Scottish Court of Session Decisions

The Property and Income Tax Act 1842, Schedule D, First Case, Rule 1, enacts—“The duty to be charged in respect thereof” ( i.e., in respect of any trade, &c., not contained in any other schedule of the Act) “shall be computed on a sum not less than

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the full amount of the balance of the profits or gains of such trade, manufacture, adventure, or concern, upon a fair and just average of three years, ending on such day of the year immediately preceding the year of assessment on which the accounts of the said trade, manufacture, adventure, or concern shall have been usually made up.…

At a meeting of the Commissioners for the general purposes of the Income Tax Acts, held at Perth on 15th December 1905, the General Accident Assurance Corporation, Limited, Perth, appealed against an assessment for the year ending 5th April 1906 on the sum of £20,950 (duty £1047, 10s.) imposed under Schedule D of the Income Tax Acts in respect of the profits of its business, on the ground that in arriving at the assessable profits no deduction had been allowed to meet losses on unexpired risks.

The assessment was made under 5 and 6 Vict. c. 35, s. 100, First Case, 16 and 17 Vict. c. 34, s. 2, and 5 Edw. VII, c. 4, s. 6; and the sum assessed was the amount, on an average of the three years ending 31st December 1904, arrived at by reference to the company's revenue accounts as follows:—

Year ending 31st December 1902.

Balance of Revenue Account	£25,659 10 7
Less balance brought forward from previous year's account	3,694 7 5
	£21,965 3 2
Add sums debited in Revenue Account and not allowable as deductions	1,071 19 4
	£23,037 2 6
Deduct interest and rents of properties already taxed, and the annual value of the company's offices	6,199 14 2
Amount of profit	£16,837 8 4
Year ending 31st December 1903. Amount of profit (after making similar addition and deductions as above)	22,503 6 8
Year ending 31st December 1904. Amount of profit (after making similar addition and deductions as above)	23,509 18 2
Total profits for three years	£62,850 13 2
One-third whereof is	£20,950 0 0

The company claimed a deduction from the total premium income of each year to meet the estimated losses on risks unexpired at the end of each year, as shown by the following statement:—

Surplus income—Year to 31st December 1902	£16,837 8 4
Add for unexpired risks at 31st December 1901, 33 1 3 per cent. of total premiums (£170,338, 8s. 2d.)	56,779 9 4
	£73,616 17 8
Deduct for unexpired risks at 31st December 1902 33 1 3 per cent. of total premiums (£231,354 14s. 10s.)	£77,118 4 11
Loss	£3,501 7 3
Surplus income—Year to 31st December 1903	£22,503 6 8
Add for unexpired risks at 31st December 1902	77,118 4 11
	£99,621 11 7
Deduct for unexpired risks at 31st December 1903 33 1 3 per cent. of total premiums (£262,479, 8s. 3d.)	87,493 2 9
Profit	£12,128 8 10
Surplus income—Year to 31st December 1904	£23,509 18 2
Add for unexpired risks at 31st December 1903	87,493 2 9
	£111,003 0 11
Deduct for unexpired risks at 31st December 1904 33 1 3 per cent of total premiums (£306,258, 2s. 6d.)	£l02,086 0 10
And 50 per cent. of one month's monthly payment premiums (the total amount of which for this year is £52,940 12s. 3d.)	£2,205 17 2
	£104,291 18 0
Profit	£6,711 2 11
Summary—Year 1903— Profit	£12,128 8 10
Year 1904— Profit	6,711 2 11
	£18,839 11 9
Year 1902—Loss	3,501 7 3
	£15,338 4 6
One-third whereof being	£5,112 14 10

was the amount on which the company claimed to be assessed.

The Commissioners being of opinion that the assessment had been made “in accordance with the instructions given by the Court in the case of the Scottish Union and National Insurance Company and Others v. Inland Revenue,” 16 R. 461, dismissed the appeal.

The company appealed.

The case stated—“The following facts were admitted or proved:—1. The company was incorporated on 23rd February 1891 under the Companies Acts as a company limited by shares. … 2. The objects of the company as set forth in the third article of its memorandum of association then in force were, inter alia:—‘( a) To undertake and carry on the business of accident, employers' liability, fidelity, guarantee, third party, burglary or theft, fire, marine, vehicle, plate glass, and mortgage, or other investment insurances, or any of them, and all or any other kinds of insurances of the like or a similar nature …, excepting life insurance.’ … 4. The company makes up its accounts to the 31st December in each year. For each of the years ending 31st December 1902, 31st December 1903, and 31st December 1904, the company paid the dividends shown in its reports and accounts. … 5. The business carried on by the company up to 31st December 1904 consisted of fire, sickness, accident, and guarantee insurances. The net premium income for the year 1902 was £231,354, 14s. 10d.; for the year 1903 £262,479, 8s. 3d.; and for the year 1904 (exclusive of £52,940 for monthly payments) £306,258, 2s. 6d. 6. Insurances are effected with the company at all periods of the year. All its Are policies, and much the larger portion of all its other policies, are granted for one year. Some of the policies endure for one month only. 7. It is the practice of insurance companies to estimate the unexpired risk at any given date on yearly policies of insurance, whether against fire, sickness, or accident, at 33 1 3 per cent. of the total premium income of the year. In the case of policies granted by

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this company for one month, it estimates the unexpired risk at any given date at 50 per cent. of one month's premium income. 8. The annual accounts made up by the company in terms of the Companies Acts show the results of the company's business in all its branches in one revenue account. Each year's revenue account credits premiums, interest, and other income received, and debits losses, expenses of management, and other disbursements made during the year, and brings out a balance which, for each of the years 1902, 1903, and 1904, was a credit balance or surplus. 9. This surplus is described in the reports by the directors of the company as ‘the balance at credit of revenue account after providing for estimated claims’ ( i.e., claims made but not settled) ‘and outstanding accounts.’ In their reports the directors recommend that a certain proportion of this surplus shall be appropriated to the payment of dividend, interim (previously declared) and final; that a certain proportion shall be placed to reserve; and that the balance shall be carried forward to next year's account; and these recommendations are considered at the annual meetings of the company held in March or April each year and adopted, a fixed amount of the balance of the revenue account being thus appropriated to interim dividend, final dividend, and reserve. 10. The amount paid in dividends for each of the years 1902, 1903, and 1904 was £9999. The amount placed to reserve for the year 1902 was £14,000, and for each of the years 1903 and 1904 £20,000. 11. The amount of the reserve as at 31st December 1904 was £150,000, made up of £85,500 set aside from revenue account and of £64,500 derived from premiums on the issue, during the period from the year 1896 to the year 1902, of new shares in the company, which latter sum was carried direct to reserve and was not credited in the revenue accounts, and on which no income-tax has been paid. The amount of the deduction claimed by the company for unexpired risks at 31st December 1904 is £104,291, 18s. The reserve is described in the annual balance sheets as ‘reserve fund, including reserve for unexpired risks.’ In the opinion of the Commissioners no part of the company's revenue is specifically appropriated to a reserve for unexpired risks, and no losses arising during the period of unexpired risks are charged to reserve fund. The income of each year has hitherto been sufficient to meet the losses on the unexpired risks of the previous year as well as its own losses, and to allow of an addition being made to the reserve. The losses on the unexpired risks of any year are paid out of the income of the following year, and in arriving at the amount of the profits for such following year for the purposes of the Income Tax Acts, a deduction is allowed in respect of such payments. 12. In arriving at the assessable profits of the company for the purposes of the Income Tax Acts in any year a deduction for the unexpired risks of that year has never been allowed.

“The company contended that, before arriving at the profits for the year for income-tax purposes, the deductions for unexpired risks made in the foregoing particulars of income should be allowed; that in the case of any insurance company with yearly policies, and in particular in the case of a company whose premium income was rapidly increasing, it was clearly necessary to provide for unexpired risks before the true profit could be ascertained; and that, if this were so, the appellants were entitled to the deductions claimed, whether they had made provision for unexpired risks in their annual accounts or not. It was further contended that, in point of fact, such provision had been made in the annual accounts because the balance sheet contained an account entered as ‘Reserve Fund, including amount reserved for unexpired risks,’ and to that account the company had each year carried a large proportion of the balance of revenue. It was further contended that the case differed entirely from that of the Scottish Union and National Insurance Company v. Inland Revenue, 1889, 16 R., pp. 461 and 474, 26 S.L.R. 330, relied on by the Surveyor of Taxes in respect (1) that in that case the premium income was practically stationary, and (2) that no provision whatever had been made in the accounts for unexpired risk.”

The Surveyor of Taxes maintained (1) that in arriving at the amount of the assessable profits of the company the whole of the premiums received by the company in any year ought to be taken into account as profits of that year, notwithstanding that the risks covered by a portion of such premiums may extend into the subsequent year ( Imperial Fire Insurance Company v. Wilson, 1876, 35 L.T.R. 271, 1 Tax Cases 71); (2) that the company is not entitled to make yearly the deduction claimed for unexpired risks in respect that the deduction is not one of the expressly enumerated deductions authorised by the provisions of the Income Tax Act to be made in estimating its annual profits (5 and 6 Vict. c. 35, secs. 100 and 159); (3) that the unexpired risks ought not to be taken into account in ascertaining the amount of income tax payable by the company, in respect that the accounts of the company, on which the assessment made is based, show that such risks are not taken into account for the purpose of ascertaining the amount of profits divisible among the shareholders of the company, and that it is only after declaring the dividend out of the profits that any sum is placed to general reserve; and (4) that the present case is governed by the opinion of the Court in the cases of the Scottish Union and National Insurance Company and the North British and Mercantile Insurance Company v. Inland Revenue, 1889, 16 R. 461 and 474. In the latter case it was stated that ‘in the fire department of the business it has for many years been the custom of the company, on 31st December, when the books are closed for the year, to set aside one-third of the net premiums received during the past year to provide for liabilities on current policies.’”

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Argued for the appellant—The distinction drawn in the books between life and fire insurance was unsound. In the case of the Scottish Union and National Insurance Company ( cit. supra) the point now raised as to deducting unexpired risks did not seem to have been fully argued, and accordingly the rule there laid down ought to be reconsidered, especially as it operated substantial and cumulative injustice in the case of companies like the present with an increasing business. Moreover, the rule in question was really one of convenience and not one of principle, and ought not therefore to be regarded as sacred. To take into account merely the actual receipts and the actual outlays without allowing for unexpired risks was unfair. The view that failure to deduct unexpired risks in any one year was made up by their being allowed for in the subsequent year was unsound, for its effect was to tax the appellants on profit which was never earned— in re County Marine Insurance Company ( Rance's case) (1870), L.R. 6 Ch. App. 104, per James, L.J. In the case of the Imperial Fire Insurance Company ( cit. supra) there was no specific statement as to the element of unexpired risk. The manner in which the company's accounts were stated might render the general rule stated by Kelly, C.B., in that case inapplicable; per Amphlett, B., and Huddleston, B.

Counsel for the respondent were not called on.