United Kingdom House of Lords Decisions

Lord Chancellor—In this case the appellants, a fire and accident insurance company, appeal against an assessment for income tax. The Commissioners arrived at the assessment by calculating income as the balance of receipts from premiums and other unquestioned sources over payments made in respect of losses and other unquestioned deductions. This balance they treat as the company's income for each of the three preceding years, and thence derive the average for which they assess the appellant company in respect of the year 1905–6.

On the other hand the company claim that an allowance should be made for unexpired risks in the way following. They say that 33 1 3 per cent. of the premiums received in any one year, say 1903, represents that part of the risk covered by such premium which runs on into the following year. Accordingly they seek to deduct from the gross income of, say 1903, 33 1 3 per cent. of the premiums received in that year because it really represents the money they earn for taking risks which run on into 1904. But at the same time they add to the gross income of 1903 33 1 3 per cent. of the premiums received in 1902, upon the ground that 1903 has in fact borne that proportion of the risks paid for in 1902.

Now, in my opinion, there is one sufficient reason for rejecting this contention. It is not found, as a fact, that 33 1 3 per cent. does represent the real value of the risks that run on into 1904 in respect of premiums received in 1903. I am not prepared to assume that it is so, for all the statement of the Commissioners that it is the practice of insurance companies to estimate 33 1 3 per cent. as the proper figure to represent that value. We are not told either for what purpose such an estimate is made, or that it corresponds with the reality. If I am to conjecture, I should incline to the view that this percentage is very far from the proper figure. For if this estimate be accepted, then in the three years 1902, 1903, and 1904, taken together, the total profit of this company, making certain deductions, was £15,338—whereas we know that for its own purposes the total profit, after the same deductions, was treated by the company as £62,850—and dividends were paid and moneys carried to reserve on that footing.

During thirty-two years, since the decision of Wilson's case ( 35 L.T.R. 271), the method of assessing fire and accident companies has been that adopted by the Commissioners in the present case. It is not scientifically unassailable, for it obviously proceeds upon the supposition that the unexpired risks at the beginning and at the end of such year are in substance the same, or that if an average of three years is taken they are upon an average the same. But no method is scientifically unassailable that does not enter into an analysis of the contracts made and contracts current in each year so minute that it is in a business sense impracticable. I think the particular correction sought by the appellants in this case is quite indefensible upon the materials before us, and further that the method adopted by the Commissioners is a good working rule in the present instance and generally. If in any particular case an insurance company can show it works hardship, no doubt the rule ought to be modified, so that the real gains and profits may be ascertained as near as need be. I am for dismissing this appeal with costs.

Lord Ashbourne—I concur with the Lord Chancellor.

Lord Macnaghten—I think your Lordships would probably agree with Mr Danckwerts in thinking that the present mode of assessing the profits of a fire insurance company for the purpose of the income tax is neither accurate nor scientific. But it has been established for a very long time. It is very simple, and it does not appear that in the long run it is productive of injustice. The alternative mode first proposed by the learned counsel for the appellants is certainly not more accurate. The inquiry afterwards suggested would, I think, be interminable. It is impossible to obtain anything approaching complete accuracy by any conceivable method. In a somewhat similar case—it was a rating case—Mr Justice Blackburn delivering the judgment of the Queen's Bench, after stating that the Court had endeavoured to lay down a rule more satisfactory than the one then in force, makes the following observations:—“We have not, however, succeeded in laying down a rule which would be consistent with the existing legislation and decisions on this subject and would at the same time be capable of being satisfactorily

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