1932 (6) TMI 12 - DSC - Income Tax

Summary

Issues Involved:
1. Interpretation of the phrase "free of income tax" in a will.
2. Distinction between income tax and super-tax (or sur-tax).
3. Application of precedent cases in determining the scope of tax exemption in annuities.

Issue-Wise Detailed Analysis:

1. Interpretation of the phrase "free of income tax" in a will:
The primary issue in this case revolves around whether the direction to pay an annuity "free of income tax" as mentioned in the will of Sir Harold James Reckitt includes freedom from super-tax (or sur-tax) as well. The will stated, "I bequeath to my trustees the sum of lb200,000 upon trust to invest the same in any of the investments hereinafter authorised and to hold the said investments upon trust there out to pay my wife during her life the annual sum of lb5,000 free of income tax." There were no additional directions regarding quarterly payments or deductions. The appellants argued that the phrase should be confined to income tax alone and not extended to cover super-tax.

2. Distinction between income tax and super-tax (or sur-tax):
The court examined the nature of super-tax, which was originally imposed by the Finance (1909-10) Act, 1910, and later referred to as sur-tax by the Finance Act of 1927. It was noted that super-tax is essentially an additional duty of income tax. Despite differences in the mode of its incidence, initiation, and collection, super-tax remains an additional duty of income tax. The court referenced the case of Bowles v. Att-Gen, where it was held that super-tax is a "duty of income tax." The court concluded that the differentiation between income tax and super-tax does not alter the fact that super-tax is an additional income tax.

3. Application of precedent cases in determining the scope of tax exemption in annuities:
The court reviewed several precedent cases to determine the scope of tax exemption in annuities. In Crawshay In re; Crawshay v. Crawshay, it was held that the phrase "clear of all deductions, including income-tax," did not include super-tax. In Doxat, In re; Doxat v. Doxat, the phrase "free of income-tax and of all other deduction" was interpreted to include freedom from super-tax. In Bates, In re; Selmes v. Bates, the phrase "such a sum in every year as, after the deduction of income-tax for the time being payable in respect thereof, will leave a clear sum of lb2,000" was held to be free of income-tax only, and not super-tax. The court noted that the specific wording of each will was crucial in determining the scope of the tax exemption.

The court concluded that the phrase "free of income tax" in the will of Sir Harold James Reckitt should be interpreted to include freedom from super-tax. The court agreed with Eve, J., and followed the sequence of authority in the precedent cases. The appeal was dismissed, and the trustees were directed to pay the annuity free of both income tax and super-tax.

Separate Judgments:

Lawrence, L.J.:
Lawrence, L.J. agreed with the Master of the Rolls and highlighted the importance of the specific wording in the will. He referenced the case of Bates, In re; Selmes v. Bates, and noted that the distinction between income tax and super-tax is not valid in this context. He affirmed that the gift of an annuity free from income tax includes freedom from super-tax.

Romer, L.J.:
Romer, L.J. also agreed with the Master of the Rolls and emphasized that the words "income tax" include super-tax. He noted that the trustee must pay the annuity in such a way that the annuitant receives the full sum mentioned, free from both income tax and super-tax.

Conclusion:
The appeal was dismissed, and it was held that the direction to pay the annuity "free of income tax" includes freedom from super-tax. The trustees are required to pay the annuity free from both income tax and super-tax.