LAWRENCE, J. - In spite of the able arguments which have been addressed to me on behalf of the Crown, I think that, on the authorities as they stand, the decision of the Commissioners was right.
(His Lordship stated the facts and continued :) The Commissioners based their decision upon the authority of Gilbertson v. Fergusson, which was decided in 1881. The facts in that case were these : The Imperial Ottoman Bank had an English agency in London, conducting a banking business in London and making profits in England, it was held that the English committee which acted as paying agent to English shareholders in the Imperial Ottoman Bank was entitled to the benefit of the tax paid upon the English profits in the proportion that those profits bore to the total profits of the Imperial Ottoman Bank.
The Commissioners have held that the principle in that case is applicable to the present case. The contention for the English agency, the Imperial Ottoman Bank, was that, as the profits of that agency were sufficient to pay the dividends payable in England, those dividends ought to be paid without any further tax being paid upon them. But the Court held that that was not so, and that those dividends were bound to suffer taxation in the proportion which the English profits bore to the total profits of the Imperial Ottoman Bank.
Counsel for the appellant, the Crown, have contended that the case of Gilbertson v. Fergusson is at any rate not decisive of the present case and really throws no light upon it; in the first place, because the point actually decided as to the proportion, was conceded by the Crown; secondly, that in that case the question under consideration related to ordinary shareholders, who suffer the taxation, as counsel for the Crown contended, directly and alone, as opposed to a preference shareholder, whose preference dividend, if it be paid to him in full, suffers no part of the taxation; and thirdly, because the judgments in that case, in dealing with the question of double taxation, say that the principle against double taxation applies where it is the same person who suffers the tax, and that there it was the Imperial Ottoman Bank which suffered the tax and which was assessed, whereas in the case before me, it is not the respondent who had suffered the tax but the English companies. Lastly, it is contended for the Crown that in any event in this case the connection between the respondent and the company who has paid the tax is too remote, an that whereas in the case of English companies the tax is assessed upon the company, in the case of the Imperial Ottoman Bank, referred to in Gilbertson v. Fergusson, it was assessed upon the agency, and in the present case it is assessed, there being no agency, upon the particular shareholder namely, the respondent.
Reliance was placed on behalf of the respondent, not only upon the case of Gilbertson v. Fergusson, but upon the principle which has been enunciated in the House of Lords in Neumann v. Inland Revenue Commissioners by which decision it was held that where the profits of a company have suffered income-tax, those profits should not suffer further income-tax in the hands of the companys shareholders. The Crown contend that that principle is applicable only to English companies, by reason of the provisions of the Income Tax Acts which deal with English companies, and that no such principle applies to foreign companies.
In my opinion, the case of Gilbertson v. Fergusson shows that a similar principle is applicable to foreign companies and that, notwithstanding the fact that the tax upon dividends from foreign companies depends upon Case V and upon Miscellaneous rule I, the principle against doubt taxation applies in the case against foreign companies, so as to exempt shareholders in foreign companies from suffering double taxation. I see no reason for distinguishing between a foreign company which pays it is dividends through a paying agent and one which pays them direct to the shareholders; nor can I see any difference between a preference shareholder and an ordinary shareholder. The ordinary shareholder may be said in one sense, to suffer the tax more directly that the preference shareholder; but the preference shareholder feels the burden of the tax as well, and the principle which underlies Neumanns Case a principle which appears to me to have been the governing principle for the decision if Gilbertson v. Fergusson shows that it is not necessary that the individual shareholders should actually bear the whole burden of the tax; it is sufficient it the profits out of which the dividends are paid have suffered tax. That is the principle of Neumanns Case. In this present case the profits of the Indian company, George Henderson & Co., in so far as they consist of the profits of the two English companies, have suffered English income-tax, and therefore, in the proportion that those profits bear to the total profits of George Henderson & Co., I am of opinion that the individual shareholder in George Henderson & Co., the respondent is entitled to relief from taxation upon his dividends. For these reasons I am of opinion that the decision of the commissioners was right and the appeal will be dismissed with costs.
The Inspector of Taxes appealed and the Court of Appeal (Greene, M.R., Scoot and Clauson, L. JJ.) delivered the following Judgment :
Sir Wilfred Greene, M.R. - This is an appeal by the Inspector of taxes against a decision of Lawrence, J., affirming a decision of the general commissioners for the city of London, who had allowed an appeal by the respondent. The assessment in question was made upon the respondent for the year ending April 5, 1931, under the rules applicable to the Income-tax Act, 1918, Sched. D, Case V, in the sum of Pounds 6,045. The respondent owns certain 8 per cent. cumulative preference shares in an Indian company called George Henderson & Co., Ltd., whose issued capital comprises both preference and ordinary shares. That company owns a large number of ordinary shares in two British companies the whole of whose profits are assessed to United Kingdom income-tax. During the year ending April 5, 1931, the Indian company received dividends upon its shares in the British companies. The dividends were paid out of profits of the British companies which had borne United Kingdom income-tax, and tax was deducted from the dividends when they were paid. On June 22, 1931, the Indian company paid the dividend on its preference shares. It was paid in full, without deduction of tax, by means of rupee warrants sent direct to the shareholders (including the respondent) without the intervention of any paying agents.
The assessment made upon the respondent was on a sum which included the sterling equivalent of the full amount of his dividend. The respondent claimed that, as part of the dividend (agreed at 44.12 per cent.) was paid out of the taxed dividends received by the Indian company from the British companies, that part should not again be subjected to United Kingdom income tax in his hands, and that the assessment should be reduced accordingly. This claim was, as I have said, successful before the general commissioners and Lawrence, J.
Questions which deal with the operation of the Income Tax Acts in relation to the dividends distributed by companies are usually troublesome. The present question is no exception to the rule. In my opinion, however, it has been correctly answered by the general Commissioner said Lawrence, J. In the case of a company the taxable income of which is derived exclusively from British sources, it is the company that is taxed, not the shareholders. If the income is derived from a trade or business, it is taxed as the companys income, and, when it is distributed in the form of dividend to the shareholders, they are regarded in effect as receiving their shares in profits which have already been subjected to tax (see All Schedules Rules R. 20). The company may, if it pleases, deduct from each dividend which it so pays a sum which in theory (but not necessarily in practice) represents the share of the tax borne by the company which is referable to that dividend. The shareholder is in effect receiving a share in a fund out of which the Crown has already taken the tax to which it is entitled. The fact that the profit is, so to speak, passed through the Company before it emerges in the shape of dividend in not regarded as creating a new income for tax purposes, and accordingly the shareholder is to liable to assessment in respect of this dividend. If the company holds share in another company the profits of which are subject to tax, and receives dividends on those shares, the position is more complicated, but the principle to be applied is the same. The holding company is not taxable in respect of those dividends, anymore than an individual shareholder would be taxable. When, in its turn, it distributes a dividend to its shareholders which is referable in whole or in part to the dividends which it has received, they in their turn, are not liable to be assessed, any more than they were in the case of dividends paid out of trading profits. They are in this case, too, regarded as receiving their share of fund which has already borne tax, and that notwithstanding that the holding company is, so to speak, interposed between them and the company which originally earned the profits and paid the tax. In fact, the revenue is not entitled to put its hands into the same bag more than once, and the bag is regarded as keeping its identity until its contents are finally divided. The simile of the bag is, of course, inaccurate, in that a particular dividend cannot necessarily be related to a particular profit, while the provisions for deduction of tax from dividend have become quite artificial. For present purposes, however, the simile is not think, a misleading one.
I will now take the case of a foreign company part of the income of which is subjected to British income-tax. Let it first be assumed that the companys share capital consists entirely of ordinary shares, that it carries on a trade here the profits from which are assessable to tax under Sched. D, and that it also holds foreign investments the income from which is not subject to tax. It pays a dividend in part out of the profits of its trade and in part out of the income received from its investments. In so far as the dividend is referable to the profits of the trade, it is paid out of a which has already borne tax, and the amount available for distribution has been diminished by the amount of the tax. It appears to me that on principle the revenue is not entitled to assess the British shareholder to tax in respect of so much of his dividend as is reverable to the profits of the trade. If it could, it would be putting its hands into the same bag twice, and there would be double taxation. I see no ground for saying that a new income, taxable in the shareholders hand, comes into existence when the dividend is paid. Here, just as in the case of the wholly British company first mentioned, he is receiving a share of a fund which has already borne tax. In other words, the bag remains the same.
I cannot see that any different result ought to follow if the position is reversed, and the foreign company carries on a trade abroad, the profits of which are not subject to tax, and receives dividends from an English Company. It is true that in this case the foreign company is not liable to direct assessment, as was the case with the foreign company which carried on a trade here. It is also true that the English company from which it receives its dividends has been taxed on its profits in its own right, and not in right of its shareholders. Nevertheless, the foreign company receiving the dividend has suffered the burden of tax in that the fund or profits out of which the dividend is paid has been struck with tax. In respect of those profits, the revenue has received the tax to which it is entitled, and it is not, in my opinion, entitled to follow them into the hands of the ultimate recipient and tax them again in his hands. If the view which I have expressed is correct, it disposes of the main argument of the Crown, which was to the effect that, in the case of a foreign company, a new income arises when its dividend is received by a British shareholder, and that this new income is taxable in his hands without regard to the tax history of the fund out of which the dividend is paid. In other words, the Crown claims that, in the case of a foreign company, the bag must be treated as losing its identity, and that what would amount to double taxation in the case of a British company and its shareholders is unobjectionable when the company is a foreign one. I can find no support in principle or in authority for this view.
The alternative argument advanced on behalf of the Crown was directed to the special case of the preference shareholder. It was said that, whatever maybe the case of an ordinary shareholder, the preference shareholder who receives his dividend in full has not suffered any diminution of his dividend by reason of British taxation, and that therefore he ought to be liable to assessed on the full amount of his dividend. In my opinion, this argument is unsound. The preference dividend, like the ordinary dividend, is paid out of a fund in respect of which the revenue has received its tax. The way in which the balance of that fund is divided up among the shareholders is a domestic matter for them, and the fact that a certain class of shareholder is entitled to received to receive out of it a fixed amount before the other class can claim anything does not appear to me to alter the position in any way. It simply means that, as between the two classes of shareholders, the burden of the tax is thrown upon the ordinary shareholder, but this does not, in my judgment, give the revenue any greater rights.
The general commissioners and Lawrence, J., held that the case was covered by the principles laid down by this court in 1881 in Gilbertson v. Fergusson. - That case was decided at a time when the application of the Income Tax Acts in the matter of dividends had not been fully worked out, and some of the observations made may require qualification in the light of subsequent decisions. Nevertheless, the correctness of the result, so far as it is relevant for present purposes, was then admitted by the revenue, and we were informed at the bar that it has regularly been followed in practice. There are two real differences and one apparent difference between that case and the present. The apparent difference lies in the fact that the same persons - namely, the London agents of the Imperial Ottoman Bank - were assessed in respect both of its English profits and of the dividends paid to English shareholders. However, they were so assessed in different capacities, and the same result must have followed if the dividends had been remitted direct to the English shareholders from Turkey and they had been subjected to direct assessment, as was admitted by Mr. Dicey, who argued the appeal for the Crown. The two real difference are first, that there was a direct assessment on the bank through its London agents in respect of the banks English profits, which is to the case here and, secondly, that the shares were ordinary, and not preferences shares. I have already given my reasons for thinking that these two differences do not affect the result, and, in my opinion the principles laid down in that case apply to the present. The appeal is accordingly dismissed with costs.
Scott, L.J. - The question in this appeal is one of general importance - namely, whether a shareholder resident in England an taxable under Case V in respect of interest or dividends paid to him by a foreign company, itself not liable to British income-tax, is entitled to relief from the gross figure of his assessment on proof by him that the source of the companys income was wholly or in part dividend on shares owned by it British companies which were liable to, and had deducted tax from the dividend so paid. It is contended by the respondent that, unless such relief is given, there would be double taxation on what is, throughout its distribution, one and the same income, and that, although there is no express statutory prohibition of such double taxation, there is a principle of income-tax law which forbids it.
I agree with my two colleagues, whose judgments I have had the privilege of reading, and with the commissioners and Lawrence, J., that there is such a principle and that our judgment must be for the respondent.
The material facts in the appeal are these. (i) Two British companies, A and B, resident in England and taxable here upon the profits of their respective trades, earned profits, and in 1930-31 were assessed to tax upon their assessable incomes. (ii) In distributing dividends to the holders of their ordinary shares, they deducted tax. (iii) George Henderson & Co., Ltd., a company carrying on business in India but not in England (which I will call the Indian company), was a shareholder in each of the two companies, and received substantial dividends from which tax had been deducted. (iv) It had one other source of income - namely, trade profits earned in India -the ratio between the two for the relevant period being dividends from companies A and B 44.12 per cent. and Indian profits 55.88 per cent. (v) The respondent is a holder of 8 per cent. preference shares in the Indian company, and was paid by it his interest in full, without deduction. (vi) The Crown claimed tax under Schedule D, Case V, upon the whole of this interest, but the respondent contended that to the extent of 44.12 per cent. his income received from the Indian company had already suffered British income-tax by deduction, and that to that extent he was entitled to relief. As support for his contention, he relied on Gilbertson v. Fergusson. The commissioners upheld his contention holding that they were bound by Gilbertsons case. Gilbertsons case, although helpful on the general principle, is not conclusive on the present appeal, because the foreign company there - the Ottoman Bank - had a branch business in England, where it earned a large part of its profits, and was directly taxed upon them under Schedule D, and the dividends paid by the company to shareholders residents in England were at least partly attributable to that English income. There is a statement of what I think is the true principle in a passage in the judgment which Clauson, L.J., is about to deliver, and to the language of his statement I respectfully subscribe. The broad principle is that income-tax law of to-day still thinks of a company as a body of persons, and of the shareholders as cooperators having a direct interest in the capital and income of their corporation, almost as if the Income-Tax Act had been passed in 1818 and not 1918. A consequence of this legislative outlook is that dividend is really dividend -a division of the profits - and, when payment is made to shareholders, it is a men distribution, for which the shareholders incur on tax liability. If the company is, in respect of the dividend, amenable to British income-tax law, having paid tax for itself and its cooperators, it naturally is given the right of deducting each corporators share of the tax. If the distribution, instead of being direct, is made indirect, by the intervention of a foreign holding company not amenable to British income-tax law, and the foreign company as a shareholder receives a distribution of tax aid profits from English companies in which it holds shares, and, then not having any other income, passes on what it receives -less only expenses, reserves, etc., - to an English shareholder, the process is still in essence distribution of the income of the British operating companies, although, so to speak, there are two pipes, instead of one, though which the stream of profits has to flow, and there has been some leakage, perhaps, at their junction. The onus of proof, however, must always rest upon the British shareholder who is assessed under Case V to prove that the dividend he has received did come, directly or indirectly, from a British source which had paid tax on the income distributed. If he can prove that fact, the principle, in my opinion, applies.
The principle was considered in Gilbertsons case and further in Bradbury v. English Sewing Cotton Co. especially by Lord Phillimore, but it is not dealt with fully in the opinions in the House of Lords in Neumann v. Inland ravened Commissioners and especially those of Lord Tomlin and Lord Wright. It is unnecessary, in my view, to add anything further, as I entirely agree with my colleagues judgments.
CLAUSON, L.J. :- Mr. Hely Hutchinson, whom I will call the tax payer, is resident in England, and holds certain 8 per cent. cumulative preference shares in an Indian Company. The Indian company is in a position to pay, and has paid, the dividends in full On the footing that these dividends are (as they admittedly are) income arising from possessions out of the United Kingdom, he has been assessed to tax upon that amount. It appears that 44.12 per cent. of the Indian companys income arises from investments in shares in English companies, the dividends upon which they receive, of course, less British tax. The rest of their income is earned in India, and is not amenable to British taxation. It is agreed, that, if these two classes of income are treated as allied pro rata towards the provision of the dividends on the tax-payers shares in the Indian company, those dividends are provided to the extent of 44.12 per cent. from the taxed dividends, and, as to the balance, out of the Indian companys untaxed income. The tax payer admits that he must pay tax on so much of his dividends as are, in this sense, provided out of the Indian companys untaxed income, but he claims that he must be treated as free of liability to tax on such part of his dividends as is, in this sense, provided out of the portion of the Indian companys income which has already suffered British tax.
The tax-payer cannot point to anything in the Acts which modifies in his case the clear charge prima facie falling on him under Schedule D, Case V, but he says - and says rightly - that the Court recognizes the principle that the Acts do not imposed double taxation, and that, if he be called upon to pay tax that part of his dividends which is (by the process I have indicated above) traced to its origin in the taxed dividends received by the Indian Company, this principle will be infringed.
The principals is stated by BRETT, L.J., in Gilbertson v. Fergusson, at p. 570 : 'Now it may be true there are no specific words in this statute which point out that the Government are not to receive the tax twice over, but it would be so clearly unjust and obviously contrary to the meaning of the statute that the Government should have the tax payable twice over by the same person in respect of the same thing, that I should say it was a necessary implication that that could not be right.'
The first matter for investigation is whether, if tax be paid by the tax payer, as claimed by the Crown, tax will be paid more then once in respect of some part of the tax-payers income. The Indian company suffered British tax on part of its income, which is the fund which provides the tax-payers dividend, and the question which arises is whether or not this payment can be said to be a payment of British tax in respect of the dividend paid to the taxpayer out of that income. An employer pays tax his income and out of the fund which has so borne tax he pays wages to his chauffeur. It obviously cannot be suggested that to tax the chauffeur on his wages is to infringe the principle against double taxation. The employers income is one taxable subject, the chauffeurs income is another, though it is true that the chauffeurs wages are found out of the employers income. In the same was it is suggested that the Indian companys income arising from its shares in English companies is one subject of taxation, and that the preference dividend paid to the tax-payer is another, and separate, subject of taxation, though it is true that a part of the latter is provided out of the former. If this suggestion be well-founded, the Crowns claim will be justified.
There is, however, a familiar principle, enshrined in the All Schedules Rules rr. 1, 20, and fully explained in the opinions of the Lords in Newmann v. Inland Revenue Commissioners that, for the purposes of the Acts, the profits or gains of a company, even though it be a corporation, and as such, and entity separate from its shareholders, are to be treated as the profits or gains of the members of the corporation, with the result that taxation of the companys profits or gains franks the dividends paid out of them to the shareholders from further tax. Machinery is provided by the latter part of r. 20 which enables those who administer the concerns of the company to throw the tax upon the shareholders by deduction from the dividends, but that machinery is permissive only. Whether or not the company deducts tax from the dividend, no further tax can be charged by the Crow, against the shareholder in respect of the dividend. In his hands, it is franked from tax, since the profits of the 'body of persons' of whom he is one have already borne tax. The dividend is regard as merely the individual shareholders part of the profits or gains of himself and the other members of the 'body of persons' and is not a taxable subject separate and apart from those profits or gains. If this be a true view of the position, it follows that, in the present case, tax having already been paid by the Indian company (by suffering deduction) on 44.12 per cent. of the dividend in respect of which tax is being claimed, tax will be paid twice over upon that portion of the dividend if the Crowns claim be allowed.
There are, however, certain points to which I must refer. It is too late to argue that the phrase 'body of persons' in r. 20 applies only to a body of persons associated together under the law of this country. It is well-settled, that the regulation applies to a 'body of persons' associated under foreign law, if chargeable to tax under the Income-tax Act. It may be suggested that an Indian company not directly charged to tax under the Act, but merely in receipt of income from which British tax has been deducted, is outside r. 20. I can see no reason for differentiating between the position of a 'body of persons' the subject of direct assessment and a 'body of persons' reached by way of deduction of tax, and accordingly I see no escape from the conclusion that the Indian company and its shareholders are, in respect of any question of taxation under the Income-tax Act, a 'body of persons' within the meaning of r. 20. It may be, and indeed has been, suggested that no body of persons comes within the meaning of r. 20 which is so associated - e.g., under the laws of foreign state - as to be precluded from enforcing against such of its shareholders as are not subject, by residence or otherwise, to the laws of this country the right of deduction of tax conferred by r. 20. I doubt whether, as the authorities stand, such a construction of the regulation is open to this court. However that may be, I can feel no doubt that the suggestion cannot be supported. The machinery of r. 20 is aimed at enabling the tax on a 'body of persons' to be adjusted as between the body and its constituent members, but I can find no indication in the rule that it is to be inapplicable to a 'body of persons' because the machinery of adjustment may, owing to the operation of foreign law, happen to be unenforceable as against some of the constituent members.
There is still one further point for consideration. If the tax-payer succeeds in his contention, the result in this particular case does undoubtedly follow that the tax-payer himself bears only 55.88 per cent of the full tax on his dividend, so that he at all events cannot say that he has suffered double taxation in his own pocket. Indeed, he personally has suffered less than full taxation. Owing to the facts (a) that the Indian companys profits are sufficient to pay his dividend in full, and (b) that, as between himself and his fellow-shareholders, owing to the fact that the Income-Tax Act is not law in India, the latter cannot throw on him his share of the tax which the funds of the company have borne in respect of the English assets, he has been fortunate enough to be able to escape part of the tax, so far as concerns his own pocket. The fact remains, however, that the Crown will, in the sense already explained, have the full tax, though not more than the full tax, on the dividend which he receives. As I understand the 'principle against double taxation,' it is a principle which operates against the Crown, and not a principle which can be invoked against the tax-payer. It does not lay down that every tax-payer shall bear tax on all his income, and, if he does so bear tax, he cannot be charged with more. It is grounded on the position that Parliament has granted the Crown a tax payable once, and not more than once, in respect of the same subject of taxation has been so fortunate as to have had some portion of his tax provided to the Crown from some source other than his own pocket.
In deference to the course which the arguments took in this court, I have thought it right to express my judgment with some elaboration, but my reasons do not, I think, differ in substance from those which have been for more succinctly expressed by Lawrence, J., below. In my judgment, the appeal should be dismissed.