APPEAL from Pennycuick J.
The taxpayer company, Westward Television Ltd., appealed to the special commissioners against the restriction by H. M. Inspector of Taxes, St. George District (hereinafter referred to as the Crown) to the sum of Pounds 29,640 of a claim for relief for the year of assessment 1965-66 under the provisions of the Income Tax Act, 1952, s. 342, in respect of a loss sustained by the taxpayer in its first accounting period from August 1, 1960, to April 28, 1964, amounting to Pounds 101, 214 after taking into account relief already granted.
3. (1) The taxpayer company was incorporated on January 12, 1960, and on August 1, 1960, commenced the trade of television programme contractors.
(2) Accounts of the taxpayers trade were prepared for the following periods and disclosed the following figures of profit and loss (as adjusted for income tax) which were agreed by the parties : August 1, 1960-April 28, 1961 : a loss of Pounds 132,107; April 29, 1961-April 30, 1962 : a profit of Pounds 165,572; May 1, 1962-April 30, 1963 : a profit of Pounds 74,735; May 1, 1963-April 30, 1964 : a profit of Pounds 276,583.
(3) The taxpayers liability to tax under Case I of Schedule D for the year 1960-61, being the tax year in which it stated its trade, was computed by reference to the profit (if any) of the period from August 1, 1960, to April 5, 1961. Such profits (if any) fell to be computed on the basis of the taxpayers first set of accounts, viz., those for the period from the date of the commencement of trading to April 28, 1961, apportioned on a time basis after disallowing expenditure incurred prior to the commencement of trading. On this basis the taxpayer had incurred a loss, and an assessment for the year 1960-61 which had been raised in an estimated amount was discharged. The taxpayer had other income subject to tax for the year 1960-61 amounting to Pounds 4,056 and it made, and was allowed, a claim for repayment of tam on this other income, under section 341 of the Income Tax Act, 1952. It was agreed that the Pounds 4,056 fell to be deducted from the losses available to be carried forward and set off against the assessable profits of subsequent tax year under section 342 of the Income Tax Act, 1952.
(4) The taxpayer fell to be assessed to tax for the year 1961-62 being the second year in which it carried on its trade, by reference to the profits (if any) of its first 12 months of trading, viz., the period from August 1, 1960, to July 31, 1961. No accounts were in fact prepared for that period and it was, therefore, agreed between the parties that the profits (if any) which should form the basis of assessment for 1961-62 should be computed by reference to those for the accounting periods from August 1, 1960, to April 28, 1961, and those for April 29, 1961, to April 30, 1962, apportioned on a time basis. On this basis it was agreed that a loss resulted and an assessment which had been raised on the taxpayer in an estimated amount was discharged.
(5) For the year 1962-63 the basis period fell to be determined under section 127 (2)(b) of the Income Tax Act, 1952, and in accordance with normal practice the period of 12 months ended July 31, 1961, was adopted. That basis was not in dispute. The result was the same as for 1961-62 and was not in dispute. Accordingly no assessment was raised on the taxpayer.
(6) The taxpayer was assessed to tax the year 1963-64 by reference to the profits of its accounting period from April 29, 1961, to April 30, 1962, which amounted to Pounds 165,572, but the tax chargeable was discharged by offset, of capital allowances under section 323 of the Income Tax Act, 1952. The unrelieved loss was, therefore, carried forward under the provision of section 342 of the Income Tax Act, 1952, The amount of that unrelieved loss was in dispute.
(7) The taxpayer was assessed to tax for the year 1964-65 by reference to the profits of its accounting period from May 1, 1962, to April 30, 1963, which amounted to Pounds 74,735 which was reduced by capital allowances to Pounds 35,953. Although the amount of the taxpayers unrelieved loss was in dispute, it was agreed that on either basis the loss carried forward from 1960-61 was sufficient to absorb the chargeable profits of the taxpayer for the year 1964-65 and no tax was payable.
(8) It was agreed that the taxpayer might by virtue of section 345 of the Income Tax Act, 1952, set against the amount of profits ultimately found to be assessable on it for the year 1965-66 a further sum of Pounds 20,328. The taxpayer on account of interest paid by it under deduction of tax in the years 1961-62, 1962-63, 1963-64 and 1964-65, in respect of which it had been assessed to tax under section 170 of the Income Tax Act, 1952.
(9) The taxpayer was assessed to tax for the year 1965-66 by reference to the profits of its accounting period from May 1, 1963, to April 30, 1964, which amounted to Pounds 276,583 reduced by capital allowances to Pounds 255,652. The taxpayer claimed to set against that amount the amount of the unrelieved loss carried forward form the year of assessment 1960-61. The taxpayer claimed that the unrelieved loss amounted to Pounds 80,886, computed as follows :-
Relieved under s. 341 1960-61
Add amounts allowable under s. 345
Available for relief 1965-66
The Crown claimed that it amounted to Pounds 9,312 computed as follows :
Loss August 1, 1960, to April 28, 1961
Relieved under section 341 1960-61
Add amounts allowable under s. 345
Available for relief 1965-66
4. It was contended on behalf of the taxpayer :- (i) that section 155 of the Income Tax Act, 1952, was concerned with a process of computation and not with relief and, therefore, that losses included with profits in a computation made under the provisions of the said section 153, for whatever purpose, did not fall to be regarded as relieved pro tanto; (ii) that the amount which fell to be carried forward and set off against the profits or gains of the taxpayers trade for the year of assessment 1965-66 was Pounds 101,214 computed in the manner hereinbefore referred to in paragraph 3 (9); (iii) that alternatively even if section 155 could be regarded as affording a measure of relief, the loss incurred by the taxpayer in 1960-61 could not be regarded as having been relieved both in 1961-62 and in 1962-63 because it formed an element in the computation of the taxpayers liability to tax for both years; (iv) that on this alternative basis the amount which fell to be carried forward and set off against the profits or gains of the taxpayers trade for the year of assessment 1965-66 was Pounds 71,033; (v) that the appeal should be allowed and relief granted on the basis contended for under (i) and (ii) above; failing that, on the basis contended for under (iii) and (iv) above.
5. It was contended by the Crown :- (i) that losses taken into account with profits in a calculation made under the provisions of section 155 of the Income Tax Act, 1952, for the purposes of affording relief to a taxpayer under the provisions of section 342 of the Income Tax Act, 1952, fell to be treated as relieved pro tanto; (ii) that the amount which fell to be carried forward or set off against the profits or gains of the taxpayers trade for the year of assessment 1965-66 was Pounds 29,640 computed in the manner hereinbefore referred to in paragraph 3(9); (iii) that the appeal should be dismissed and relief granted accordingly.
6. The commissioner gave their decision on the point at issue - whether losses which were combined with profits in a calculation made under the provisions of section 155, Income Tax Act, 1922, so as to produce a net figure of loss (and consequently no assessment) for a basis year of assessment could be said to have been relieved pro tanto to such profits :
'This question has already been canvassed in the case of Inland Revenue Commissioner v. Scott Adamson, a decision of the Court of Session in Scotland which is binding on us. In our opinion, the facts of that case, though somewhat simpler, cannot really be distinguished from the present case, and following that decision this appeals fails. The figures being agreed between the parties we determine the claim for losses in the sum of Pounds 29,640.'
The taxpayer company appealed.
Pennycuick J., dismissing the appeal, held that in the absence of compelling reasons to the contrary, it was the duty of the court to follow decisions of the Court of Session on the Income Tax Acts, that the decision in Inland Revenue Commissioners v. Scott Adamson was directly in point and must, therefore, be followed. His Lordship, however, expressed some doubts as to the correctness of the Scottish decision.
The taxpayer appealed on the grounds that no part of the loss incurred by the taxpayer company in the year of assessment 1960-61 had been relieved in the years of assessment 1961-62 and 1962-63 under section 342 of the Income Tax Act, 1952, and that, in consequence, Pounds 101,214 of such loss remained to be relieved under the same section against the companys trading profits for the year of assessment 1965-66.
It was contended that the court was not bound by the Scottish decision, that it should not be followed and was in any event distinguishable.
Peter Rees for the taxpayer company.
G. B. Graham Q. C. and J. Raymond Phillips Q. C. for the Crown.
The following cases, in addition to those referred to in the judgment, were cited in argument : Fry v. Burma Corpn, Duckering v. Gollan and Harling v. Celynen Colieries Workmens Institute.
DACKWERTS L. J. This is an appeal from a judgment of Pennycuick J. dated November 24, 1967, in which he dismissed an appeal from a decision of the special commissioners given at a hearing on October 24, 1966, and the case stated is dated July 7, 1967.
The matter is complicated by the provisions of the relevant sections which are material for the purposes under the Income Tax Act, 1952. Pennycuick J. did not really, I think, decide the matter entirely for himself, but was following Inland Revenue Commissioners v. Scott Adamson. He, obviously, by his judgment, felt some doubt the matter, but he followed the case in question and did not really add any particular observations of his own.
[His Lordship read paragraph 3 of the case stated and continued :] Before going into the intricacies of the Income Tax Act, it appears that so far no income tax has been paid by the company over the years in question, and the profits set out in this case have amounted to Pounds 516,890, and there is a loss no doubt to be set against that of Pounds 132,107. So it is rather startling to find that the company has not already received relief in respect of the losses, and that enormous profits has been earned in the intervening years. But what appears to be the truth when you come to deal with the Income Tax Act turns out to be something different sometimes, and a contention has been put forward by Mr. Rees in his very able arguments which suggests that it is no good thinking about the actual profits or actual losses, because you have to compute the figures for accounts under the provisions of sections 217 and 128 in such a way that he says he is able to claim that the company has not been relieved in respect of the loss of Pounds 132,000 odd.
Section 341 of the Income Tax Act, 1952, provides :
'(1) Where any person sustains a loss in any trade, profession, employment or vocation, carried on by him either solely or in partnership, or in the occupation of woodlands in respect of which he has elected to be charged to tax under Schedule D, he may, upon giving notice in writing to the surveyor within two years after the year of assessment, claim relief from tax on an amount of his income equal to the amount of the loss.
'.......... (3) For the purposes of this section, the amount of a loss sustained in a trade shall be computed in like manner as the profits or gains arising or accruing from the trade are computed under the provisions of this Act applicable to Case I of Schedule D.'
The actual section upon which the case turns (this is the other section mentioned) is section 342 :
'(1) Where a person has in any trade, profession or vocation carried on by him, either solely or in partnership, sustained a loss (to be computed in like manner as profits or gains under the provisions of this Act applicable to Cases I and II of Schedule D)'
- and now I come to the important words -
'in respect of which relief has not been wholly given either under the lost preceding section or under any other provisions of this Act, he may claim that any portion of the loss for which relief has not been so given shall be carried forward and, as far as may be, deducted from or set off against the amount of profits or gains on which he is assessed under Schedule D in respect of that trade, profession, or vocation for the six following years of assessment.'
The Finance Act, 1952 - which is the same year as this Income Tax Act, of course - has removed the limit of the 'six following years', so that provisions disappears, and apparently it means that the loss could be carried forward for any number of years.
Subsection (3) says :
'Any relief under this section shall be given as far as possible from the first subsequent assessment for any year within the said six following years, and so far as it cannot be so given, then from the next such assessment.'
and so on.
I turn now to sections 127 and 128. It is not necessary for me to refer to the charging sections, I think, because they are sufficiently familiar. The sidenote to section 127 is : 'Computation under Case I and II to be normally on profits of previous years.'
'(1) Subject to the provisions of this and the three next following sections, tax shall be charged under Cases I and II of Schedule D on the full amount of the profits or gains of the year preceding the year of assessment.'
That is the basic principle which applies in the assessment of profits under Case I.
'(2) Where, in the case of the trade, profession or vocation, an account has or accounts have been made up to a date or dates within the period of three years immediately preceding the year of assessment - (a) if an account was made up to a date within the year preceding the year of assessment and that account was the only account made up to a date in that year and was for a period of one year beginning either at the commencement of the trade, profession or vocation, or at the end of the period on the profits or gains of which the assessment for the last preceding year of assessment was to be computed, the profits or gains of the year ending on that date shall be taken to be the profits or gains of the year preceding the year of assessment;' -
there are no such accounts, as I understand it, in the present case -
'(b) in any case to which the provisions of paragraph (a) do not apply, the Commissioner of Inland Revenue shall decide what period of 12 months ending on a date within the year preceding the year of assessment shall deemed to be the year the profits or gains of which are to be taken to be the profits or gains of the year preceding the year of assessment.'
That seems to leave to the commissioners some choice to be exercised by them.
Then there is an operative provision in subsection (3) which I do not think I need read.
The sidenote to section 128 is : 'Period of computation at commencement of trades, professions and vocations.' The section provides :
'(1) Where the trade, profession or vocation has been set up and commenced within the year of assessment, the computation of the profits or gains chargeable to tax under Case I or Case II shall be made either on the full amount of the profits or gains arising in the year of assessment or according to the average of such period, not being greater than one year, as the case may require and as may be directed by the commissioners.
(2) Where the trade, profession or vocation has been set up and commenced within the year preceding the year of assessment, the computation of the profits or gains chargeable to tax under Case I or Case II shall be made on the profits or gains for one year from the first setting up thereof.'
The sidenote to section 150 is : 'Apportionment of profits.' Section 155(1) reads :
'(1) Where, in the case of any profits or gains chargeable under Case I, Case II or Case VI of Schedule D, it is necessary, in order to arrive at the profits or gains or losses of any year of assessment or other period, to divide and apportion to specific periods the profits or gains or losses for any period for which the accounts have been made up, or to aggregate any such profits or gains or losses or any apportioned parts thereof, it shall be lawful to make such a division and apportionment or aggregation.
(2) Any apportionment under this section shall be made in proportion to the number of months or fractions of months in the respective periods.'
That is rather a difficult provision to apply to the tax in any given case and what has been done in this case is to take so many days and apportion accordingly. The accounts, therefore, have been taken in such a way, as appears from the statement of facts in the case, that the loss has been carried forward into several years, and the question is whether that loss has been absorbed by the profits in subsequent years, or whether, on the other hand, the contention of Mr. Rees that you pay no attention to the actual profits or losses, but deal with computations based on statutory accounts, is right. He says that the real test is not actual losses or assessments, but things which are called statutory losses; and, therefore, a wholly artificial situation is produced, according to him, under which the company has never received in the course of the assessments relief in respect of the losses which were sustained in the first year of the companys trading.
Mr. Rees makes one point with which I cannot agree. He gives narrow meaning to the word 'relief'. It seems to me that the word 'relief' is a word of infinite width, and it is a word which means what it says; that is to say, that if the company has had the benefit of setting off the losses that have been made, then the company has had relief in respect of the losses in question. On that footing, it seems to me that it would be ridiculous to suppose that the company has not had the benefit of the loss of Pounds 132,000 or the appropriate figure based on that against profits which have been made in the subsequent year. It seems to me that common sense must be applied to some extent, and these artificial figures cannot be effective in that way in the present case.
By taking a hypothetical case Mr. Rees has shown that his artificial method of dealing with things would in some cases produce a result adverse to the taxpayer, instead of producing one very favourable, and Lord Clyde described it as 'preposterous'. Mr. Rees referred to Inland Revenue Commissioners v. Scott Adamson, decided in 1932, which was a decision on section 33 of the Finance Act, 1926 (the forerunner of section 342). In that case the figures were much more simple, and it is easy to see the point that was being made. The taxpayer in 1929-30 made a loss of Pounds 61 and his assessment was nil. In 1930-31 there was a loss for ten months to March 31, 1930, of Pounds 61, and a profit for two months to May 31, 1930 - that it, one-sixth of Pounds 142 - of Pounds 24, leaving a loss of Pounds 37, and the assessment was nil. In 1931-32 the profit for the year to March 31, 1931, was Pounds 142, and what was claimed by the taxpayer was not only to bring in the sum of Pounds 37, which one can understand was the balance, which the profits of Pounds 24 were insufficient to relieve against, but also to bring in the Pounds 61, the benefit of which had already been received in the preceding year, and adding the two together to make an amount of Pounds 98 so as to reduce the profit of Pounds 142 to a comparatively small figure. I am not surprised that Lord Clyde described it as 'preposterous'. It seems to me in that case, quite plainly, that the taxpayer had the benefit of the loss of pounds 61 set off against profits to the extent of pounds 24 in 1930-31, which produced a nil assessment. So he had in fact received the benefit in the second year of that part of the pounds 61, and the amount then still unrelieved was pounds 37.
In those circumstances, the Court of Session rejected the claim of the taxpayer and assessed the loss to be brought into account of pounds 37. In my view, the right conclusion was reached by the Court of Session. It is not quite the same as in the present case, which is more complicated and in which the figures are much larger. But I would decide the present case in the same way as that case was decided by the Court of Session, not simply following the Court of Session, but because I think the method adopted there was the right one and the that should be adopted in the present case. I would, therefore, dismiss the appeal.
SALMON L.J. Commonsense and even justice are perhaps uncertain guides in ascertaining the highly complicated and artificial rules which govern tax liability. However, I derive some comfort from the fact that the construction which my Lord puts upon the relevant statutory provisions, and with which I agree, seems to me to be just and to make sense.
There is no doubt that the taxpayer company made a loss from August 1, 1960, when it started to trade, until April 28, 1961, of some pounds 132,000. Then in the ensuing 12 months up to April 30, 1962, it made a profit of pounds 165,000 odd. It paid no tax in respect of its first years trading, which ended on July 31, 1961. For the fiscal year 1961-62 its liability to tax was assessed on the basis of its first years trading ending July 31, 1961. By a time apportionment there was a profit shown from April 29, 1961, to July 31, 1961, of some pounds 41,000. The loss from August 1, 1960, to April 28, 1961, was pounds 132,000. As a result, there was a loss for the first years trading and accordingly for the fiscal year 1961-62 of some pounds 91,000 and the assessment was a nil assessment. The tax position for the year 1962-63 was assessed on exactly the same basis in accordance with the provisions of section 127(2)(b) of the Income Tax Act, 1952. It is quite plain that if the loss to which I have referred had not been taken into account for the fiscal years 1961-62 and 1962-63, the company would have been assessable to tax on a profit of some pounds 41,000 in each of those years. It is only by taking the loss into account in each year that, at any rate in a broad sense, the company has to that extent been relieved from tax. It is agreed that for the year 1964-65 it was relieved to the tune of nearly pounds 36,000; and they were relieved also, under section 341 for 1960-61, in respect of some pounds 4,000. Accordingly, the Crowns case is that, having been relieved to the extent of pounds 41,000 in each of the years 1961-62 and 1962-63, there is now left only pounds 9,000 of the loss in the first year available for relief.
Those figures, as figures, are I think agreed. The real fight is as to whether or not pounds 41,000 can be treated as tax relief in each of the second and third years. As I understanding Mr. Rees very able argument, he says that under section 342 there can be relief against nothing except tax liability. Accordingly, before you come to the question of whether there is relief, you have to see whether there is any tax liability in respect of which relief can be claimed; and you can only solve that question by computing the profits or losses for the year. Mr. Rees says that in computing the profit or loss for the year it may be that you take into account the loss from a former year, but that is a method of computation, and if that method of computation shows you that there is no tax payable, there is nothing against which relief can be applied. But in the end this argument seems to me to attach altogether too artificial a meaning to the word 'relief' in section 342.
The material words of section 342 are :
'Where a person has...... sustained a loss...... in respect of which relief has not been wholly given........ any portion of the loss for which relief has not been so given shall be carried forward and, as far as may be, deducted from or set off against the amount of profits or gains on which he is assessed under Schedule D....... for the years of assessments.'
In a real sense it seems to me that this company has used the loss or part of the loss of pounds 132,000 to obtain relief from tax liability for the second and third years of its trading. As I have said, but for using that loss, it would have been assessed in each of those years for tax on profits of pounds 41,000. If Mr. Rees is right, the most astonishing results would follow, for having taken the loss into account in the second and third years, it shows a trading loss of some pounds 91,000 in each of those years. Although his client company has been magnanimous enough not to claim it, Mr. Rees concedes that if his argument is correct, not only could it claim relief in respect of the loss which it utilised in the second and third years, but it could in addition claim relief in respect of the pounds 91,000 loss which it made in each of those years. So it could in effect utilise not only the pounds 132,000 loss but also about another pounds 180,000 of loss to reduce its liability to tax. That seems a very startling result.
I do not feel disposed to construe the word 'relief' in section 342, so strictly and so artificially as to lead to such a result, unless compelled to do so by authority. Far from being obliged to do so, the very point that has arisen for decision in this case fell to be decided some 36 years ago in the Court of Session in Scotland in Inland Revenue Commissioners v. Scott Adamson. In that case the argument which has been advanced here on behalf of the taxpayer company was rejected. So far a I know, during the last 36 years that decision has never been questioned in any reported case, and it is of considerable persuasive authority. Lord Evershed M. R. pointed out in Abbott v. Philbin that it is of great importance that, if possible, the Income Tax Acts which apply equally to Scotland as they do to England, should be interpreted in the same way on both sides of the border. Therefore, unless there is some compelling reason for differing from the decision of the Court of Session, we ought to follow it. There is no such reason. The judge entertained some doubt about it. I confess that I have some slight doubts myself, but they certainly are not such doubts as would justify me in refusing to follow it. I would, accordingly, dismiss the appeal.
FENTON ATKINSON L.J. I agree, and I would only add a few words. Mr. Rees in his most attractive argument has persuaded me that the matter is perhaps not quite so clear as it seemed to the Court of Session in the Scott Adamson case, but he has fallen well short of persuading me that that case was wrongly decided. Accordingly, I think we should follow that decision, and I agree that the appeal fails.
Appeal dismissed with costs.
Leave to appeal refused.
June 17, 1968. The Appeal Committee of the House of Lords (Lord Guest, Lord Upjohn and Lord Donovan) allowed a petition for leave to appeal.
Solicitors : Solicitor of Inland Revenue; Iliffe Sweet & Co.