LORD GREENE, M. R. - The main question in this appeal is whether the appellants were properly assessed to income-tax in respect of shares of profits in an Australian firm in which they were partners, remittances from which are said by the Crown to have been payable to them in the United Kingdom. The rule under which the assessment was made was rule 2 of the Rules applicable to Case V which, at the relevant date reads in this way, so far as material : 'The tax in respect of income arising from possessions out of the United Kingdom, other than stocks, shares, or rents shall be computed on the full amount of the actual sums annually received in the United Kingdom from remittances payable in the United Kingdom, or from property imported or from money of value arising from property not imported, or from money or value so received on credit or on account in respect of any such remittances, property, money or value.'
The transactions in respect of which the claim of the Revenue is based and resisted by the taxpayer are set out fully in the case stated by the General Commissioners for the City of London. I will state, as shortly as I can, such crucial facts as are necessary for the understanding of this judgment. The appellants were partners in the firm of Antony Gibbs and Sons, of London. The partners in that firm were also partners in two other firms carrying on business and controlled abroad. One of them, which I will call the Australian firm, with head quarters at Malbourne, had several other Australian partners. That firms business, although at one time it had been carried on at a loss, was, at the relevant time, being carried on at a profit. The result of that state of affairs was that the account of the partners in the London firm in respect of this interest in the Australian firm showed a profit in the accounts of the Australian firm, and the result inured in the appropriate shares to the benefit of the partners in the London firm. The other foreign firm carried on business in Chile where it head office and control were situated, the partners being the partners in the London firm with other partners in Chile. That business had been carried on at a loss. At the relevant time, without going too closely into the figures, it had an item of loss in its accounts of some Pounds 800,000 or more. The effect of that was to show the account of the partners in the London firm in the books of the Chilean firm as liable to contribute their proper shares to that loss as and when it was necessary to find the money to meet it. But the Chilean firm was a very large debtor to the London firm on current account. I am not quite sure that I have the figure right, but I think it was something in the neighbourhood again of Pounds 800,000. For that the Chilean firm was liable to pay the London firm. The effect, if it has not done so, would have been that, when required, the payment would have had to be provided by all the partners in the Chilean firm in proper proportions.
In the first of the year with which we are concerned, the position was that the London partners were entitled, if they so desired, to call upon the Australian firm to remit to this country the shares of the partners in the London firm in the distributable profits of the Australian firm. The appellants contained that no such profits were ever remitted to this country, and, accordingly, the provisions of rule 2 do not come into play. In proof of this they rely on certain transactions which were quite deliberately carried out for a business purpose which is, to say the least of it, perfectly intelligible. The position of the London partners was this. They had made profits in Australia, and their firm in Chile had incurred losses in respect of which they were liable to contribute their shares. The Chilean firm owned money on current account to the London partners, and, not unnaturally, it occurred to the London partners that their share in the Australian profits might conveniently be made available for the discharge, pro tanto, of the debt owing by the Chilean firm to London. In order to carry that transaction out, it was necessary that the share of the partners in the Australian profits should be transferred, in the first instance to the Chilean firm, and then from the Chilean firm to London, in part satisfaction of the debt of Chile to London.
The method of carrying out international transactions of that kind aimed at the transfer, not a pieces of currency, but of credits, would be by means of entries in the books of the three firms concerned. Macnaghten, J., says of the entries which were made in the present case the 'they did not alter the character of the remittance which ultimately reached London.' With all respect, I do not follow this. The greater part of international financial operations takes place by means of transfers of credits from one country to another. A perfectly familiar method of transferring money from one country to another is by the transfer of credits effect by entries in books in the parts of the world concerned. That is so familiar, and has been recognised so clear by the courts, that I do not take up time with a view to establishing the proposition that credits of this kind can by the appropriate entries, be routed round the world.
If the transaction is expressed in words of some technicality, what was done in this case was this. The London partners were possessed of a chose in action, namely their shares of the Australian profits which were then in Australia and had never been remitted to this country. By means of the appropriate entire in the books they assigned that chose in action to the Chilean firm. The Chilean firm thereupon became creditors of the Australian firm. The members of the London firm thus ceased to be creditors of the Australian firm because they had assigned their shares of those profits to Chile. All these things were carried out simultaneously, but, looking at them in succession, in the way in which one has to look at them, Chile at that moment of time, so to speak, is a creditor of Australia in regard to what had been before a debt owing to London. Then the debt of Chile to London was satisfied by assigning to London the shares of profits of which Chile had become owner, to wit, the chose in action which it had acquired by transfer from Australia. That is the case, put in its shirtwaist possible form, which is put forward by the appellants, and it is the case which was accepted by the General Commissioners of the City of London, who, of course, are familiar, probably as familiar as anybody, with this method of transferring credits round the would. The learned judge, however, as I have said, took the view that the entries made in the books of the Australian and Chilean firms did not alter the character of the remittance to London of the Pounds 24,000, that being the particular item with which the case with which he was dealing was concerned. With all respect, I take the view that it did alter its character. If that Pounds 24,000 had come direct from Australia to London, it would unquestionably have been a remittance of profits derived by London from Australia. In the course of its journey from Australia back to London its character had been entirely changed. It had been changed because it had passed into the ownership of Chile and became an asset belonging to Chile, and when it came out from the ownership of Chile it came out for the purpose, not of effecting a transfer from Australia to London of Londons share in the Australian profits, but for the purpose of discharging a debt due from Chile to London, a purpose for which it was perfectly open for Chile to use it.
Therefore, it seems to me that the learned judge was in error in disregarding that mutation of character which the Pounds 24,000 had suffered in its voyage from Australia to Chile and from Chile back to London. There are several other transactions. I need not mention the details of them, and I do not propose in this judgment to set out in detail the precise method of book-keeping which was adopted. I think I have described the method of effecting these transfers sufficiently for present purposes.
The Commissioners, in stating the facts which they found, annexing exhibit 1 which was the summary of accounts showing the precise method of entry in the various books, came to this conclusion : 'We, the Commissioners, found that the sums in question were remitted by Chile in part payment of its debt, and were not income arising from possessions outside the United Kingdom,' and they allowed the appeal and discharged the assessment. That is a perfectly clear finding that the accountancy technique adopted in this case was effective to produce the result climbed, namely, that the share of Australian profits belonging to the London firm had passed to Chile, and had become the property of Chile, and that Chile made use of that piece of property in part discharged of its debt to Nondon. It is a finding come to after hearing accountants on both sides, and I read it as a finding that, from the accountancy point of view, the method adopted of effecting this transfer was correct and effective. If the accountancy method of doing a thing did not produce the desired result in law, it would not be any use saying that the accountants have done their business in the proper accountancy way. But, having regard to the nature of international transfers and the way they are effected in practice, I regard this finding of the Commissioners as a statement that the book-keeping was effect to produce the result desired. In my opinion, if the result desired is what the partners say it was, and it is so found in the case, and if the finding of the Commissioners is one which can be supported on evidence, that finding is conclusive because it involves no error of law. It does not attribute to those accountancy transactions some efficiency which, in law, they do not possess.
The case for the Crown is a little complicated to describe, but I will do my best to state it as I understand it, and I am sure I do understand if. If I do not state it correctly, it will be due, not to lack of understanding, but from inability to express myself clearly. The first point that was taken by counsel for the Crown related in fact to the last there of these five transactions. In the summary of accounts which forms exhibit E, the book-keeping of the transaction is shown. On October 19, 1938 entries appear in the books of the various firms remitting the sum of Pounds 4,000 representing the shares of profits of two only of the London partners in the Australian firm. The entries show the transfer of that sum of 4,000 from Australia to Chile. They show that transfer from Chile to London with the consequential crediting of Australia in Chiles books, and they show the necessary consequential entries; but I need not go into them. The Pounds 4,000 thus, according to the account, reached London.
Here I must interpose a reference to a particular transaction, which is shown in the books of the London firm. I have said that Chile was a large debtor to London. The London partners decided at some stage - we have not the exact details about it, but it was before these transactions took place - that it would be wise to build up in the London books a suspense account by way of reserve against the possibility that the debt from Chile to London would become wholly or partly a bad debt. This they effect by transferring sums from the accounts of the various partners in London from time to time to what they called the Chile suspense account. The amount it so contributed was divided as between the various London partners in the shares in which they were interested in the London partnership. That is a perfectly intelligible transaction, and nothing depends on that part of it. But exhibit E shows that in respect of these various transfer of the Australian profits the London partners dealt with the Chilean suspense account in the London books in this way, again a perfectly intelligible way. The suspense account, having been built up for the purpose of creating a reserve against the big Chilean debt, it was perfectly natural that, as that debt came to be paid of, this suppose account would be correspondingly reduced. That would involve writing back from the suspense account to the credit of the London partners in the London books the appropriate sum by which the Chilean debt had been reduced. The result of the transfers from Australia, if they be effective, as found by the Commissioners, was to reduce the Chilean debut. The London partners accordingly - and the accounts go to show it - made entries in their books by which they wrote down the suspense account by the amounts so received and credited that sum back to the partners by whose joint efforts the suspense account had been created. But it appears from the account that these sums were not written back to the credit to the partners in the shares in which the partners had originally contributed them, but were written back to all the partners equally. It is said that the writing back to the partners of an equal interest, instead of in the proportions in which they had put the money up, was a indication that what the partners were doing was not dealing with the payment by Chile but in effect making a division of the Australian profits in the proportions in which the partners were interested in the Australian profits. They were interested in the Australian profits, not in the proportions they were interested in the London profits, but equally.
I go back to the Pounds 4,000 item that I was dealing with. That Pounds 4,000 was routed from Chile in the same way as the other payments with which we are concerned, and eventually is said by the appellants to have reached the London firm by way of further part payments of the Chilean debt. The Pounds 4,000 appears on the relevant page in the private ledger in the London books as written back from the Chilean suspense account to the partners account in equal shares of Pounds 2,000 each.
Counsel for the crown argued in relation to this and following items as follows. He referred to some cables which appear on p. 16 of annex D to the case from which it appear that, on October 17, 1938, Melbourne wrote to London as follows : 'We can remit Pounds 10,000 sterling in reduction London partners capital, suggest that you retain this amount from Sulphide Corporation Limited remittance due on October 19.' I suppose that is a remittance due to Australia from the Sulphide Corporation. To that London replied on October 19, 'Referring to your telegram of 17th we have retained. Await our letter before making entries.' That latter phrase refers, quite obviously, to the proposed dealing with the shares of the London partners in the Australian profits. Now says counsel for the Crown : Those two telegrams show that at some time between the 17th and 19th', or, I suppose, on the 19th, 'when the remittance from the Sulfide Corporation was due, the London partners retained out of it a sum of money.' It does not specify what the sum is but it looked as though it referred to the Pounds 10,000 mentioned in the Australian cable. It is said that shows that London was retaining for itself out of moneys belonging to Australia, which London collected in London, a sum of money on October 19, whereas the entries in the books, as is shown by the cables, could not have been made until a later date. It is said that this shows conclusively that what happened on October 19 was London, being entitled to a share of profits from Australia, paid itself that share of profits by retaining the money out of the Sulphide Corporations, remittance.
There is one paragraph in the case, paragraph 12, which I should mention to complete the picture, which says this : 'The London firm from time to time receives in London moneys which belong to the Australian firm. In respect of the transfers the subject of this appeal, the London firm retained the amount of the particular transfer and remitted only the balance of the Australian firms money to the Australian firm'. That paragraph, naturally read, appears to me to mean that in respect of the credits which were thus sent round via Chile the London firm paid itself by means of a retention out of Australian moneys in London. That would mean the transfer of credit was effect by their retention. Moreover, it is a perfectly clear finding that the tensions were not in respect of shares of profits received by the London firm from Australia, but were in respect of debts owing by Chile to London. That seems to me to be a perfectly clear finding. Counsel for the Crown argued that that finding could not stand, because the evidence shows in the last three cases - he did not deal with the other two for a reason which I will explain - including the one I am dealing with, that the retention took place before any transfer of the creditors was affected. We ruled, in the course of the argument, that it was not open to the Crown to take any such point. No such point was taken before the Commissioners. Had it been taken, quite obviously further evidence might have been called, if it was available, to explain the prices technique adopted in the method of these retentions, and how and in what manner the retentions took place. But it was never suggested before the Commissioners that any point arose on this letter in respect of the date of the retentions. Accordingly the point was not dealt with in any way by the Commissioners, and there is no finding about it - in fact their finding contradicts it, and very naturally contradicts it if I may say so, especially having regard to the fact that no such point was raised.
We are told (and I can well believe it) that before Macnaghten, J., the Crown would have attempted to raise this point but for the fact that the learned judge took a view at a very early stage that the case for the Crown was a very powerful one. Therefore, I can well believe that the point was not brought out with perfect clarity. But it was been brought out with perfect clarity before us, and we decided that it could not be brought out here. The justification for doing it which counsel for the Crown put forward was this. He said : 'The burden of proof is on the taxpayer to show that the assessment was wrong. When you look at the relevant documents you find this flaw in the taxpayers case, namely, retention out of the Australian moneys in London before anything came from Chile.' But it seems to me it would be deplorable if the Crown, having omitted to raise any such point before the Commissioners as a point of fact, and thereby having made it impossible for evidence to be going into, because the point was not looked upon as having any substance at all, should, be allowed to take the point in the Court of Appeal, and that all the Crown has to do in such a case is to sit dumb and allow the other side to proceed with the case on the footing that no such point is going to be raised. I must not be misunderstood when I say that. I am not suggesting for one moment that those who represented the Crown before the Commissioners were guilty of any sort of impropriety in sitting dumb and not rising the point. They conducted their case, I am perfectly certain, with that contour which the Crown always, in my experience, shows before the Commissioners; but the effect is precisely the same. If they did not think the point was worth taking, and therefore omitted to take it, the result was precisely the same, and I protest against any attempt in this court to raise an issue of fact in such circumstances which ought to have been raised before the Commissioners and was not raised We therefore refused to allow the Crown to take the point.
The other points taken by the Crown are not of a dissimilar nature, and they rest principally on the entries in the London books relating to the Chile suspense account. The first set of entire relating to the Pounds 24,000 is dated as follows. The transfers from Australia to Chile and from Chile to London are dated May 2, 1936. The entries in the London books in relations to that sum of Pounds 20,000 showing the dealings on the Chile suspense account are December 31, 1935. I am not sure whether it appears in the case, but it is an obvious inference from those and certain other entries in relation to other transactions that December 31 was the end of the London firms financial year, and that at that date one would expect the accounts to be tidied up with the final entire. It is said that the entry in the books of the London firm shows that before the transfer came round from Chile on May 2, 1936, the partners on December 31, 1935, had dealt in their books with the sum of Pounds 24,000. Moreover, it is said they did deal in their books with that sum by writing back from the Chile suspense account Pounds 24,000 and distributed it among themselves, not in the proportion in which they had originally subscribed to the Chile suspense account, but in the same proportions, that is to say, equally, as they were entitled to under the Australian partnership agreement. The argument couples that with the finding which I have already referred to in paragraph 12, that, in respect of the transfer the subject of this appeal, the London firm retained the amount of the transfer and remitted only the balance of the Australian firms money to the Australian firm. It is said here we have a retention by the London firm which took place on December 31, 1935, which must be taken, prima facie, to be the correct date of that transaction. At that date they had no credits transferred by Chile, and the finding in paragraph 12 shows that they were retaining the moneys.
It is a very similar argument to that raised in respect of the Pounds 24,000 that they were dealing with the Australian moneys before they had received them. It is said, that having regard to those circumstances, the Commissioners were bound to find that the entry in the London books showing the writing back of the Chile suspense account represented a transfer from Australia which the London partners had received by way of retention of the Australian moneys they had in their hands. The finding of the Commissioners entirely negatives any such proposition, because in paragraph 12 the retentions are stated in terms to be in respect of the transfers the subject of this appeal. The transfers the subject of this appeal were the complicated transfers which I have mentioned resulting in the ultimate receipt by way of credit in the books of Pounds 24,000 from Chile. It seems to me the Commissioners were entitled to have regard to these facts. The London partners had found this idea of effecting these transfer of credits. They knew perfectly well that these transfers would be effective - at any rate, the probability was so high that there was no harm in acting upon it. When it is found that these entries were made in the books at the end of December 1935, one natural inference would be that these entries were made in anticipation of what was going to happen when the transfer of these credits from Australia to Chile, and so forth, had been completed. That is a perfectly reasonable business inference to draw from all the facts. It is an inference which, in my opinion, was not only open to the Commissioners to draw, but which on the facts of this case, I should have thought was obviously the correct one. The dealings with the Chile suspense account continued throughout all these transactions - except, I think, one -and they are all dated December 31 of the relevant year, and they were all in respect of these sums which they were proposing to transfer from Australia to Chile. I cannot take the view which counsel for the Crown put before us that that inference was not open to the Commissioners on the facts; in other words, that the Commissioners were bound on the evidence, on the facts as found, and as stated in the case, to draw the inference that when they made those entities in relation to the suspense account in the London books what they were doing was in fact, dividing up the share of Australian profits which they had paid themselves by way of retention out of Australian money in London.
As I have said, the entries, quite clearly shows that what they are dealing with is not retention but credit. When one looks again at the finding in paragraph 12 of the case that appears perfectly clear. Paragraph 12 appears to me to be a finding that the retention took place after the transfers had taken place. The argument of counsel for the Crown really depends on assuming that the date of December 31, 1935, is the date on which the transactions were effected and not as being the date at which the partners, for the purposes of their own domestic accounts, proposed to treat them as having been transacted. It appears to me clear that these entries in the books were made at a date convenient to the partners, and, given that date, were entries in relation and only in relation, to the group of transactions which are shown in exhibit E. I should add that in respect of the next it, the sum of Pounds 28,000, a similar argument based of the entries in the London books and the dealings which the Chile suspense account was raised. I need not go into it except that I ought to mention this additional fact. In the letter from Australia to London, dated January 9, 1937, Australia tells London that, at that date, there was standing to the credit of the London firm in the Australian books a sum which, after deducting the estimated amount required for taxation would amount to Pounds 35,000 Australian. On January 28, London writes to Melbourne, taking a figure of Pounds 34,000 Australian as equivalent to Pounds 28,000 sterling and saying that that letter is probably on its way dealing with the Pounds 28,000. The argument is then made that the correspondence shows that the Pounds 28,000 was still in the Australian firm possession on January 9, 1937, whereas when one looks at exhibit E one finds that the sum is treated in the books as having been transferred to Chili and from Chile to London on December 22, 1936, and credited to the partners by way of transfer from the suspense account on December 31, 1936.
This rather complicated argument is put up. On December 31, 1936, the London partners were dealing with the sum of Pounds 28,000. Paragraph 12 of the case shows that they had retained the sum of Pounds 28,000. That sum of 28,000 on December 31, 1936, was, in fact, still in Australia -ergo, they must have been dividing Pounds 28,000 of Australian profits. It seems to me, with all respect, that if that case was going to be made, further evidence might have been called to deal with it; but, leaving that on one side, the inference which the Commissioners have drawn is not in accordance with that submission; in fact, it contradicts it entirely. It is, as I have said, a finding that the retentions were, in fact, in respect of the sums transferred. Moreover, in this instance, there still remains the very natural inference that the entry on December 31, 1936, was made in anticipation of that transaction being carried out. I need not repeat what I have said already in that connection in relation to the amount of Pounds 24,000.
In the result, the appeal must be allowed with costs here and below, and the assessments discharged.
MORTON, L. J. - I agree, and I have only a very few words to add. The Commissioners state in the special case in paragraph 8 what the partners desired to do. They say : 'The partners in the London firm desired that their share in the profits of the Australian firm should be set off against the London firms share in the losses of the Chilean firm.' They go on to state in paragraph II the effect of the entries in the Chilean firms books. They say : 'The effect of the entries in the Chilean firms books was to decreased the amount shown in the London firms general account as owing to the London firm by the Chilean firm and to reduce by a corresponding amount the debit balance on the London firms partnership account in the books of the Chilean firm.' Finally, they go on to express the view that that was a real transaction, with a real business effect, by their finding that 'the sums in question were remitted by Chile in part payment of its debt.' It seems in me that the findings which I have quoted cannot be successfully assailed, and that they are fatal to the Crown. It is immaterial that, if these transactions had been carried out in a different way, the financial result to the partners in London might have been the same and tax might have been payable. If authority is wanted for this statement, it is to be found in the case of Hall v. Marinas, and particularly in the observations of Romer, L. J. (19 Tax Cas. at p. 602).
I agree that the appeal must be allowed and the assessments discharged.
SOMERVELL, L. J. - I agree, and I have also very little to add. Counsel for the Crown, in the course of his argument, agreed that the general arrangement, which has already been described by Lord Greens M. R., could have been carried out in a way which would have taken the final result out of rule 2 of Case V. I think also, if I understood him aright, he was inclined to agree that if the retention of moneys referred to in paragraph 12 of the case (which has already been read), took place after the transfer from Australia to Chile and from Chile to London, he could not say or, at any rate, he would be in great difficulty in saying, that the sum was a remittance within the meaning of rule 2 of Case V. His submission was that the moneys were retained under the procedure set out in paragraph 12 before the transfers through Chile had come through. If he could establish that, then he said that the tripartite arrangement under which those credits were used for diminishing Chiles debts to London was an application of the remittance within rule 2 already received and liable to tax. Its subsequent application could not affect this liability. In my opinion, this submission is not raised, or raised with any sufficient clarity, in any of the contentions of the Inland Revenue as set out in the case. In think the Case itself makes it clear that it was not raised effectively at the hearing before the Commissioners.
If it were clear that all the relevant documents and evidence relevant to this point were before us, it might or might not have been possible to raise the point here. It is, however, quite clear to me that we have not all the relevant documents and evidence. If one takes transaction 1, for example there is no documents which clearly shows at what date the retention referred to in paragraph 12 was made, although there is almost certainly such a document. Secondly, I think, if the point had been clearly raised, and if, as counsel for the Crown suggests - and I assume for the moment it can be established - that some retentions were made prior to the transfers to the books being completed, evidence might have been called on behalf of the taxpayer which might have established that those retentions were in anticipation of and conditional on the transfer to Chile going through. If that had been established, it would clearly have been perfectly relevant.
I agree with the Crowns submission that before the Commissioners the onus is on the taxpayer to displace the assessment. On the other hand, the taxpayer is entitled to have any points relied on clearly indicated, or, perhaps it would be more accurate to say if they are not clearly indicated at that stage they cannot be relied on later, any rate, in cases where their determination requires further evidence for their proper determination. For these reasons, it seems to me impossible for this court to entertain the Crowns submissions with regard to any to these transactions. Apart from that submission, it seems to me clear that there was evidence to support the Commissioners finding, and, for the reasons which have already been given, and which I will not attempt to respect, I agree that the appeal should be allowed.
Leave to appeal to the House of Lords refused.