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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> New Zealand and Australian Land Co., Ltd v. Scottish Union and National Insurance Co. [1920] UKHL 543 (22 July 1920)
URL: http://www.bailii.org/uk/cases/UKHL/1920/57SLR0543.html
Cite as: 57 ScotLR 543, [1920] UKHL 543
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SCOTTISH_SLR_House_of_Lords
Page: 543↓
House of Lords.
(Before
v.
(In the Court of Session, October 23, 1919, 57 S.L.R. 15.)
Subject_Revenue — Income Tax — Company — Repayment in respect of Colonial Tax — Claim by Preference Shareholders to Receive Benefit of such Repayment — Income Tax Act 1842 (5 and 6 Vict. cap. 35), sec. 54 — Finance Act 1916 (6 and 7 Geo. V, cap. 24), sec. 43.
Facts:
A Scottish company carrying on business in various colonies paid the respective colonial income tax upon its profits in each colony. Having also paid British income tax, it obtained, under section 43 of the Finance Act 1916, repayment of a portion thereof in respect of its payment of the colonial taxes. Held ( aff. judgment of the Second Division), in a question with its preference shareholders, who were entitled to a fixed preferential dividend and no more, that the company was entitled to deduct from such preferential dividend the full amount of the British income tax.
Rover v. South African Breweries, [1918] 2 Ch. 233, disapproved.
This case is reported ante ut supra.
The second party, the Scottish Union and National Insurance Company, appealed to the House of Lords.
The section upon which the case turns (6 and 7 Geo. V, cap. 24) is as follows:—“43. If any person who has paid, by deduction or otherwise, United Kingdom income tax for the current income-tax year on any part of his income at a rate exceeding three shillings and sixpence, proves to the satisfaction of the Special Commissioners that he has also paid any Colonial income tax in respect of the same part of his income, he shall be entitled to repayment of a part of the United Kingdom income tax paid by him equal to the difference between the amount so paid and the amount he would have paid if the tax had been charged at the rate of three shillings and sixpence, or if that difference exceeds the amount of tax on that part of his income, at the rate of the Colonial income tax equal to that amount. In this section the expression ‘United Kingdom income tax’ means income tax charged under the Income Tax Acts; and the expression ‘Colonial income tax’ means income tax charged under any law in force in any British possession, or any tax so charged which appears to the Special Commissioners to correspond to United Kingdom income tax.”
The Land Company paid Colonial income tax in the Dominion of New Zealand, in each of the States of New South Wales, Queensland and Western Australia, and in the Commonwealth of Australia. Those taxes were paid on the profits earned in New Zealand, the respective States, and the Commonwealth respectively. The balance of the profits after paying these Colonial taxes was remitted to the United Kingdom, and formed part of the profits of the company on which United Kingdom income tax was charged. These profits were assessed for the year in question at £418,161, and United Kingdom income tax at the rate of 5s. in the £1 thereon, amounting to £106,540, 5s., was charged upon and paid by the Land Company. The Land Company claimed repayment under the section above quoted of a part of the United Kingdom income tax equal to the difference between the amount so paid at 5s. in the £1 and the amount that would have been paid if the tax had stood at 3s. 6d. in the £1. They satisfied the Commissioners that Colonial income tax had been paid at the rate of at least 1s. 6d. in the £1 in respect of the income earned in New Zealand and Australia. The Commissioners admitted the claim, and repaid to the Land Company £28,435, 17s. 6d.
By the articles of association the holders of the preference stock are entitled to a dividend at the rate of 4 per cent. and no more, cumulative. Such a dividend was declared in November 1917. In making the payment the Land Company deducted therefrom the United Kingdom income tax at the rate of 5s. per £1 assessed on and paid by the company. The Insurance Company as holders of preference stock claim that the sum so deducted ought to have been reduced by the amount received by the Land Company from the Commissioners under section 43 in respect of the Insurance Company's preference stock. In other words, they claim that the preference stockholders, and not the company as a whole, are entitled to the benefit of the amount returned under section 43 so far as it related to the preference stock.
The terms of section 43 appear to me to be decisive against this claim. The person, and the only person, who can claim the repayment under that section is defined by the initial words of the section—“If any person who has paid by deduction or otherwise United Kingdom income tax for the current
Page: 544↓
This view of the case is that on which the Second Division proceeded. It is not a mere technicality, but proceeds upon the reality of the transaction and gives effect to the rights of the parties. Payment of the Colonial income tax was part of the expense of carrying on the business in Australia or New Zealand, and the profits were necessarily diminished by the amount so paid just as by any business expenses incurred in the ordinary course. If this Colonial tax had not existed, so much more would have been available as profits from the business in the colonies for division among the shareholders of the company. The preference stockholders were entitled to their 4 per per cent. and to nothing else. This 4 per cent. they have received, subject, of course, to the deduction for the United Kingdom income tax. The claim now put forward is a claim to something beyond the 4 per cent. The preference shareholders in effect demand that the sum repaid in relief of the general assets of the company which bore the Colonial taxes should be handed over to them in addition to their 4 per cent. dividend. I can see no real foundation for this claim either in law or on the merits.
The sums repaid by the Commissioners go into the assets of the company, and will fall into the dividend payable to the ordinary shareholders, whose dividends would otherwise have been diminished by the whole amount of the disbursements for the Colonial income tax. It is on the ordinary shareholders that the burden of this Colonial tax, as of all other business expenses, falls, and any relief by repayment in respect of it ought in all fairness to go into the funds of the company, and so inure for the benefit of those who bore the burden. The preference shareholders are not entitled to anything out of the funds of the company after the 4 per cent. has been paid. The funds of the company must, of course, be applied in the first instance towards paying the interest due on the preference stock. If by any catastrophe there were not enough to pay the stipulated preferential dividend without recourse to the sums repaid by the Commissioners under section 43, these sums would, like any other assets of the company, have to be applied for this purpose. But so long as the business of the company goes on in the ordinary course the holders of the preference stock have no claim to it.
The case of Rover v. The South African Breweries, 1918, 2 Chancery 233, was cited to your Lordships. In that case Astbury, J., gave a decision in favour of the preference shareholders on the very point which is now under consideration in this appeal. The main ground on which that decision was rested was that the company were only entitled to charge against the preferential shareholder, by way of deduction, the sum which they actually had paid for United Kingdom income tax, and that where there is a repayment of a portion of the sum paid it comes to the same thing as if in the first instance a reduced sum had been paid. So, of course, it does as regards the effect of the transaction on the pocket of the person paying. But it by no means follows that because such a repayment has been made under section 43 the case can be dealt with on the assumption that what takes place is equivalent to a reduction of the United Kingdom income tax by the amount returned. The wording of the section shows that this is not what was meant. It is only a person who has paid the United Kingdom income tax that is entitled to apply for the repayment in respect of Colonial taxes which have been paid on the same portion of income. In the present case it was only as a person who had paid the United Kingdom income tax that the company became entitled to claim the repayment on proving that the company had also paid the Colonial tax in respect of the same portion of income. The company has, in fact, paid the United Kingdom income tax, and it is the company that is entitled to the repayment received. To treat the payment as diminishing the amount deductible in respect of United Kingdom income tax from the preferential dividend of 4 per cent. is to hand over the repayment to the preferential stockholder, who has clearly no claim to it.
I think the decision in Rover's case was erroneous. In that case it appears to me that the considerations adverted to in the earlier part of this judgment which show that the preferential stockholder cannot be entitled to this repayment were overlooked. The decision proceeded simply on the assumption that the repayment had the effect of diminishing pro tanto the United Kingdom income tax.
In my opinion this appeal should be dismissed with costs.
Page: 545↓
The question raised by the Special Case was whether the full dividend of 4 per cent. to which, and to no more than which, the appellants as holders of preference shares in the respondent company were entitled having been paid in full, the respondents were entitled to deduct the whole amount of five shillings in the pound as income tax for which they were said to be accountable under the Finance Act 1916 to the Inland Revenue Authority of the United Kingdom; or whether the appellants were entitled, in respect of the preference shares on which the whole of the possible dividend to which they were entitled had been paid, to a deduction or return to them, as between themselves and the respondent company and its ordinary shareholders, of the amount allowed by section 43 of that Act, an amount which I may for convenience treat as being eighteenpence out of the five shillings. Section 43 is in these terms—“If any person who has paid, by deduction or otherwise, United Kingdom income tax for the current income tax year on any part of his income at a rate exceeding three shillings and sixpence proves to the satisfaction of the Special Commissioners that he has also paid any Colonial income tax in respect of the same part of his income, he shall be entitled to repayment of a part of the United Kingdom income tax paid by him equal to the difference between the amounts so paid and the amount he would have paid if the tax had been charged at the rate of three shillings and sixpence, or if that difference exceed the amount of tax on that part of his income, at the rate of the Colonial income tax equal to that amount.”
The respondent company carried on a large part of its business in New Zealand and Australia. It earned profits there on which Colonial income taxes were charged. The amounts of those Colonial taxes were deducted by the respondent company, just as were general expenses, and what remained as nett balance was remitted to Scotland, where the respondent company was domiciled, to be divided as profit earned along with other profit coming into general revenue account.
There is no doubt about the liability of the respondent company to United Kingdom income tax in respect of these profits, nor is there any doubt about their right to claim a repayment or allowance under the terms of section 43 which I have quoted. The question which arises is whether the preference shareholders having received their dividends in full, are entitled to claim against the respondent company, and as between themselves and the company to participate in the allowance made by the United Kingdom authorities to the latter under section 43 in respect of the Colonial taxes which had to be paid in New Zealand and Australia before the nett profits earned there could be ascertained and sent to Scotland. Other questions might conceivably emerge if the preference shareholders had not received the full amount to which by their contract they were entitled. But as they have received all that they could possibly claim under that contract, the only question that does arise is whether they are entitled as between themselves and the repondent company to any allowance under section 43.
The answer to this question depends on the language of the section. It will be observed that the words used confer a right to claim only on a person who can show that he has paid Colonial income tax on the part of his income on which he is taxed in the United Kingdom. Speaking for myself, I am wholly unable to understand how the appellants can be truly said themselves to have paid Colonial income tax on their preference dividends. They have received those dividends in full. No doubt the respondent company paid Colonial income tax on the profits out of the residue of which the preference dividends have been paid. But that did not diminish the income of the appellants. They neither paid the tax themselves nor were indirectly subjected to it in any way. It is the ordinary shareholders alone who have lost by it, and in a question between the various bodies of shareholders and the respondent company as to how the latter, who actually paid the tax, are to account for the amount allowed them over here for having paid it, I think that as against the ordinary shareholders the appellants have no title. Neither under the language of section 43, nor indirectly, does it seem to me possible for them to substantiate a claim based on the words employed by the Legislature.
The appellants as preference shareholders are outside the legislative jurisdiction of the Dominions, and are not taxed there. It is true that profits carried by the respondent company are within that jurisdiction and are taxed. But the only income to which the appellants are entitled in respect of their preference shares has been left undiminished. It is taxed here only. So is taxed here the income of the respondent company out of which it is derived. But under the machinery of the Income Tax Acts the amount of the tax is exacted only once. The appellants have to bear the ultimate burden of the five shillings, and they can claim no allowance under section 43, because they have paid nothing either directly or indirectly in respect of which they can claim. Someone else paid, and that other person, the respondent corporation, has kept the appellants clear of all deduction from their income on that account.
The opinion which I have thus expressed is not consistent with the conclusion arrived at by Astbury, J., in Rover v. South African Breweries, 1918, 2 Ch. 233. But after giving attentive consideration to the reasoning of the learned Judge in that case, I am unable to satisfy myself with his construction of section 43, or to follow him in his conclusion.
Page: 546↓
It was pointed out in the course of the argument that such a construction of the statute would lead to results which cannot possibly have been intended. The purpose of section 43 is to give some relief to the taxpayer who has paid both British and Colonial income tax upon the same income. Here the double tax has been borne by the ordinary shareholders, and no part of it has fallen upon the preference shareholders, and yet it is said that the latter and not the former are entitled to the benefit of the relief. If that were so the whole purpose of the statute would be frustrated, and the ordinary shareholders would still bear the whole burden of the double tax while the preference shareholders would be relieved of a part of the single tax which they have borne. Further, it seems probable that if the appellants succeeded the preference shareholders, having borne tax at 3s. 6d. in the £1 only, would be liable to be assessed to tax for the additional 1s. 6d. in the £1, in which case the revenue would get back through those shareholders the whole of the sum paid to the company under section 43 of the Act.
I think it is impossible that a construction of the Act which would produce such results can be the correct one. I think the true effect of the statute is that while the repayment is to be made out of the amount paid for tax, the tax “charged” for the purpose of section 54 of the Act of 1842 remains the same. If so, the preference shareholders are entitled to nothing more, and the amount repaid remains in the coffers of the company.
I agree in all respects with the judgments delivered by the learned Judges in the Second Division, and think that the interlocutor appealed from should be affirmed.
I may be allowed, however, to express the view that I have considerable doubt as to whether the merits of the appeal in any true respect depend upon the construction of section 43 of the Finance Act of 1916. I say so for this reason, that I cannot identify the appellants with the persons who are mentioned in that section, and I therefore cannot see how they have any title to claim benefit under it.
The section specifically provides for the case of a person who has paid income tax in the United Kingdom providing that he also has paid an Australian income tax in respect of a particular part of his income. In such a case relief is granted so as to prevent, within the limits of the section, the same taxpayer paying double income tax.
It is admitted that the appellants received their income as preference shareholders of this company in full, that is to say, subject to payment of the British income tax alone. It is further admitted that they did not discharge the double burden of paying Colonial income tax. The case accordingly, in my opinion, is at an end.
The appellants' case seems to have two defects. It mistakes the fact, and so far as law is concerned it depends upon a whole network of fallacies.
The important part of the case is that the Colonial income tax is paid by the respondents as a company on that part of its income which is earned in New Zealand, or the other Australasian Colonies mentioned in the case, and that Colonial income tax is paid and paid alone on the profits earned in the Colonies. “Said profits are arrived at after meeting the working expenses of” the company “in the said Colony.” The balance of the said profits after deducting the Colonial income tax paid is remitted to the United Kingdom and “carried to the credit of the general revenue account” of the company. In short, up to that stage the Colonial income tax is treated and is properly treated as part of the oncost of carrying on the business in these Colonies. It enters the debit charges in the same way as any other item of oncost. A balance on both sides of account is struck, and it is that net balance alone which reaches the United Kingdom.
What happens to it there? It forms part of the profits of the company upon which the United Kingdom income tax is paid. It is perfectly possible to conceive of the business of the company managed at home so excellently well that its finance might be able to yield a balance of divisible profits to the shareholders although there was nothing or very little coming in from the Colonies. On the other hand, it is perfectly possible to figure a large net balance arising from the Colonies, but, owing to loss in the home investments and otherwise no profit or very little profit being payable to the shareholders.
To apply to a position of that kind on the facts any kind of proposition such as was urged for the appellants, to the effect that the payment of income tax made by the company in the Colonies was a payment made on behalf of individual shareholders and as their agent is totally inadmissible. In the same sense it might be said that each individual shareholder was the true principal in a transaction of paying the salary of every Colonial servant of the company. and that the company itself in its corporate capacity was the mere agent or hand of the individual shareholder.
Page: 547↓
It is totally inadmissible to say that the individual shareholder has a right to an aliquot portion of the profits earned upon the transactions in the Colonies, or to an aliquot portion of relief granted in respect of items in those transactions of the company. There is no such doctrine of aliquot distribution that I am aware of that can be applied to a case such as this. The company having paid Colonial income tax, it is not challenged that the same company paying income tax in this country is entitled, under section 43 already mentioned, to the rebate which is there set forth. That has been granted. By this means the relief against double payment becomes completely operative. The taxing authority has made the proper allowance. After that, the whole question is not one for the taxing authority, but is one of distribution among the shareholders inter socios. That distribution is governed by the articles of association of the company. These have prescribed by section 10 that the holders of preference shares or stock shall receive 4 per cent. and no more out of the profits of each year before the other shareholders receive any dividend. This they have received. The claim preferred by the appellants in this appeal is equivalent to a demand upon their company for more, and to a demand the burden of satisfying which would fall upon the remanent shareholders in the concern. I see no justification for this.
My opinion is against the soundness of the decision of the case of Rover—is entirely in accord with that of your Lordships.
Their Lordships dismissed the appeal.
Counsel for First Party, Respondents— Sandeman, K.C.— Austen Cartmell— Douglas Jamieson— Danckwerts. Agents— Maclay, Murray, & Spens, Glasgow— J. & J. Ross, W.S., Edinburgh— Sherwood & Company, Westminster.
Counsel for Second Party, Appellants— Moncrieff, K.C.— M'Millan, K.C.— A. C. Black— Beveridge. Agents— Cowan & Dalmahoy, W.S., Edinburgh— John Kennedy, W.S., Westminster.