LORD GREENS, M.R. - The point raised by this appeal is one which might fairly be described as singularly devoid of merit. We have to decide a bare question of law.
Put in diagrammatic form, so to speak, the question may be thus formulated. A trading company in the year 1 sells goods on credit. The amount so owing to it is brought into account in the computation of its profits and gains for the year 1. In the years 2 and 3 events happen which, first of all, depreciate the value of that debt, and later on destroy its value altogether. In the accounts for the years 2 and 3 the Revenue accept the view that the depreciation and final devaluation of the debt should be made the subject of an allowance in those respective years. In the year 4 further events happen of a quite unusual and, indeed, unexpected nature, which have the effect of converting the debt which has been treated as bad into a perfectly good debt, which is paid in the year 4. The Revenue then says : 'In taking the account of your profits and gains for the year 4, you must bring in that sum as a receipt. You have received it in the year 4, and you must bring in that sum as a receipt. You have received it in the year 4, and you must accordingly bring it into account.' It is not a question of revising or amending, by additional assessment or otherwise, any of the assessments for the years 1, 2 or 3. The claim of the Revenue is to treat that receipt as a receipt of income for the year 4.
The only statutory provision which bears on this question to which I need refer is rule 3(i) of the Rules applicable to Cases I and II of Schedule D to the Income Tax Act, 1918. That sub-rule is as follows : 'In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of. . . any debts, except bad debts proved to be such to the satisfaction of the Commissioners and doubtful debts to the extent that they are respectively estimated to be bad.' Then there is a provision as to bankruptcy or insolvency : 'In the case of the bankruptcy or insolvency of a debtor, the amount which may reasonably be expected to be received on any such debt shall be deemed to be the value thereof.'
There is one curious point about that provision which I only note in passing. It finds its place in a series of sub-rules, all of which appear to deal with deductions, such as disbursements, expenses or losses, whereas this particular sub-rule prohibits the deduction of any debts. A debt would obviously only be the subject of deduction if the taxpayer was entitled to say to the Revenue : 'Although I keep my profit and loss account on the basis of treating debts as being equivalent to receipts, yet, as between me and the Revenue, I am entitled to deduct debts because I have not yet been paid.' The effect of the rule is to treat the account, which has to be taken for income tax purposes, on the same basis as a commercial account, and to prohibit the deduction of debts on the ground that they still remain to be paid and consequently ought to be brought into account in the year in which they are paid. The practice always has been, and rightly, having regard to that language, to treat debts in the ordinary commercial way as though they were receipts of the year and bring them into the account accordingly.
The first question which falls to be decided in examining this matter is one on the true construction of that sub-rule. In the case of the Gleaner Co. v. Assessment Committee, a case in the Privy Council on appeal from Jamaica arising out of the Jamaica Income Tax law, it is said that a provision similar in terms to this one did not justify the giving of an allowance in respect of doubtful or bad debts save on the occasion when the debt was first brought into the account. For instance, the reasoning of that decision, if it applied to the present case, would have produced this result, that the allowances granted by the Revenue in years 2 and 3 would not have been authorised by the language of this sub-rule. The allowances could only have been made in respect of the debt in the year 1. In the year 1 there was no ground at all for writing it down, much less for treating it as altogether bad, and, therefore, nothing fell to be done about it. The consequence would have been, if that view applied, that the allowances granted by the Revenue in the years 2 and 3 would have been merely voluntary allowances not made pursuant to any provision of the statute. It was further said in that case that : 'if, therefore, debts decided to be doubtful in one year were found to be good at a later date, apart from the provisions of Section 30' - that is, of the Jamaica Act - 'there are no means whatever of obtaining further income tax upon the amount, nor, if their value further diminish, could they be the subject of reassessment.' That language, if it were applicable to the present case, would preclude the crown from maintaining the claim it now makes, namely, to have the receipt in the year 4 brought into account in respect of that year. But in the recent case of Absalom v. Talbot, in the House of Lords, the effect of sub-rule (i) was considered in that connection. It is right to say that the observation to which I am about to refer were by way of dicta only. But of the five noble and learned Lords who were sitting on that appeal, three, namely, the lord Chancellor (Lord Simon), Lord Atkin and Lord Porter, emphatically and clearly dissented from the view which had been expressed by the Privy Council in the Gleaner case, and held - I repeat by way of dictum only - that it was legitimate for the Revenue to make allowance in a subsequent year in respect of a debt which in the earlier year had been treated as a perfectly good debt. The other two noble and learned Lords, Lord Thankerton and Lord Russell of Killowen, appear to have been inclined to take the opposite view, although they did not express any concluded opinion. We have, therefore, three clearly expressed statements in that case as to the true construction of this sub-rule. We are not bound, of course, to follow them I think it falls to us to decide whether, in our opinion, those expressed opinions are in accordance with the true meaning of the sub-rule. If we came to the conclusion that they were not, and that the view of the Privy Council in the Gleaner case was preferable, the result of this case might well have been different to what I consider it should be, because then the allowances would have been purely ex gratia allowances. But, in my opinion, the views expressed by those three members of the House in Absalom v. Talbot are correct.
I think I am right in saying that no one of the three noble and learned Lords thought it necessary to examine carefully the language of the sub-rule in order to show how and why the construction of it admitted the making of such allowances as we have to consider in this case. But it seems to me that that task is not really a difficult one, for this reason. When one looks at the language, it starts, first of all, by prohibiting a deduction in respect of a debt. That would appear to mean, as I have said, that a taxpayer cannot come and say : 'Exclude this debt from the computation because it has not yet been paid.' But in this case, in the years 2 and 3 the company was in effect saying to the Revenue : 'We claim a deduction in those two years in respect of this debt; the reason being that in those years 2 and 3 something has happened to it which has had the result, first, of reducing it in value, and subsequently destroying the value altogether, on the ground that it was bad.' The company claiming to make that reduction in respect of the debt in the years 2 and 3 is entitled to the relief which the sub-rule allows, namely, that, if it is a bad or doubtful debt proved to be such to the satisfaction of the Commissioners, a deduction may be made. That is exactly what happened.
The contrary view, of course, is that the only occasion when the question of badness or doubtfulness of debts falls to be considered is the occasion when the debtor is bringing his debt into the account. But I cannot see that the language of this sub-rule necessarily leads to that result. It applies to any deduction claimed in respect of any debt, at any time in the year it seems to me, and such a claim was precisely the claim that was made by the company in this case. I am accordingly of opinion that we ought to follow the dicta of the majority of the House in Absalom v. Talbot. That is the first question to be considered.
The next question is : What is to be done where, in a subsequent year the debt having in the meanwhile become a good debt, is paid In the Gleaner case, as I have said, it was regarded as a consequence of the early part of the decision, that a receipt in a subsequent year of a debt previously treated as a bad could not be treated as something to be brought into account in that year, or as a ground for revising or reopening the earlier assessments. In the Absalom case that consequence was not referred to, save by Lord Porter. He said this 'Your Lordships attention, however, has been drawn to the practice in the past of the Inland Revenue authorities of making an allowance in respect of losses for bad or doubtful debts as and when they occur, though the debt itself was originally treated as being of its face value in a previous years accounts. Such a practice necessitates, I think, the corresponding obligation on the part of the taxpayer to submit in a later year to an increase in the sum at which a debt previously treated as bad or doubtful should be brought into account if in fact a payment greater than the assumed value had been obtained or seems likely to be obtained, on a later occasion.' That appears to mean that, in Lord Porters view, a subsequent improvement in the debt in a later year could be given effect to, notwithstanding that the debt had not in fact been paid because he uses the phrase 'seems likely to be obtained.' I am not sure that I would accept that view, but we have not to consider it here because we are now dealing with a case where the debt has in fact been paid. Then he refers to Anderton & Halstead, Ltd. v. Birrell. He says 'The decision in that case turned upon a different point, namely, whether the debt could be treated as having been mistakenly valued at too low a figure in the years in which the value had been written down, so that the profits of those years could be recalculated, the value written up, and the sum, on which tax was payable, increased.' That was a demand by the Crown to get what it wanted by a different method, namely, by reopening the earlier assessment. Lord porter goes on : 'The argument that it could be so treated was held to be unsound, but nothing was said to throw doubt upon the right of the subject to have the value of a debt reduced at any time as and when it was discovered to be bad or doubtful, or of the Crown to have it increased in some future year if it proved to be of a greater value than had been assumed in an earlier year when it was brought into account or valued.' Lord Porter took the view that, if the debt was paid in the subsequent year in whole or in part, that payment was a matter to be brought into account; but he also seems to have taken the rather more extreme view that, even if it were not paid, a mere change of its value would justify giving effect to that change in the account of the year in which it took place. As I have said, I am not prepared, without further consideration, to accept that.
If one looks at the position when the company in the year 4 received this sum, the first question that occurs to one is to ask this : As between the Revenue and the taxpayer, has the sum so received in any shape or form been brought into account for tax purposes Counsel for the appellant says : 'yes, it has. It was brought into account in the form of a debt in the year 1, according to the ordinary practice, and, having been brought into account in the form of a debt in the year 1, it is not possible to strike it with tax in the year 4 when it is received.' The reason why a receipt is not taxed in the year of receipt, I apprehend, is that it has already been taxed in the form of a debt in the year to which the debt is referable. But, in the present case, it seems to me impossible to disregard what has happened in the years 2 and 3 as affecting the position of the taxpayer on the one hand and the Crown on the other in respect of this particular receipt. It seems to me, looking at the whole of what has happened, that it is quite impossible to say that this receipt ought to be treated as having been previously brought into account for tax at all. It is perfectly true that it was originally brought into account in its then shape of a debt, but the effect of what happened in years 2 and 3 appears to me to have reversed that position altogether. The net result is that, at the end of the year 3, it is untrue to say that this particular item has been brought into account for tax purposes because, although it was brought in in calculating the profits in the year 1, it was taken out again in calculating the profits of the years 2 and 3. Here is a receipt in year 4. Why should not it be struck with tax when it has not so far been brought into effective computation It is not like an ordinary trading debt which, when it is received, would not be taxed a second time. This is peculiar debt, having regard to its history, of which it is impossible to say that, at the time when it was received, it has been brought into account for tax purposes while it was still only a debt. You cannot put what happened in the year 1 into a sort of watertight compartment and disregard what happened in the years 2 and 3. In my opinion, you must look to the result of all the transactions and ask yourself in the year 4 : What is the status of this receipt as between the taxpayer and the Revenue Is it a receipt which must be excluded from computation on the ground that it has already come in in another form, namely, the form of a debt, or is it to be treated as something which has never been brought into account at all owing to the particular provisions of sub-rule 3 (i), and to what, in fact, was done under those provisions In My opinion, the Crowns contention is right in this matter.
Counsel for the appellant pointed out that the receipt in the year 4 had its origin, from the commercial point of view, in the coal contract made in the year 1. No doubt that is perfectly true, but the question we have to decide is : What is the status of this receipt as between the taxpayer and the Revenue, having regard to the events which have happened Clearly, as he points out, if in year 1 there had been a debt which for some reason had been omitted and then in year 4 the amount of that debt was paid, the proper course, according to the ordinary practice, would be not to treat that as a trading receipt of year 4 but as a trading receipt of year 1, when it ought to have appeared in the accounts in its then form of a debt. That is perfectly true, but the proper remedy in that case is to reopen, by proper procedure, the account of year 1. But that is not this case at all. That is a case of mere omission. This is a case where the whole position of the debt has been completely revolutionised by what happened in years 2 and 3. I can see no reason for saying that, as between the taxpayer and the Revenue, this receipt must be attributed to the year 1.
In my opinion, the learned Judge, who took that view contrary to the view of the Commissioners, was perfectly right, and the appeal must be dismissed.
SOMERVELL, L.J. - I agree.
COHEN, L.J. - I also agree.
Leave granted to appeal to the House of Lords.