HARMAN L.J. - I am authorised by Salmon L.J. to say that he concurs in the judgment I am about to deliver.
This appeal is concerned with those annual payments which are dealt with by sections 169 and 170 of the Income Tax Act, 1952, re-enacting the old general rules 19 and 21. Section 169 provides that where any annual payment is payable wholly out of profits or gains brought into charge to tax the payer is to be charged with the tax and may, on making the payment, deduct and retain a sum representing the amount of the tax at the standard rate for the year in which the amount payable became due. The payee is bound to suffer this and the payer is discharged of the sum represented by the deduction as if he had actually made it.
Under section 170 where any such annual payment is not payable out of profits or gains brought into charge the payer must, on making the payment, deduct the amount of the tax and account for it to the Crown. The question here is whether the taxpayer company, whom I shall call 'the company,' having made deductions on making certain annual payments, is entitled to retain them under section 169 on the footing that the payments have been made out of moneys brought into charge or must, as the Crown claims, account for them under section 170. The special commissioners held the company accountable. The judge reversed that decisio : the Crown appeals.
Most of the transactions with which this case is concerned have for me an air of total unreality. The several companies which come and go seem merely figures, dummies set up as payers or receivers of large sums of money for no apparent commercial purpose, although I can only suppose for some end concerned with taxation. No explanations were offered to the special commissioners, nor to us, of the object or effect of these transactions, which I confess to finding incomprehensible.
I will state the facts so far as I can follow them. [His Lordship stated the facts and continue :] It is obvious that both the dividends for the years 1958, 1959 and 1960, and the annual payments to Aconite for those years could not have been paid out of the current profits. It is well settled that, where a company or an individual is in receipt in any year of sufficient assessable profits these may be treated as available in ordinary circumstances to pay annual sums and this entitles the company to deduct tax on making the payments, and that his is so even though as a matter of book-keeping the company is shown as making the payments out of capital. The principle goes back, at any rate, to Sugden v. Leeds Corporation and is best explained, perhaps, in the judgment of Lord Greene M. R. in Allchin v. Coulthard, a judgment fully approved in the House of Lords. In that case Lord Greene M. R. showed very clearly that for the purpose of showing the source from which the taxpayer makes annual payments the way in which he keeps his accounts is irrelevant. If, during the year in question he has made profits, the fact that in his published accounts he has shown those profits as absorbed for other purposes does not prevent him as against the Crown pointing to those profits as profits brought into charge to tax and so entitling him to retain the tax deducted under section 169.
The principle so luminously explained by Lord Greene M. R. is easy to follow if one considers the case of a private person who may deduct and retain income tax on annual payments which he makes, even though he has in the year in question used up all his income for capital purposes. He need not, of course, keep any accounts at all and has only to show that in the year in question there were taxed profits in his hands to entitle him to make the deduction. Limited companies, on the other hand, have to keep accounts, but I do not see that for this purpose they need actually rewrite the accounts. It will be enough to show that the taxed profits in fact existed for the relevant perio : see the speech of the Viscount Sumner in Birmingham Corporation v. Inland Revenue Commissioners.
In the present case it has been sought to expend the principle to the case of dividend : it is said that the company is entitled to go back, however far into the past, to find some year in which there were assessed profits ever far into the past, to find some year in which there were assessed profits (whatever the rate of assessment), and that these are available unless already paid away in dividends to 'frank,' as the judge called it, the dividend in question. There is no authority for this proposition. It is an analogy said to follow from the principles enunciated by Lord Greene M.R. in Allchin v. Coulthard but I do not myself think the analogy a true one.
For the purpose of the presentation of the argument, Sir Andrew Clark, for the taxpayer company, relied entirely on a document he called 'H' attached to the case stated. This document purports to show the assessed income of the company in each of its trading years from 1952 onwards. Thus in 1957 the accumulated total of taxed income is shown as Pounds 376,609, and the gross dividends paid up to that date as Pounds 302,42 : hence the Pounds 74,000-odd mentioned by the judge. I do not find this companys balance sheets and profit and loss accounts. No such figure as Pounds 74,000 accumulated balance of dividends is to be found in its accounts at all nor any asset which could represent that sum. It will be remembered that the balance on profit and loss account after the very large dividend had been paid in 1957 was rather over Pounds 4,000 and the whole of the assets of the company were then sold for Pounds 17,000 or so. This would be strange indeed if there were in existence in fact an accumulated profit of Pounds 74,000. Document 'H' seems to take no account of payments by the company by way of taxation. In fact, document 'H' seems to me as unreal as most of the other documents in this case.
The argument, as I understand it, is something as follows. Both the payments of the dividends and the payments of the annual sums as shown in the books are mere matters of book-keeping and irrelevant so far as the Crown is concerned. The books can be rewritten for taxation purposes to show the annual payments made out of profits, there being sufficient profits in each year to make them, as is the fact, while the dividends can be treated as though paid out of the accumulated balance of taxed profits remaining over from previous years and thus exempt from tax. Like the special commissioners I am unable to accept this. I agree at once that in the ordinary case the annual profits can be treated as available for the annual payments, but I do not see how the dividends which were stated by the directors to have been paid out of those very annual profits can now be said to have been paid out of something else. In the first place, I do not find by looking at the accounts of the company that there was, in fact, a hidden reserve of some sort from which the dividends could be paid. Secondly, where a company has resolved to pay a dividend out of certain profits and has acted on that resolution. I know of no authority which entitles it thereafter to claim that it was not payable out of those profits at all but out of some other fund. This does not seem to me to follow from the cases cited.
Apart from this, if the dividends were supposedly paid out of past accumulated profits, they would seem to be payments made out of capital sources and so to treat them would alter the rights of the recipients, who would be receiving a capital dividend and not an income dividend. If then the company has elected to pay these dividends out of its annual profits, it must abide by that election and cannot now seek to attribute the same profits to a different purpose, namely, the payment of the annual sums to Aconite. I find myself in agreement with the special commissioners in the view they take that there is no evidence to show that the company ever did have recourse to an accumulated balance of taxed funds and that as a matter of fact they did not do so and cannot now be heard to say that they did.
The companys argument is that so far as dividends go this, too, is a mere matter of book-keeping and the principle of Allchin v. Coulthard can according to its books the dividends were paid out of current profits, whereas the annual payments were made out of current capital receipts, but both are mere matters of book-keeping and are irrelevant as between the company and the Crown. Like the special commissioners I find myself unable to accept this argument. It is still true to say, as Lord Atkin did, in Birmingham Corporation v. Inland Revenue Commissioners, that the first question remain : were the payments in question in fact made out of profits brought into charg It seems to me that the company, having declared dividends out of its taxed profits for the years in question, and having paid them as if made out of those profits, that is to say under deduction of tax, cannot be heard to say that the dividends were not so paid. The decision to pay out of taxed profits of the year made a difference to the position of the recipients of the dividends, for if these had been paid not out of income profits but out of capital profits, such as were the receipts by way of instalment, the company could not lawfully have deducted the tax, nor could recipients who were entitled to return of tax have made claim for such returns.
Central London Railway v. Inland Revenue Commissioners, seems relevant in this connection. There Romer L.J. sai : 'I do venture to say this, that, where, not for the purposes of convenience or for the purposes of giving effect to the payers own notions of account keeping, but for the purpose of definitely deciding and of recording the fact that a decision has been come to that a certain payment of interest is to be paid out of capital and not out of interest, then the account is not only of great importance but, in the absence of evidence to the contrary, is conclusive upon the matter.'
It was argued that the only exception from the ordinary rule that a company may rewrite its accounts for tax purposes was where the company was obtaining some fiscal advantage from so doing. This was accepted by the judge and formed the basis of his decision. No doubt the fact of a fiscal advantage being obtained is a bar, but I do not think it is the only one. I do not regard the companys expedient as legitimate. The annual payments here could not on the facts of the case have been paid out of past accumulations of profits, because on the facts of the case they did not exist; they were a mere fiction and no rewriting of the accounts would have provided them. The cases show that where there are current profits the annual payments can be taken to have been paid out of them, but I find no warrant for saying that this can be extended so as to pretend that dividends in fact paid out of current profits could have been treated as not so paid by resorting to surplus profits of past years even if these exist, and I find in this case that they do not. In these circumstances, I would allow the appeal and restore the finding of the special commissioners.
DANCKWERTS L.J. I agree with the judgment delivered by Harman L.J. As Harman L.J. has stated, the principles which apply to this case were explained by Lord Greene M.R. in Allchin v. Coulthard. His judgment received the approval of the House of Lords, and must be taken to express the law on this subject.
I would call attention to the example which Lord Greene M.R. gave an page 234, which is that of a company. It is clear, therefore, that Lord Greene M.R. considered that the principles which he laid down applied as much to a company as to an individual person dealing with his own business. It seems to me that this must be so, and I fail to see why a resolution of the directors of the company has any more irrevocable effect than the decision of an individual to make a particular payment out of moneys which have reached his bank account from a particular source. Individuals and companies alike pay their debts out of whatever is the convenient asset available for the moment. The only difference is that the directors usually pass a resolution as to the payment. Then the matter passes into the hands of the accountants to show the payment against the appropriate fund in the final settlement of the accounts.
Lord Greene M.R. plainly considered that in making up the accounts between the taxpayer and the Revenue, the funds which have already been brought into charge for purposes of income tax, might be utilised in such accounts however the allocation may have been shown for other purposes. This is the ordinary rule, although special circumstances may produce a different result. Lord Greene M.R. treated Birmingham Corporation v. Inland Revenue Commissioners and Central London Railway v. Inland Revenue Commissioners as special cases, and Lord Macmillan (who made the leading speech in the last- mentioned case) in Allchins case accepted the principles stated by Lord Greene M.R. as correct. It must be accepted, I think, that there is, therefore, no conflict between these cases. But is must be possible to apply the rule without using the income already charged to tax twice over. This is the part of the case which presents the most difficulty. Harman L.J. has analysed the facts and the evidence in the present case, and I do not need to repeat the process. I agree with the conclusion which he has reached that it is impossible for the company to show that the sums of income subjected to tax were available to pay the annual sums in the present case. I agree, therefore, that the appeal should be allowed.
Appeal allowed with costs on appeal and below. Assessments restored.
Leave to appeal.