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inland Revenue Commissioners Vs. Payne. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata
Decided On
Reported in[1942]10ITR59(Cal)
Appellantinland Revenue Commissioners
RespondentPayne.
Excerpt:
- .....but the most sustained argument on this branch of the case was upon the meaning of the word 'power'. it was sad that word must have a very restricted meaning and, indeed, must be confined to a power in what i may call the strict converyancing sense. it was said that if it was not so limited in its application it would extend to the exercise of a maybe5e right of property and, indeed, would give to the section a scope which the legislature could not possibly have intended. it is then said that in the present case the power to determine the settlement. if it existed, could only be the power derived from mr. walter paynes control of the voting rights of the company, and that is no doubt the case. but it is said that those rights, which he exercised in the way that he did, are.....
Judgment:
GREENE, M. R. - (His Lordship stated the facts and continued :) The word in the definition clause of 'settlement' which is relevant to that question is the word 'arrangement'. The word 'arrangement' is not a word of art : It is used, in my opinion, in this context in what may be described as a business sense, and the question is : Can we find here an 'arrangement' as so construed? It is said that the only element in this transaction which falls within the definition of 'settlement' is the deed of covenant itself. I am unable to accept that argument. It appears to me that the whole of what was done must be looked at, and where that is done, the true view, in a certain relationship to the company as part of one definite scheme, the essential heads of which could have been put down in numbered paragraphs on half a sheet of note-paper. Those were the things which it was essential that Mr. Payne should do if he wished to bring about the result desired. He did it by a combination of obtaining the control of the company, entering into the covenant, and then dealing with the company in such a way as to achieve his object. Now if a deliberate scheme, perfectly clear cut, of that description is not an arrangement within the definition clause, I have difficulty in seeing what useful purpose was served by the Legislature in putting that word into the definition at all. I am clearly of opinion that, by placing himself into these relationships with the company, Mr. Walter Payne was engaged in making an 'arrangement' within the meaning of that clause. That he was the settler under it is manifest, and I need not take up time in dealing with that aspect of the matter.

The next question that arises is whether he was in a position to revoke or otherwise determine the settlement or any provision thereof. IN my opinion, there is only one answer to that question. The position in which he had placed himself was on in which he could bring to an end his liability under his deed of covenant. That deed of covenant was a provision of the settlement; it was an integral part of it; and his liability under it could be determined by him at any moment that he pleased by the mere exercise of his voting rights in such a way as to put the company into liquidation. But the most sustained argument on this branch of the case was upon the meaning of the word 'power'. It was sad that word must have a very restricted meaning and, indeed, must be confined to a power in what I may call the strict converyancing sense. It was said that if it was not so limited in its application it would extend to the exercise of a maybe5e right of property and, indeed, would give to the section a scope which the Legislature could not possibly have intended. It is then said that in the present case the power to determine the settlement. If it existed, could only be the power derived from Mr. Walter Paynes control of the voting rights of the company, and that is no doubt the case. But it is said that those rights, which he exercised in the way that he did, are not aptly described as a 'power', they are rights which are inherent in his ownership of the shares. The argument, in my opinion, is putting much too limited a meaning on the word 'power'. As Clauson, L. J., pointed out in the course of the argument, the point would have had more substance if such a word as arrangement' had not appeared in the definition clause. In relation to such a word it is impossible, it seems to me, to confine the word 'power' to a strict power in the conveyancing sense. It must, therefore, have a wider and more popular meaning. The argument that the exercise of a mere right of a property cannot be a 'power' is, in my opinion, beside the point. The question in the present case is, not as to the bare exercise of a voting right looked at by itself. That voting right was brought into the scheme and was an essential part of the scheme, and it was used as the mechanism by which Mr. Walter Payne should be in a position to bring his liability to an end. It so happens that under the particular device adopted the method of bringing that liability to an end was by exercise of the votes attached to his shares. But those voting rights, used for the purposes for which they were used, and playing the part in the scheme which they did play, are in my opinion, properly described in the context of this section as a 'power'. In my judgment, therefore, that argument fails.

The next question that arises on the meaning of Section 38 (1), paragraph (a), is whether or not in the event of the exercise of the power Mr. Walter Payne would, or might, 'cease to be liable to make any annual payments by virtue or in consequence of any provisions of the settlement', the relevant provision in this case, of course, being the covenant. It was said that, as by the winding up of the company the liability of Mr. Walter Payne to make payments came to an end by the very force and nature of the covenant itself, these words are in appropriate to cover such a case, and that they are contemplation, not the termination of liability, according to the terms of the contract, but, so to speak, a premature termination of a liability which would otherwise have continued. In my opinion that argument also fails. The question is : Did Mr. Walter Payne cease to be liable to make any annual payments? The answer is that he did. The fact that he so ceased because his liability had been brought to its conclusion, instead of being revoked by a superimposed power of revocation, appears to me to be irrelevant. The language, in my opinion, is amply clear to cover this case.

I therefore come to the conclusion that the present case is covered by the section; but that still leaves the question whether or not Part II of the Third Schedule to the Act applies. A word of explanation of the apparent purpose of the Legislature may be usefully given. As the operation of the Act was made retrospective, the Legislature was minded to give persons who had entered into transactions of the kind at which the section was aimed an opportunity of putting their affairs in that connection in order. There were, at least, two types of transaction which the Legislature intended to hit, and to hit retrospectively. One was a transaction under which a power had been taken which, if exercised, would put an end to a liability to make payments. Another was the case where a power to revoke a settlement had been given. Powers of that kind might have been given to the settler or they might have been given to some other person as part of the settlement, or to the settler, with the consent of other persons, and there were various methods of achieving the results desired : but it was evidently thought a hardship that persons who had entered into covenants of that kind, or settlements of that kind, at a time when there was no objection to them from the tax point of view, should find that they were bound for ever thereafter, without any opportunity of getting rid of the offending provisions, to stand by their covenants or their settlements and be bound by them. Accordingly, the Schedule provides that 'in the case of a settlement made before the twenty-seventh day of April nineteen hundred and thirty-eight, sub section (1) of the relative section shall not, by reason only of the provisions of paragraph (a) thereof, apply to sums payable by the settler by virtue or in consequence of any provision of the settlement in a year to which this Part of this Schedule applies'. Those years appear in paragraph (7) as being the years 1937-38 and 1938-39. Now, the conditions which must be fulfilled to qualify for that exemption are as follows : Paragraph (a) is the first alternative. Paragraphs (a), (b) and (c) are dealing with the particular types of transactions which I have just mentioned. Paragraph (a) :'If at the expiration of three months from the date of the passing of this Act' (those three months would expire on October 29,1938) ' (i) no person has or can have any such power as is referred to in the said paragraph (a); and (ii) the settler has not received and is not entitled to receive any consideration in respect of the release or disclaimer of any such power; or (b) the like annual payments have been payable by the settler by virtue or in consequence of that provision of the settlement in each of the seven years of assessment ending with a year to which this Part f this Schedule applies'. Pausing there, and speaking quite broadly, sub-paragraph (a) is providing for the case where what I may call an offending power, by which liability to make annual payments can be got rid of, can be elirainated from the settlement, assuming that it is possible to do so and that those concerned are desiring to do so, and, if that is done, the retrospective provisions of the Act will not apply. The settlor concerned would have put himself right for the future, because such a covenant would then stand as a covenant containing no such power to revoke or determine, and therefore would be caught in the future, but exemption for the past can be obtained if the settlor, so to speak, repents and puts the matter right for the future. Paragraph (b) is a special case of exemption to which I need not refer. Paragraph (c) gives exemption if 'before the expiration of three months from the date of the passing of this Act-(i) the settlement, or the provision by virtue or in consequence whereof the annual payments are payable, has been revoked' and (ii) a new settlement has been made by which annual payments fall to be made for a period there stated. What was provided for there was getting rid of the matter of offence, not by the elimination of an offending power, but by the cancellation of the settlement itself and the substitution of a new in offensive settlement. Those were the two classes of things to which exemption in that Part of the Schedule was directed.

Now it is argued that the present case comes within clause 1, subclause (a), sub-paragraph (i), because it is said that the company, having gone into liquidation before October 29,1938, no person on that date had or could have 'any such power as is referred to in the said paragraph (a) of sub-section (1) of Section 38 of the Act, that is to say, a power to revoke or otherwise determine the settlement or any provision thereof'. The learned Judge declined to accept that view, and he held that the provisions of paragraph (a), sub-paragraph (i), of clause 1 of the Schedule did not apply to the present case in view of the fact that the covenant had come to an end, or rather that the obligation under the covenant had come to an end on the liquidation of the company. The reasons that he gave for that view commend themselves so completely, to my mind, that I do not find it necessary to repeat them or to express my own views upon the subject, except to say this : if this paragraph (i) be written out at length, it will run as follows : 'If no person has or can have power, whether immediately or in the future and whether with or without the consent of any other person to revoke or otherwise determine the settlement or any provision thereof'. It seems to me that that language is completely unsuitable to describe the case where the non-existence of any such power is not due to the fact that it has been revoked or eliminated, but is due to the fact that the settlement in which it is embedded has disappeared altogether. That language, it seems to me, does not fit such a case. That is all that I wish to say upon the construction of that Schedule.

There is another argument which was put forward on behalf of the appellant with regard to this point. It was said that it would be very unfair to construe the provisions of the Schedule in such a way, because the result would be that, whereas existing covenants and existing settlements could be put right, there was nothing to protect a settlement that has run its course before October 29, 1938, from the retrospective operation of the Act. That is an argument which does not disturb me in the least. The Legislature was not in any way bound, nor do I see that in fairness it was bound to deal with cases of that kind. It might be that the settlor in such a case had the power but would not have exercised it, even if he had been given the opportunity to do so, and it might be that the power was one the exercise of which he could not bring about, because he could not get some necessary consent and, therefore, it is not to be assumed that every settler under a defunct settlement would have been in a position, or would have been willing, to do the things the doing of which would obtain exemption for a settlement that was still alive. In my view the case of the defunct settlement was one which the Legislature thought fit to disregard.

In the result the appeal fails and must be dismissed with costs.

CLAUSON, L. J.-I agree with the result, and with all the reasons which my Lord has stated. I, therefore, confine myself to expressing my concurrence.

GODDARD, L. J.-I agree.


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