LORD WRIGHT, M.R. - In this appeal the Court are all agreed what their decision ought to be. It is a case of importance and of complexity, but, as we are all agreed, I think it desirable to give judgment at once. The taxpayer here, the Bank of New Zealand - the respondent on this appeal - is a bank registered and resident in New Zealand. It carries on and at all material times did carry on its banking business in London, but not so as to be resident or ordinarily resident in the United Kingdom, It carries on its banking business at a branch office in London, and there is no question but that, in respect of profits arising from the trade exercised at the London branch office, it is assessable to income-tax under Case I of Schedule D.
The two main questions which have to be decided are : first, what limitations are to be imposed upon those profits. That involves an investigation of certain exemptions which it is claims, have to be applied in considering what are the assessable profits under Case I. Then there is a second main question, which arises in the event of the first question being decided against the Revenue, and that is, what deductions are permissible under the rules in order to ascertain the balance of profits and gains under Case I
There are comparatively few facts which I need detail. There is a summary or skeleton statement of the financial position of the bank, so far as is material for the purposed of this case - that is to say, a statement of the material receipts and expenses of the London branch. That summary of accounts refers to four sets of receipts on the credit side. The first is interest on 5 percent. War Loan amounting to Pounds 75,621; the second is interest on India 3 per cent. Stock, which amounts to Pounds 1,500; then there are two other items which go together - one is interest on Grand Trunk Pacific Railway Bonds, which is Pounds 412, and the other is interest on Auckland Electric Power Board Bonds, Pounds 1,203. These four figures are the items about which the dispute centers. On the other side there are set out working expenses and various other expenses, and a particular matter to which I must refer here is an item 'Interest and expenses paid in New Zealand in respect of money borrowed in New Zealand, and used at the London branch'; that total figure is Pounds 112,868; but we are only concerned here withe a proportionate amount of that figure, namely, Pounds 41,262, which is said at this stage in the case to be in respect of money borrowed in New Zealand and used in the purchase of the above-mentioned assets of the London branch, namely, the securities mentioned in the four items of receipts, the four sets of receipts, to which I have already referred. The main charge here is for interest. The money used for the purchase of these various securities in London was part of the floating capital used by the bank in its trading at its London branch, and it is not necessary to consider why. It is a matter of ordinary business. As a matter of accounting between the two sections, between the London branch and the main office, the London was debited with interest charges. They retained these moneys out of amounts collected, and used these balances due to the head office, so far as they retained them, in the ordinary course of their banking business, either for making loans or for purchasing bills or securities in London, the profits derived from that use of the money being included in the accounts of the London branch. One other thing I may mention : the four securities that I have already referred to are different in certain incidence in their character. The War Loan was dealt with by being paid without deduction of tax, and had not been assessed to tax at all so far, The interest on the India Government Stock and on the securities of the two Colonial companies had been taxed by deduction in the ordinary course - that is to say, by the agents who were entrusted by the India Government or the various companies with the payment in this country of the interest on the securities. The tax deducted has been repaid to the bank on the ground that it was not resident in the United Kingdom, but without prejudice to any of the questions raised on the appeal. The general position is this, that if the Crown succeed on their claim that these four sets of securities are all of them liable to taxation under Case I of Schedule D, the interest will amount to Pounds 78,556, and that is the first main question divided into three branches, because different considerations apply to the three classes of point arises whether the Pounds 41,262, which is treated as paid in respect of the money invested in the securities, ought to be excluded in ascertaining the balance of profits and gains under Case I of Schedule D, of whether any part of that should be so excluded.
The special Commissioners and Lawrence, J., have both decided against the Crown and in favour of the taxpayer, the bank. I may say at once that a great many cases have been cited to this court and a great many arguments have been adduces. If I do not refer in detail to all those cases or to all those arguments, it must not be thought that I have failed to do so out of any disrespect or from any disregard of the cases and the arguments which I have considered to the best of my ability. But it seems to me any of these authorities and many of these contentions do not really assist in coming to a conclusion on the matters before the Court and I have, therefore, felt it best to decide the case, as far as I can or the constructions of the relevant sections and on the broad principles which appear to me to be necessary to be applied in construing these sections.
I shall deal first with the matter of the War Loan, because that defends on a quite different set of sections. The position is this : It is not denied by the Crown that the War Loan interest, as interest, is immune from taxation, and, therefore, cannot be taxed as interest either under Schedule C or under Case III of Schedule D. The exemption under the sections to which I shall refer in a moment is admitted, but it is said that the Crown are entitled to disregard the possibility of taxing under the other Schedules, or cases, or to disregard the immunity under the other Schedules, or Cases and to fix their attention on Case I of Schedule D, and the claim that they are entitled, on any view, to tax under that Case. The question which arises more particularly in the two following classes of interest, but which also arises here (or perhaps arises equally in all there), is that the bank is not a resident, but is a trader, and, therefore, an exception which only applies to it as a non-resident, it is said, has no bearing at all upon the claim to immunity in respect of its position as a trader, because as is well known, the essence of liability in questions of this sort is that the taxpayer is carrying on a trade in this country, and it does not matter whether he is resident or not; the essential feature is that he is trading in the country. That is under Schedule D, R. 1 (a) (iii).
It is necessary to consider what is the exemption relied on by the respondent here, and that is to be found as the law now stands in Section 46 (1) of the Income-tax Act, 1918. I ought perhaps to read that section as it is so important in this case. It seems to me to be perfectly clear. It is in these terms : 'Where the treasury have before the commencement of this Act issued or may thereafter issue any securities which they have power to issue for the purposed of raising any money or any loan' -then follow the material words - 'with a condition that the interest thereon shall not be liable to tax of super-tax, so long as it is shown, in manner directed by the Treasury, that the securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom, the interest of securities issued with such a condition shall be exempt accordingly. 'Then in sub-section 2 there is a provision as to the securities forming part of the investments of a foreign insurance company. That provision I do not think throws any real light on the question here. There is, however, another section to which I ought to refer, and that is section 49(2) : 'The Treasury may direct that any Exchequer bonds, issued under their authority during the continuance of the present war and a period of six months thereafter, and any securities issued under the War Loan Acts, 1914 to 1917, or any Act amending those Acts shall be issued, or shall be deemed to have been issued, subject, to the condition that the interest on the bonds and securities shall be paid without deduction of tax, and the interest shall be so paid accordingly; but any such interest shall be chargeable under Case III of Schedule D.' I think it is useful, without going into the history of this particular line of legislation too minutely, to refer to one section in the Finance Act of 1915, namely, section 47, which was reproduced in Section 46 of the Act of 1918, which I have just read, but be it noted that Section 47 of the Finance (No. 2) Act, 1915, has not been repealed, and, therefore, must be read along with Section 46 of the Act of 1918. It is in these words : 'The Treasury may, if they think fit, during the continuance of the present war and a period of twelve months thereafter, issue any securities which they have power to issue for the purpose of raising any money or any loan with a condition that neither the capital nor the interest thereof shall be liable to any taxation, present or future, so long as it shown in manner directed by the Treasury that the securities are in the beneficial ownership of persons who are neither domiciled nor ordinarily resident in the United Kingdom, and securities issued with such a condition shall be exempt accordingly.' That was slightly modified in Section 44 of the Finance Act, 1916, but for immediate purposes it is necessary, I think, only to refer to Section 46 of the Act of 1918 in this connection.
Section 46 is in my opinion a perfectly general exception; the language is unqualified. It says that the securities are not to be liable to tax or super-tax if the Treasury have issued them subject to the condition which is stated. We have been supplied with a copy of the prospectus issued by the Treasury dated 1917 as an illustration of what course is to be taken in the cases, and this is what it says : 'Stock and bonds of these loans and the dividends payable from time in respect thereof, will be exempt from all British Taxation, present or future, if it is shown in the manner directed by the Treasury that they are in the beneficial ownership of a person who is neither domiciled nor ordinarily resident in the United Kingdom of Great Britain and Ireland. Further, the dividends payable from time to time in respect of stock and bonds of these loans will be exempt from British Income-tax, present or future, if it is shown in the manner directed by the Treasury that the stock or bonds are in the beneficial ownership of a person who is not ordinarily resident in the United Kingdom of Great Britain and Ireland, without regard to the question of domicile.' I do not read that as throwing any light on the construction of section 46, but it does seem to me to state correctly what Section 46 means, and to give effect to its terms. If not withstanding what I regard as the clear language of this section, it was construed as merely relating to interest as interest, which is the expression used in the argument by the counsel for the appellant as defining its meaning, with the consequence that the owner of the securities - in this case the bank - can only escape taxation if the tax is sought to be imposed upon him under Case III of Schedule D and that he is liable to be taxed under the precisions of Case I of Schedule D, then it seems to me that a result is being reached which is quite contrary to the apparent meaning of the particular legislation and which, to my mind, involves the very serious frustration of what I imagine the parties, taking the securities from time to time, might be assumed to have contemplate. The section was put in 1935, when it was undoubtedly desired to attract subscriptions to loans which were being put forward, as we well remember in those critical years of the War. It seems to me that it would be rather deplorable if, notwithstanding what I regard as the clear language of Section 46, the owner, not being ordinarily resident in the United Kingdom, were still taxed on this War Loan as part of his trading profits, and in my view that is not the true construction the section. The words of section 46 are not introduces in respect of any particular Schedule; they are quite general and that they are quite general is made even more apparent when reference is made to Section 47 of the Finance (No. 2.) Act, 1915. I see no ground at all consistent with ordinary principles or construction for cutting down their meaning and treating them as only applicable to Case III of Schedule D, the Case under which by Section 49 War Loan securities were taxable, if they can neither be charged under Case III Schedule D nor under any case of Schedule D at all.
As I say, the matter is purely one of construction, and I do not think there is any authority which throws any direct light on a matter of this sort. A reference has been made to the case of Cadbury Brothers v. Sunclair, where effect was given to an act of Parliament - an old Act of 1960 - which provided in respect of a particular piece of land that that should be immune from every charge under any public tax. The question arose in somewhat curious way. Cadbury Brothers, who were occupying the land in question as lessees for the purposes of their business, were held to be debarred from deducting the annual value of the land. In their capacity as the occupiers of the land, it was claimed that they were entitled to deduct, in estimating their profits and gains, the annual value of the land which they so occupied for the purposes of their trade, and it was held that if they were not allowed to do that they would be, as occupiers, indirectly taxed to pay a sum of money or otherwise charged in respect of the lands, contrary to the Act of Charles II, and its was held that they were entitled so to deduct it. It was argued that as this land was not separately assessed and charged under Schedule a, because exempted from taxation under the Act of Charles II, therefore the annual value could not be deducted under the well-known provisions of Schedule D, Case I, but that contention was rejected as involving a contravention of the act giving the immunity, and, in my opinion, equally there would be a contravention of Section 46, construed, as I construe it, in wide terms and as a general exemption if, notwithstanding section 46, the bank were taxable in respect of their war Loan under Schedule D, Case I, as part of their trading receipts.
In my opinion the effect is that these receipts and interest are taken entirely out of the taxable income of the bank in this country. The ingenious argument of counsel of the appellant started with the proposition that Section 46 only related to interest as such and, further, praying in aid Section 46 only related to interest as such and, further, praying in aid Section 49(2), contended that the interest in question was transferred to Case III of Schedule D; that the effect of Section 46 was merely to debar the Crown from enforcing that charge and that the Crown were therefore free to charge under Case I of scheduled as part of the trading profits, notwithstanding the terms of Section 46, which, he said, were irrelevant in this connection, and he relied very strongly on the well-known proposition that the Crown, in certain cases, may elect under which cases of Schedule D - because that is all he is concerned to argue in this court - they will charge the taxpayer. He relied on Liverpool, London and Globe Insurance Co. v. Bennett. In that case, which is very familiar, an insurance company which carried on business here and abroad had very large investments in foreign states, as the condition of carrying on an insurance business there. They did not bring the interest on those investments home to this country. They received it abroad and did not remit it here. Under the law as it then stood, under the fourth Case of Schedule D of the Act of 1842, the duty to be charged was only to be computed on the full amount of the sums which had been or would be received in Great Britain in the current year without any deduction or abatement. What the Crown did was to ignore the question of charging under Case IV, because if they had gone to that particular cupboard they would have found that the cupboard was bare; but they decided to charge under Case I, and all the three Courts who tried the case decided that they were entitled to do so. It is sometimes put on the footing that where you have, as you have in Schedule D, a number of cases, and those Cases overlap, as they do in certain events and in certain matters, and it is more beneficial to the crown to proceed under one Case rather than under the other, the Crown can choose under which Case they will proceed. For instance, if they proceed under Case I, they will be able to tax traders who are non-resident but they will be bound to allow against the amount of the interest in a case such as that in question the expenses of the business. The interest is part of the receipts and has to be brought into account and, on the other side, the expenses of the business will have to be brought into account. On the other hand, if they charge under Case IV, tax will not be subject to abatement by reason of expenses; they will recover on the basis of the actual interest recovered. In that particular case there was the wider and more convincing reason that there was no taxable subject under Case IV but that, in my opinion, throws no light upon a case like the present. There was no exemption or exclusion in question in that case. It was simply a question of the content of the subject-matter of charge under Case IV. In the case now in question, according to my construction of section 46 there is a definite exclusion from all taxation and there can be no question at all of taxing either under Cases III of Scheduled or under Case I. Whichever cupboard the Crown goes to in the circumstances of this case they will find it entirely bare for purposes of taxation so far as this War Loan is concerned. I agree, therefore, on this issue with the decision of the Commissioners and the Court below.
The next part of the case involves rather different considerations, but again it raises the same question namely, whether the bank is exempted from taxation by the provisions of the Act in such a way that it cannot be taxed under any specific Schedule - in this case schedule C - because the bank is a non-resident and, as in the previous case, whether the crown, notwithstanding such exemption as there is, are still entitled to charge under Case I of Schedule D on the footing that the interest in question constitutes profits of a non-resident trader. The position here depends on the General rules of Schedule C. The interest of the India stock in question constitutes profits payable out of the public revenue. There are certain rules applicable to Schedule C which define the content and nature of the charge.
The first body of rules is called General Rules. I need not refer to No. 1, but No. 2 is a rule relied on as embodying the exemption. It say : 'No tax shall be chargeable in respect of 'certain items, and the first is (a) : The stock, dividends or interest transferred to accounts in the books of the Bank of England in the name of the treasury or the National Debt Commissioners in pursuance of any Act of Parliament, but the Bank of England shall transmit to the special commissioners an account of the total amount thereof'; and then (b) : 'The stock, dividends or interest belonging to the Crown in whatever name they may stand in the books of the Bank of England' : and then (c) : 'The stock, dividends or interest of any accredited minister of any foreign State resident in the United Kingdom.' The content of (a) has not been very precisely defined by either side, but is perfectly clear that (b) and (c) are dealing with an absolute exemption. Then comes (d), which is material for the purposes of this case : 'No tax shall be chargeable in respect of (d) the interest or dividends on any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the Commissioners of Inland Revenue that the person owning the securities and entitled to the interest or dividends is not resident in the United Kingdom...' Then there are other provisions which I may ignore, but I think rule 3 ought also to be looked at. It is in these terms : 'Any bank carrying on a bona fide banking business in the United Kingdom shall be relieved, by repayment or otherwise, from tax under this Schedule in respect of the interest on any securities with the bank proves to the satisfaction of the special commissioners to represent subscriptions by the bank to any Government loan issued for the purposes of the present war either before or after the passing of this Act, and the bank shall include the amount of any such interest in the computation of its profits or gains for the purpose of assessment under Case I of Schedule D. That rule 3 affords a striking contrast to the rule which I have just read in rule 2. In the first place it is limited to tax under this Schedule and, in the second place, it provides in terms that the amount of such interest is to be included in any assessment under case I of Schedule D.
It is contended on behalf of the bank accordingly that rule 2 (d) is not limited to charges under Schedule C but is general in the exemption which it gives and that, therefore, the same result follows in connection with the India Stock, namely, that the owner can claim an exemption if he is able to show to the satisfaction of the Commissioners of Inland Revenue that he is not resident in the United Kingdom.
There are other rules which I may refer to, under the heading : 'Rules as to interest, etc., with the payment of which persons other than the Bank of England, the Bank of Ireland and the National Debt commissioners and entrusted., 'That will deal with cases under rule 2 (d). There are elaborate provisions dealing with, among other things, the way in which the tax in a case of this sort has to be dealt with. In the first place, the person responsible for collecting the tax is the person entrusted with the payment of the dividends, and he is under an obligation to make returns to the inspectors appointed by the commissioners are to have all necessary powers to examine and check the books and accounts of dividends (rule 2), 'and shall assess and charge the dividends at the rate of tax in force at the time of payment, but reduced by the amount of the exemptions (if any) allowed by them' - that is by the special commissioners' and shall give notice of the amount so assessed and charged to the person entrusted with payment' - that is to say the agent or nominee of the foreign or Colonial Government who is the person responsible to pay the dividends on behalf of the person entitled thereto and pay the tax to the general account of the Commissioner. That in itself is in one sense machinery but it has this effect, that the tax is not directly chargeable upon the owner of the security, but it is chargeable upon the person trusted by the foreign or Colonial government with the duty of paying in England the interest, and though it may be that any one who is exempt from a liability to pay may have that exemption made effective in the returns provided by the person entrusted with the payment, it is not excluded and it seems to be recognized as proper practice that, if that procedure has in fact taken place, the owner may, in appropriate cases, claim a repayment of the tax deducted. That was done in the present case, as it is stated in the Case : 'the interest on the India government Stock and on the securities of the two colonial companies had been taxed by deduction in the ordinary course, but the tax deducted therefrom had been repaid to the bank on the ground that it was not resident in the United Kingdom, but without prejudice to any of the questions raised on the appeal.'
That being the general position, it is contended on behalf of the Crown that though this provision is effective as regards charges under Schedule C, it has not effect at all as regards an alternative claim under Schedule D, Case I, and, while counsel for the appellant has conceded in this Court, on the basis of Fry v. Salisbury House Estates Ltd., that he cannot this case because under the terms of case III, rule 1(c) of Schedule D these are 'profits on securities bearing interest payable out of the public revenue other than such as are charged under Schedule C.' Admitting, as the does, that they are not chargeable under Schedule C, he uses that sub-rule as bringing the matter within the preview of Schedule D and then he says that the Crown have the right of election to Tax under Case I or Case III of Schedule D. I do not, however, follow that his argument is that the exemption would not also apply under Case II, and, if that be so, the curios result would follow that the exemption takes the profits out of Schedule C and transposes them to Case III, of Schedule D, without destroying the exemption which would still apply, although, according to the argument, it is limited to Schedule C, with the only practical result that it gives the crown in that event an opinion to a charge under Schedule D, Case I. But for various reasons I cannot accept that argument, which appears to me to be very artificial and not well-founded.
The real and final argument against the view which counsel for the appellant put forward is, however, to my mind this, that the exemption under Schedule C, rule 2(d), is an unlimited exemption, as unlimited as the exemption which I have already discussed in the case of War Loan. I think that appears from the mere language of Schedule C, rule 2(d), but if there where any doubt about it I think that doubt would be resolved by the consideration that this Act is a Consolidation Act and that Schedule C, rule 2 (d), is, as I think, merely repeating the exception which was given for the first time to securities of the class in Section 71 of the finance (1909-10) Act, 1910. That exception, which is unlimited in language, cannot be taken us appertaining to any particular Schedule, except on the ground, of course, that there should be no charge on these particular securities except under Schedule C; but the section itself, sub-section (2), runs in these terms : 'Income-tax shall not be payable in respect of the interest of dividends of any securities of a foreign State or a British possession which are payable in the United Kingdom, where it is proved to the satisfaction of the commissioners that the person owning the securities and entitled to the interest or dividends is not resident in the United Kingdom.' That seems to me to cover any question of income-tax in respect of the interest or dividends in question. I think that the effect of that is reproduced in the words 'No tax shall be chargeable in respect of : (d) the interest or dividends on any securities of a foreign State of British possession,' and as I regard the exemption in section 71(2) as unlimited, so I construe the exemption in Schedule C, rule 2 (d), of the Act of 1918 as equally unlimited. The effect of the exemption is not changed by the mere fact that for purposes of drafting there is a different arrangement and because rule 2 (d) is placed in the position where it is, and that, I think, sufficiently disposes of the objection and makes it unnecessary to consider any further the somewhat artificial suggestion that the only effect of Schedule C, rule 2(d), is to remove the tax from Schedule C and put it into Schedule 2(d), counsel for the appellant, as I understand, has accepted the position, so far as this court is concerned, that there can be no interchange as between one Schedule and another. He treat that point as decided by this Court in the case of Thompson v. Trust and Loan Co. of Canada, and he accepts, so far as this Court is concerned, the views expressed by Lord Atkin in fry v. Salisbury House Estates Ltd.
I should like to read a short passage from that judgment because it is peculiarly applicable to the whole of the argument of the appellants counsel in this case. Lord Atkin said (99 L.J.K.B., at p. 412;  A.C., at p. 454) : 'The scheme of the Income-tax Acts is and always has been to provide for the taxation of specific properties under Schedules appropriated the them, and under a general Schedule D to provide for the taxation of income not dealt with specifically. 'I observe the words' not dealt with specifically', because these taxes are dealt with specifically in the Act of 1918 under Schedule C and, therefore, Schedule D on that basis cannot apply at all. The noble and learned Lord proceeds : 'Schedule a provides for the taxation of income derived from property inland; B for income derived from the occupation of land; B for income derived from Government securities; E for income derived from employment in the public service. It is unnecessary to go further back than the Income-tax Act of 1842., the provisions of which were incorporated in every Customs and Inland Revenue Finance Act up to 1918, when the present consolidation Act was passed. I need not repeat the familiar Schedules altered and extended by the Act of 1853. It is only necessary to refer to section 100 of the Act of 1842, which defined the tax to be imposed under Schedule D' and further on Lord Atkin quotes from Schedule D : 'The said last mentioned duties shall extend to every description of property or profits which shall not be contained in either of the said Schedules (A), (B) or (C), and to every E. My Lords, nothing could be clearer to indicate that the schedules are mutually exclusive; that the specific income must be assessed under the specific Schedule; and that D is a residual Schedule so drawn that its various cases may carry out the object so far as possible sweeping in profits not otherwise taxed. For this reason no doubt the actual Schedule was drawn in the widest terms'. Then Lord Atkin proceeds, after quoting the words, 'Such language covers income from land in Schedule A and from Government securities in Schedule C. Its true meaning is made apparent by Sec. 100. Moreover, the dominance of each Schedule A, B, C and E over its own subject-matter is confirmed by reference to the sections and rules which respectively regulate them in the Act 1842. They afford a complete code for each class of income dealing with allowances and exemptions, with the mode of assessment and with the officials whose duty is its to make the assessments. Thus under A and B the assessment and collection is regulated by the general Commissioners; under C the assessment is by commissioners specially appointed for the purpose; under E the assessment and collection are made in the departments or by the Officers of the public corporations concerned; while under D the assessment is regulated by additional commissioners. I find it impossible to conceive that these various Commissioner had an option to encroach upon the duties of one another, or that the taxpayer was exposed to having his income freed from the restrictions and exemptions imposed by statute under one Schedule in order to be subject to a different set of restrictions and exemptions imposed by statute under another Schedule. 'Later on, Lord Atkin said (99 L. J. K. B., at p. 413,  A.C., at p. 456) : 'I am of opinion that income derived by a trading company from investments of its and, whether temporary or permanent, in Government securities must be taxed under Schedule C, and cannot for the purposes of assessment under Schedule D be brought into account'. I will not read any more of that passage, which, I venture to thins, is of great importance in considering the various arguments advanced in this case. It is, I think, quite wrong to say that Schedule C, rule 2(d), is merely dealing with the machinery of collection : not only does it contain an exemption, but, by its terms, it gives a right or repayment if necessary to a person who is not resident in the United Kingdom, and the various rules as to interest, and so forth, which are set out in the second and third sets of rules and Schedule C are rules which, as Lord Atkin points out, deal with substantive matter, namely, the imposition of the charge and responsibility for paying the charge upon the person entrusted and various ancillary rights and responsibilities which flow from that position.
On this point as a whole my conclusion is that the words of Schedule C, rule 2(d), are sufficient to embody a complete and general exemption in respect of all taxation under the Act of 1918. I am, of course, in this judgment not dealing with super-tax at all, but with matter arising on what used to called 'ordinary income-tax'.
I pass now to head - namely, the question of the securities of the two Colonial companies. That arises a different question, because in order to deal with that case it is necessary to arrive at conclusion as to the meaning of rule 7(1) of the Miscellaneous Rules applicable to Schedule D. If that construction of that rule is held to be of a particular nature, its effect will simply be to throw the income of these particular securities into the same class and into subjection to the same rules as I have held should be applied in regard to foreign and Dominion securities. Whether or not that is so is a matter not without difficulty, but I have come to the conclusion, in agreement with the Commissioners and the learned Judge, that rule 7(1) has that effect, and that, therefore, the same conclusion applies to these securities as that which applies to those which I have last been discussing.
There are, however, various matters to be considered in order to justify that conclusion. Rule 7(1) appears, as I have indicated, in the body of Miscellaneous rules, but I do not think that the position in which, for reasons of draftsmanship or for convenience, a provision appears in an Income-tax Act can in any way be treated as decisive of the scope and effect of the provision. I should like to refer to a passage from Lord summers judgment in Kirkes trustees v. Inland revenue Commissioners. Lord summer was there dealing with the question as to the right of repayment of excess profits duty, and the language which had to be construed was this : 'Where any person has paid excess profits duty, the amount so paid shall be allowed as a deduction in computing the profits or gains of the year which included the end of the accounting a period in respect of which the excess profits duty has been paid; but where any person has received repayment of any amount previously paid by him by way of excess profits duty, the amount repaid shall be treated as profit for the year in which the repayment is received.' That was found in rule 4(1) of the Rules applicable to cases I and II of Schedule D of the Income-tax Act, 1918. Lord Summer dealing with it says this  (S.C. (H.L.) at p. 64; 11 Tax Cas., at p. 332 : 'The express mandatory terms of the sentence show, in carefully chosen language, that he' (that is, the person who enjoys this advantage) 'is to submit to something by reason of his having previously enjoyed this advantage in the shape of repayment of an amount previously paid by way of excess profits duty. Something which is not a profit, but is only a money repayment; something which may not result in a profit, because although trading goes on there is so great a loss on the year that this repayment does not make up the deficit; something which may not be a trading profit because trading has ceased altogether, nevertheless is to be treated as profit and as profit for the year.' Then Lord Summer a little later proceeds : 'I think, therefore, that the word treated is an apt word to impose a charge. 'Then later Lord Summer says : 'The only difficult point in the case, I think, is the effect of transferring the section, which was contained in one of the paragraphs headed Income-tax in the finance (No. 2) Act, 1915, into the consolidating Income-tax Act 1918. The section there becomes one of the rules applicable to Schedule D; and it has been argued, not without force that the true charge in the Income-tax Act is to be found in the first clause and that the rules are only modes of applying the charge previously expressed. The conclusion is drawn that this paragraph being only a rule, does not operate to prevent the principle of construction of that charge laid down in Brown v. National Provident Institution from applying and accordingly there payment is taken out of any charging words. If, however, it is right to hold that treated as profit involves chargeability as profit, then the mere fact that these words are words of charge additional to the charge at the commencement of the Schedule does not prevent them from being effectual as a charge or render that part of their full meaning surplusage. All that has happened is that there are two statements as to chargeability, and the words treated as profit for the year still contain a specific charge. 'I rely on that statement involving this, that the court must consider the exact language and effect of a provision such as that now in question in rule 7(1). Though the fact that the provision merely appears in one of the rules and not in part of the Act which is ostensibly and specifically of a charging character is something which ought to be borne in mind, and even, to some extent, raises the presumption that no charge is intended, yet if the effect of the true construction that no charge is intended, yet if the effect on the true must be construed accordingly. Now, I think that rule 7 (1) cannot be construed in any other way than as imposing a charge with limitations and qualifications.
The income of the securities in question here is dealt with in the same way as the income of the securities which come within schedule C. The person - a bank., or other financial agent - is entrusted by the foreign or Colonial Company with the sums out of which he has to pay the interest on the various bonds, and it is natural and proper that such an agent should be accountable to the Revenue, just as in the case of foreign and Colonial Government securities, and that the same system of dealing with the income should be given effect to. It is said that that is merely machinery, but I do not agree. There is involved first the responsibility of the agent, then his relief from responsibility if he pays over the amount of the income-tax to the Revenue authorities, and, finally the right of either an allowance or repayment in favour of any owner who is under the Act exempt from liability. All these matters go far beyond cases of mere machinery, and I think that the general effect and intention of rule 7(1) is to put these securities, for the purposes material to be considered in this case - that is to say, a method of payment and, where necessary, an allowance of repayment and exemption - on the same footing as the securities, foreign or Colonial Government securities, which I have considered as coming under Schedule c. Rule 7(1) begins by a positive and mandatory provision; I need not read it in detail, but it deals with this type of securities and so forth, and says that where any interest arising out of such securities is' entrusted to any person in the United Kingdom for payment to any persons in the United Kingdom' - that is the exact position so afar under Schedule C in the matters - 'the same shall be assessed and charged to tax under this Schedule' - that is under D - 'by the special commissioners.' That finds the assessing authority, and it provides that the person to be assessed and charged to tax is the person entrusted, and that therefore imposes the charge on such a person. It is impossible to say that this is mere machinery. Then it proceeds in clause 2 : 'All the provisions of Schedule C relating to the tax to be assessed and charged in respect of dividends payable out of any public revenue other than that of the United Kingdom, and entrusted to any person (other than the National Debt commissioners or the Bank of england or the Bank of Ireland) to the tax to be assessed and charged under this rule. 'Now, it is to be noticed at once that the extension is without qualification - 'All the provisions so Schedule C relating to the tax to be assessed and charged in respect of dividends', and so forth. The argument which has been put forward is that the rules which are so extended are to be read in limited sense. If you go back to Schedule C, there are first general rules applicable to C, and then there are 'rules as to interest, etc., payable out of public revenue to or though the Bank of England or the Bank of Irelands, or by the National Commissioners.' These obviously cannot apply to the securities dealt with in rule 7(1) of the Miscellaneous rules to which I am referring, and they are expressly excepted in rule 7(2). Then there are a number of 'Rules as to interest, etc., with the payment of which persons other than the Bank of England, the Bank of Ireland and the National debt Commissioners are intrusted. 'These rules are applicable to the income from the securities that I am now dealing with, and they set out the various provisions as to the person being entrusted with the payment, and so forth - provisions of a character to which I have already referred. No doubt all these things are brought in under rule 7, but there is nothing in rule 7(2) which limits the scope and the extension. 'All the provisions of Schedule C relating to the tax to be assessed and charged' are to be extended, and I cannot see any reason at all why these general words should not include the general rules mutatis mutandis. For instance, General Rule 1(a) is : 'Tax under this Schedule (a) shall extend to all profits arising from interest, public annuities, dividends and shares of annuities payable in the United Kingdom 'and so forth; that is obviously inapplicable. But rule 1(b) is : 'Tax under this Schedule (b) shall be charged by the Commissioners designated for that purpose by this Act' : and (c) : 'shall be paid by the persons and bodies of persons respectively intrusted with payment, on half of the persons entitled thereto.' These are clearly applicable, though, to some extent, they are repeated, as indeed they must be repeated, in rule 7(1). Then we come to rule 2, which I have already read, which contains certain exemptions - in particular, exemption rule 2(d) - and I cannot find anywhere any intention to exclude that General Rule 2 of Schedule C from the category of the provisions of C relating to the tax to be assessed and charged, all of which are to extended to the securities now in question; I think that is the only fair construction of this rule, giving all weight to the circumstance that it appears where it does. That is not a consideration which out weights the view I have formed as to the general effect of the rule.
It is, however, further contended that this is a different case from that last considered of the interest on dividends on foreign and Dominion securities, because the latter were subject to the special exemption under sec. 71(2) of the Finance (1909-10) Act, 1910, and, therefore, it is easier and simpler in a consolidation Act like the present to construe the exemption in the Act of 1918 as having the same effect and scope as the exemption given by the Act of 1910. There is certainly some force in that argument. Prima facie as I have already said, a consolidation Act merely consolidates, and, generally speaking, ought to be construed according to it own language, and if its language can only be construed in one way, then it must be construed as changing the law. There is every reason why all the provisions of Schedule C should apply to the very analogous case of this foreign interest intrusted to a person in the United Kingdom. The position is identical for practical purposes with that in respect of the interest on foreign Government securities. Although I think it is true to say that Sec. 71(2) of the finance (1909-10) Act, 1910, does not deal with these securities at all, still that may have been a casus omissus which the draftsman in framing the Consolidation Act might will have made good when the law was consolidated, as it was, in 1918. However, that may be, I think that this rule ought to be construed as counsel for the respondent bank has contended, though I do not accept his argument that under the various provisions of the Act of 1853, and so on, it is possible to treat Sec. 71 of the Act of 1910 as extending to the particular securities of this character.
There is, however, one further point which is of significance, and which, in my opinion, confirms the view at which I have arrived on the construction of the Act of 1918 and of Rule 7. In the finance Act of 1924, Sec. 27, there is an important provision giving a right of appeal in certain cases from the decision of the Commissioners of Inland Revenue to the Special commissioner, where the taxpayer is aggrieved by the decision of the Commissioners, of Inland Revenue on any question of domicile or residence affecting him. In sub-section 3 you have this provision : 'This section applies to the following questions :- (a) any question as to ordinary residence arising under sub-section (1) of Section forty-six of the Income-tax Act, 1918.' That, it will be remembered, deals with the question which has already been discussed in this case : the language used in the Act is 'ordinary residence.' Then : (b) any question as to domicile or ordinary residence arising under paragraph (a) of Rule 2 of the rules applicable to Case IV of Schedule D, or under paragraph (a) of Rule 3 of the Rules applicable to Case of Schedule D.' These again are exemptions in which the expression is 'domicile' or 'ordinary residence.' Then : '(c) any question as to residence arising (i) under paragraph (d) of Rule 2 of the General Rules applicable to Schedule C; or' (and this is the material passage) '(ii) under Rule 7 of the Miscellaneous Rules applicable to Schedule D in connection with a claim for repayment of income-tax made to the Commissioners of Inland revenue by the person owning the stocks, funds, shares or securities and entitled to the income arising therefrom, or entitled to the annuities, pensions or other annual sums, as the case may be, and from whose income a deduction has been made on account of the income-tax assessed and charged under the said Rule.' that provision (c) (ii) treats rule 7 as containing a provision in the terms set out. Now these terms which are set out are the exact terms to be found in General Rule 2(d) of Schedule C, and they can only be found in Rule 7 of the Miscellaneous Rules under Schedule D if rule 7 has incorporated in virtue of the provisions of sub-section 2 the terms of general Rule 2(d) of Schedule C to which I have arrived at merely on the construction of the rule itself in the Act of 1918. That provision is not merely a statutory confirmation or recognition, as it were, of what the construction of rule 7 was thought or intended to be, because under Part III of the Act is among other things, provided that 'Part II of this Act' (that is the Part in which the section to which I have been referring occurs)' Shall be construed together with the Income-tax Acts.,' and therefore you cannot construe rule 7 without reading into it the provisions of this section of the Act of 1924 to which I have already referred. There is one other section in the Finance Act, 1926 which points to the same conclusion, and it is section 5 of Part II of the section Schedule, which says (sub-section 1) : 'Any person who is intrusted with the payment of any interest, dividends or other annual payments which are payable to any persons in Great Britain or Northern Ireland out of the public revenue of the Irish free State or out of or in respect of the stocks, funds, shares or securities of any Irish free State company, society, adventure or concern shall be relieved from the obligation imposed on him by general Rule 1 of Schedule C and Miscellaneous rule 7 of Schedule D to pay tax thereon on behalf of the persons entitled thereto as regards any such interest, dividends or other annual payments in respect of which he furnishes' a list. Then it is further provided in sub-section (3) : 'Any interest, dividends or other annual payments in respect of which the person intrusted with payments is by virtue sub-paragraph (1) of this paragraph relieved from the obligation to pay tax shall be assessable and chargeable under Case IV or Case of Schedule D as the case may be'; that is to say, these securities and the interest on them are expressly taken out of rule 7, just as they are taken out of General Rule 1 of Schedule C, and they are relegated to the position of being the subject of direct taxation instead of subject to deduction by the person intrusted with the payment in England, and against general Rule 1 of schedule C and Miscellaneous Rule 7 of Schedule D are put on the same footing as, having regard to their indentity of character, they should be.
The conclusion at which I arrive, therefore, is that rule 7 incorporates among other things the provisions of General Rule 2 (d) of Schedule C, and that the same consequences follow from that as follow in the case of the second class of securities with which I have been dealing - that is, the securities of foreign or Colonial Governments. I agree, therefore, on that point with the decision of the commissioners and of the learned Judge.
So much, therefore, for the three specific items which fall under the first main head of discussion in the case. In all these cases, it having been decided that the contention of the Crown was wrong, and that the interest was exempt from taxation under the Act of 1918, whether under Schedule C or Schedule D, there remains what counsel for the appellant described very aptly as the second main head, and that is, what is the amount of deduction for expenses which can be allowed in respect of the general trading profits of the bank as its London branch That turns upon the provisions of Schedule D and certain rules. I am, of course, dealing with Case I of Schedule D. Case I of Schedule D is defined in the rules applicable to Case I in these terms : 'The tax shall extend to every trade carried on in the United Kingdom or elsewhere, and shall be computed on the full amount of the balance of the profits or gains upon a fair and just average'; and then in the rules applicable to Cases I and II you have this rule 3 : 'In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purpose of trade, profession, employment or vocation.' That is put in negative form but is generally, and I think correctly, treated as being capable of being converted into a position enactment, with the result that it provides that' money wholly and exclusively laid out or expended for the purposes of the trade' may be deducted. So far as I know, these are the only two provisions in the Act which are relevant for the discussion of the novel point which has now been raised. The point is this : the effect of the decision that the interest on the securities in question here should be exempted and excluded is that the assessable profits are reduced by that exemption to the extent of Pounds 78,556. The case finds that the expenses which can be attributed to the earnings of those profits -that is to the 5 per cent. War Loan and the India Stock and the two Colonial companies securities - are Pounds 41,252. It is contended on behalf of the Crown that, if the banks get the benefit of that exemption, they should be deprived of the advantage of deducting this sum Pounds 41,262 being the expenses attributable to the earning of the income which has been held to be immune from taxation. In other wards, it is said if the corpus - that is to say, the income - is to be excluded, the accessory - that is to say, the expense of earning it - ought to be excluded. The exclusion on the one aside ought to be balanced by an exclusion of the other, otherwise the taxpayer is getting double advantage : he is getting his exemption in respect of the interest and he is also having the additional benefit of deducting the expenses of earning that interest, just as if that interest had been included as taxable. I confess that there seems to be great force in that argument, and if I had been able to find a warrant of giving effect to it in the language of the Act, I should certainly have done so, because it seems to me to be both a reasonable and a proper conclusion. The point, as I say, is novel. A number of cases have been cited by counsel for the appellant, but I cannot find that they throw any light on this particular question. They are either cases in which it was held that the expenses which were in dispute were not expenses of the trade at all, or to put it in another form, that they were expenses which appertained not to the trade but to the position of the taxpayer in some other capacity of property owner or landowner, or again as in the Salisbury House Case, to which I have already referred, where it was held that the taxpayer was carrying on two separate and distinct traders, and, therefore, the various exemptions or rules which applied to the one did not apply to the other.
Of the cases in question that have been referred to, there is Dow v. Merchiston Castle School, Ltd., Union Cold Storage Co. v. Jones, Strong & Co. of Ramsey, Ltd. v. Woodifield, and Inland Revenue Commissioners v. Scottish Central Electric Power Co. In none of these cases do I find any help for the problem now put before the court. The expenses which are dealt with here by the Commissioners are interest on the money borrowed and used to purchase these particular securities, and it would be a suitable conclusion if that could be deducted. There are also, however, expenses in respect of the London overhead charges, which, as I gathered from the case, are also included in this figure of Pounds 41,000. The case for the Crown can, I think, be put most forcibly in this way, that this particular sum of Pounds 78,000 odd is to be taken out of the trade altogether, and treated as if it had never been there at all. It can be put out of the computation and along with it the cost or earning it should also be excluded, and in that way the trade from both points of view would be considered as if there never had been any such profits at all. But I cannot find in the Act anywhere any provision which would justify any such elimination of a part of the expenses, where, as here, there is only one indivisible trade. It is quite different, as I say, from the cases to which I have referred which counsel of the appellant has cited. There is only one trade and we know exactly what are the expenses of that trade, and rule 3(a) of the Rules applicable to Cases I and II so Schedule D provide that the expenses of the trade, if the 'money is wholly and exclusively laid out for the purposes of the trade' are to be deducted. The result seems to be that the Legislature in the Income-tax Acts has expressly provided for certain exemptions and exclusions which will operate when the profits of the trade are being dealt with under Case I of Schedule D, and has, either inadvertently or by design, omitted to made any corresponding provision in respect of any allocation or apportionment of the expenses of the trade. In other words, when, for the purpose of taxation under Schedule D, Case I, you come to compute the profits, you have to exclude altogether his Pounds 78,000 because there is, according to the view which the Court here takes, express exclusion of these profits, and that reduces one side of the computation, but when you come to the other task of ascertaining the expenses 'wholly and exclusively laid out for the purposes of the trade,' you are faced with the total sum, and there is no provision for any apportionment. It may well be that that has followed from the circumstances that these exemptions were introduced at a comparatively late date, and the effect of them was not considered in connection with rule 3. I do not know that may be, but the short result is that I find no means, consistent with the language of the Act, of giving effect to this contention of the Crown. I think that some such provision ought reasonably to gave been included in the Act, but I simply cannot find it. I have got gone though the various complications which may arise in regard to assessing the profits under Case I of Schedule D. I am quite content here to limit myself to the particular problem with which the Court is faced and to state the conclusion at which I have arrived.
The result on the whole case is that, in my judgment the appeal fails and ought to the dismissed with costs.
ROMER, L.J. - The Master of the Rolls has dealt so fully with the facts and the law of this case that I have very little to add. In the few observations I shall make, I propose to deal with the four questions arising upon the appeal in the order in which they have already been dealt with by the Master of the Rolls.
In making my observations on the first of those questions, I would like to begin by reference to the case of Liverpool, London and Globe Insurance Co. v. Bennett, because, that authority in my opinion has very direct bearing upon the first question. In that case the Court was confronted with the application made by an insurance company resident and trading here amongst whose assets were included certain foreign securities such as are dealt with by Case IV of Schedule D of the Income-tax Act. The Company, however, had not received in the year of assessment any interest from those securities; the interest had been allowed to accumulate as they then stood, the Company was not liable to direct assessment in respect of any of that interest. In those circumstances the company sought to have excluded from a statement of its profits and gains in its business the interest on those securities which had accrued to it abroad but had not been sent into this country, and they sought to have it excluded on the ground that inasmuch as they were not liable to be charged under that case, Case IV, in respect of that interest, so, too, they were not liable to be charged in respect of that interest under Case I.
Now, it the argument of counsel for the appellant on the first point is to be accepted, one would have thought that the Court would have disposed of the application of the insurance company in a very short way. They would have said : 'Case IV of Schedule D is dealing with interest. Case I of Schedule D is dealing with profits and gains of a trade - trading receipts; what have we got to do with interest ?' That is not the view they took. They dissected the trading receipts; the discovered that among the trading receipts were those items of interest and they pointed out that those items of interest were dealt with by the two cases, both by Case I and by Case IV, and that the Crown had an option to share that interest either under Case IV, as it could, or under I.
Now, it is perfectly plain, I think, from that case that if the rules of Case IV had in terms excluded all such interest from all taxation, that interest would equally have been excluded from taxation as a trading receipt under Case I. It would not have been possible for the Crown to say : 'It is true it is excluded under Case IV, but we claim that we have the right to tax it as a trading receipt under Case I.' But the interest was not exempted from taxation by any of the rules of Case IV : It merely did not fall to be charged under Case IV because it did not happen to have been received in this country.
Now, applying that decision to the present one, Section 46 of the Act of 1918 says that the interest on war Loan shall not be taxed - as read the section - under any Schedule, an din my opinion it is impossible for the Crown to say : 'It is indeed exempted from taxation but only from taxation as interest and we can charge it as a trading receipt under Case I.' I think they are precluded from raising that point by the very decision in the Liverpool, London and Globe Case. But apart altogether from authority it appears to me that the words so Section 46 are quite plain and that interest on the war Loan is for all purposes of income-tax exempt - in the case, of course, of the non-resident. So much for the first point.
The second point arises under Schedule C, rule 2(d), in relation to interest on some India Stock and without any question at all that interest is dealt with in rule 2 of the Rules applicable to Schedule C. It is within this description : 'Interest on dividends on any securities of a foreign State or a British Possession which are payable in the United Kingdom, where it is proved... that the person owning the securities and entitled to the interest or dividends is not resident in the United Kingdom.' Now it is said on behalf of the Crown that the rule must be read as though it said : 'No tax under this Schedule be chargeable.' The rule in terms says that no tax shall be chargeable in respect of amongst other things, the interest amongst other things, the interest described in sub-rule (d). In my opinion there is no justification for so qualifying the word 'tax'. In rule 1 we find this : 'Tax under this Schedule.' In rule 3 we find the expression' tax under this Schedule'. Rule 2, in contradiction to those two rules, says : 'No tax shall be chargeable'. I should have been surprised to find that in clause 2 this particular kind of interest was only excluded from taxation under Schedule C because, as has been pointed out by the Master of the Rolls, before the Act of 1918 such interest was excluded from taxation under any and every Schedule by reason to the provisions of Sec. 71, of the Finance (1909-10) Act, 1910, and, to say the least of it, it is extremely unlikely that when passing the consolidated statute of 1918 and introducing, as it has been introduced by a rule of Schedule C, the provisions of Sec. 71, the Legislature intend those provisions to have a more restricted operation than they had before.
I now pass to the third question which, I agree, is rather more difficult. That question relates to interest on certain securities in a Canadian company and a New Zeland company respectively. That interest, again, is undoubtedly dealt with by rule 7 of the Miscellaneous Rules applicable to Schedule D. That rule provides as follows : (1) 'Whether any interest, dividends, or other annual payments payable out of or in respect of the stocks, funds, shares or concern. . . are entrusted to any person in the United Kingdom', and so on : 'the same shall be assessed and charged to tax under this Schedule by the Special Commissioners'. Then follows paragraph 2 : 'All the provisions of Schedule C relating to the tax to be assessed and charged in respect of dividends payable out of any public revenue other than that of the United Kingdom, and entrusted to any person' I leave out immaterial words - 'for payment to any persons in the United Kingdom shall extend to the tax to be assessed and charged under this rule.' It will be observed that the sub-section does not say : 'All the provisions so Schedule C relating to the assessment and charging of the tax' but that all the provisions of Schedule C relating to the tax are to apply.
I turn back once more to rule 2 of Schedule C - rule 2(d), I have already expressed my opinion that that rule provides for complete exemption from taxation of the interest to which it refers. That being so, inasmuch as it is a rule relating to tax under Schedule C, it is one of the provisions which apply to the tax that is to be assessed and charged under rule 7 of the Miscellaneous Rules applicable to Schedule B.
It is said by counsel for the appellant that before the Act of 1918 came into operation such interest was not exempt in such a case at all because Sec. 71 of the Finance (1909-10) Act, 1910 for some reason or other, did not extend to interest from securities of Colonial companies. That is true. But why interest from Colonial companies should be placed in this respect on a different footing from interest from securities of foreign States I do not know, and I cannot help thinking that the omission of such interest from Sec. 71 of the Finance (1909-10) Act, 1910, was an oversight, and as an oversight that was pout right and was intended to be put right by the Act of 1918. I have no more to say about that question.
I now come to the fourth question, which is, I think, the most difficult of them all. Two alternative views may be taken on that question, views which I think I can best explain by an illustration. Suppose that a company - a non-resident company trading here - has in a particular year trading receipts amounting to Pounds 3,000, consisting of Pounds 1,000 from War Loan and Pounds 2,000 from other sources, and supposing that its trading expenses, properly chargeable under Schedule B, Case I, amount in the year to Pounds 600 the balance of profits and gains is Pounds 2,400. On that sum the Crown would be entitled to levy tax, but it will be observed that of that Pounds 2,400, Pounds 1,600 may be said to come from sources of revenue other than the interest of War Loan and Pounds 800 from interest of War Loan, and when the Crown seeks to lay its hand on the Pounds 800 for the purpose of taxing it, the tax-payer may say : 'No. Sec. 46 forbids that; therefore you can only tax me on Pounds 1,600.' In other words, the result of Sec. 46 would be to remove from the companys profit and loss account not the whole Pounds 1,000 interest on War Loan, but the Pounds 1,000 less its proper proportion of the trading expenses of the company. That is lone way of looking at it. The other way of looking at it involves the application of Sec. 46 at an earlier stage. The application takes place in this way and at this time. When the company is drawing up its profits and loss account, or somebody is drawing it up on its behalf, the moment that amongst the trading receipts is put down this Pounds 1,000 the company says : 'No, that must removed from the account altogether having regard to Sec. 46 because by reason of Sec. 46 we are, for income-tax purpose, to be treated as being in exactly the same position as though the War Loan, which we have, produced no income at all.' The result of that would be, of course, in the illustration I have given, that a company would be taxed under Case I merely on Pounds 1,400.
Now, I confess that the first of those two possesses for me a certain attraction. On the other hand, the Master of the rolls - and greene, L.J., I under stand, agrees with him - has taken the view that the second of those alternatives is to be preferred. I am not so enamoured of the first alternative as to differ from them.
In the circumstances I agree with the Master of the Rolls that this appeal fails on fall four points.
GREENE, L.J. - I agree. It is to disparagement to the ingenuity with which the argument for the Crown has been presented to say that to my mind at any rate it is on all four points completely unconvincing.
I will say a few words of my own with regard to each of the four points which have arisen.
With regard to the first point, the question arises in this way : Section 46 of the Income-tax Act, 1918 provides that the interest of certain securities shall be exempt from tax and super-tax. The securities in question area securities which have been issued with a particular condition annexed to them, that condition being 'that the interest thereon shall not be liable to tax or super-tax, so long as it is shown, in manner directed by the Treasury, that the securities be in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom'. Now, speaking for myself, I find in that language a perfectly clear legislative provision that, so long as the securities are in the beneficial ownership indicated in the section, no tax is to be levied in respect of the interest upon them. To say, as has been said on behalf of the Crown, that the true effect of the section is merely that the interest is not to be taxed as interest but can be taxed as part of an aggregate of profits of trade, appears to me to override the perfectly plain language of the section. It is a matter of some satisfaction that construction which I consider should be placed upon the section will enable the perfectly clear undertaking given in the prospectus when this War Loan was issued to the public to the public to be kept both in the spirit and in the letter.
The second point arises Schedule C, rule 2. The subject-matter with which it is concerned is interest on securities of a British possession, an rule 2 of Schedule C provides that no tax shall be chargeable in respect of that interest in the case of non-residents.
Now it is to be observed that this particular interest has its proper home in Schedule C. Schedule C is the Schedule to which, in the first instance, it is quite plainly appropriate, and it is by that Schedule that this class of interest is in fact taxed. Now, when I find that the Schedule to which a class of income is appropriate and in which it is dealt with says, in terms, that no tax shall be chargeable in respect of that income in certain circumstances, I myself find it quite impossible to read those words as meaning simply 'no tax shall be chargeable under this Schedule'. The fact that the income is by its nature income to which that Schedule is applicable in the first instance makes it impossible to my mind to read the words 'no tax shall be chargeable' with any such qualification upon them. when the Legislature wishes to show that an exemption in a Schedule is to be limited to the tax chargeable under that Schedule, it does so in plain terms, as indeed it has done in rule 3 of Schedule C. In my opinion the second point also fails.
The third point arises in this way. By rule 7 of the Miscellaneous Rules to Schedule D : 'All the provisions of Schedule C relating to the tax to be assessed and charged in respect of dividends payable out of any public revenue other than that of the United Kingdom' are to apply to what, for convenience, I will shortly call the dividends of foreign companies. I agree that is sufficient to conclude this matter to observe that the language of paragraph 2 of rule 7 is, as my brother Romer has pointed out, to this effect, that all the provisions of Schedule C relating to the tax to be assessed and charged are to apply, and when I turn back to Schedule C and see what are the provisions relating to the tax to be assessed and charged, one of them is unquestionably rule 2. In addition to the matter of exemption which is provided for there, it is worth calling attention to this circumstances, that one of the provisions of that rule in schedule C in relation to the tax is that which provides for the manner in which the exemption is to be given effect to, namely, by allowance or repayment on a claim being made to the Commissioners of Inland Revenue. For my part it appears to me that the language of rule 2, taken by itself, is quite sufficient to decide the question, but if the matter examined a little further this conclusion is, I think, confirmed.
Counsel for the appellant contended that the only effect of paragraph 2 of rule 7 was to import a particular set of provisions relating to assessments which are headed in Schedule C, 'Rules as to Interest, etc., with the payment of which persons other than the Bank of England, the Bank of Ireland and the National Debt Commissioners are instructed.' He then went on to say that under the second of those rules the Special Commissioners, when they are busying themselves with the assessment of the paying agents, can and indeed, if they have sufficient information, should exempt from the charge any dividends payable to what, for convenience, I call a non-resident and should do that not by virtue of any express exemption collected from Schedule C but because by Schedule D itself the tax is limited to non-residents.
I have not myself heard it explained with regard to that last point why it is that the words should not be sufficient to bring under charge to tax dividends payable to non-residents, in view of sub-paragraph (b) of paragraph 1 of Schedule D, in which there is no mention of residence at all, and Case VI. However that may be, the result will work out, according to counsels argument, in this way, as I understand it. The Special commissioners are assessing the paying agents. They will not - and it is common ground that they will not - probably the majority of cases have before them the information as to the ownership of the securities which would enable them to give effect to any exemption which an owner is entitled to on the ground that he was a non-resident. They will, therefore, assess the paying agent in respect of the amount which he is to pay over to the owner of the shares.
Now, what is to happen According to counsels argument, the remedy of the taxpayer who is aggrieved by that decision is not a remedy which is governed by Schedule C at all but is a remedy based on the fact that he has been improperly assessed to tax or, rather, his dividend has been improperly assessed to tax because under Schedule D it ought never to have been assessed at all. Now mark what would happen. His right would apparently be to obtain repayment, by a petition of right and the issue of residence or non-residence would be an issue of fact to be decided by the Court. Unless and until he has recovered his tax it would be quite impossible for the Crown, while the assessment of the paying bank in respect of that dividend stands, to raise a fresh assessment against the shareholder under Case I, because, there would then be standing at one and the same time in respect same piece of income two assessments. The way it will work out, according to counsels argument, in practice would be this, that the assessment under Case I of the non-resident proprietor, who has obtained repayment, either because the Commissioner are satisfied without litigation or as the result of litigation, would then fall to be revised, in order to bring into in an item of income which obviously could not have been brought into that assessment before because it had already been taxed. that would still leave this curious position, that there would still be on foot it respect of the same piece of income two assessments, because the effect of repayment to the proprietor to the tax deducted from his dividend would not be the anomalous position, as I say, of two existing assessments standing in respect of the same piece of income.
I, for my part, find it impossible to suppose that that is a result which the Legislature was contemplating. Whether or not the previous legislation had the effect of importing rule (2) of Schedule C by reference into the provisions of rule 7 of the Miscellaneous Rules applicable to Schedule D I do not find it necessary to determine. In my judgment that rule is quite clearly imported by the consolidation Act of 1918, and if that be the case the way the machinery will work will be this : The assessment having been made upon the paying agent, the non-resident proprietor can avail himself of the machinery provided in rule 2(d) of Schedule C by proving to the satisfaction of the commissioners of Inland Revenue the fact of his non-residence and then obtaining relief by way of allowance or repayment. That that is what the Legislature intended is, in my opinion, made quite clear when the Finance Act, 1924, is examined. Under Sec. 27 of that Act a new right of appeal to the Special Commissioners was given from a decision of the Commissioners of Inland Revenue. It is to be observed that the right is a right to appeal from a decision. When the decisions which the section deals are examined, omitting for the moment the one relevant to this point, it will be found that each and every one of them is a decision of the Commissioners of Inland Revenue under a statutory power given to them in the Act to decide the issue of fact, residence or non-residence, domicile or non-domicile, as the case may be. Therefore, it appears to me extremely unlikely that in such a context there will be found a right appeal given -as counsel would have as construe the paragraph to which I am about to refer - not from a decision of the Commissioners given in the exercise of a statutory jurisdiction to decide a matter of fact but from some administrative refusal to repay tax which has been improperly levied.
I myself find it quite impossible to read the section in that way. The section is dealing with decision and decision means prima facie a decision of an express character under some power to decide, and that power is found in each of the other cases.
The case in question here gives a right of appeal from a decision of the Commissioners with regard to any questions as to residence arising, firstly, under paragraph (d) of rule 2 of the General Rules applicable to Schedule C or, secondly, under rule 7 of the Miscellaneous Rules applicable to Schedule D in connection with a claim for repayment of income-tax made to the Commissioner of Inland Revenue by the person owning the stock, etc., from whose income a deduction has been made on account of the income-tax assessed and charged under the rule. That language shows, to my mind, as clearly as anything can show that the procedure to which reference is being made, and in respect of which a right of appeal is being given, is a procedure in which, tax having been assessed on and paid by the paying agent, the owner of the share them makes, to the Commissioner of Inland Revenue, a claim for repayment on which claim the Commissioners of Inland Revenue have under the existing legislation a power to give a decision, and it is from that decision that the right of appeal to the Special Commissioners is granted.
Now that exactly fits the language of rule 2, paragraph (d) of Schedule C because under the rule the obligation of the share-holder who seeks repayment is to prove the fact of non-residence to the satisfaction of the Commissioner of Inland revenue; in other words, they are the people who have the statutory power to decide that matter of fact. The manner in which the exemption is given effect to under that rule is by way of repayment of tax, words which appear again in Section 27(3) (c) of the Act of 1924. Indeed, when the language is appreciated the whole matter to my mind fits together, both from the point of view of substance and from the point of view of machinery. It is worth observing that when the Legislature by section 10 of the Income-tax Act, 1853, extended to this clause of dividend the machinery which had previously been applicable to the case of into foreign or Colonial Government loans, it was bound to bring it into charge under Schedule D, because the language of Schedule C which is confined to interest payable out of public revenue would not have been apt to cover it, and if it was to have been brought under Schedule C, Schedule D was the appropriate Schedule in which to put it, but the Legislature, having regard to the close correspondence between the circumstances of the two cases, when they brought it into Schedule D made it subject to the provisions of schedule C with regard to the matters appropriate to schedule C and that, to my mind, is the history of the matter. Whether or not before the Act of 1918 there was some gap in that correspondence is beside the point. In my opinion the correspondence, if it was not perfect before, was made perfect by the Act of 1918.
That brings me to the last point, the question of expenses. The judgment for the crown on that point is of this nature, that in the account of a trading company made out for the purpose of its return under Case I of Schedule D the interest with which we are concerned must, in the first instance, be brought into the account as an item of receipt; and that the statutory provisions which exempt the interest from tax are to be given effect to by then removing altogether that item from the statement of profits and gains, and removing with it something which clings to it in the process of removal, namely, some apportioned part of the expenses of the company. Now I can find no warrant whatever in the language of the statute to produce that result. When the statute says that interest is to be exempt I am quite unable to read it as meaning that in giving effect to that exemption by implication some repercussion is to take place on a different provision of the act altogether. It seems to me quite improper to read any such implication into it. Counsel for the appellant says, and say with truth, that there are many cases in the working of the Act where it is necessary to make apportionments, and he instances as one the case where a non-resident company carries on business both in England and abroad and its accounts have to be dissected in order to bring in only that part of the business which appropriate for the purpose of taxation. That is perfectly true, and the reason why the dissection has to be made there is that the statute quite clearly requires it and cannot be effective unless it is made. But in this case I can find nothing in the statute which requires this interest which is to be brought into the account as an item of receipt is to be taken out of it with some apportioned expenses appropriated to it as thought it were a trade by itself. If the Legislature had intended that, in my opinion, it should have said so, and I am quite unable the suggested result can only arise from an implication from those clause or a qualification upon them - in the way contended for.
I agree that the appeal fails on all points and should be dismissed with costs.