NOV 25 26; DEC 16 1946
This is another appeal by a taxpayer against assessments made under the Finance Act, 1936, Section 11. The facts are extremely complicated, but fortunately it is only necessary to refer to them in the most summary manner in order that the short point which arises may be understood. The point in issue aries in this way. As the result of a series of transaction extending over a number of years certain valuable assets belonging to Lord Howard de Walden and consisting of shares in and debts owing by an English company becomes vested in four Canadian companies. It is not disputed that these transactions were of the kind described in the preamble to Section 18, and it is admitted that their main, and indeed their sole, purpose was to to avoid liability to taxation. The only interests which, during the relevant periods, were held by Lord Howard de Walden in respect of the consideration payable under these transaction, consisted of (1) a life interest in certain notes to him by the Canadian Companies; (2) part of certain notes issued to him by the Canadian Companies and repayable on demand, the remainder being stated to be sums actually deposited by the appellant; (3) a comparatively small number of shares in two of the companies; and (4) certain annuities payable to himself or his wife by one or other of the companies. The remainder of the consideration, or what represented it, he had effectively put out of his control. It is admitted that the whole of the income of the Canadian companies would be chargeable to income-tax if it were the Canadian companies would be chargeable to income-tax if it were the income of Lord Howard de Walden received by him in the United Kingdom. The annuities and the interest element in each payment of the notes (see Howard de Walden (Lord) v. Beck), have borne tax in the usual way. The assessments which were upheld (subject to adjustment of figures) by the Special Commissioners and by Macnaghten, J., on appeal were based on the view that the whole of the income of the four Canadian companies is, under the section, to be deemed to be the income of Lord Howard de Walden for all the purposes of the Income-tax Act.
Now, apart from the extended meaning given to the words 'power to enjoy' by Section 18 (3), the only income of the Canadian companies which Lord Howard de Walden has power to enjoy can consist at the most of a very small part of the actual income of the companies. The question, therefore, and the only question which arises is whether the assessment should be based on that part only (as had been held below) or on the whole income of the four companies. We have come without any hesitation to the conclusion that the latter is the true view. The income of a person resident or domiciled out of the United Kingdom which under sub-section (1) is deemed to be income of the taxpayer is described as 'that income', a phrase which refers back to the income mentioned in the earlier part of the sub-section in the following phrase 'where such an individual has. . . acquired any rights by virtue of which he has. . . power to. . . any income of a person resident or domiciled out of the United Kingdom which under sub-section (1) is deemed to be income of the taxpayer is described as 'that income', a phrase which refers back to the income mentioned in the earlier part of the sub-sections in the following phrase 'where such an individual has.... acquired any rights by virtue of which he has... power to... any income of a person resident or domiciled out of the United Kingdom'.'Power to enjoy income' includes the cases mentioned in sub-section (3) and in particular the cases where ' (b) the receipt or accrual of the income operates to increase the value to the individual of any assets held by him or for his benefit' and ' (c) the individual receives, or is entitled to receive, at any time any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income'. In the present case it appears to us clear beyond the possibility of doubt that both (b) and (c) apply. The receipt of the income by each company operates to increase the value of the notes and of the deposit debt which are clearly 'assets' held by Lord Howard de Walden or for his benefit, the notes in fact being held by trustees. Similarly, the payments made and to be made in respect of the notes and deposits are 'benefits' within the meaning of (c) since 'benefit' as defined by sub-section (5) includes a payment of kind.
An examination of the language of sub-section (3) in conjuction with sub-section (1) into which, being a definition clause, it must be read, makes it clear that the power to enjoy income with which sub-section (1) is dealing need not by any means necessarily extend to the whole of the income of the non-resident person. Thus the benefit which is derived by the taxpayer from the increase in value of assests held by him may be very small compared either with the total income of the company or with so much of that income as is derived from the assets transferred. We are unable, therefore, to accept the argument that the income which is caught by sub-section (1) is limited to the income which the taxpayer is, in fact, entitled or able to received. Counsel for the appellant argued that sub-section (3) does not deal with the quantam but only with the character of the income which the taxpayer is to be deemed to have power to enjoy. But the real question depends upon the meaning of the words 'any income' in sub-section (1), words which, in our opinion, are, in the context of the sub-section, when read together with sub-section (3), incapable of being construed as limited to income which the taxpayer is entitled or able to enjoy in fact.
Our conclusion on this matter can be tested by writing (for example) the provisions of sub-section (3) (b) into sub-section (1) which will then run as follows : 'Where such an individual has, by means of any such transfer..... acquired any rights by virtue of which the receipts or accrual of any income of a person resident of domiciled out of the United Kingdom operates to increase the value to the individual of any assets held by him or for his benefit..... that income shall..... be deemed to be the income of that individual... ' It seems to us hopeless to suggest that as a matter of language the income which is deemed to be the income of the taxpayer is to be confined to such part of the income as represents the increased value of the assets. But here a difficulty is raised by counsel for the appellant, the nature of which we can best explain by stating the three possible constructions of the relevant provisions which were discussed before me. At one end of the scale lies counsels argument in the present case. At the other end of the scale lies the argument favoured by counsel on behalf of the Crown, that however small the benefit in fact enjoyed by the transferor of the assets, and however large the income of the non-resident person or company, the whole of that income is to be deemed to be income of the transferor, even if only part of it is traceable to the assets transferred. An intermediate suggestion favoured by neither side was to the effect that the only income of the non-resident which is to be deemed to be income of the transferor is that part of the income which is traceable to the assets transferred. No doubt, in the majority of cases which, in practice, come within the scope of the section, the transferee will have been constituted, either individually as a trustee or as a corporation, for the sole purpose of carrying out the transactions and will have no other income. But cases might arise where the transferee selected was, for example, an existing corporation with very large assets and income of its own and the income attribute to the assets transferred might be a very small proportion of its total income. It cannot be supported, argues counsel for the appellant, that the Legislature can have intended to produce such an extreme result as might be produced upon the second of the three constructions since he would impose an entirely disproportionate penalty on the taxpayer; and rejection the intermediate view which, he said, could not be reconciled with the language use, he arrived, by a process of elimination, at his own construction as being the only possible one.
We find it impossible to accept that argument. If, as it seems to us, the language of the section clearly does not limit the income of the non-resident in respect of which the taxpayer is charged to the actual benefit which he draws from the income of the non-resident - a construction, be it observed, which would largely defeat the expressed purpose of the section-it is illegitimate to force upon that language a strained construction, merely because it may otherwise lead to a result which to some minds may appear to be unjust. But even if the only alternative to the construction of counsel for the appellant is the second of the three constructions, we are not prepared to say that it is necessarily as unjust as he contends. The section is a penal one, and its consequences, whatever they may be, are intended to be effective deterrent which will put a stop to practices which the Legislature considers to be against the public interest. For years a battle of maneuver has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful. It would not shock us in the least to find that the Legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers. It is not, however, necessary for us to choose between the second and third constructions. We would rather defer that choice until a case which raises the issue can be considered on its own facts. In the present case it is sufficient to say that the appellant is in our opinion chargeable in respect of the entire income of the Canadian companies, the whole of which is to be traced to the assests originally transferred to them.
One further point taken by counsel for the appellant may be mentioned. He pointed out that in so far as the right to enjoy income of the four companies is vested in the appellants son, who holds the majority of the shares, income received by the son will taxed in his hands in the ordinary way, and at the same time the appellant will be liable to tax on the whole income of the companies which is deemed to be his. This, it was urged, involves double taxation, since no relief is afforded by paragraph 3 of the Second Schedule to the Finance Act 1936. There is a short answer to this argument. There is no doubt taxation since the subject-matter of tax is different, the income of the son being one thing and the income of the companies being another. But, quite apart from this, the argument based on hardship leaves us unmoved. The son will bear tax in the ordinary way upon his own income, the father will be taxed on the companies income because he is the person against whom the deterrent action of the section is directed. The fact that the section has to some extent a retroactive effect again appears to us of no importance, when it is realised that the legislation is a move in a long and fiercely contested battle with individuals who well understand the rigour of the contest.
There in one further argument advanced by counsel for the appellant which we only mention in order to say that we disagree with it entirely. By the Finance Act, 1938, Section 28, certain amendments were made in Section 18 of the Act of 1936. In particular, the provision was made by a new section to meet devices by which a transferor took care to give himself no power to enjoy any income of a non-resident transferee company within the meaning of Section 18, but obtained the money he required, for example, by borrowing form the company, all the shares being vested (for example) in his children. In this new section the phrase 'power to enjoy' did not, and obviously could not, appear, as the best and the natural method of taxing the transferor was by taxing him on the amounts he in fact obtained out of the companys coffers. This new section, which only charges with tax the benefit in fact obtained, shows, according to the argument, that the legislature understood Sections 18 as imposing the same limitation on the quantum of income charged with tax under that section. Quite apart from that the new section is dealing with a different type of transaction, it is in our opinion quite illegitimate to use subsequent legislation to construe previous in this way, even where the subsequent legislation forms part of the same code. The argument, which in any event is inadmissible, is particularly so in the present case which is dealing with assessments for periods before the amendment came into force. Questions similar to those raised in the present case were considered by Lawrence, J., in three appeals by Beattys (Earl) Executors v. Inland Revenue Commissioners. Lawrence, J., answered these question, against that taxpayers, and the decision is therefore an authority against the arguments submitted in the present case by counsel for the appellant who contended that the decisions in the Beattys Case were wrong and ought to be overruled. It follows from what we have already said that those decisions were in our opinion correct in so far as they deal with the same questions as those raised in the present appeal. We agree with the conclusions of Macnaghten, J., and the appeal must be dismissed with costs.
Leave to appeal to the House of Lords.