The following facts are taken from the judgment of Lord Hanworth, M.R. :
'This is an appeal from a decision of Finlay, J., which was given on February 14, 1933. The case raises an important point - I may say a very important point - to the appellants, the Assam Railways and Trading Co. They are seeking to have relief under Section 27 of the Finance Act, 1920, in respect of certain income-tax charged in the United Kingdom by reason of the fact that they have paid what is called Dominion Income-tax.
'The facts upon which the point arises may be stated quite shortly. The business of the company is a composite one. It runs a railway, and, as the part of its name Trading Company indicates, it has other activities; for instance, it works coal mines, timber concessions, saw-mills and brick-works, and carries on a plantation business in Assam. The company is an English company; it is controlled by a board in England. It is taxed under Case I of Schedule D on the whole of the profits which arise from its business in India, and from India alone, that its profits are derived.
'Now the company has issued certain debentures, and the interest which is required for the service of payment upon the debentures is a sum of Pound 42,500. That figure has been referred to with some insistence because it is a figure which is the largest sum which creates the divergence in the two views expressed between the appellants and the respondents in this court. The company claim that they are entitled to have a deduction made in respect of the income-tax which they have been charged in India. They say that the whole of their profits arising from the whole of their business in India, and the result is review of the Income-tax authorities in India, and the result is that they have, according to the system prevailing in India, paid income-tax upon the whole of their profits before those profits came over and were received by the board in London, and they claim that they are entitled, in consequence, to have the relief which they are given by Section 27 measured by the fact that the whole of their profits have already suffered a diminution by paying income-tax to the Indian central authority.
'One of the most notable differences between the system of calculating the assessable income in India and in England is this : Whereas under rule 3 of the Rules to cases I and II of Schedule D it is provided that in the United Kingdom in computing the amounts of the profits or gains which are to be charged no sum shall be deducted in respect of any annual interest payable out of the profits and gains, and there is therefore, no right to deduct the sum which has to be paid by way of interest upon the debenture debt; it is otherwise in India, and apparently they are allowed to deduct, before computing their true profits, a sum which has to be charged against those profits for the purpose of paying the debenture interest. It will be noted, therefore, that in figures which are considerable, but are not so large that a sum of Pounds 42,500 is a negligible item, there must arise a considerable difference between the difference between the profits which are subjected to Indian income-tax and the profits which, according to English computation, would be subjected to the English income-tax. In the first case, the company would be entitled to deduct Pounds 42,500 from their profit in India, and therefore pay a smaller sum as the total due from them for income-tax, whereas, if the same profits were to be scrutinised according to the English system, they would not be allowed to deduct this Pounds 42,500. I have given that figure in order to make a distinction which stands out on the two systems adopted by the Dominion and by the United Kingdom; but I think that dwelling upon a particular item, large and important though it is, likely to lead one into an error when we have to consider the problem that is before us.
'The question is what relief from the United Kingdom income-tax is the Assam Railways and Trading Co., entitled to? They contend - I am reading paragraph 10 of the Case -that the relief should be based on the amount of the income as computed for the purpose of the United Kingdom income-tax, and that the method by which the Indian assessment was computed and the deductions allowed in arriving at that assessment were immaterial. That, accordingly the fact that the debenture stock interest had been allowed as a deduction, and the Bogapani Tea Garden item had not been included in computing the Indian assessment should not be taken into account, and the relief should be allowed on the amount of the United Kingdom assessment, without any deduction for these two items. Shortly put, I may repeat that the claim of the company is to say : The whole of our profits have been reviewed for the purpose of paying income-tax in India; it is the whole of those same profits which are under review in the United Kingdom for the United Kingdom tax; and we are entitled to relief in respect of the whole of those profits, for they are the same in both countries.'
Finlay, J., held, while the appellants were liable to tax in the United Kingdom on the full income of Pounds 186,808, they could only claim relief from Indian income-tax to the extent to which that tax had been paid, namely, on the sum of Pounds 129,365.
The appellants appealed.
Latter, K.C., and Cyril King, for the appellants. - The income of the company is the income for all purposes, and the Dominion income must be deemed to have paid its quota of Dominion tax - Rover v. South African Breweries. The facts in Rolls Royce Ltd. v. Short were different, but the principle was established that the foreign income is the income for all purposes. The full income of Pounds 186,808 has been assessed in India and agreed as the income of the appellants; it has been put under the income-tax harrow there, and has borne its proper share of Indian tax. Any special concessions which the tax authorities in India may make do not alter the fact that the whole of that income has been submitted to the appropriate tax, and is therefore entitled to relief in the United Kingdom.
The Attorney-General (Sir Thomas Inskip, K.C.), and Reginald Hills, for the respondents.
The relevant parts of Section 27 of the Finance Act, 1920, are set out in the judgment.
LORD HANWORTH, M.R., stated the facts and continued : Now we have to look at Section 27 of the Finance Act, 1920, very carefully. Two cases have been called to our attention, the one the Rolls Royce Case, the other the Dalgety Case. I think it may be at once stated that the latter case has no relevance to the point we have to consider. In the Rolls Royce Case it is said by counsel for appellants, in a forcible argument, that there are words to be found in WARRINGTON, L.J.s judgment, and also in Atkin, L.J.s which, if they do not confirm, at any rate led on to, the view which he has advanced in this Court. For my part, while I adhere to the judgment I expressed in that case, and in particular to the conditions on which relief is given, and which I table, I also think it wise to repeat what I said there, that 'It is never possible to forecast the result of such a relieving section generally. Experience may prove that in effect it does not give relief in as many cases it was hoped and anticipated, and indeed intended that it should do.' This case, to my mind, must be considered in the light of its own facts and in the interpretation to be put upon the section itself. Now Section 27 was intended to give a relief from the United Kingdom tax in respect and because of the payment already made of a similar tax in a Dominion, and, as I point out in the Rolls Royce Case, a person who is entitled to relief is a person who has paid United Kingdom tax by deduction or otherwise for any year of assessment on any part of his income. The relief is a relief from United Kingdom tax, and it is upon that part of his income which has paid Dominion income-tax.
Now what does one mean by 'United Kingdom income-tax' and 'Dominion income-tax'? Before I examine sub-section 1, I wish to go to the table of interpretations which are to be found in sub-section 7 and which are contained in (b), (c) and (d). We are there told that for the purpose of the construction of this sub-section 1 we are to interpret the term 'United Kingdom income-tax' in a particular way, and it means the income-tax chargeable in accordance with the provisions of the Income Tax Acts. Next, (c), 'The expression Dominion income-tax means any income-tax or super-tax charged under any law in force in any Dominion, if that tax appears to the Special Commissioners to correspond with United Kingdom income-tax or super-tax.' The duty of deciding whether such a tax corresponds with income-tax or super-tax of the United Kingdom charged upon the Special Commissioner is no doubt for this purpose, that in some Dominions there may be an analogous tax, imposed under a different name or with a somewhat different system, but yet a tax which the subject may be able to convince the Special Commissioners has the same characteristics that belong to our own income-tax over here.' (d) The expression Dominion rate of tax means the rate determined by dividing the amount of the Dominion income-tax paid for the year by the amount of the income in respect of which the Dominion income-tax is charged for that year.' Then there is an exception, that where it is charged on an amount other than the actual profits, the Dominion rate of tax shall be determined by the Special Commissioners, also giving power to the Commissioners to adjust what needs adjustment if it is not charged in respect of actual profit. Then come some further words, that 'For the purpose of this section, the rate of United Kingdom income-tax shall be ascertained by dividing by the amount of the taxable income of the person concerned the amount of the tax payable by that person on that income before deduction of any relief granted' and so on. Now to my mind the directions and interpretation given in (b), (c) and (d) all point to the separate system of ascertainment of income-tax being treated as separate and independent-different firmaments, if I may use that expression-and you are to ascertain the Dominion rate of tax by taking the sum which is actually charged for the year and making your calculation by a dividend and a divisor; and in the same way you are to ascertain the rate of the United Kingdom income-tax, again by taking the actual amount of the taxable income. We have therefore got in those passages a definite reference to what is the statutory or taxable income, quite apart from, and independent of, the real income.
Now, be it remembered that the amount of relief which is to be given under sub-section 1 is not from the whole of the tax paid in a Dominion; it is to be determined as follows : 'If the Dominion rate of United Kingdom tax, the rate at which relief is to be given shall be the Dominion rate of tax : In any other case the rate at which relief is to be given shall be one-half of the appropriate rate of United Kingdom tax.' To my mind, it is quite plain that you have got to take the two separate systems of ascertaining taxable incomes in each country, and when you have got those two rates, then you are able to set one rate against the other, and you may get the whole of the Dominion rate allowed if that is less than one-half of the appropriate rate in the United Kingdom, but you cannot get more than one-half. Those factors are, to my mind, very important in considering what is to be the right interpretation of sub-section 1. We have to consider that a subject who is a taxpayer in the United Kingdom may under certain circumstances be entitled to recover or have relief from not more than one-half of the United Kingdom tax in respect of his payment of Dominion tax, that rate being discovered by the amount paid for the year of Dominion income-tax.
Now in the present case we have not got the complexity which arose in the Rolls Royce case of different system of computing the tax, nor have we got the difficulty that may arise from the different terminations of the year of charge. We have the simple case of two similar periods, and the same profits, but charged under the statutory directions in each country in a different way and resulting, therefore, in a different tax. It is said by counsel for the appellants : 'If you will apply the system of what may be called the Salisbury House Case to the profits which have been dealt with in India, the whole of the income has been scrutinised for the purpose of being charged to Dominion income-tax; all of it has been passed in review; and it matters not whether some items have been allowed by way of deduction or not. The whole of it has been reviewed; and therefore it is comparable with the whole of the income which has once more to be reviewed for United Kingdom income-tax.' I repeat that by way of emphasis because I now proceed to look at sub-section 1. It says : 'If any person who has paid, by deduction or otherwise, or is liable to pay, United Kingdom income-tax for any year of assessment on any part of his income' -now that includes, and it must be remembered that these words include, and identify, a person of this sort : a person who may have a composite income derived in part from securities which would fall to be taxed under Schedule C, some part of whose income would fall to be taxed under Schedule A, and some portion of whose income is derived by profits sent over from a Dominion. The part of income that is cognisable under this section is the part which comes from the source overseas and which is to that extent separate and distinguished from the part which he may enjoy and falls under Schedule C. Now having got that, if that person, proves to the satisfaction of the Special Commissioners that he has paid Dominion income-tax for that year in respect of the same part of his income' -again that would be the part as contra-distinguished from the part of his income that falls under Schedule C - 'he shall be entitled to relief from United Kingdom income-tax paid or payable by him on that part of his income' - that is, the part that comes from overseas - 'at a rate thereon to be determined as follows.'
The situation which is claimed by counsel on behalf of the company is very arguable; it is attractive, and indeed I make no secret that during the considerable part of this case I was inclined to hold the view which counsel presented. I am glad to reveal that, because it shows - at least I hope it shows - that I have given full consideration to the view presented. But when we come to consider what is to be the relief, it has to be shown by the taxpayer that on a part of the income which is his statutory income in the United Kingdom he has paid Dominion income-tax for that year. Now, are we to re-open and to readjust the figures in each country? Are we to set side by side the items which compose the total assessable income for which the man is to be charged first in the Dominion and afterwards in the United Kingdom? To my mind, not so. You have to deal with the results which have been attained by following the legislative directions in each country, and you have to deal with the total result when those exceptions or deductions or abatements have been allowed, and you cannot scrutinise those abatements or deductions by a comparison with a different system in the other part of the Commonwealth; and it falls upon the taxpayer to prove that he has paid income-tax for that year in respect of the same part of his income. Now he has paid in the present case tax on a part of his income which is revealed by the assessment made upon him which I find at p. 5 in the exhibit 'C' : there is found the order as to what this company is to pay : 'Order. The Income Tax adjustment account of the Company is as follows' : profit is taken, and the allowance for debenture interest, and so on. The result is that the total figure is Pounds 129,365; then by converting that into rupees at 1s.6d. you get a figure of 1,724,866 rupees, and an income-tax at 18 pies upon that brings you to a total assessment of 161,706 rupees 3 annas. That is your total sum that has to be paid, and that is the total of the statutory income which is made chargeable to income-tax, and that is the amount that is paid. If you take that in your hand, the company can then show that it has paid income-tax at the rate which will be discovered by following out the directions which I have already referred to in (c); you will then find that it has paid tax on this sum of Pounds 129,365, at that rate, and, as we know those are the profits of the company, the company can show that to that extent, the extent of Pounds 129,365, they have paid Dominion tax for that year in respect of that part of its income, and, that is the same part as falls to be included in the total statutory income subjected to United Kingdom income-tax. It is in respect of that sum, and, so far as I can understand, that sum only, that the relief is given by the section. As a matter of fact, we read from the Case that for some reason, which I dare say is good but does not for the moment appear very easy to understand, the Commissioners have allowed that Dominion income-tax has been paid on a sum of Pounds 135,907, part of the total sum which is assessed to United Kingdom income-tax, namely Pounds 186,808. If any adjustment has to be made the Case will have to go back to the Commissioners for it to be made, but as I suppose the Crown are content with the figures as represented in the Case the figure of relief would then stand as on Pounds 135,907, which appears to be larger than the figure on which there was an actual payment of the tax upon the statutory figure found to be liable to Dominion income-tax.
It is for these reasons that I have come to the conclusion that the respondents are right, and that the appeal must be dismissed with costs. I will only add this, that while I adhere to the conditions that I table in the Rolls Royce Case I do not find assistance from that case, because I think that all the Judges were making the observations that they did in that case alio intuitu, and we have different problem to solve, based upon the proper construction of Section 27.
LAWRENCE, L.J. - I agree. Section 27 is aimed at relieving a taxpayer against double taxation where he has already paid Dominion income-tax in respect of the income which is sought to be taxed in the United Kingdom.
In the present case there is no complication of facts or figures. The income-tax is assessed on the gains and profits earned in the same period in India and in England; the amount of the profits and gains to be brought into charge for income-tax is the same in both countries. In India allowances are made in respect of the profits and gains which result in the taxable income of the appellants being Pounds 129,365. In the United Kingdom allowances are made in respect of the same profits and gains which result in the taxable income of the appellants being L 186,808. Now what has to be ascertained in order to measure the relief to which the taxpayer is entitled under section 27 is : On what part of the taxable income in the United Kingdom have the appellants paid income-tax in India? To my mind the answer in the circumstances in this case is plain : that they have only paid Indian income-tax upon L 129,365, part of the taxable income in the United Kingdom of Pounds 186,808, and that there is no duplication of taxation so far as regards the difference between those two sums, with the result that the appellants are only entitled to relief in respect of Pounds 129,365, part of their taxable income of Pounds 186,808. That, it seems to me, is carrying out both the letter and the spirit of Section 27.
I agree that this appeal fails.
SLESSER, L.J. - I agree. I find, in the case of Rolls Royce, Ltd. v. Short, although the matter there to be considered was different from that in the present case, a statement of principle in the judgment of the Master of the Rolls which I apply in the present case. My Lord says this (94 L.J. K.B., at p. 853; 10 Tax Cas., at p. 70) : 'The fact of paying a tax in a Dominion does not induce relief. The basic condition is that a person has paid tax on his income over here; then if some part of that income so charged and assessed to tax in the United Kingdom can be identified and proved to have paid Dominion tax, that same part which has suffered dual taxation can be relieved of the tax paid here up to the measure of relief given by the section.' Now applying that basic condition to the present case, I ask myself what amount here can be identified and proved to have paid Dominion tax so that, related to the income-tax charged in the United Kingdom, it can be said that that amount has suffered dual taxation; and the amount, as appears from paragraph 8 of the Case, is L 129,365. That sum and that sum only, in my opinion, can be identified and proved to have paid Dominion tax out of the total of Pounds 186,808 assessed to United Kingdom income-tax. I do feel the difficulty which has been pressed upon us by counsel for the appellants to be such that we are compelled to say, as his argument would lead us to say, that, directly it is shown that a part of income which is assessable to United Kingdom income-tax has paid tax in India, necessarily the whole part which is assessable to income-tax in India is thereby relieved, regardless of the amount of income there liable to taxation. I do not think that the language requires that, and I think the language which speaks of the necessity that he has paid income-tax in respect of the same part of his income requires the Commissioners first to inquire what is the part of the income and then to consider, as my Lord has said in the Rolls Royce Case, whether he has in fact paid Dominion income-tax on it or not. The result of any other view, unless one were driven by the language to take it, would be, as it seems to me, that, however small the sum which had been paid in India in Dominion income-tax there which was paid in respect of part of his income, the whole of the income which under review in that country, though possibly completely exempted, would have to be deducted from the United Kingdom income-tax here, so that the result is that, so far from suffering dual taxation, the subject might escape a very considerable amount of taxation in both countries. Fortunately, I do not think, either on the authority of the Rolls Royce case, or on the language of this section, we are driven to that conclusion.