Scottish Court of Session Decisions

The Free Church of Scotland and others, pursuers, brought an action of count, reckoning, and payment against Hugh Martin and others (A. G. Macknight's trustees), defenders.

The case is reported supra, p. 35. That report gives the facts. The question remaining for decision was the second objection taken to the trustees' accounts, viz., that they had failed to recover recoverable income tax, on which question the Court had allowed amendment.

The defenders Hugh Martin and Robert Martin (two of the trustees) lodged a minute of amendment deleting their answers to the second objection stated by the pursuers and substituting therefor the following answers “Admitted that certain payments of income tax were deducted from or made in respect of rents received by the defenders, and that such payments were not recovered for the period prior to 5th April 1909, and that thereafter certain sums were recovered. Quoad ultra denied. Explained that the trust income was ingathered and payments made, not by the defenders personally, but by various house factors employed by the trustees or by the law agents in the trust acting as factors for the trustees. Said law agents were, for the period prior to October 1906, Messrs Hugh Martin & Mackay, S.S.C., and thereafter Messrs Hugh Martin & Wright, S.S.C. These house factors were— here followed the names of the house factors]. Explained that by the Income Tax Act 1842 (5 and 6 Vict. cap. 35), section 01, Schedule A, No. 6, allowances in respect of the Property and Income Tax under Schedule A of that Act are made by the Inland Revenue Commissioners, inter alia, on the rents and profits of lands, tenements, hereditaments or heritages vested in trustees for charitable purposes, so far as the same are applied to charitable purposes, and it is further provided by said section that ‘the said last-mentioned allowances to be granted on proof before the Commissioners for Special Purposes of the due application of the said rents and profits to charitable purposes only, and in so far as the same shall be applied to charitable purposes only,’ and also that ‘the said last-mentioned allowances to be claimed and proved by any steward, agent, or factor acting for such school, hospital, or almshouse, or other trust for charitable purposes, or by any trustee of the same, by affidavit to be taken before any Commissioner for executing this Act in the district where such person shall reside, stating the amount of the duties chargeable, and the application thereof, and to be carried into effect by the Commissioners for Special Purposes, and according to the powers vested in such Commissioners, without vacating, altering, or impeaching the assessments on or in respect of such—properties, which assessments shall be in force and levied notwithstanding suchallow—ances.’ In terms of the Income Tax Act 1860 (23 and 24 Vict. cap. 14), section 10, claims for repayment of income tax must be made within the three years next after the year of assessment. For the reasons stated on record no part of the income arising from the trust subjects was applied towards the establishment and maintenance of the mission carried on by the defenders or for any other charitable purpose until 5th April 1905, and the trustees were not entitled to the statutory allowances for periods prior to that date. The attention of these defenders was not directed to the

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fact that income tax was to any extent recoverable during said years, and they gave no instructions to their factors or law agents to take steps for recovery thereof. The trustees' accounts were regularly audited by Messrs A. & J. Robertson, C.A., Edinburgh, but these auditors made no observation as to the recovery of income tax. Assuming that there was any failure to recover income tax on the part of these defenders, they submit that that was a pure omission for which they are not responsible. They have taken no steps to recover the sums thus lost from their law agents or factors, as they do not think that they are responsible therefor, but they are willing and hereby offer to allow the pursuers to take in their names any legal proceedings which they may deem advisable against said law agents and factors on receiving an undertaking to indemnify them against the expenses of such proceedings.” [ Here followed a statement of the income and income tax payable thereon for the various periods]

They added, inter alia, the following plea-in-law—“(1) Any failure to recover income tax being a mere omission for which these defenders are not legally responsible, the objection with reference thereto should be repelled.”

The defender William Sutherland Mackay (the remaining trustee) lodged a minute of amendment deleting his answer to the second objection stated by the pursuers, and adopted the answer and pleas-in-law for the other defenders, and stated in addition—“This defender further explains that while he was aware that by statutory provision income tax on trust funds applied for charitable purposes was recoverable, he was not aware, and it did not occur to him, that the expenditure of the income of this trust in promotion of a mission at Bathgate or elsewhere was, or might be held to be, expenditure as for charitable purposes within the meaning of the Income Tax Act 1842. Explained further, that this defender was in partnership with the defender Hugh Martin till 30th September 1906, when the partnership was dissolved. For a month after the said dissolution of partnership the said Hugh Martin was sole law agent in the trust, and thereafter up to the present time the said firm of Hugh Martin & Wright have been the law agents in the trust.”

The pursuers lodged a minute of amendment, adding at the end of their second objection to the defenders' accounts the following:—“With reference to the statements in answer the pursuers have no knowledge as to the particular persons by whom the trust income was ingathered. The pursuers believe and aver that the defender Hugh Martin, either by himself or as representing his firm for the time, has acted as factor and law agent for the trustees during the whole period of the trust. The provisions of the Income Tax Acts are referred to. The pursuers do not admit that the trust income accruing prior to 5th April 1905 was not applied for charitable purposes within the meaning of said Acts, or that the trustees were not entitled to the statutory' allowances for periods prior to that date. The pursuers on the contrary maintain that the trustees were entitled and bound to recover the said allowances for the whole period down to 1909. Believed to be true that the trustees have taken no steps to recover the sums lost to the trust estate from any parties who may be responsible to them therefor. Quoad, ultra not known and not admitted. The pursuers submit that in the circumstances above set forth the defenders are themselves liable to account to the pursuers for the sums in question, as sums which should have been assets of the estate had the trustees exercised due diligence as above mentioned, and that it would be inequitable that the pursuers should be required to take action against other parties who may be responsible to the trustees. The pursuers further maintain that in any event the defender Hugh Martin is in the circumstances liable to account to them for the sums in question.”

They further added the following plea-in—law—“(2) The defenders' answers to the pursuers' second objection being irrelevant the said objection of the pursuers should be sustained.”

Argued for the pursuers—This process was habile to try the question of liability of the trustees as trustees and also as law agents such of them as had acted as law agents, for they were called as trustees and as individuals, and there was no necessity to take from them as trustees an assignation of their rights against themselves as law agents— Muir v. Collet, 1862, 24 D. 1119; M'Naught v. Milligan, 1885, 13 R. 366, 23 S.L.R. 236. The trustees were personally liable for the amount of the income tax they had failed to recover. They could have recovered the income tax—Income Tax Act 1842 (5 and 6 Vict. cap. 35), sec. 61; Commissioner of Income Tax v. Pemsel, [1891] AC 531. Failure to recover income tax was failure to ingather an asset and rendered the trustees personally liable. In any event this applied for the period subsequent to 5th April 1905. They were also liable for the prior period, for although the income was not being actually expended on a religious purpose, it was accumulated, and the accumulated income together with current revenue was thereafter applied to a religious purpose, and when the income was applied the tax should have been recovered. Indeed it was within the meaning of the Income Tax Act 1842 that the tax on income earmarked for but not actually expended on a religious purpose should be recovered. Further, the law agents of the trust were personally liable as a law agent spondet peritiam, and failure to recover income tax owing to ignorance of a decision binding in the United Kingdom was negligence on his part and entailed personal liability— Frame v. Campbell, 1836, 14 S. 914, 1839, M'L. & R. 595, per Cottenham, L.C., at p. 614; Simpson v. Kidstons, Watson, Turnbull, & Company, 1913, 1 S.L.T. 74; in re Sharpe, Rickett v. Rickett, [1906] 1 Ch 793.

Argued for the defenders Hugh and

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Robert Martin—Prior to 5th April 1905 the income was not applied to a religious purpose but was accumulated. The Income Tax Act 1842 allowed recovery of the tax only when the income was de facto applied, and “applied” in its ordinary meaning meant “expended.” The Income Tax Act was strictly construed, and the privilege of recovery could not be extended to cases beyond those actually covered by the words, e.g., to income earmarked for but not applied to religious purposes, or accumulations of income— Maughan v. The Free Church of Scotland, 1893, 20 R. 759, 30 S.L.R. 666; Rex v. Special Commissioners of Income Tax, [1911] 2 KB 434. There was no averment that the income was actually applied, and the pursuers' averments were therefore irrelevant. Further, Robert Martin acted solely as a trustee and could not be held liable for a mere omission. It was absurd to hold gratuitous trustees personally liable for a loss due to ignorance of an English decision on an abstruse branch of the law. A trustee could leave such matters as this to competent law agents, and there his responsibility ended when he was prepared as he was here to assign his rights of action against the law agent to the pursuers. Further, there was no relevant averment of negligence against the law agent. Even if the pursuers' averments were otherwise relevant, the only averment of fault against the law agents was that they failed to be aware of a decision of the House of Lords in an English case when there was a Scotch decision to the contrary— Baird's Trustees v. Lord Advocate, 1888, 15 R. 682, 25 S.L.R. 533. That was not an averment of a sufficient degree of negligence to render them personally liable. Frame v. Campbell ( cit.), and Simpson v. Kidstons, Watson, Turnbull, & Company ( cit.) were not in point, for the law agent in those cases was employed to do a particular item of business. In re Sharpe ( cit.) was not in point, for there liability was based on a positive act of an agent not an omission.

Argued for the defender William Sutherland M'Kay—As trustee this defender adopted the argument for the other defenders and referred to the Trusts (Scotland) Act 1861 (24 and 25 Vict. cap. 84), sec. 1, and Buchanan v. Eaton, 1911 S.C. (H.L.) 40, 48 S.L.R. 481. Further, there was no averment of want of professional skill in a sufficient degree to render him liable as law agent. The decision in Baird's Trustees v. Lord Advocate ( cit.) was still authoritative as to the meaning of “charitable” in Scots law in all cases except with regard to income tax— Blair v. Duncan, 1901, 4 F. (H.L.) 1, per Halsbury, L.C., 39 S.L.R. 212; Macintyre v. Orimond's Trustees, 1904, 6 F.. 285, per Lord Moncrieff at p. 292, 41 S.L.R. 225, 1905, 7 F (HL) 90, 42 S.L.R. 466.

At advising—