LORD GREENE, M.R. - This appeal arises out of a friendly controversy between the respondents, London Film Productions, Ltd., and the appellant, Mr. Asher, with whom they have certain contractual relations. Under the relevant contact sums have fallen to be paid to Mr. Asher and will in future fall to be paid by the respondents. The controversy is whether the respondents, in making those payments, are entitled to deduct tax under rule 21 of the General Rules applicable to all Schedules of the Income-tax Act, 1918. Mr. Asher contends that, if these receipts be of an income nature, he is only liable to direct assessment. If that contention were correct there would be no legal right in the respondents to deduct the tax.
The way in which the question as staged is by an action brought by Mr. Asher to recover from the respondents the amount of the deduction. I have often thought that the cases of this kind it is extremely inconvenient that the Crown (which is vitally interested) cannot, under the existing procedure, be made a party or otherwise appear. The result is that the Crown is technically not bound by any decision which may be pronounced in its absence. It may well be that the practice of the Inland Revenue is to accept the decision in cases of this kind, which is merely a decision as between two subjects. Cases might very well arise, however, where the Crown was unwilling to accept that decision and might itself embark upon litigation, possibly with new facts. The result would be highly inconvenient and I venture to suggest that the Inland Revenue authorities might usefully consider whether it might not be worth while approaching the rule committee with a view to obtaining enactment of a rule under which they could receive notice of litigation of this kind and should be given a right to attend and put forward any argument or facts they thought right. The corollary would be that they would be bound by the decision, and the whole matter would be cleared up between everybody concerned. However, under the present practice, all we can do is to decide the matter as an issue between two subjects on the evidence that is put before us.
Mr. Asher on July 14, 1938, entered in to a contract with the respondents whereby they agreed to employ and engage him 'as a production executive, to render his exclusive services to the company for and during the period of this agreement in and about its business of producing motion pictures' as there described. He was entitled to a number of benefits under the contract, including, in particular, under clause 15, remuneration consisting of certain percentages in respect of motion picture which the respondents produced. The contract was to last for two years from May 23, 1938. On June 7, 1939, the parties entered into a contract which I will call the cancellation contract. It recites the original contract, which it describes as a service agreement, and it recites that Mr. Asher had been engaged under that service agreement upon the making and production of two motion pictures entitled 'Q. Planes' and 'The Spy in Black'. Those two motion pictures are referred to later as 'the said motion pictures.' It recites the mutual agreement that the service agreement should be determined and the parties released from their liabilities thereunder. Clause 1 provides that the service agreement shall, in all respects, be cancelled as from February 28, 1939. Under clause 2 Mr. Asher released the company from any obligation or liability to pay him any of the amounts or percentages of whatever character mentioned in clause 15 of the service agreement or to pay to him any salary, remuneration or other allowance in respect of any period subsequent to February 28, 1939, and from all other obligations on the part of the company. I only pick out the more important words in these various paragraphs. Then he acknowledges in clause 3 that he has received all his salary and remuneration down to February 28, 1939. Clause 5, which is the important clause, provides as follows so far as it is relevant, and I will condense its provision : 'In consideration of the premises and of the termination of the service agreement as aforesaid, the company shall pay to Mr. Asher in full settlement and satisfaction the following amounts'. Then there is provision for the payment of a sum of Pounds 1,000 down and of a sum of Pounds 1,452-13s. 6d. on September 30, 1939. Then sub-paragraph 3 provides 'and a sum equal to 60 per cent. of all moneys (if any) in excess of Pounds 110,000 which are actually received by the company or its subsidiary. Harefield Productions Ltd., in respect of the said motion pictures' - those are the two I have referred to - 'under either of the following two heads'. The first of those heads is (a) 'From Columbia Pictures Corporation, Ltd. on account of the cost of production of the said motion pictures in respect of the companys or Harefield Productions, Ltd.s respective shares of the revenues to be derived from the world-wide exploitation thereof'. We were informed that the sum of Pounds 110,000 represented an estimate of the cost of production of these two pictures incurred by the respondents. Therefore, on that basis, those percentages were treated for the purposes of the contract as being percentages of the amount of profits which the respondent would receive by the exploitation of the films. This is the general nature and intent of that percentage agreement. Sums had been paid from time to time under that agreement as set out in the pleadings in respect of those percentages.
When the case was heard before Atkinson, J., the main, if not the only, argument presented to him on the part of Mr. Asher appears to have been that the sums receivable under the cancellation contract were in the hands of Mr. Asher not income but capital. Atkinson, J., refused to accept that argument. It has not been put before us and, in my opinion, the view of the learned Judge on that subject was right. But, of course, that does not end the matter. It gets the case as far as this. These sums are income in their nature and as such fall within the income-tax net. The question still remains (with which the learned Judge, in view of the argument presented to him, did not deal) whether, in falling into that net, they come within the category of income which is subject to deduction by the payer, or whether they fall within the category of income in respect of which direct assessment should be made. This is the real controversy, which is not decided merely by saying that these sums have an income quality.
The case was presented to us by counsel for Mr. Asher with admirable clearness and was rested on several alternative arguments. First of all it was said the receipts under this contract are receipts which would fall into calculation for the purposes of assessment under Case II of Schedule D which deals with 'tax in respect of any profession, employment or vocation not contained in any other Schedule.' The word 'employment' there must now be read subject in any other Schedule.' The word 'employment' there must now be read subject to Section 18 of the Income-tax Act, 1922, which transfers certain employments to Schedule E. The argument here was that Mr. Asher was carrying on a profession or vocation of a film producer. It was said that in respect of that he would be assessable under Case II and the receipts that he would receive under the cancellation agreement would be elements in his professional or vocational receipts and would have to be dealt with as such on a direct assessment. It was said that on the basis that he was carrying on a profession or vocation the receipts which come to him under a cancellation agreement are just as much professional or vocational receipts as receipts which come under the performance of an agreement made in the course of carrying on the profession or vocation. Case are not unfamiliar where it has been held in the case of trading operations which are assessable under Case I that receipts from the cancellation of an ordinary trade agreement made in the day to day course of the trade are regarded for tax purposes as receipts of the trade just as much as the receipts received under the carrying out of an ordinary trade agreement. But whether that principle applies or does not apply to professions or vocations may be another question altogether, the answer to which may depend on the facts of individual cases. In the present case there is not need, in my opinion, to go into that controversy because I will assume that the agreement is right, and that it Mr. Asher is assessable under Case II these receipts would be receipts in respect of his profession or vocation and would not be receipts under a personal debt or obligation by virtue of a contract under rule 1 (a) of Case III. But I am entirely unconvinced by the argument that Mr. Asher is carrying on, or does carry on or was carrying on, any 'profession or vocation' at all according to be found in paragraph 1 of the statement of claim and the terms of the original service agreement. The first paragraph of the statement of claim says : 'The plaintiff is a producer of cinematograph films.' That is a very jejune statement. What the precise nature of that occupation is we are not told.
It was argued that we ought to regard that particular occupation in the same light as that of a professional artiste who makes his income by entering into contracts periodically with managers for whom he performs. An example of that was the well-known case of Davies v. Braithwaite, where that question was discussed, and it was held that an actress was carrying on a profession none the less because the manner of carrying it on was by entering into contracts for giving her services. The other reference to the nature of Mr. Ashers occupation is to be found in clause 1 of the service agreement by which he is employed and engaged as 'a production executive.' That phrase is one which does not convey any very clear impression to my mind, because it is a phrase which I rather believe has come from the other side of the Atlantic and what it may mean over here we are not informed. We are asked to find on that evidence alone that the occupation of Mr. Asher is a 'profession or vocation'. I find it quite impossible to accept that view. I should have thought from that information that his occupation was more the occupation of a manager, or person of that kind, who is engaged under a service contract to manage a business or some particular branch of a business. I have yet to learn that a manager or a managing director is carrying on 'a profession or vocation.' Contracts of that kind are, I should have thought, mere contracts of employment and nothing else. In any event, no facts are put before the Court which, in my opinion, would justify us placing Mr. Ashers occupation in either of the categories which it has been suggested are its proper home. Therefore I come to the conclusion that Mr. Asher fails in his contention that he is assessable under Case II.
Before I come to look at the other Cases in Schedule D, I must turn to the argument that was put forward that the case falls under Schedule E. It is not necessary to discuss what the position would or might have been under the original service agreement had that agreement remained in force. What we have to consider is whether or not the receipts under the cancellation agreement are taxable under Schedule E, in which case they would be taxable by direct assessment, and the taxpayer there would be entitled to such deductions as are provided for in rule 9 of the rules applicable to Schedule E. It is said that if the receipts do not come under Case Ii of Schedule D, they come under Schedule E. The first argument was that these receipts are a pension. In my opinion they cannot be regarded as anything of the kind. They are, and are expressed to be, compensation for the cancellation of a contract. Anything less like a pension I find it difficult to think of. Then it was said, even if they are not a pension they are profits from an employment, and profit in the sense that they are referable to the services performed under the service agreement and must be regarded as remuneration for service so rendered in the past. Atkinson, J., in the concluding paragraph of his judgment, appears to have favoured that view. But, in my opinion, that view cannot be sustained, having regard to the clear language of the agreement itself which sets out beyond possibility of doubt what the precise consideration is for these payments. It seems to me impossible to say that the parties agreed that Mr. Asher should be remunerated for his past services. He gave up expressly in the cancellation contract any claim to any remuneration in respect of what he had done in the past. This is merely a method (and a method that no doubt was convenient to the respondents) of paying him compensation for giving up his rights under that agreement. That method obviously might have been much more convenient to them than the method of paying him a lump sum down. I cannot regarded these payments as in any sense remuneration which is to be related to his contract of employment. Therefore, in any opinion, Schedule is not the proper Schedule under which Mr. Asher would fall to be assessed in respect of these receipts.
Before examining the other relevant cases of Schedule D I must say a word on the subject of rules 19 and 21 of the General Rules. In the present case rule 21 would be applicable because the respondent company is not in a position to say that these payments were made 'out of profits or gains brought into charge.' Therefore, the tax they would deduct if they were entitled to deduct it, they would have to hand over to the Revenue. In a case, the only report of which is to be found in a note to Hanbury, In re, 20 Annotated Tax Cases, p. 332, I endeavoured, in the course of a judgment, in which the other two members of the Court agreed, to set out what appeared to me to be the proper scope of rules 19 and 21. I do not propose to examine that judgment, but merely to extract from it a phrase which I think is a convenient one for the purpose of distinguishing the class of income taxable by deduction from the class of income which merely becomes an element in the computation of profits and gains. The phrase I used was 'pure income profit'. I pointed out that rules 19 and 21 were concerned with pure income profit, and anything that was not pure income profit did not fall within their scope.
Turning back to Schedule D, the case for the respondents in that these payments fall under Case III, the language of which is as follows : 'Tax in respect of profits of an uncertain value and of other income described in the rules applicable to this case.' The relevant rule is rule 1, which says : 'The tax shall extend to (a) any interest of the money, whether yearly or otherwise, or any annuity, or other annual payment, whether such payment is payable within or out of the United Kingdom, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise or as a reservations thereout' - not come the important words - 'or as a personal debt or obligation by virtue of any contract, or whether the same is received and payable half-yearly or at any shorter or more distant period.' It seems to me that once Case Ii is excluded and once Schedule E is excluded, the language of that rule covers the present case. These payments are payable as a 'debt or obligation' by virtue of this contract which, as counsel for the respondents rightly points out, is the source of the income. The contract, and nothing else but the contract, is the source of the income. Therefore, it seems to me that the language falls precisely within the language of rule 1. The payments are annual payments in the sense that they have that necessary recurrent quality which is the distinguishing mark differentiating an income payment and a capital payment for these purposes from any other payment. You can have an annual payment under this rule, even though it happens by some accident or other to fall due in one year only. The question is, has it the necessary periodical or recurrent quality If that view is right, the appellants next argument necessarily falls to the ground because he says, as his last point, that the case falls within Case VI. Case VI provides for 'tax in respect of any annual profits or gains not falling under any of the foregoing cases and not charged by virtue of any other Schedule.' If I am right in thinking that the case does fall under Case III it is automatically excluded from Case VI. Having regard to the view which I have formed, it is unnecessary to consider what is precisely the scope and application of Case VI, and particularly the question whether Case VI case are always examples or necessarily examples of direct assessment. It may or may not be so.
I may say for the sake of caution that that question, whether there might be cases under Case VI to which rules 19 and 21 would apply, was not a question which was discussed in the case of Hanbury, In re, or was relevant to the point then before us. It may or may not be the fact that in some cases under Case VI, rules 19 and 21 would apply, because a curious miscellaneous collections of receipts has by statute been brought under Case VI. I express no opinion upon that point whatsoever. What I am saying is merely a word of caution to the effect that that particular point was not before the Court in Hanbury, In re, and was not considered, and my observations, accordingly, must be read in that light. There may be nothing in the point but I wish to refer to it by way of precaution. If the views which I have expressed are correct, that is an end of the case. The result is that the decision of the learned Judge is right, but the reasons which he gave, although in my opinion, correct as far as they went, did not sufficiently cover the ground.
The result is the appeal must be dismissed with costs.
MACKINNON, L. J. - I agree with the judgment of Lord Greene, M. R. In view of the appalling complexity of the statutes involved here, I may be forgiven for saying that his conclusion is not one arrived at with case, though he has overcome the difficulties of the case so lucidly. But there was one passage in his judgment (with which I am in complete agreement) which is very easily reached on numerous manifest grounds - I mean the passage in which he pointed out that where a question arises between two subjects as to the duty of one of them to act under rule 19 or under rule 21, it is a misfortune that legal machinery does not exist whereby the Commissioners of Inland Revenue can be represented in such cases as parties to the argument and be found by the decision. I agree that the appeal fails.
GODDARD, L. J. - I agree.
Leave to appeal to the House of Lords granted.