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Cite as: [1924] ScotLR 601, [1924] SLR 601

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SCOTTISH_SLR_Court_of_Session

Page: 601↓

Court of Session Inner House First Division.

Tuesday, July 15. 1924.

61 SLR 601

Eglinton Silica Brick Company, Limited (In Liquidation)

v.

Inland Revenue.

Subject_1Revenue
Subject_2Income Tax
Subject_3Assessment
Subject_4Excess Profits Duty — Assessment to Income Tax of Repayments of Excess Profits Duty — Income Tax Act 1918 (8 and 9 Geo. V, cap. 40), Schedule D, Rules Applicable to Cases i and ii, Rule 4 (1), and Case vi.
Facts:

Rule 4(1) of the rules applicable to Cases i and ii of Schedule D of the Income Tax Act 1918 enacts“… when any person has received repayment of any amount previously paid by him by way of excess profits duty, the amount repaid shall be treated as profit for the year in which the repayment is received.”

A company in liquidation which had made a loss in trading for the last year in which it carried on business and was therefore immune from income tax on its trading profits for that year had received, however, within the year certain repayments of excess profits duty levied some years earlier. Held, ( dub. Lord Sands) that the amounts so repaid were to be deemed to be ascertained and taxable trading profits in the year of repayment and not merely items to be taken into account in the computation of the trading or other profits of that year.

Headnote:

The Eglinton Silica Brick Company, Limited (in liquidation), appellants, being dissatisfied with a decision of the commissioners for the Special Purposes of the Income Tax Acts confirming assessments to Income Tax on the sums of £7224 and £1150 for the year ending 5th April 1922 and the year ending 5th April 1923 respectively, obtained a case for appeal in which H. G. Marrian, Inspector of Taxes, was respondent.

The Case Stated—“1. The following facts were admitted or proved:—(1) The appellant company carried on the business of brickmaking. in the year 1904 it went into voluntary liquidation, but the liquidator
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continued to carry on the appellant company's business until the year 1921. In 1921 the liquidator sold the business (including lands and works, fixed and other plant, and good-will) to the Eglinton Magnesite Brick Company, Limited. The business was taken over by that company on the 5th October 1921 and was thereafter carried on by it. The business of the appellant company ceased at that date. (2) The profits of the business were assessed to income tax under Schedule D for the year ended the 5th April 1922 on the sum of £6282 less £1017 wear and tear, and this assessment was apportioned under Rule 9 of Cases i and ii of Schedule D between the two companies, the appellant company being charged on the sum of £3141 less £508, 10s. wear and tear, and the Eglinton Magnesite Brick Company, Limited, being charged on a like sum. The appellant company having made a loss in trading for that year, the amount on which it was charged was reduced to nil under the provisions of Rule 3 of the Miscellaneous Rules applicable to Schedule D which provides for the adjustment of an assessment in the case of a person who ceases to carry on business. (3) The appellant company had been assessed to excess profits duty from time to time under the provisions of Part 3 of the Finance (No. 2) Act 1915. The appellant company's accounts were brought to a close each year on 30th April, and during the final accounting period of the appellant company, which ended on the 30th April 1921, the appellant company made a loss and claimed a repayment of excess profits duty under the provisions of section 38 (3) of that Act. (4) On the 30th March 1922 after the appellant company ceased to carry on business the liquidator received a repayment of excess profits duty amounting to £7224, and on the 20th December 1922 he received a further repayment of excess profits duty amounting to £1150. (5) Rule 4 (1) of the rules applicable to Cases i and ii of Schedule D of the Income Tax Act 1918 enacts that—‘Where any person has paid excess profits duty the amount so paid shall be allowed as a deduction in computing the profits or gains of the year which included the end of the accounting period in respect of which the excess profits duty has been paid, but where any person has received repayment of any amount previously paid by him by way of excess profits duty the amount repaid shall be treated as profit for the year in which the repayment is received.’ That rule is a re-enactment of section 35 (1) of the Finance (No. 2) Act 1915. It was under the latter part of this rule that the assessments under appeal were made in respect of the repayments of excess profits duty referred to in paragraph 4. (6) According to the notices of assessment issued to the appellant company the amount of the assessment for 1921–22, viz,, £7224, was entered in a column having the following printed heading ‘In respect of profits of trade, profession, employment, or vocation,' and the amount of the assessment for 1922–23, viz., £1150, was likewise entered in a column having the following printed heading:—' In respect of profits of trade, profession, or vocation.’ The notice of assessment for 1921–22 also contained in writing the following heading:—‘Repayment of E. P. D.,' while the notice of assessment for 1922–23 contained in writing the following heading:—Profits arising from E.P.D. repayt.’ Copies of these notices of assessment marked ‘A’ and ‘B’ are annexed to and form part of this case.

2. It was contended on behalf of the appellant company—(1) That the mere receipt of the payments of money did not amount to carrying on a trade; that the appellant company had ceased to carry on trade on 5th October 1921, and that thereafter the business was carried on by the Magnesite Company. (2) That as the appellant company had ceased to carry on any trade before the repayments were received, it could not be assessable therefor under Case i of Schedule D. (3) That as the assessment under Case i of Schedule D made upon the appellant company in respect of the profits of its trading for the year ended the 5th April 1922 had already been discharged, it could not be assessed again under Case i for that year, or if it could be so assessed it could only be assessed on the average of its profits for the three preceding years, and not on the actual amount received within that year. (4) That as the provision as to the treatment of repayments of excess profits duty was to be found in the rules applicable to Cases i and ii of Schedule D, the repayments could only be assessed under one or the other of these two cases, and could not be assessed under Case vi. (5) That as the notices of assessment showed that the assessments purported to be made under Case i or Case ii of Schedule D. it was not open to the Crown to argue on this appeal that the liability was under Case vi of Schedule D; and (6) that the said repayments of excess profits duty were not in any event annual profits or gains, and were not assessable under Case vi of Schedule D.

3. It was contended on behalf of the Crown—(1) That the excess profits duty repaid was a profit assessable under Schedule D, whether the trade had ceased or not. (2) That the provision for assessing repayments of excess profits duty was originally contained in section 35 (1) of the Finance (No. 2) Act 1915 which was not a rule of Cases i and ii of Schedule D, and that therefore an assessment in respect of such a repayment was not necessarily made under either of those cases; and (3) that if the repayment was not assessable under Case i of Schedule D, it was assessable under Case vi of Schedule D, and that the assessment was made under Schedule D generally and not under any particular case.

4. Following previous decisions of the Special Commissioners in similar cases, we held that these repayments were in the circumstances of this case assessable under Case vi of Schedule D, and that as the assessments were made under Schedule D generally, the form of the notices of assessment did not preclude our holding that the assessments were properly made. We accordingly confirmed the assessments. …”

The question of law for the opinion of the
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Court was—“ Whether the appellant company was properly assessed in respect of the said repayments of excess profits duty?”

Argued for appellants—This assessment should have been made, if at all, upon appellants' successors in the business— Wankie Colliery Company, Limited v. Inland Revenue, [1922] 2 A.C. 51; Armitage v. Moore, [1900] 2 QB 363. Further, repayment of excess profits duty should be treated as a capital accretion and not as income. In any event such repayments were not ascertained profits, but merely items to be taken into account in computing the profits on the average of the three preceding years.

Argued for respondents—The terms of rule 4 (1) should be construed as meaning that the repayments of excess profits duty were to be treated as ascertained profits for the year of repayment and not merely as items in computing such profits. The assessments fell to be made either under Case i or Case vi of Schedule D, and had been made under Schedule D generally and not under any particular case.

Judgment:

Lord President (Clyde)—This is an appeal against the assessment to income tax of a company in liquidation in respect of (first) a sum of £7224 for the year ending 5th April 1922, and (second) a sum of £1150 for the year ending 5th April 1923. The business of the company was sold in 1921, and was taken over by the purchaser on the 5th of October in that year. Accordingly the year ending 5th April 1922 was the last income tax year in which the company actually carried on business. In that year it was assessable to income tax on the profits of that year, calculated in accordance with the Income Tax Act of 1918—that is to say, on the basis of the average profits which it had made in the three preceding years. In settling with the Revenue for that year the company in liquidation availed itself of Rule 3 of the Miscellaneous Rules applicable to Schedule D. It convinced the Revenue that in its last year it had not in fact made any profits but a loss, and it secured accordingly immunity from income tax on its trading profits for that year.

On the 30th March 1922, however, the larger of the two sums which are concerned in this appeal, and on the 20th December 1922 thereafter the smaller of the two sums in question, were received by the company in liquidation. These sums were repayments by the Inland Revenue of excess profits duty levied on the company some years earlier, and the question is whether these two payments do or do not constitute assessable profits of the company for the purposes of the Income Tax Act of 1918.

It is obvious that the adjustment of the excess profits duty to the general scheme of the income tax is attended with some difficulty both in the matter of its exaction and in the matter of repayment. At the best this difficulty was, as might be expected, capable of solution only in a more or less rough fashion. The solution adopted by the Legislature was that which is contained in the enactment which now forms paragraph (1) of Rule 4 of the Rules applicable to Cases i and ii of Schedule D of the Income Tax Act 1918. That paragraph consists of two parts. By the earlier part it is provided that where anybody has paid excess profits duty the amount so paid is an allowable deduction “in computing the profits or gains of the year which included the end of the accounting period.” The second part begins with a “but,” and is in the following terms:—“But where any person has received repayment of any amount previously paid by him by way of excess profits duty, the amount repaid shall be treated as profit for the year in which the repayment is received.”

It will be observed that in accordance with the nature of excess profits duty no assessment to that duty could be made except in respect of ascertained and assessable profits. Excess profits duty was simply a share of the net balance of profits and gains—in other words, of the actual profits computed by methods familiar under the Income Tax Acts—of certain defined kinds of business or trades. A share of that net profit corresponding to the excess of such profit over and above the “standard profit” was appropriated by the Revenue under the name of excess profits duty. But in the computation of profits for the purposes of excess profits duty there was this peculiarity, that regard was had to the “accounting period,” and not to the three years average characteristic of the assessment of trading profits to income tax. This was what made it difficult to harmonise the two systems of taxation. With perhaps rough justice the first part of paragraph 1 of rule 4 allowed the excess profits duty to be deducted in computing (for income tax purposes) the profit of the year which included the end of the accounting period. The principle is obvious. It is that if a taxpayer has made profits assessable (directly, or indirectly through the operation of the three years' average) to income tax, and the Revenue takes a share of those profits in name of excess profits duty, it is only fair that the profits actually assessed to income tax should suffer some corresponding deduction. I say “some corresponding deduction,” because to make the deduction exactly and precisely correspondent was exceedingly difficult if not practically impossible.

The problem which arose in the case of repayment of excess profits duty was different. Nobody knew or could know how soon or how late repayment might fall to be made; nor whether the business whose profits were assessed to excess profits duty would be in the same hands when repayment, if any, came to be made. By that time the business might have ceased to be in existence. Repayment might therefore have to be made to a person who was not carrying on the original business. The original trader might have given up business, died, and an executor might have come in his place. The solution provided for all these cases is that contained in the second part of the paragraph, according to which the amount repaid to any person is to “

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be treated as profit for the year in which the repayment is received.” It is obvious that the amount of the former trading profits so repaid could not actually be trading profits for such year. None the less, the amount repaid is to be treated as if it were that which—in fact—it is not, and cannot be. The amount repaid consists of trading profits which reach the taxpayer out of their proper time. However belated his fruition of them, they have not lost their original character as trading profits, In my opinion this is what explains the position of paragraph (1) of Rule 4 as part of the Rules under Cases i and ii of Schedule D, which are concerned with the profits of trades and vocations. That some artificial rule should be formulated was in the circumstances inevitable, and the highly artificial character of the rule adopted is shown by the words in which it is expressed—the amount repaid “shall be treated as profit for the year in which the repayment is received.” In short, the amount repaid is deemed to be something that it is not, and could not in the actual circumstances possibly be. Nor is this in any way unreasonable or contrary to what might be expected, if regard be had to the subject-matter. For, as has been seen, the excess profits duty was itself a part of the trading profits computed by methods familiar under the Income Tax Act. It was not merely a part of something which entered into the computation of profit; it was actually computed profit. And, but for the disparity between the “accounting period” and the three years' average, it would have been directly assessable to income tax. At any rate it was indirectly assessable to income tax (but for its withdrawal for excess profits duty) through the medium of the three years' average. When it is repaid, it is no more than fair and reasonable that it should be repaid subject to some corresponding liability for income tax to that which it originally escaped solely on account of its withdrawal for excess profits duty. Paragraph (1) of Rule 4 therefore subjects the repaid trading profits to income tax. It does so by requiring them to be treated as if they were profits of that year, and by that I understand that the sums repaid are to be regarded as sums assessable to income tax as profits of the year in which they are received—apart altogether from the question whether, in that year, the business (if still in the hands of the recipient) has been profitable or not, and equally apart from the question whether, in that year, the recipient is still carrying on the business or not. The repayments, in short, are deemed to be ascertained and assessable trading profits in the year of repayment—not merely an element in the computation of the trading, or other, profits of that year.

It was remarked that in settling with the revenue for its last trading year the company did not seek (either by re-opening the arrangement with the revenue or otherwise) to bring into computation of its assessable profits for that year the sum of £7224, although it was actually received a few days before the end of that year. I think they were right not to do so. I do not think they would have been entitled to do so. As I read the rule, the original taxable character of the trading profits attached to them as and when repaid; and it would not have been permissible to treat them as an item in computing the profit for the last year in which the company continued to trade.

If 1 have correctly interpreted the rule, then it would appear that the only question of law put to us in the case ought to be answered in the affirmative.

Lord Skerrington—The language of Rule 4, sub-head (1), of Schedule D, Cases i and ii, is ambiguous, but looking to the subject-matter of the enactment I think that it should be construed in the sense contended for by the Inland Revenue rather than in that contended for by the appellants. When it was enacted that the amount of excess profits duty repaid “shall be treated as profit for the year in which the repayment is received,” I think that the Legislature intended that the sum so repaid should be deemed to be part of the ascertained and taxable profits of that year, and should not merely be regarded as a factor for ascertaining the amount of the taxable profits of a subsequent year different from the year in which the repayment was received.

Lord Cullen—I concur.

Lord Sands—I have felt some difficulty in this case and my difficulty arises in this way, that the statute directs that “the amount repaid shall be treated as profit for the year in which the repayment is received.” One must I think presume that what was primarily in view when this section was framed was not special circumstances such as have here arisen, but the case of a firm that had carried on and was continuing to carry on business. Now what is the effect of such a direction? Prima facie I would have said that it meant that the repayment was to be treated as if it were actual profit of the year of repayment. Now this would seem to be in favour of the Crown, but really it is not, because the income tax is not levied on actual profits of the year; it is levied on notional profits made up on the average of the three preceding years, and accordingly to reach the result at which your Lordships have arrived we must read this repayment as an actual profit that is not to be treated as such in the ordinary way but is to be added to the notional profit of the year in order to ascertain the amount of income tax for that particular year. I have some difficulty in that construction and I have doubts whether it is the construction that has hitherto been adopted in practice in the ordinary case of a going business, for I apprehend that if the matter had been regarded in this way by the revenue authorities they would simply have deducted the income tax from the repayment. I appreciate, however, the considerations which your Lordship in the chair and Lord Skerrington have urged and I am not prepared to dissent.

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The Court answered the question of law in the affirmative.

Counsel:

Counsel for the Appellants— D. P. Fleming, K.C.— Patrick. Agents— Fyfe, Ireland, & Company, W.S.

Counsel for the Respondent—Lord Advocate ( Macmillan, K.C.)— Skelton. Agent— Stair A. Gillon, Solicitor of Inland Revenue.
1924