1960 (12) TMI 86 - DSC - Income Tax

Computation of salary, fees, wages, perquisites or profits - Taxation on cost of that perquisite - sum paid by employers for a suit bought by them as a present to him and supplied to him included in salary computation - assessment made under Schedule E of the Income Tax Act, 1952 as contended for the Crown that the taxpayer received in the year 1955-56, in addition to the cash emoluments of his employment, an advantage by virtue of that employment which was money's worth, namely, a suit of clothes; that, on the evidence, that advantage of money's worth fell to be measured by the price paid by Anglo-Oriental to the tailors for the suit, that was the sum of 14 15s.; that that sum was, correctly included in computing the amount of the salary, fees, wages, perquisites or profits of the taxpayer from his employment within the meaning of rule 1, Schedule 9, to the Income Tax Act, 1952; and that the assessment for the year 1955-56 ought to be confirmed - as contented by taxpayer suit was not an advantage received by him by virtue of his employment which was capable of being turned into money, because his employers would have been displeased if he had sold it; alternatively that, if the value of the suit was an advantage received by him by virtue of his employment which was capable of being turned into money, the value was not the price paid by Anglo-Oriental to the tailors, namely, 14 15s., but the sum which he could have raised by the sale of the suit in November, 1955, and that that sum was very small. What is the money's worth which the taxpayer got, was it the payment which the employers made or was it the benefit which the taxpayer got from the payment? - HELD THAT - LORD EVERSHED M.R. The point involved in this appeal falls indeed within the narrowest compass; but it is, or appears to be, novel in the sense that no strictly comparable case seems to have come before the court before. It seems that the taxpayer never acquired any rights against anybody. He received this letter; armed with it, he went to Messrs. Montague Burton's establishment, and Montague Burton expressed themselves as willing to supply him with the clothes he ordered. When the clothes were delivered, then (and then only) the taxpayer got something which was his own. He acquired at that point of time a suit, albeit he had no right against anyone to get the suit. Nor had he, as I conceive, any right against the company, though as a matter of ordinary decency as between master and servant he could no doubt rely upon the company doing what they said they would do. But this was not a case in which he was entitled to call upon the company to pay some sum of money on his behalf, as that phrase is ordinarily understood. As I think in this case, and in accordance with Mr. Heyworth Talbot's argument, what the taxpayer got-what the company intended to give him, what the letter to him and Montague Burton said would be done, and was done--was a present of a suit. Until he got it, he got nothing; and when he got it, the thing which came in (which was his income expressed in money's worth) was the value of the suit. We are here concerned with the present of a suit; that is the subject-matter; and the value of the suit in money seems to me to be the amount for which the taxpayer is properly taxable. Therefore, dismiss the appeal. HARMAN L.J. I agree. The only controversy was whether he was to pay tax on the cost of that perquisite to his employer, or the value of it to him, and it appears to me that this perquisite is a taxable subject-matter because it is money's worth. It is money's worth, because it can be turned into money, and when turned into money the taxable subject-matter is the value received. I cannot myself see how it is connected directly with the cost to the employer. It is admitted that as a conventional matter the difference can be taken as that between 14 15s. and 5. Income-tax is a tax levied on income. The taxpayer has to pay on what he gets. Here he has got a suit. He can realise it only for 5. The advantage to him is, therefore, 5. The detriment to his employer has been considerably more, but that seems to me to be irrelevant, and I do not see that it makes any difference that no property in this suit ever passed to the employer. I think, in Lord Watson's words in Tennant v. Smith 1892 (3) TMI 1 - HOUSE OF LORDS that it is a benefit consisting in something acquired which the acquirer becomes possessed of and can dispose of to his advantage--in other words, money, or that which can be turned to pecuniary account. This can be realised in cash, and it is that realisable quality which is the measure of the taxpayer's liability.I would therefore dismiss the appeal. DONOVAN L.J. I agree, and I add a few words only because of the novelty of the point. The case wears an aspect of triviality which is deceptive. Tax on 15 alone is involved, but the proposition on which the claim is based is of much wider significance, and it will look very different when applied to other cases which can easily be foreseen, and some of which were referred to during the argument. The proposition was stated thus Where an employer offers to spend money for an employee as a reward for service ; and that offer is accepted, the employee is liable to be taxed on the money so spent, and not on the thing which the money provides for him. A good many qualifications would need to be added to that proposition to make it true. It looks true in cases like Hartland v. Diggines and Nicoll v. Austin where money liabilities of the employed officers were discharged by the employer. But what the officers were really taxed upon was the money's worth of the immunity they were thus given from their own liabilities. No valuation of that money's worth was required, it was obviously of the same value as the liability which had been discharged. In the present case the taxpayer never became liable to pay the 14 15s. to Messrs. Montague Burton. Between him and them there was no privity of contract at all; and when the employers paid this sum, they discharged their own liability, and nobody else's. On what principle is this payment nevertheless to be treated as the taxpayer's income? To that question, I think, no satisfactory answer is or can be given. At first the Crown suggested that it was the principle underlying certain surtax cases where taxed income had been applied under a trust for the benefit of the beneficiaries; but the court in those cases explained that once the trustees so applied the income, that income itself became the beneficiaries'; In the end the Crown conceded (I think rightly) that no true analogy could be drawn between that class of case and the present. That being so, I can discover no test which yields the result that the payment by the employer to Messrs. Montague Burton in the circumstances of this case is the income of the employee. In that situation one must get back to what has always, so far as I know, been accepted as the basis of liability under Schedule E, namely, that liability extends to the profits or gains arising or accruing to the holder of the office or employment as such, whether those profits take the form of money, or money's worth. No money arose or accrued to the tax- payer here from this transaction. Money's worth did, in the shape of the suit. The suit (and the suit alone) answers the description of profit accruing to the employee from his employment. On that basis it should be assessed to income tax at its money value in the taxpayer's hands, that is to say, what he could get for it if he sold it as soon as he received it. It is agreed between the parties that this is the sum of 5; and I therefore also think that the special commissioners and Danckwerts J. came to the right conclusion in this case, and that the appeal should be dismissed.

Summary

Issues Involved:
1. Whether the value of a suit provided by an employer to an employee is taxable as income under Schedule E of the Income Tax Act, 1952.
2. Determination of the correct valuation of the suit for tax purposes.

Issue-wise Detailed Analysis:

1. Taxability of the Suit as Income:

The taxpayer, an employee of Anglo-Oriental and General Investment Trust Ltd., received a suit as a Christmas present from his employer. The suit was valued at lb14 15s and was included in his taxable income by the tax authorities under Schedule E of the Income Tax Act, 1952. The taxpayer contended that the suit should not be considered part of his salary, fees, wages, perquisites, or profits from his employment.

The Crown argued that the suit constituted a taxable perquisite or profit within Schedule E because it was an advantage received by virtue of employment and capable of being turned into money. The taxpayer countered that the suit was not an advantage capable of being turned into money because his employers would have been displeased if he had sold it. Alternatively, even if it was an advantage, its value should be the amount he could have raised by selling the suit, which was very small.

The special commissioners held that the suit was indeed a taxable advantage capable of being turned into money but disagreed with the Crown's valuation based on the purchase price. They valued the suit at its second-hand market value when it became the taxpayer's property, which was agreed to be lb5.

Danckwerts J. affirmed the special commissioners' decision, holding that the benefit received by the taxpayer was the value of the suit in his hands, which was lb5.

2. Valuation of the Suit for Tax Purposes:

The core issue was the correct valuation of the suit for tax purposes. The Crown contended that the value of the suit as a perquisite should be the sum paid by the company (lb14 15s). The taxpayer argued that the value should be what he could get for the suit if he sold it immediately, which was agreed to be lb5.

The court examined whether the taxpayer received a benefit in cash or in kind. The Crown's position was that the taxpayer should be taxed on the money spent by the employer, not on the value of the suit in the taxpayer's hands. The court rejected this premise, distinguishing the case from precedents like Nicoll v. Austin and Hartland v. Diggines, where the employer discharged a liability of the employee.

The court concluded that the taxpayer did not acquire any rights against anybody until he received the suit. Therefore, the taxable benefit was the value of the suit when it became his property, which was lb5. The court agreed with Danckwerts J. that the taxpayer should be taxed on the value of the suit in his hands, not the cost to the employer.

Judgment:

The court dismissed the Crown's appeal, upholding the decision that the taxable value of the suit was lb5, the amount for which the taxpayer could have sold it immediately upon receiving it. The court emphasized that the benefit received by the taxpayer was the suit itself, not the money spent by the employer. Therefore, the correct valuation for tax purposes was the second-hand value of the suit, not its purchase price.