JENKINS L.J. - This is an appeal by the Crown from a judgment of Upjohn J. dated December 20, 1957, whereby he affirmed a determination of the special commissioners dated July 24, 1956, in favour of the present respondents, a company called Australian Mutual Provident Society. The case concerns the effect on the companys tax liability of the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947.
The company, and this is important, is a mutual insurance company, which was incorporated in New South Wales in 1849 and is now regulated by certain later Australian statutes. The company has a branch office in London and carries on part of its business here.
I should next refer to some of the income tax provisions relating to insurance companies. Rule 15 of the rules applicable to Schedule D, Cases I and II, in the Income-tax Act, 1918, provides as follows by sub-rule (1) : 'Where an insurance company carries on life insurance business in conjunction with assurance business of any other class, the life assurance business of the company shall for the purposes of this Act be treated as a separate business from any other class of business carried on by the company.'
Rule 3 of the rules applicable to Case III of Schedule D has an important bearing on this case. [His Lordship read it and continued :] These provisions are those contained in the Income-tax Act, 1917. There are seven years assessments concerned in the case, from 1947-48 to 1951-52. The Act of 1918 applies to the five earlier years and the Act of 1952 applies to the last two years. There is no material difference between the Act of 1918 and the Act of 1952 for the present purpose, so I can confine my references to the provisions in the Act of 1918.
The relevance of the fact that the company is a mutual insurance concern is this : it is well settled that a mutual insurance company is not liable to tax on its mutual insurance business on the ground that the surpluses arising arise from transactions by the members inter se which are not, for income tax purposes, regarded as a trade carried on by the company. Rule 3 of the rules applicable to Case III of Schedule D was introduced. In fact, in the year 1915 by the Finance Act of that year. As to the provisions of that rule, it was, I think, for some considerable time understood that the effect of it was to provide a mode of ascertaining the proportion of the investment income of the company concerned attributable to its business activities in this country, and the method of calculation laid down is of a kind which one can readily understand as a rough and ready method of arriving at a fair proportion of that income.
The scheme was to take a sum arrived at by ascertaining the proportion of the premium income received in this country to the premium income received throughout the world. That proportion sum produced a figure which, as I have said, was long understood as representing simply a proportion of the income from investments corresponding to the proportion of the business done in the United Kingdom to the whole of the business done.
That view, however, was not accepted by the House of Lords in a case concerning this same company. Inland Revenue Commissioners v. Australian Mutual Provident Society, which came before the House of Lords early in 1947, judgment having been delivered on March 31 of that year. In that case the dispute was, as I understand it, of this nature : the company had amongst its investments certain investments which were exempt from income tax, and the question was at what stage in the calculation prescribed by rule 3 of Case III of Schedule D allowance ought to be made for these tax-free investments.
The company contended, as I understand it, that the deduction ought to be made from the proportion of income found to be attributable to United Kingdom activities under the provisions of the rule, for it was said that only thus could the company be given the full benefit of exemption; on the other hand, the Crowns view was that the tax-free investments should be deducted from the totality of investments before applying the calculation to them. The view of the company on this matter, I understand, prevailed in this court, but when the matter came before the House of Lords their Lordships took a radically different view.
This new way of looking at the matter was introduced into the case by an observation made by Viscount Simon in the course of the argument. He said 'Why does the existence of exempted income affect the application of rule 3 Does the mere fact that it it is included as an item in the computation of the profits charged under rule 3 amount to charging it with tax The real question to be determined is whether, on the true construction of the rule, there has been any error or mistake in the case of this society which holds in its life assurance fund investments exempt from income tax, and further what is the right decision in view of the fact that the revenue has, in effect, made the concession that the existence of the exempted income makes a difference to the calculations.'
In the course of his speech Viscount Simon said : 'Section 15 of the Finance Act, 1915, was, it would seem, aimed at meeting this difficulty' - that was the difficulty of taxing insurance companies situate as the respondent company in this case was, that is to say, foreign insurance companies with branches in this country - 'and it did so by providing for a conventional figure, which should be deemed to be profits, comprised in Schedule D, on which a non-resident life insurance company, with a branch in the United Kingdom, would make a contribution to United Kingdom tax, however it arranged its investments. The provisions now contained in rule 3 of Case III call for the use of certain factors in order to arrive at this conventional figure, upon which such an insurance company as the respondent society is required to pay tax in respect of the annual profit of its life assurance business carried on in this country.'
Then he said application of rule 3, the thing to be taxed is not, in whole or in part, exempted receipts, but is a conventional or notional sum-calculated, it is true, by the use of figures which might include the proceeds of exempted investments - but a sum deemed to be profits, to be charged as such, without any deduction save that provided for in sub-rule 4.'
Again he said : 'Once it is accepted that rule 3 of Case III is not one which taxes income from investments, whether exempted or not, but one which taxes a conventional sum calculated as the rule directs, it becomes reasonably clear that the sum to be taxed is not varied by inquiring whether one of the elements in the calculation contains income from exempted investments. If variation is required on this ground, it must be provided by legislation.'
Lord Wright said : 'The charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge by an arbitrary figure derived from a percentage of the investment income. In this connexion it was not material to distinguish between exempted and unexempted income. At that was needed was a yardstick.'
There are other observations tending in the same direction elsewhere amongst their Lordships speeches, but I think those citations will show sufficiently the view they took which was, in effect, that the sum arrived at by applying the calculation provided for by rule 3 of Case III of investment income received by the company and attributed to its activities in this country, but was a figure representing the profit derived by the company from its business in this country. It was conventionally arrived at or notionally arrived at (as it was put in one place by Viscount Simon), but, when arrived at, it was an actual figure for tax purposes, taken as representing for those purposes the profit arising from the companys business in this country.
It is noteworthy that their Lordships throughout their speeches made no reference at all to the circumstances that inasmuch as that was a mutual insurance company it was not taxable on the profit of its insurance business as distinct from the income of its investments. If the sum so arrived at could be regarded as a figure of investment income conventionally ascertained there would actually be an end of this case, for it will be seen on reference to the Australian double taxation relief agreement that income from investments is excluded from its scope, so, on that view, the position would simply be that the company would be liable to tax on the figure arrived at by the calculation laid down in rule 3 as income from investments and would pay tax accordingly; but, as their Lordships left the matter, there can be no doubt that the figure arrived at under rule 3 must be regarded for tax purposes as being a figure representing business profits and nothing else, in that state of the law the Order came into operation.
The agreement was signed on behalf of the government of this country and of the Commonwealth of Australia on October 29, 1946. The necessary steps to bring it into operation and give it statutory effect were taken as regards this country on April 23, 1947, and, no doubt, corresponding steps were taken by the Australian authorities at or about the same time. So that in March, 1947, when judgment was delivered by the House of Lords in the case to which I have referred, the agreement had, in fact, already been signed but had not yet been given statutory effect.
The agreement (one of many agreements of this character) was made under the provisions of section 51 of the Finance (No. 2) Act, 1945, which provided as follows : '(1) If His Majesty by Order in Council declares that arrangements specified in the Order have been made with the Government of any territory outside the United Kingdom with a view to affording relief from double taxation in relation to income tax, excess profits tax or the national defence contribution and any taxes of a similar character imposed by the laws of that territory, and that it is expedient that those arrangements should have effect, then, subject to the provisions of this Part of this Act, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax, excess profits tax and the national defence contribution so far as they provide for relief from tax, or for charging the income arising from sources in the United Kingdom, to persons not resident in the United Kingdom, determining the income to be attributed to such persons and their agencies, branches or establishments in the United Kingdom, or determining the income to be attributed to persons resident in the United Kingdom who have special relationships with persons not so resident.
'(2) On the making of an Order in Council under this section with respect to any arrangements relating to a Dominion as defined for the purposes of section twenty-seven of the Finance Act, 1920 (which provides for relief in respect of Dominion income tax), the said section twenty-seven shall cease to have effect as respects that Dominion except in so far as the arrangements otherwise provide.'
The important words to notice in that section are the words in subsection (1) - '...then, subject to the provisions of this Part of this Act, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax...' It follows that if and so far as there is any inconsistency between rule 3 of the rules applicable to Case III of Schedule D, on the one hand, and the agreement, on the other hand, then the agreement, having duly been given statutory effect, must prevail over the rule.
I should next refer to some of the provisions of the agreement. It is scheduled to the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947, Statutory Rules and Orders 1947, No. 806. The body of the Order says, by paragraph 1, that it 'may be cited as the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947,' and, by paragraph : 'It is hereby declared- (a) that the arrangements specified in the agreement set out in the Schedule to this Order have been made with the Government of Australia with a view to affording relief from double taxation in relation to income tax, excess profit tax or the national defence contribution and taxes of a similar character imposed by the laws of Australia; and (b) that it is expedient that those arrangements should have effect.'
The agreement is set out in the Schedule. [His Lordship referred to the relevant parts of articles II and III and continued :] There is nothing else to which I need refer until article XV, which provides for the commencement of the agreement. The agreement is to have effect when all formalities are completed : '(a) in the United Kingdom, as respects income tax for the year of assessment beginning on April 6, 1946, and subsequent years; ' - and other provisions are made in regard to its having effect as to surtax; and '(b) in Australia, as respects tax for the year of tax beginning on July 1, 1946, and subsequent years.'
The question in the case may be expressed as being whether the sum of business profits (as I have termed it) arrived at by the calculation prescribed by rule 3 of the rules applicable to Case III of Schedule D is an industrial or commercial profit of an Australian enterprise, namely, the respondent company, within the meaning of the Double Taxation Relief Agreement. If it is, then the result would appear to be that the company can claim to be assessed in accordance with the provisions of paragraphs (2) and (3) of the third article of the agreement and cannot properly be assessed to tax on the sum arrived at by the calculation prescribed by rule 3.
On the Crowns side it is contended that, although actual business profits are by definition 'industrial or commercial profits' for the purposes of the double taxation relief agreement, the rule 3 sum of business profits has nothing whatever to do with the provisions of that agreement. It is, argues Mr. Pennycuick, a purely notional sum. It has no substratum of fact. It is not a sum arrived at by a conventional calculation but, when so arrived at, representing actual profit. It is a purely notional sum; and he contends that the agreement is concerned with actual profits; though they may be artificially estimated in accordance with income tax principles, actual profits there must be. He says that the true view is that the companys liability to tax under rule 3 of Case III on the sum of business profits arrived at by the rule 3 calculation is wholly outside the agreement and that the company remains liable to tax upon it.
In my view that contention should not be accepted. It appears to me that for the present purpose it does not greatly matter whether the sum of profit referred to in rule 3 is to be regarded as an actual or notional sum. The purport of the rule, as I understand the construction placed upon it by the House of Lords, is to impute to an establishment (operating here) of a foreign insurance company a sum representing the profits arising to that company from its life insurance business in the United Kingdom. That is the object of it and to carry out that object it applies the proportion formula. On the other hand, the agreement (which, as I have mentioned, must be taken to override the Act where the two conflict) provides in paragraph (3) of article III its own method of estimating and arriving at the profits arising to an Australian company (including an insurance company) from its business (including life insurance business) in the United Kingdom.
The system adopted in rule 3 is a rough and ready method of taking the proportion to which II have referred. The system prescribed by the agreement is of a far more elaborate and detailed character; but both, in the case here relevant of an Australian company carrying on life insurance business in this country, aim at the same object, which they seek to achieve by different means. It may be that the figures arrived at by applying one or other of the two formulae would be widely different, but, in my view, the agreement must prevail by the terms of the Act under which it was made.
It follows from that that for the purpose of assessing this company to tax for the years in question on the profits of its business in the United Kingdom one may completely ignore rule 3 and the figure arrived at by applying the calculation laid down in that rule. The companys liability is to be measured in accordance with the agreement and not otherwise.
What the effect of applying the agreement in substitution for rule 3 may be it is not for me to say. It may be that it will be found that the fact that this is a mutual society will result in the liability being reduced to nil; on the other hand, one can see that there might be room for argument to the effect that the various hypotheses postulated by paragraph (3) of article III of the agreement might, when applied, involve the assumption that the company was not a mutual company; but questions of that kind do not concern us at this stage and I would prefer to say nothing about them.
The case has been most elaborately argued. I have confined myself, in effect, to one aspect of it which appears to me to be decisive in favour of the company, but I intend no disrespect to the careful and elaborate argument presented. In the result I see no reason at all to disturb the concurrent views of the special Commissioners and the judge and I would dismiss this appeal.
PARKER L.J. I agree. The short though difficult question in this case is whether the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947, applies in the circumstances of this case. If it does not, then it is clear-and, indeed, it is conceded-that the seven assessments in this case, five made under rule 3 of Case III of the Income Tax Act of 1918 and two under section 430 of the Act of 1952, are valid assessments; if, on the other hand, it does apply, then, by virtue of section 51 of the Finance (No. 2) Act, 1945, the measure of liability under the Relief Order prevails and supersedes the liability under rule 3 of Case III and, accordingly, the seven assessments in question must be discharged.
The Relief Order in effect provides that none of the enterprises there referred to shall be taxed in the United Kingdom unless certain conditions are fulfilled. The first is that it must be an enterprise of the type laid down in the Relief Order, and the Relief Order provides that one of the enterprises in question shall be one carrying on the business of life insurance; accordingly, albeit that the company in this case is a mutual society, it is clearly an enterprise within the Order. Secondly, that enterprise must have a permanent establishment in the United Kingdom, and there is no doubt that this company had. The third condition is that what may be taxed are only profits from the activities or business of that enterprise, not including income in the form of dividends, interest, etc. The sole question really in this case is whether the profits on which the company were assessed to tax are profits within that Relief Order.
I am afraid that for my part I am conscious of the inability fully to understand the decision of the House of Lords in Inland Revenue Commissioners v. Australian Mutual Provident Society but, be that as it may, it is a decision clearly binding upon this court. As I understand it, their Lordships were there construing rule 3 of Case III as providing that a certain proportion of the investment income of such a company as this should be deemed to be the business profits of that company and that, be it observed, whether the company in question was a proprietary company or a mutual society as, indeed, was the case before the House of Lords.
If that be right, then, albeit that they were deemed to be business profits, it seems to me that those profits so deemed come within and and come plainly within the words of the Relief Order. I would add this : that it does seem to me that, in so far as one can look at the surrounding circumstances and the intention of the parties, that must have been their intention. For more than 40 years before the agreement incorporated in the Relief Order was made a foreign enterprise such as this was not taxed under Case I of Schedule D but under rule 3 of Case III.
As Viscount Simon put it in the case in the House of Lords to which I have referred : true that the company might be regarded as carrying on in this country a trade through its branch, but there was much practical difficulty in arriving at the figure under Case I of Schedule D of annual profits of such a branch for, in the case of life assurance business, the true profits attributable to the branch could not be ascertained in the normal manner, as is shown by provisions in the Assurance Companies Act, 1909, for a quinquennial valuation. Section 15 of the Finance Act, 1915, was, it would seem, aimed at meeting this difficulty, and it did so by providing for a conventional figure, which should be deemed to be profits, comprised in Schedule D on which a non-resident life assurance company, with a branch in the United Kingdom, would make a contribution to United Kingdom income tax, however it arranged its investments. The provisions now contained in rule 3 of Case III call for the use of certain factors in order to arrive at this conventional figure, upon which such an assurance company as the respondent society is required to pay tax in respect of the annual profit of its life assurance business carried on in this country.'
That being so, it being the case that for some 40 years taxation of a life insurance company under Case I of Schedule D was to all intents a dead letter, one arrives at this : That, if the Crowns argument is right, the inclusion in the Relief Order of an enterprise carrying on the business of life insurance would have been there for purely theoretical interest in that only theoretically and not practically did such a life insurance company earn actual trading profits liable to tax.
For these reasons and the reasons given by my Lord I would dismiss this appeal.
PEARCE L.J. I agree with what my Lords have said and II have nothing to add.
Leave to appeal to the House of Lords.