1958 (6) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Tax liability of a mutual insurance company under the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947.
2. Interpretation of Rule 3 of Case III of Schedule D in the Income Tax Act, 1918.
3. Applicability and precedence of the Double Taxation Relief Agreement over domestic tax rules.

Detailed Analysis:

1. Tax Liability of a Mutual Insurance Company under the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947:
The case concerns the tax liability of a mutual insurance company, specifically whether the Double Taxation Relief (Taxes on Income) (Australia) Order, 1947, affects the company's tax obligations. The company argued that under this Double Taxation Relief Agreement, its tax liability should be calculated according to the provisions of the agreement rather than domestic tax rules.

2. Interpretation of Rule 3 of Case III of Schedule D in the Income Tax Act, 1918:
The primary issue revolves around Rule 3 of Case III of Schedule D, which was historically understood to provide a method for determining the proportion of investment income attributable to a company's business activities in the UK. The rule aimed to tax a conventional figure representing the profits from the company's business in the UK. The House of Lords had previously interpreted this rule, stating that the sum arrived at by applying the rule was an actual figure for tax purposes, representing business profits.

3. Applicability and Precedence of the Double Taxation Relief Agreement over Domestic Tax Rules:
The Double Taxation Relief Agreement, made under Section 51 of the Finance (No. 2) Act, 1945, was intended to provide relief from double taxation. The agreement must prevail over domestic tax rules where there is a conflict. The agreement specifies that it applies to industrial or commercial profits of an Australian enterprise, including life insurance business profits, and provides its own method for calculating these profits.

Judgment Analysis:

Tax Liability Determination:
The court needed to decide whether the sum of business profits calculated under Rule 3 was an industrial or commercial profit within the meaning of the Double Taxation Relief Agreement. If so, the company should be assessed according to the agreement's provisions rather than Rule 3.

Interpretation of Rule 3:
The House of Lords had previously ruled that Rule 3 provided a conventional figure representing business profits, not just investment income. This figure was deemed to be the profit for tax purposes, regardless of whether it included tax-exempt investments.

Precedence of the Double Taxation Relief Agreement:
The agreement, having statutory effect, overrides Rule 3 where there is inconsistency. The agreement provides a detailed method for calculating profits, which must be used instead of the rough and ready method of Rule 3. The court concluded that the company's tax liability should be measured according to the agreement, ignoring Rule 3.

Conclusion:
The court affirmed the decision of the special commissioners and the lower court, dismissing the appeal. The company's tax liability should be assessed under the Double Taxation Relief Agreement, not Rule 3. The agreement's method for calculating profits must prevail, potentially reducing the company's tax liability to nil due to its mutual status. The appeal was dismissed, and leave to appeal to the House of Lords was granted.