APPEAL from CROSS J. 1
The following are the relevant paragraphs of the case stated by the commissioners :
1. At a meeting of the special commissioners held on July 20 and 21, 1965, the Land Securities Investment Trust Ltd. (hereinafter called 'the company') appealed against the following assessments to profits tax : Chargeable accounting period from April 1, 1959, to March 31, 1960, in a sum of Pounds 30,000 (tax); chargeable accounting period from April 1, 1960, to March 31, 1961, in a sum of Pounds 50,000 (tax); chargeable accounting period from April 1, 1961, to March 31, 1962, in a sum of Pounds 45,000 (tax); chargeable accounting period from April 1, 1962, to March 31, 1963, in a sum of Pounds 24,000 (tax); and chargeable accounting period from April 1, 1963, to March 31, 1964, in a sum of Pounds 1,68,750 (tax).
4. The company was a very large public company carrying on business as a property investment trust company. Its issued share and debenture capital totalled some 85m., and it held (either itself or through subsidiaries) properties values at over 100m. It did not carry on any trade of dealing, and was not assessed to income tax under Case I of Schedule D. Its chairman and managing director at all relevant times was Sir Harold Samuel. One of its wholly-owned subsidiaries was Associated London Properties Ltd. (hereinafter called 'Associated'). Associated was a party to the agreement and to one of the deeds of transfer referred to later in this case, but the commissioners were informed that nothing turned upon that because Associated was grouped with the company for the purpose of assessment to profits tax.
5. The Church Commissioners owned certain freehold and leasehold properties which were let or underlet to the company for (or, in the case of one property, to Associated) on long leases. By agrteement dated January 5,1960, the Church Commissioners agreed to sell to the company their freehold or leasehold interest (or, in the case of the property let to Associated, to sell to Associated) subject to the lease and underleases to the company in consideration of rentcharges. Brief particulars of the properties, the leases to the company or to Associated are set out below :
Particulars of lease or underlease to the company
No. 1. Freehold
993 years from 1953 at 5,000
No. 2. Freehold
150 years from 1948 at 2,000
No. 3. Freehold
150 years from 1947 at 2,000
No. 4. Underlease 71 years from 1949 at 7,500 per annum
whole term less three days at at 17,500
No. 5. Leasehold 99 years from 1935 at 5,000 per annum
at whole term less three days 7,000
No. 6. Leasehold 99 years from 1934 at 9,500 per annum
whole term less three days at 20,000
No. 7 Freehold
999 years at Pounds 9,000 (this was the lease to Associated)
The agreement provided that the transfers of the properties should be in a form agreed, and the transfers were duly made on March 25, 1960. These provided that the rentcharge reserved in each case was a yearly rentcharge for the period of 10 years from April 1, 1959, charged on and issuing out of the property transferred.
6. (a) It will be seen from paragraph 5 above that the company and Associated, which had previously owned long leases or under-leases for varying terms at rents totalling Pounds 62,500 per annum, acquired by the transfer freeholds and leaseholds, subject to head rents totalling Pounds 22,000 per annum, burdened with rentcharges totalling Pounds 96,000 per annum for 10 years.
(b) It was common ground that, prior to the transfer, the rents paid by the company or Associated (totalling Pounds 62,500 per annum) were deductible in computing profits tax purposes; it was also common ground that after the transfer the head rents (Pounds 22,000 per annum) were so deductible. The dispute concerned the rentcharges.
(c) The Company or Associated deducted income tax at the standard rate on paying the rentcharges, on the footing that section 177 of the Income Tax Act, 1952, entitled them so to do, and the Church Commissioners did not challenge their right to do so.
7. It was common ground that in the negotiations leading up to the agreement of January 5, 1960, there was no legally enforceable agreement between the company or Associated and the Church Commissioners for the purchase of any of the properties for a lump sum.
8. It was contended on behalf of the company; (1) that the rentcharges reserved in the transfers were rentcharges to which section 177 applied, and that (by reference to the statutory provisions concerning the computation of profits for profits tax) they should be deducted in computing the profits assessed, and the assessments should be reduced accordingly; (2) it was further contended (in answer to the Crowns contentions) that the rentcharges were not payments of a capital nature, nor could any part of them be regarded as of a capital nature.
9. It was contended on behalf of the Crown : (1) that the documents referred to in paragraph 3(2) above were admissible the relevant to the inquiry as to the true nature (capital or income) of the payments made in respect of the rentcharges; (2) that the reference to 'rentcharge' in section 177 was a reference to a rentcharge of an income nature and did not extend to a rentcharge which was of a capital nature; (3) that on the evidence referred to in paragraph 3(2) above the rentcharges were part capital and part income, and should be dissected, and that section 177 applied only to such part as (on dissection) should be found to represent an income payment, and that accordingly the company was only entitled to a deduction in computing its profits for profits tax purpose, of that part of the rentcharges in question and no more; (4) that it (contrary to the above contentions) the whole of each rentcharge was within section 177 and the company was accordingly entitled to deduct income tax therefrom, it was nevertheless not entitled to deduct the payments for profits tax purposes by virtue of section 14(1) of the Finance (No. 2) Act, 1940, since on income tax principles they were payments of a capital and not of a revenue nature; and that the documents mentioned in paragraph 3(2) of this case were relevant and admissible evidence in relation to this contention.
[The following transfer dated March 25, 1960, in respect of Marcol House, Regent Street, is an example :]
'1. In consideration of the rentcharge hereinafter reserved and the convenant by Land Securities hereinafter contained the commissioners being seised in fee simple hereby transfer to Land Securities (and so that the same covenants shall be implied herein as if the commissioners had been and had been expressed to convey or transfer as beneficial owners) the land comprised in the title above referred to reserving out of the premises to the commissioners a yearly rentcharge of Pounds 12,000 of the period of ten years from April 1, 1959, charged on and issuing out of the property hereby transferred and to be paid without any deductions except for property or income-tax by equal yearly payments on March 25 in every year the first payment of Pounds 12,000 for and in respect of the full year commencing on April 1, 1959, to be made on March 25, 1960, and the last payment to be made on March 25, 1969.
2. Land Securities hereby covenant with the commissioner that Land Securities will at all times hereafter during the continuance of the term thereof pay the said yearly rentcharge (including the said sum of Pounds 12,000, for and in respect of the said full year commencing on April 1, 1959, at the times hereinbefore appointed for payment thereof.
3. For the removal of doubt it is hereby declared that in the event of the exercise in any manner whatsoever by the commissioners of their powers or any of them under section 121(4) of the Law of Property Act, 1925, the surplus of all moneys received by or under or by virtue of or arising in consequence of the exercise of the said powers or any of them after satisfaction of all sums to which the commissioners may be entitled as rentcharge-owners hereunder shall in all circumstances be held in trust for and payable to Land Securities.
4. It is hereby further declared that the rights of the commissioners under section 121(4) of the Law of Property Act, 1925, shall continue in being for so long as any part of the rentcharge herein reserved remains unpaid notwithstanding the expiration of the period of ten years hereinbefore mentioned.'
The commissioners held that the rentcharges were covered by section 177 of the Income Tax Act and were deductible for profits tax. Their decision is fully set out in the judgment of Danckwerts L. J.
Cross J. allowed an appeal by the Crown, holding that the company had purchased a capital asset, that a capital asset could be acquired in consideration of payments wholly of an income character, but that it was possible to have a rentcharge charged on land only part of which was a rentcharge for the purpose of the Income Tax Acts and that the payer was only entitled to deduct tax under section 177 from that part of it which represented interest, as opposed to payment of the capital value. He also held that when dissecting the rentcharge to determine how much represented income, the court could have recourse to outside evidence.
The taxpayer appealed on the grounds (1) that the legal character of the rentcharge payments in question fell to be determined by reference to the agreements under which they were made and without regard to other evidence. (2) That the legal character of the said rentcharge payments was wholly that of income within the meaning of the Income Tax Acts (and in particular within the meaning of section 177 of the Income Tax Act, 1952). (3) That the commissioners were justified in finding that no asset of any monetary value was acquired by the taxpayer in return for the said rentcharge payments. (4) That, accordingly, the said payments were payments of a revenue nature properly deductible in computing the profits of the taxapayer for profits tax purposes.
The Crown in a cross-notice relied on the following contentions in addition to those referred to in the judgment of Cross J. : (i) that, since the rentcharge payment were made by the taxpayer in consideration for the acquisition by it of capital assets, such payments were prima facie capital payments, and fell to be treated as such unless the taxpayer showed that some part thereof was an income payment ;(ii) that, even, if the whole of the payments by the taxpayer were 'rentcharges' within the meaning of that word as used in section 177 of the Income Tax Act, 1952, only such part thereof as was shown by the taxpayer to be an income and not a capital payment was deductible in computing its profits for the purpose of profits tax.
F. Hayworth Talbot Q. C. and Michael Nolan Q. C. for the taxpayer company.
W. A. Bagnall Q. C. and J. Raymond Phillips Q. C. for the Crown.
THe following cases, in addition to those referred to in the judgments, were cited in argument : Foley v. Fletcher; Perrin v. Dickson ; Inland Revenue Commissioner v. Westminster(duke); Inland Revenue Commissioners v. Ramsay; Inland Revenue Commissioner v. Mallaby-Deeley; Sothern-Smith v. Claney; Fry v. Salisbury House Estates and Lomax v. Peter Dixon & Son.
DANCKWERTS L. J. This is a profits tax case. It is an appeal from a judgment given on December 11, 1967, by Cross J., who decided in favour of the Crown reversing the decision of the special commisioners.
The question is simply whether certain rentcharges which were created by the parties in regard to the relevant transactions are deductible under the provisions of section 177 of the Income Tax Act, 1952, and I think I will start by reading from the observations of the commissioners in relation to their findings in the case.
[His Lordship read paragraphs 4, 5 and 6 (a) of the case, observed taht the taxpayer company was covenanting to pay Pounds 96,000 per annum for ten years which was an increase in the amount of the rental that had been and that Pounds 96,000 per annum was an addition of the Pounds 22,000 per annum mentioned in paragraph 6(a), read paragraphs 6(b) and (c) and 7, and continued :]
Then the commissioner set out the contentions of the respective parties and I can turn to paragraph 10 :
'We, the commissioners who heard the appeal, decided as follows :
(1) We held that the reference in section 177 to any..... rentcharge was an unqualified reference to any rentcharge reserved or charged upon land; that the rentcharges reserved by the deeds of transfer were rentcharges reserved or charged on land; that in determining whether section 177 applied to such rentcharges, it was irrelevant to enquire whether on dissection (if any dissection be allowable in law, and we thought it was not) they contained a capital and income element; that the said rentcharges were rentcharges from which section 177 authorised the company to deduct income tax.
(2) The only other issue before us we understood to be that deduction of the rentcharges in computing the assessable profits was prohibited by section 14(1) of the Finance (No. 2) Act, 1940 : the rentcharge being (it was contended) payments made to secure capital assets.
The only assets which might be said to have been acquired by the company under the transfers were the reversions to their lease and underlease. Having regard to the length of time unexpired on the latter it seemed to us doubtful whether these reversions had any real monetary value. From a commercial point of view we thought the reality of the matter was that the company had substituted larger rents for a ten-year period for smaller rents for varying longer periods. The payments claimed were in their nature rents and as such were income payments properly deductible in computing the companys profits. We left figures to be agreed.'
The commissioner, therefore, found in favour of the taxpayer and, of course, an odd feature of this case is that the contentions of the parties are reversed in regard to what usually happens in these revenue cases, that is to say, that the taxpayer company is arguing that the rentcharges are subject to income tax and that they can deduct tax and the Church Commissioners have accepted that position. I think the position which annoys the Inland Revenue Commissioner in this case is that, being a charity, the Church Commissioner claim to be entitled to recover the tax which has been deducted against them and, therefore, that presents a favourable feature to them.
Cross Js case is reported in the Weekly Law Reports and the relevant statutes, including the Finance Act, 1940, are conveniently set out at the beginning of the report, but I do not propose to read through them in detail. The only I intend to read is section 177 of the Income Tax Act, 1922, which is the relevant section for the purposes of the present case.
[His Lordship read section 177 and continued :]
Cross J., with second-sight or otherwise, found a capital ingredient in these rentcharges and the course which he adopted was to send back the case to the special commissioners so that they, in effect, might dissect these annual rentcharges and separate the capital element from the income element for the purpose of the provisions of the Act. I am bound to say I find it difficult to agree with his decision. In the first place it is to be observed, as has already been stated in the case by the commissioners, there never was any agreement as to any capital sum. No doubt it may be that the Church Commissioners were disposing of a capital asset, but they were disposing of a capital asset entirely for a consideration expressed in the form of the rentcharges which were agreed between the parties.
I therefore turn to the exhibits to the stated case. The first one is the contract between the parties. It was dated January 5, 1960, and it is between the Church Commissioners, the taxpayer company and the associated company. It provides as follows by paragraph 1 :
'The Commissioners shall sell and the first purchaser shall purchase the properties described in items 1 to 6 inclusive of column one of the schedule hereto And the Commissioners shall sell and the second purchaser shall purchase the property described in item 7 of column one of the said schedule subject to the leases mentioned in column three of the said schedule and subject and except and reserved as hereafterr mentioned'
those are leases to which the sale was subject being in favour of other persons.
Clause 2 provides : 'The properties are sold subject to the following conditions and stipulations and to the general conditions of sale of the Law Society, 1953.' Then there is a reference to the Commissioners solicitor, which I need not read.
Clause 4 is an important one : 'The considerations for the transfer shall be the respective rentcharges described in column five of the schedule and the covenants on the part of the respective purchaser for the payment of the said rentcharges' and clause 5 : 'The purchase shall be completed on March 25, 1960, at the office of the Commissioners solicitor.'
I need not refer to the schedule, I have stated the effect of it. There are a number of rentcharges and they add up, as I say, to the sum of Pounds 96,000 a year.
The transfer is also exhibited. The properties being registered under the Lands Transfer Act, it is in the form of a transfer according to the Land Registration Acts, 1925 and 1936. 'Deed of of transfer between the Church Commissioners for England,' and then the address,' (hereinafter called the Commissioners) of the one part and the Land Securities Investment Trust Ltd.,' and then their registered office, '(hereinafter called Land Securities) of the other part.'
[His Lordship read paragraph 1 of the Transfer, and continued :]
Then there are certain remedies attached to this, being a rentcharge. The Law of Property Act, 1925, by section 121, provides certain remedies which apply to rentcharges to enforce the same if they are not paid.
There is no doubt that that document describes exactly what a rentcharge is, 'issuing out of and charged on land,' and there is no doubt whatever that there are rentcharges. There are other documents reserving rentcharges in the same way; whether they were upon freeholds or upon long leasehold they were also included in the transaction.
The case as argued on behalf of the Crown is based to a large extent upon analogy with cases which relate to annuities, in particular, Secretary of State in Council of India v. Scoble 550 - which is one of the two cases upo which Cross J. relied - and another, a decision of his own, in Vestey v. Inland Revenue Commissioners. I do not propose to go in detail into the facts of those cases. Scoble was a very different case from the present. It was case where the Government of India was purchasing a railway undertaking and a capital sum was named and then there was an option which was exercised by the Indian Government. Apparently they had not enough money in their possession to pay the very large capital sum which was concerned and they exercised the option and elected to pay the sum over a period of years by payments which were obviously payments of capital as well as interest. That seems to me to be an entirely different case and of no assistance, really, in the present case at all. But it was relied upon by the Crown because they pointed out that in a case of annuities-which, of course, are mentioned in the same section as rentcharges-they were shown in that way to be capable of comprising both capital and interest and they were dealt with accordingly.
The other case was Cross J.s decision in Vestey v. Inland Revenue Commissioner It is not necessary for me to say whether it was rightly or wrongly decided and I do not propose to say, but, of course, it was a different case, as it seems to me, from the present case. There again there was a capital price reached in agreement between the parties and then periodical payments were provided for for paying off that sum. It seems to my mind quite a different case from the present.
On the other hand, in the present case there seems to be no evidence to support the view of Cross J. that there was any capital sum agreed between the parties at all, and that seems to me also to be inconsistent with the finding of the special commissioners. What appears to be the case here is that the Church Commissioners were minded to dispose of their properties and their long leaseholds for payments in the form of rentcharges which, prima facie at any rate, are completely payments of income and fall within the direct terms of section 177, which is the relevant section for the purpose of this matter; and except where modern legislation such as section 28 of the Finance Act, 1960 (which produces financial murder in regard certain transactions between parties), expressly interferes, it always has been the law that a taxpayer is entitled to arrange his affairs in such a way as to produce the minimum chargeable amount to tax. I rely on, and propose to apply, the observations of Lord Greene M. R. in Inland Revenue Commissioners v. Wesleyan and General Assurance Society, and I propose to read some extracts from the observations of Lord Greene M. R. which seem to me particularly relevant to the present case.
Lord Greene M. R. says :
'It is perhaps convenient to call to mind some of the elementary principles which govern cases of this kind. The function of the court in dealing with contractual documents is to construe those documents according to the ordinary principles of contruction, giving to the language used its normal ordinary meaning save in so far as the context requires some different meaning to be attributed to it. Effect must be given to every word in the contract save it so far as the context otherwise requires.
'Another principle which must be rememberd is this. In considering tax matters a documents is not to have placed upon it a strained or forced construction in order to attract tax, nor is a strained or forced construction to be placed upto it in order to avoid tax. The document must be construed in the ordinary way and the tax legislation then applied to it. If on its true construction it falls within a certain taxing category, then it is taxed. If on its true construction it falls outside the taxing category, then it escapes tax.
'In dealing with income tax question it frequently happens that there are two methods at least of achieving a particular financial result. If one of those method is adopted, tax will be payable. If the other method is adopted, tax will not be payable. It is sufficient to refer to the quite common case where property is sold for a lump sum payable by instalments. If a piece of property is sold for Pounds 1,000 and the purchase price is to be paid in ten instalments of Pounds 100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of Pounds 100 a year for ten years, tax is payable'-of course he was talking about income tax. 'The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not.'
Lord Simon in the House of Lords said much the same thing :
'It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment of that is its true nature. The question always is what is the real character of the payment, nor what the parties call it,'
and then he refers to the result of a particular case, which I need not read.
It seems to me those propositions apply in the present case. On the face of it, these are a series of rentcharges and, as such, they plainly fall within the terms of section 177.
Mr. Bagnall, in his able argument, attempted to persuade us that we should give a different meaning to the transactions in the present case by applying the cases relating to annuities because in some cases, as I have already mentioned, annuities are treated as not genuine annuities, or they are treated as comprising capital payuments as well as payments of income, but those are cases, as I have already said, which on the terms of the transaction admit of those constructions. I am not prepared to say that in no circumstances could rentcharges be subject to the application of similar principles, but I am satisfied that in the present case nothing of that sort can be said. There is no suggestion that the transaction was not a perfectly bona fide one with the intention of creating rentcharges, and rentcharges, unless there is some element in the transaction which shows that a different construction should be applied, are payments of income and nothing else, it seems to me.
In the present case the Crown desired to introduce some evidence, which was objected to and therefore, I think properly, not give, that the parties might have had some sort of calculations in their minds in reaching the figures which were eventually decided upon for the rentcharges. Well, it may be so, but they were entitled to carry out the transaction in the manner which they adopted and the notable feature of the present case, compared with the various authorities to which we have been referred, is that there is no lump sum throught mentioned in any way whatsoever. In my view, this is simply a case where the Church Commissioners disposed of their assets for a number of rentcharges which were income payments and received a higher income for ten years, and that appears to be the purpose they had for the transaction. On the other hand, the purchasing companies were prepared to pay a higher rent for a lilmited period with a view to getting a more favourable financial position at the end of that period. It is a perfectly straightforward transaction, as I see it, and it seems to me that the special commissioners reached the right conclusion. I would allow the appeal and restore the decision of the special commissioners.
SALMON L. J. I agree. I must confess that during the course of the hearing my mind has fluctuated somewhat, but in the end I consider that the findings of fact by the commissioners make it necessary for us to allow the appeal.
I do not wish, however, to be understood as accepting the argument that was advanced on behalf of the company to the effect that whenever a capital asset is transferred in consideration of a rentcharge, that transaction necessarily falls within section 177. The case was put in the course of argument of a transfer of property for a rentcharge of Pounds 1,000,000 a year for two years. I am far from convinced that in a case such as that the rentcharge could be regarded in its entirety as an income payment or an income receipt. So to regard it would be open up tempting but illusory vistas to those acquiring properties from charities. It would mean that tax could be deducted from the payments and then recorved by the charity concerned from the Crown. Thus the Crown would be making a large contribution to what might in reality be regarded as a purchase price of Pounds 2,000,000.
The case, however, with which we have to deal is quite different. There is no evidence before the court that the parties approached this transaction as, or intended the transaction in reality to be, the transfer of property for a capital sum payable with interest over a certain period; indeed, there is a finding by the commissioners, as I read it, that this did not occur. It is a very different case, as my Lord has said, from Vesteys case, because the shares admittedly of a market value of Pounds 2,000,000 were sold for Pounds 5 1/2 million payable by 125 yearly instalments of Pounds 44,000 each. The commissioners found in that case that on an actuarial basis the annual sum required to pay Pounds 2,000,000 at 2 per cent. interest in equal instalments over 125 years was Pounds 43,670, which is is just under Pounds 44,000. Cross J. came to the conclusion that the irresistible inference in that case was that the annual payment of Pounds 44,000 contained an element of capital repayment plus an element of interest and I am far from saying that he came to the wrong conclusion. As at present advised I think Vesteys case was correctly decided, but is wholly distinguishable from the present case.
For the reasons that my Lord has given I think Scobles case is also clearly distinguishable from the present case. To my mind, the commissioners basic finding here is that from a commercial point of view there was in reality a substitution of larger rents over a ten years period for smaller rents over longer periods of varying duration. The payments were in their nature rent, and as such were income payments properly deductible in computing the appellants profits.
It is conceded that one can transmute a capital asset into a right to receive income. Rent and rentcharges, prima facie, are income. There certainly were no facts to contradict that presumption or to support that the findings of the commissioners were not entirely justifiable. On that hypothesis, there is merely an exchange of rents; instead of smaller rents being paid for very long periods, larger rents were payable over a shorter period. In my view, the commissioners were entitled to come to the conclusion that these were income payments and income receipts, and for my part I cannot agree with the judge in holding that that decision was wrong.
I would allow the appeal.
FENTON ATKINSON L. J. I agree.
If I had been left to decided the matter on my own I think I would have been inclined to go the whole way with Mr. Heyworth Talbots argument. I would have been inclined to say that section 177 refers to payments in respect of any rentcharge; that the agreement between the parties created certain rentcharges totalling Pounds 96,000 over ten years; that it is conceded that these were genuine rentcharges, there being no question here of the fixing of the label 'rentcharge' to misdescribe the true nature of the transaction, the true meaning and effect of the contract between the parties being to sell certain assets in consideration of rentcharges, and that, therefore, on the plain words of the section the taxpayer company was entitled to deduct the tax from the payments and there could be no legal basis for embarking on a dissection of the rentcharges to see what part was capital and what was income. But having listened to my Lords judgments, I feel that the approach oversimplifies the matter and, in any case, goes further than is necessary to decide this appeal on its own particular facts. For the reasons my Lords have given, I agree that this appeal should be allowed.
Appeal allowed with costs.
Leave to appeal.
Solicitors : Nabarro, Nathanson & Co.; Solicitor of Inland Revenue.