Privy Council Appeal No. 73 of 1998
Baldeo G. SinghAppellant v. The Board of Inland Revenue Respondent
THE COURT OF APPEAL OF TRINIDAD
---------------JUDGMENT OF THE LORDS OF THE JUDICIAL COMMITTEE OF THE PRIVY COUNCIL, Delivered the 1st March 2000 ------------------
Present at the hearing:-Lord Browne-Wilkinson
Lord Goff of Chieveley
Lord Millett[Delivered by Lord Millett] ------------------
1. RET Limited ("the company") went into voluntary liquidation on 27th February 1976. The appellant was the holder of 436 of the 453 issued shares in the capital of the company. In the course of the winding-up he received during the income year 1978 payments totalling $457,230 out of the proceeds of the liquidation. The greater part of this sum represented the proceeds of the realisation of work in progress. The Tax Appeal Board held that the payments in question were "distributions" within the meaning of section 23(1)(b) of the Income Tax Ordinance Chapter 33.01 (now section 49(1)(b) of the Income Tax Act Chapter 75.01) and as such were taxable under section 5(1)(k) of the Ordinance (now section 5(1)(k) of the Act). The Boards decision was upheld by a majority of the Court of Appeal (Sharma and Hosein J.J.A, Hamel-Smith J.A. dissenting).
2. With the leave of the Court of Appeal the appellant now appeals to their Lordships. In his Printed Case the appellant raises an additional claim which was not dealt with by the Court of Appeal, namely that, if the payments in question are subject to income tax in his hands, then he is entitled to the benefit of a dividend income allowance pursuant to section 24 of the Ordinance (now section 56 of the Act). The appellant had not raised this claim before the Tax Appeal Board because it was inconsistent with his claim that the payments were distributions of capital and as such were not taxable at all.
3. There is no material difference between the terms of the relevant provisions of the Ordinance and the corresponding provisions of the later Act, and like the Court of Appeal their Lordships will for convenience refer throughout to the provisions of the Act.
(i) Section 5 of the Act provides:-
"Income tax shall be payable upon the income of any person in respect of
(k) dividends or other distributions".
(ii) Section 2(1) provides that "distribution" has the meaning assigned to that expression in section 49.
(iii) Section 49 provides:-
"(1) In relation to any company distribution means
(a) any dividend paid by the company including a capital dividend;
(b) any other distribution of the assets of the company (whether in cash or otherwise) in respect of shares of the company, except so much as represents the repayment of share capital, or is equal in amount or value to any new consideration given on the distribution "
(iv) Section 56 provides that a taxpayer who receives a distribution from a resident company is entitled to a dividend income allowance calculated in the manner set out in the Fourth Schedule. Section 56(4) however provides:-
"In this section and in the Fourth Schedule distribution does not include a distribution made out of -
(c) profits or gains of a company on which before 1st January 1966 no income tax was paid or after that date no corporation tax was paid."
(1) Are the sums totalling $457,230 paid by the liquidator out of the proceeds of the winding-up of the company and received by the appellant as a contributory "distributions" within the meaning of section 49(1)(b) of the Act? and if so
(2) Is the appellant entitled to a dividend income allowance in respect of such payments in accordance with section 56 of the Act?
6. Their Lordships begin by observing that the payments in question fall fairly and squarely within the statutory formula contained in section 49(1)(b) of the Act. They were paid by the liquidator out of the assets of the company and the appellant received them by virtue of his shareholding in the company. They were thus distributions of assets of the company made in respect of the companys shares. It is true that the payments were made by the liquidator and not by the company itself, but while payment by the company is a requirement of section 49(1)(a) there is no similar requirement in section 49(1)(b). For the purpose of the latter subsection it is enough that the payment is made out of the assets of the company.
7. The appellant contends that section 49(1)(b) should be construed as limited to distributions by the company while a going concern and not as including distributions in a winding-up. He supports that contention by pointing out that the Act is an Income Tax Act and that the principal charging section (section 5) imposes a charge to tax upon income and not upon capital. He submits that the construction for which the Board of Inland Revenue contends results in the double taxation of income and the taxation of tax-free capital gains. The Board is seeking to charge him with income tax on distributions which represent either retained profits which have already borne corporation tax or capital gains which are not taxable.
8. Their Lordships are not impressed by these arguments. Section 5 charges income tax upon the income of the taxpayer. It is a commonplace that what is capital in the hands of the payer may be income in the hands of the recipient. As the inclusion of capital dividends in section 49(1)(a) demonstrates, the section is not confined to income payments. That section 49(1)(b), like section 49(1)(a), extends to payments of capital is confirmed by the exception of "so much as represents the repayment of share capital", for these words would be otiose if the operation of the paragraph were limited to income. Section 49(1)(a) is, no doubt, limited to payments by the company while a going concern since, as Hamel-Smith J.A. pointed out, a company loses its powers to make a distribution on going into liquidation. There is, however, no reason for limiting section 49(1)(b) in the same way, given that the distribution need not be made by the company so long as it is made out of its assets. On the contrary, their Lordships regard the difference in wording as a strong indication that section 49(1)(b), unlike section 49(1)(a), is not intended to be limited to distributions while the company is a going concern.
9. Their Lordships are unable to accept the appellants contention that the Boards construction leads to double taxation of distributed profits. This danger is removed by the provision of a dividend income allowance. The effect of this is that those profits which have already borne corporation tax are subjected only to the additional tax which is exigible from the shareholder under a graduated system of personal income tax. Their Lordships do accept the appellants contention that the Boards construction results in the taxation of what would otherwise be tax-free capital gains. They are, however, unable to agree with him that this cannot have been the intention of the legislature. There is nothing irrational in exempting capital gains made by a company from tax while they remain undistributed while subjecting them to tax when paid out to its shareholders. This is clearly the effect of section 49(1)(a) in relation to capital dividends. Given that all dividends paid by the company while a going concern are taxable, whether paid out of profits which have already borne corporation tax or out of tax-free capital gains, it would be strange if similar payments were to fall outside the charge to tax merely because they were paid to shareholders in the course of a winding-up.
10. Hamel-Smith J.A. took the fact that the Companies Ordinance uses the word "dividend" to describe payments to creditors in or towards satisfaction of the liabilities of the company as confirmation of his view that the legislature could not have intended to charge income tax on distributions by a liquidator in the course of winding-up. Their Lordships agree that it would indeed be absurd to subject dividends paid to creditors to income tax. But the construction of section 49 for which the Board contends leads to no such absurdity. The payment of dividends to creditors in the course of a winding-up are not within section 49(1)(a) because they are not paid by the company, and they are not within section 49(1)(b) because they are not paid in respect of shares of the company. The contrast between "any dividend paid by the company" and "any other distribution of the assets of the company" makes it plain that the word "dividend" is to be understood in the usual sense as denoting only dividends to shareholders. While, therefore, it would indeed be absurd if dividends paid to creditors were taxable as income, this does nothing to support the appellants argument that section 49 must be limited to payments made by a company as a going concern.
11. Their Lordships consider that the payments in question in the present case fall within the clear words of section 49(1)(b), and that there is much force in the submission made on behalf of the Board that the only reason why the matter has caused any difficulty, and led to disagreement among the members of the Court of Appeal, is because the appellant has relied on arguments and authorities which are directed not to the interpretation of the express provisions of the section but to the question whether a charge to income tax would arise in the absence of such provisions. It is beside the point whether in their absence the payments in question would or would not have formed part of the appellants income for tax purposes. The only question is whether the payments are distributions within the meaning of section 49(1)(b). If they are, then they are taxable, whatever might have been the position in the absence of section 49(1)(b) or under a different statutory formula.
12. The appellant took their Lordships through the leading cases on the different statutory formulae which have been employed in this context in the United Kingdom and Australia. While for the reasons previously stated such cases can be of no direct assistance, their Lordships found them instructive as providing a likely explanation of the reason why the wording of section 49(1)(b) takes the form it does.
13. The cases start with Inland Revenue Commissioners v. Burrell  2 K.B. 52 C.A. The Revenue sought to charge supertax on distributions to shareholders by the liquidator of a company in liquidation to the extent that they represented undistributed trading profits. The applicable tax legislation, enacted in 1918, contained no special provisions in relation to company distributions. The Court of Appeal held that no tax was payable. The Court rejected the Crowns submission that undistributed profits retain their character as profits and pass to the shareholders as such unless validly capitalised before the liquidation. It upheld the taxpayers claim that on a winding-up the companys undistributed profits cease to be income and are distributed to shareholders as an indistinguishable part of the companys assets to which they are entitled.
In Commissioner of Taxation (New South Wales) v. Stevenson  59 C.L.R. 80 the High Court of Australia had to consider an assessment to income tax on that proportion of the distribution on a winding-up which represented undistributed profits. The applicable tax legislation which had been enacted in 1928 contained a definition of "dividend" which was sufficient to include capital dividends but nothing which corresponded to section 49(1)(b) of the Act with which the present appeal is concerned. The assessment was discharged on the ground that the word "dividend" was not apt to describe the distribution of the assets of a company in liquidation to its shareholders. In the course of their judgment Rich, Dixon and McTiernan J.J. made some observations (at. p. 101) to which their Lordships consider it appropriate to refer:-
"The considerations which we have already discussed are, we think, sufficient to show that some clear expression of intention to include amounts received in a liquidation in the income of the taxpayer should be required before a court holds that such amounts are liable to taxation as income. In truth no part of such distributions are income of the shareholder and, if legislation includes them in his taxable income, the reasons for doing so must depend not on their true nature but upon the desire to effectuate the policy behind a graduated income tax. For, unless they are taxed, it is possible for a company to withhold distributions of profit and then wind up for the purpose of bringing them into the hands of the shareholders without exposing them to additional tax thereon companies must seldom be ready to wind up merely for the purpose of effecting a distribution of profit. Whether the legislature will regard the danger as sufficiently serious to warrant the imposition of a tax upon distributions in a winding up must be uncertain. In the absence of express provision, general words should not be given any extended application in order to meet the case."
14. The legislature evidently did regard the danger as sufficient to merit further legislation. By the time the same question again came before the High Court of Australia in Resch v. Federal Commissioner of Taxation [1941-1942] 66 C.L.R. 198 the applicable legislation, enacted in 1930, contained a new section dealing expressly with distributions in a winding-up. Dixon J. pointed out at pages 219-222 that the new section impliedly conceded what had been decided in Stevensons case, namely that the previous section was confined to distributions of profit by a company as a going concern and did not apply to a distribution in a winding-up. The new section, however, destroyed that distinction and rendered distributions to shareholders in a winding-up taxable to the extent specified.
15. Their Lordships consider this account to be instructive in two respects. First, it demonstrates that, while distributions to shareholders in a winding-up are not income and are not subject to income tax in the absence of express statutory provision to that effect, they may be brought within the charge to tax by the use of appropriate language. Secondly, it indicates that, while a provision like section 49(1)(a) is insufficient for the purpose, wording of the kind found in section 49(1)(b) may well be sufficient.
16. Once it is recognised that the question turns on the proper construction of the relevant statutory provisions, reference to other formulae employed by taxing statutes in other jurisdictions can be seen to be unnecessary and possibly misleading. Their Lordships are satisfied that the payments in question in the present appeal fall within the plain language of section 49(1)(b) and are subject to income tax in the hands of the appellant.
17. This makes it necessary to consider the appellants claim to a dividend income allowance. As their Lordships have already explained, the purpose of the allowance is to avoid any element of double taxation. It operates to limit the individual shareholders liability in respect of company dividends and distributions by giving credit for the tax already borne by the company.
18. In order to prevent section 56 from having any wider effect section 56(4)(c) disallows the allowance in the case of any distribution made out of profits or gains of a company on which neither income tax nor corporation tax has been paid. It is of the essence of the appellants case that the payments in question are distributions of capital and do not derive from profits or gains which have been subjected to income or corporation tax in the hands of the company. On this footing they are not eligible for the allowance.