NOV. 11, 12. DEC. 16, 1941.
December 16. - LORD GREENE, M. R. - The judgment which I am about to read is the judgment of the Court.
The questions raised by this appeal are short and the answers to them do not, in our judgment, admit of doubt. They arise in the Finance Act, 1936, Section 18 : 'For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income-tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows :- (1) Where such an individual as by means of any such transfer, either alone or in conjunction with the meaning of this section, power to enjoy, whether or with or in the future, any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income-tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income-tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section, be deemed to the income of that individual for all the purposes of the Income-tax Acts : Provided that this sub-section shall not apply if the individual shows in writing or otherwise to the satisfaction of the Special Commissioners that the transfer and any associated operations were effected mainly for some purpose other than the purpose of avoiding liability to taxation.'
Finance Act, 1938, Section 28 (2) : ' The proviso to sub-section 1 [of Section 18 of the Finance Act, 1936] shall cease to have effect and the following two sub-sections shall be inserted immediately after the said sub-section... (1B) : The last two foregoing sub-sections shall not apply if the individual shows in writing or otherwise to the satisfaction of the Special Commissioners either (a) that the purpose of avoiding liability to taxation was not the purpose... for which the transfer or associated operations or any of them were effected; or (b) that the transfer and any associated operations were bonafide commercial transactions and were not designed for the purpose of avoiding liability to taxation.' following circumstances. On March 20,1933, by an agreement of that date, four ladies, the appellants wife, Mrs. Latilla, and her two daughters and a Mrs. Jane Johnson, being all at that time resident in the United Kingdom, sold to a company called latjohn Trust, Ltd., their shares in a mining partnership having the firm-name of John Mack & Co. The shares in question were two one-third shares, of which one was owned by Mrs. Johnson and the other by Mrs. Latilla and her two
daughters in equal thirds. The remaining one-third share in the partnership belonged to a Mr. John Mack, who lived in Rhodesia where the mine owned by the partnership was situate. Latjohn Trust Ltd., was a limited company incorporated under the laws of Southern Rhodesia, where it was admittedly resident during the period with which this appeal is concerned. The incorporation took place on the same day as the sale agreement. The consideration to which the four ladies were entitled under the agreement consisted of shares and non-interest bearing debentures in the company, in each case of the nominal value of pounds 1, the appellants wife receiving 1,667 shares and 41,667 debentures. The sale was to take effect as from April 1,1932. Latjohn Trust, Ltd., proceeded to carry on business in partnership with Mr. Mack, who had consented to the sale. The terms of the partnership with Mr. Mack, who had consented to the sale. The terms of the partnership as it existed between Mr. Mack and the four ladies and later between Mr. Mack and the company are not stated. The accounts show the sums receivable by the company in the various years in respect of its two-thirds share of the profits of john Mack & Co. The company has never declared a dividend, but has applied its profits in redeeming debentures. It has been the practice of the four ladies to borrow money form the company in anticipation of the redemption of debentures which they held.
Until the Finance Act, 1936, came into force, Mrs. Latilla, as the result of these transactions, was able to obtain for herself a share of the profits which the company derived form the partnership business without incurring for herself or her husband any liability to British income-tax. She, or rather her husband, as the person assessable in respect of her income, now claims that the provision of that Act have not altered the position. The Crown, on the other hand, claims that by reason of the Finance Act, 1936, Section 18, income-tax and surtax are payable by Mr. Latilla in respect of income of the company which Mr. Latilla admittedly has power to enjoy within the meaning of sub-section (3) of that section. The details of the assessments which have given rise to the controversy need not be stated. The Special Commissioners found that the transfer of the shares in the partnership to the company was effected mainly for the purpose of avoiding British taxation, and was not a bonafide commercial transaction. This finding goes farther than is required by the proviso to sub-section (1) of Section 18 in force at the relevant times which throws the burden of proof on the taxpayer. Nevertheless an attempt was made, not very vigorously, to attack it on some ground which we must confess remains obscure to us. There was ample evidence to support the finding which is quite unassessable, and we therefore say no more about it.
The substantial argument presented on behalf of the appellant was concerned with the words 'income becomes payable in the preamble to Section 18. It is not disputed that if those words are apt to describe the share of partnership profits received by the company, the operative part of the section applies to the case, and the assessments as agreed are valid assessments. It is, accordingly, unnecessary to refer to the complicated provisions of the operative part of the section. The preamble explains the purpose of the legislation, namely, to prevent 'the avoiding by individuals ordinarily resident in the United Kingdom of liability to income-tax by means of transfer of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom'. It is notorious that previously to the passing of this legislation individuals who were minded to enjoy their income without bearing the appropriate burden of British taxation were able to do so by transferring assets productive of income to a non-resident person or company by whom the income was retained abroad, so as not to incur taxation, here. The money representing the income was then, by mean of one or other of several well-known expedients, transferred to this country as capital. The device used in the present case of transferring money by repayment of debentures was a favourite one, and it was effective for its purpose. These ingenious schemes the legislature set out to defeat in the Finance Act, 1936 Section 18, and the question which arises in the present appeal is whether or not the transaction now under consideration falls outside its scope.
As we have said, the answer depends in this true construction of three words in the preamble. It was argued by counsel on behalf of the appellant that the operative provisions of sub-section (1) of Section 18 are confined to cases where the transfer of assets which was taken place is of the description mentioned in the preamble, namely, a transfer of assets 'by virtue of in consequence whereof, either alone of in conjuction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom'. With this argument we agree, since the words 'any such transfer' in sub-section (1) clearly refer to a transfer of the description mentioned in the preamble. Counsel for the appellant then argued that the transfer in the present case, although it was a transfer of assets within the comprehensive definition contained in sub-section (5), was not a transfer of that description since no income became 'payable' to the company. He pointed out, quite correctly, that the assets transferred in the present case were shares in a partnership, together with the interests of the transferors in the mining property itself, and that the income derived form the company was derived through the activities of the partnership in exploiting the mine. He contended that the words were not apt to describe income derived by a persons own exertions, since income so earned is his own and cannot be said to be 'payable' to him. In the special case of a partnership he referred to the limitations which existed at common law upon the right of partners to sue one another, and he claimed that the share of partnership profits to which the company became entitled could not be described as income which became 'payable' to the company. We disagree with all these contentions in their application to the facts of the present case, and we need not discuss their wider implications. The share of the profits of the partnership to which the company is entitled is that share which comes to it in accordance with the terms of the partnership.
The company is entitled to call upon its partners to do whatever may be necessary, for example, by signing a cheque on the banking account of the partnership, to enable the company to obtain its share. In the partnership accounts the companys undrawn share of profits would appear as a debt owing to the company. If the profits were under the control of the other partner the company could, by appropriate proceedings, compel him to pay over its share. If this is not income 'payable' to the company we do not know what it is. With regard to the argument that it was not the transfer of assets which produced the income, but the activities of the partners, we agree with the arguments submitted by the Attorney-General that these activities are 'associated operations' within the definition of that phrase in sub-section (2). By that sub-section, so far as is relevant, an associated operation means, in relation to any of the assets transferred, words of the widest import which, in our judgment, clearly cover the operation of turning the assets to account. Although the figures are agreed, we must refer to a suggestion made by the Attorney-General in the course of his argument, to the effect that the Crown in such a case as the present was entitled to go behind the accounts as agreed between the partners and examine the accounts of the partnership itself in order to ascertain what in the view of the Crown the profits of the partnership were, In our opinion this would not be legitimate. The 'income payable' to a partner is his share of the partnership profits which the partners, in accordance with the partnership agreement, determine to divide. He cannot demand more. It is right to say that the Attorney-General finally accepted the position that in the present case the Crown was bound to accept the actual amounts received by the company as being the correct basis for the assessments.
The appeal is dismissed with costs.
Have to appeal to the House of Lords.