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Issues Involved:
1. Whether dividends paid by a UK-resident company to the appellant company, assessable under Case I of Schedule D, should be included in the appellant company's assessable profits for the years 1955-56 and 1956-57. 2. Whether there was a "discovery" within the meaning of section 41 of the Income Tax Act, 1952, allowing the inspector to raise the additional assessment for the year 1955-56. Detailed Analysis: 1. Inclusion of Dividends in Assessable Profits: The appellant company, Cenlon Finance Co. Ltd., argued that dividends paid by Henry White (Sutherland House) Ltd. should not be included in its assessable profits under Case I of Schedule D. The appellant contended that dividends are only taxable by deduction at source under section 184 of the Income Tax Act, 1952, and are not subject to further assessment in the hands of the shareholder. The appellant relied on precedents such as Bradbury v. English Sewing Cotton Co. Ltd. and Neumann v. Inland Revenue Commissioners, asserting that dividends are income but cannot be taxed again in the hands of the recipient. The respondent, represented by the Crown, countered that the dividends in question were trading receipts and should be included in the computation of the appellant's profits. They argued that section 184 is a machinery provision and does not exempt dividends from being treated as trading receipts. The Crown emphasized that all profits from trading activities, including dividends, must be included in the computation of taxable profits under Case I of Schedule D. The House of Lords upheld the Court of Appeal's decision, agreeing that dividends received by a trading company must be included in the computation of its profits for tax purposes. The judgment clarified that section 184 does not provide an exemption from tax for dividends received by a trader. The court distinguished between dividends received by non-traders, which are not assessable under Schedule D, and dividends received by traders, which are trading receipts and must be included in the computation of profits. 2. Discovery under Section 41: The appellant argued that there was no "discovery" within the meaning of section 41 of the Income Tax Act, 1952, because the new inspector did not uncover any new facts but merely reinterpreted the existing facts. The appellant contended that a discovery must involve finding new facts, not a change in legal interpretation. The Crown argued that "discovery" includes any situation where it newly appears that the taxpayer has been undercharged, regardless of whether new facts have come to light or there has been a change in legal interpretation. The Crown relied on the precedent set in Commercial Structures Ltd. v. Briggs, which held that discovery has a broader meaning and includes changes in the understanding of the law. The House of Lords agreed with the Crown's interpretation, affirming that discovery under section 41 can arise from a new understanding of the law. The court held that the new inspector's conclusion that the dividends should have been included in the appellant's assessable profits constituted a valid discovery, allowing for the additional assessment for the year 1955-56. Conclusion: The House of Lords dismissed the appeal, holding that dividends received by a trading company must be included in the computation of its profits for tax purposes under Case I of Schedule D. Additionally, the court affirmed that discovery under section 41 includes changes in the understanding of the law, allowing the inspector to raise the additional assessment for the year 1955-56. The appeal was dismissed with costs.
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