons, to sign the firm name of R. & J. Dick, it being declared that my trustees shall have the sole power of granting such authority. And I provide and declare that my trustees shall not be required to take any active part in the carrying on of the said business, and in respect of the business being so carried on my trustees shall not be liable for omissions or for negligence, but each for his own actual personal fraud. In the event of any question arising amongst the said employees regarding the appointment and remuneration of managers and foremen connected with the usiness or scale of wages to the work people, all such questions shall be submitted to and determined by my trustees. And in the event of any of the said employees so misconducting himself as to render it, in the opinion of my trustees, desirable that he should be removed from the business, my trustees shall have the power to do so, and his interest therein and in the prospective profits shall cease and be dealt with in the same way as in the case of a deceasing or bankrupt employee.

(Fifth)—Farther, my trustees shall be entitled to take payment in so far as the same has not been previously paid (at such times and in such amounts as looking to the requirements of the business they may deem proper) of the amount of profits standing at the credit of the said employees or any of them, and sums so taken shall be debited to my capital account and treated as payments pro tanto of the sums standing at my credit in the books of the firm. And further, my trustees shall have right to require payment out of the business from time to time of such proportion of my capital as may not in their judgment be required for the sufficient carrying on of the business, and when the whole of my said capital and interest shall have been fully paid to my trustees, they shall then pay out of the accumulated profits the amount appearing in the books as due to the representatives of deceased or bankrupt employees, and to such employees as may have retired from the business, if there be any such, pro rata, or arrange for such payment being made by the surviving employees in such manner as to them shall seem fit; and my trustees shall thereupon convey to the employees who may be surviving at that date the whole business, including the stock-in-trade and other assets, and all the shop businesses, both at home and abroad, and goodwill thereof, and also the factory at Greenhead with the whole machinery, plant, and tools therein, the price of which is hereby fixed at twenty thousand pounds sterling, which shall be paid in addition to the sum standstanding to my credit as aforesaid (subject always to the payment by the employees of the debts and obligations of every kind due and exigible from the business), according to their respective interests therein as shown by the number of shares allotted to them, or to which they may have right under these presents, and as appearing from the books of the business.

(Sixth)—Further, the employees or the survivors of them (but excluding bankrupt, retired, or dismissed employees or their representatives), after my death shall, notwithstanding what is before written, at any time be entitled to purchase from my trustees, and they are hereby empowered and instructed to sell to the employees, the said business, including the foresaid stocks of gutta percha or balata for the capital sum standing to my credit in the books of R. & J. Dick at the time of such purchase, and also the factory and machinery at Greenhead at the price hereinbefore stated, subject always to the payment by the employees of the owing by the business, and I hereby authorise and empower my trustees if they see fit to lend part of the said capital on the security of the said business and assets thereof, or any part thereof. It is understood that my trustees, although they are not to take any active part in the management of the business, shall be entitled from time to time, by themselves or by any other person or persons whom they may appoint for that purpose, to inspect the books of the business in order to ascertain the position of the same, and the yearly balance sheet of the business shall be exhibited to and approved and sanctioned by them after being duly audited, and in the event of the balance sheet in any one year showing a loss, my trustees shall then be entitled to investigate into the causes which have led to the failure of profits, and along with the employees in the management to take such measures as may be deemed most expedient to prevent the recurrence of loss for the future, but in the event of its being found after a fair trial that losses continue to be made, and that the business cannot be carried on at a profit, or that the profits are so inadequate, as in the judgment of my trustees to render it necessary that the business should be wound up, they are hereby empowered so to do and to realise the assets, and after paying thereout the debts and obligations owing by the business, they shall apply the available proceeds, in the first place, in payment of the sum standing to the credit of my capital account (with interest as aforesaid) in the books of the business, and the remaining proceeds shall thereafter be divided amongst and paid to the employees, including the deceased, bankrupt, retired, or dismissed employees or their representatives, if there be any such, in proportion to the amounts standing to their credit in their respective accounts in the books of the business pro rata.

(Lastly)—It is hereby understood and declared that the arrangement herein set forth regarding the disposal of my business

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shall form part of the settlement of my affairs, as if the said arrangement had been embodied in my trust-disposition and settlement. And I reserve power to alter, innovate, or revoke these presents, in whole or in part. And I reserve my own liferent; and I dispense with delivery hereof; and I consent to registration hereof for preservation.”

The remaining facts as stated in the case were as follows:—“At the date of Mr Dick's death, on 7th March 1902, his capital in the business amounted to £351,550. At the same date the firm of R. & J. Dick had an overdraft of £143,177 from their bank. It was arranged between the trustees and the employees that the overdraft should be liquidated by the employees before they began to pay out Mr Dick's capital. By the 31st December 1903 the overdraft had been liquidated to the extent of £93,209, and the indebtedness of the business as at 7th March 1902 (date of Mr Dick's death), and at 31st December 1903, was as follows:—

As at 7th March 1902— To the bank,	£143,177
trustees,	351,550
	£494,727
As at 31st December 1903— To the bank,	£49,908
trustees,	351,550
	401,518
Reduction of indebtedness during the period from 7th March 1902 to 31st December 1903,	£93,209

During the same period the accumulated 90 per cent. of the profits of the business credited to the accounts of the employees in the books of R. & J. Dick, under the provisions of the second article of the deed of arrangement, was £72,076, 17s. 1d. The assessable profits of the business for the year ending 5th April 1905, taken on the average of three years to 31st December 1903, amount to £43,441, for which an assessment has been made on R. & J. Dick. The appellant's income from all sources for the year ending 5th April 1905, for the purpose of determining whether he is entitled to abatement, amounts (1) to £561 if his income from the business is taken at his share of the 10 per cent. of profits payable to the employees in cash, or (2) to £2000 if his income from the business is taken at his share of the full amount of profits, whether paid to the employees in cash or credited to their respective accounts in accordance with the provisions of the deed of arrangement.”

After consideration of the facts and arguments submitted to them, the Commissioners confirmed the assessment as made. The appellant appealed by way of case stated under the Taxes Management Act 1880 to the Court of Session as the Court of Exchequer in Scotland.

The appellant argued—The share of profits in the business of R. & J. Dick placed annually to his credit in its books was not income. Tennant v. Smith (Inland Revenue), March 14, 1892, 19 R. (H.L.) 1, 29 S.L.R. 492, cf. opinions of Lord Chancellor and Lord Macnaghten. £561 was admittedly all the income of which appellant had the actual enjoyment—why should he be assessed on £2000? If Revenue's argument were sound, a man with only £50 a year to live on might be rated on £1600, which would reduce the argument to a reductio ad absurdum. The appellant had not a vested but only a contingent right to his share of the 90 per cent. of profits. For the business might lose all its money, or the trustees owing to losses might decide to wind it up before the testator's estate had been paid out. The withholding of the 90 per cent. of profits was not a matter of contract but of bequest, in this differing from cases of salary deferred, in part, by contract. This distinguished it from Hudson v. Gribble, Bell v. Gribble, [1903] 1 KB 517, and Smythe v. Stretton, 1904, 20 Times L.R. 443, 90 L.T. Rep. 756. In these cases though the whole salary was not actually received, it was because the recipients had voluntarily contracted to have a certain amount set aside, and the legal conception was that they received the whole salary. The present case had no similarity to the case of Mersey Docks v. Lucas, June 28, 1883, Law Rep. 8 App. Cas. 891, where the income was actually earned and received. The deed of arrangement did not change the employees into partners; they remained employees, but in addition became beneficiaries as to a small percentage of profits, and prospective beneficiaries in the usiness itself. The owners. of the business were the trustees, who had the decision in the event of loss as to whether the business was to be wound up or not, and who could dismiss the employees for misconduct of which they were judges. The final act of the scheme was directed to be the conveyance by the trustees to the employees, which assumed that up till that time the trustees were the owners

The respondent argued— Tennant v. Smith (Inland Revenue) merely decided that a bank agent in computing his income was not bound to include the annual value of a bank house occupied by him in performance of his duty. The other cases cited by appellant were in respondent's favour. In Smythe v. Stretton the deferred salary might be forfeited or lost, and yet the whole salary was held assessable. The principle to be deduced from Smythe v Stretton, Hudson & Bell v. Gribble, and Mersey Docks v. Lucas, was that if under the Income-Tax Acts it was found that there does come profit to a company or individual, that profit once earned was liable to tax, whatever the individual might choose to do with it, whether he set it aside voluntarily or compulsorily or not. The appellant's share of the ninety per cent in question was his profits. The deed of arrangement was really a deed by which the testator directed his trustees to sell his business to the beneficiaries at once, but with deferred payment. The trustees did not carry on the business, and were not liable in a question with the general public. The relation between the trustees and the beneficiaries was that of unpaid sellers and

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buyers respectively. The beneficiaries were really partners and proprietors of the business, but were only entitled to a conveyance from the trustees on payment of the price. It was for the appellant to show that the money standing at his credit in the books of the company was not his. He did not discharge the onus by showing that till a certain date (the payment of the price) he could not touch the money, nor did this fact affect the payment of income-tax.

At advising—