9911796707
TMI Blog1960 (1) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... aim for allowances for the income tax year 1952-53. In that return he set out the figures of ? 18 6s. as the bank interest. In fact the correct amount of his income from that source in the year ending April 5, 1952, was ? 51 5s. 9d. In order to appreciate the basis of the judgments of the courts below it is material to observe that no assessment was ever made on Mr. Hinchy on the basis of his incorrect return, that the only assessment made on him for the relevant year was made after the correct amount had been discovered, and that this assessment in respect of all the tax for which he was liable for that year was made before the issue of the writ on June 13, 1956. These facts raise the question of the construction of subsection (3) of section 25 of the Income Tax Act, 1952, which provides: "A person who neglects or refuses to deliver, within the time limited in any notice served on him, or wilfully makes delay in delivering, a true and correct list, declaration, statement or return which he is required under the preceding provisions of this Chapter to deliver shall--(a) if proceeded against by action in any court, forfeit the sum of ? 20 and treble the tax which he ought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the sources of his income" of paragraph 4 of Schedule VI of the Income Tax Act, 1952. It was further contended that the penalty could not be made to work in all the cases to which it is made applicable if it were construed as limited to treble the tax avoided by the default; and that if the legislature had intended the subsection to bear this meaning it would have used the phraseology to be found in section 48 of the Act. The Crown's construction of the words had not, so far as was known, ever been challenged in the period of over a century which had elapsed since the enactment of the Income Tax Act, 1842. Diplock J. took the view that the consequence of the construction of section 25(3) contended for by the Crown seemed to him to be absurd and unjust, and if there was some other possible construction, consistent with the words, which led to results less absurd and unjust, he would be inclined to adopt it. In his view, there was such an alternative construction, for it seemed to him that a reasonable meaning of the words "the tax which he ought to be charged under this Act" was the tax to which the taxpayer ought to be duly assessed, but to which he had not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n charged with the lesser amount by reason of his defective return, and that this forms the basis of the penalty under section 25. It is unfortunate that the Court of Appeal do not seem to have appreciated that there had been no assessment on the respondent on the basis of the incorrect return which could play its part in the quantification of the penalty. In this case, as in many others, there is not, to use the language of the Court of Appeal [1959] 2 Q.B. 357, 378; [1959] 3 W.L.R. 60; [1959] 2 All E.R. 512 " tax...with which he [the taxpayer] has not been charged by reason of the defective return. "He has not been charged because the time for charging him has not yet arrived. When that time does come, non constat that the return will have any causative effect on his assessment. The latter may be based on other information, and in the case of income under Schedule E must be based on his income in the current and not the past year. It is an essential constituent of this problem that at the time of the commission of an offence under section 25, assessment may be in the future whereas, under section 48 (the fraud section), assessment must be in the past. Nevertheless, alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent had formed the basis of assessment? I cannot give this meaning to the words. So to do would entail the making of an artificial assessment on the basis of the return, the making of the true assessment and the subtracting of the one from the other. I do hot pause to speculate on the hypothetical difficulties of policy and procedure which might arise. I am content to say that to add the necessary words would, in my opinion, be legislation and not construction. I also tried to consider whether, on the assumption of an ambiguity, I could gain assistance from the fact that the element of treble tax was attached to penalties after proceedings in court, by section 23(2) of the Finance Act, 1923, which also changed the penalty for abettors of fraud in what is now section 48 of the Income Tax Act, 1952. Again I could find nothing to drive me to a recondite secondary meaning. I cannot ignore the fact that a multiplier of the tax with which he ought to be charged was made a constituent of the penalty for the equivalent of this offence by section 118 of the Act of 1805. I cannot believe that, in the year of Trafalgar and Austerlitz, Parliament was considering such a refinement as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave, in fact, exercised this power for a long time, and it is no doubt a tribute to the way in which they have exercised their discretion that this appears to be the first time that the extent of their power has been challenged in court, and that it has been possible to delay for so long the revision of the penalty provisions in the Income Tax Acts, although the need for such revision had long been evident. The incongruities and anomalies in these penalty provisions have a very long history. Some had their origins in the Income Tax Acts of 1799, 1803 and 1806, and even in the Act of 1842 there were already serious anomalies. But in those days the rate of tax was low and penalties based on the total amount of tax payable were probably not oppressive. And this is not the only chapter of the law in which illconceived provisions introduced by temporary Acts with limited application have long survived without any radical revision and have to be applied in circumstances very different from those which existed at their origin. This case turns on the proper construction of section 25(3) of the Income Tax Act, 1952. [His Lordship read the subsection and continued:] In a somewhat similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? 20 plus treble tax. Under the Act of 1915, section 107, the penalty which a court could impose was still only ? 50, but the rise in the rates of income tax made that an inadequate penalty in many cases and the provision which now appears in section 25(3)(a) was introduced by the Finance Act, 1923, section 23(2). Before dealing with the crucial question in this case, the proper construction of section 25(3)(a), there are several matters which it may be convenient to deal with at this stage. The appellants submitted that this sub-section is governed by section 25(2), so that it only applies if the return or other statement was not true and correct to the best of the judgment and belief of the person making it. We were informed that the commissioners never take action under this section unless they think that the declaration required by sub-section (2) was not truly made, but I can find no basis in law for it being a defence to an action to prove that the return or statement was made to the best of the judgment and belief of the defendant. The offence is not delivering a true and correct return, and if, in fact, it is not true and correct, the penalty follows as a matter of course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax which he ought to be charged under this Act" means treble his whole liability to income tax for the year in question (less surtax and tax deducted at source, as I have already explained). It is not so easy to state the contrary contention briefly and accurately. Unfortunately, the respondent was not represented in this House. That was due to no fault of the appellants, and the Attorney-General very properly drew your Lordships' attention to points on which counsel for the respondent might have relied, but that is not altogether an adequate substitute for an argument for the respondent. Broadly, the contention is that it cannot have been intended that that which would have been chargeable in any event on the inaccurate return which was sent in should enter into the computation of the penalty, that the penalty must have been intended to have some relation to the offence, and that the tax which he ought to be charged must be the additional tax which he ought to be charged by reason of the discovery of the true state of affairs. Otherwise the penalty will often be grossly and extravagantly disproportionate to the offences. A man might be properly chargeable to ? 5,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate to the undisclosed income." I agree with the Court of Appeal that if it is possible to infer the meaning which they attach to these words that should be done. One is entitled and indeed bound to assume that Parliament intends to act reasonably, and therefore to prefer a reasonable interpretation of a statutory provision if there is any choice. But I regret that I am unable to agree that this case leaves me with any choice. When I look at the way in which the provisions of section 25(3)(a) were brought into the Income Tax Acts, and at the way in which those provisions must be applied in circumstances other than those contemplated by the Court of Appeal, I find myself unable to hold that the crucial words are capable of the interpretation which they have adopted. The Act of 1952 is a consolidating Act, and one must presume that such an Act makes no substantial change in the previous law unless forced by the words of the Act to a contrary conclusion. Therefore, in interpreting a consolidating Act, it is proper to look at the earlier provisions which it consolidated. The previous law was contained in section 107 of the Income Tax Act, 1918, and section 23(2) of the Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that argument loses almost all its force when applied to the Act of 1918. Under that Act the General Commissioners, an independent body, had full discretion to modify the penalty, and all that could then be said was that, owing to the increase in the rates of tax, the maximum penalty had become so high as to be extravagant in the great majority of cases. But there was no obligation under the Act of 1918 to inflict the maximum penalty in cases where it was disproportionate to the offence. In 1923 the same words were inserted in section 107(1)(b) but with the omission of the vital words "not exceeding." Why these words were omitted I do not know, but their omission creates the present difficulty. Normally, it would be impossible to hold that, when the same words as those already in one subsection are later inserted in another subsection of the same section, they can be given a meaning different from the meaning of the words which were there already. I do not find it possible in this case to hold either that the words in the original Act of 1918 had a limited meaning, or that they were given a limited meaning by the Act of 1923, or that after 1923 the same words in subsect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is what penalty is attached to his default by the words "the tax which he ought to be charged under this Act." The Revenue say that the meaning of these words is that the defaulter incurs, apart from the ? 20, a penalty of three times his total income tax bill in respect of all sources of income directly assessable for the year in which the offence is committed. They say that this is the way in which the words have been understood and applied ever since they first appeared in an Income Tax Act (the first use of them in this context was in section 118 of the Income Tax Act of 1805); that whenever their import has been noticed judicially, as in Attorney- General v. Till [1909] 1 K.B. 694 in the Court of Appeal, and in Attorney-General v. Johnstone 136 L.T. 31, the same meaning has been attributed to them; and that the Income Tax Codification Committee itself, which in the years before 1939 laboured with so much intelligence and devotion to no eventual result, clearly assumed this to be the correct meaning. All this, I think, is true; and these considerations are persuasive. But, having regard to the extreme severity which might attend such a penalty under present scales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me." My Lords, I do not think that the words of Section 25(3) which are in question give any hint of an intention to measure the tax penalty by a computed excess of this sort. It can be done if an appropriate formula is used. Section 48, for instance, does apply such a formula, where the conditions are such that an assessment, though an inadequate one, has been made. Again, section 49 allows treble the excess tax where a false return of Schedule D income has led to underassessment or would have led to it if undetected. But no such formula is used or indicated in the section that we have to consider. Moreover, there is another and fundamental obstacle to the introduction of this "excess tax" idea which the Court of Appeal judgment imports into the meaning of the section. Their definition depends essentially on the existence of a first incorrect assessment, such as they believed to have been made in this case, which assessment can then be compared with the corrected true assessment which emerges when the full facts are known. We were assured by the Attorney-General in the course of his argument that in this case there had been no such assessment for 1952-53, and, as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule E assessment. The result was that ? 21 of the untaxed interest was, in effect, taxed under Schedule E and recovered through P.A.Y.E.; and the deduction of ? 21 from the full amount of ? 51 "untaxed interest" in the Schedule D assessment is merely a recognition of this arrangement, designed to prevent the ? 21 from being taxed twice over. It does not mean that Mr. Hinchy's assessments, when they came to be made, were on anything less than the full sum of ? 51 for untaxed interest. Considering the way that the matter is dealt with in more than one letter in the correspondence exhibited, I do not wonder that the Court of Appeal took the facts to be otherwise. I still do not know why the figure of ? 21 was taken for the purpose of adjusting the P.A.Y.E. code number. It is quite possible that it was related to the ? 18 6s. shown in the inaccurate return of April, 1952: but, even so, P.A.Y.E. is no more than provisional retention of tax. It is not assessment. It appears, therefore, that in this case there was never any failure to charge the taxpayer with the true amount of his tax for the year or any inadequate lower assessment induced by his wrong return. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e charged under this Act" can ever have been intended to mean the amount of tax which a person would escape if his inaccurate return were accepted as providing final figures for the purposes of assessment. The basic facts of the administration and collection of tax do not admit any reality to such a conception. I come back, therefore, to the only construction which is, I believe, open to a court of law. When a man does what Mr. Hinchy did, sends in what is not a true and correct return, he commits an offence and the measure of his penalty must be ascertained as the situation is at that date. At that date he will neither have been assessed nor will he have paid any tax for the year except, it may be, some provisional deduction under P.A.Y.E. The question, what tax he ought to be charged under the Act seems to me to be, in these terms, a simple one. It is the sum of tax for which he will become liable for that year when assessment properly carried out under the Act has imposed liability upon him. It could not be anything else when the offence consists of failing or refusing to make a return at all, and I do not see how the meaning of the words can change if the offence takes th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tens of thousands of pounds but also presents striking anomalies when its effect is contrasted with the effect of other penalty sections in the same Act. I do not think it necessary to dwell upon these or to illustrate them, because the opportunities of doing so are almost inexhaustible. What I do not perceive, however, is how these considerations can alter the interpretation of the words used by the statute. If it is said that Parliament could not have intended to impose such onerous fines for breaches which in some cases may not be blameworthy in any degree, I can only point out that Parliament has imposed just the same penalty where the default is neglect to make any return at all, and yet none of the suggested interpretations of the section achieves any penalty short of treble the whole direct assessment in those cases where there has been neither return nor assessment. Personally, I do not see any marked distinction in degrees of blame between mere carelessness which results in not making a return and that form of carelessness which leads to a return being made which misleadingly appears to be complete when it is not. Again, whatever we managed to say about the meaning of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and learned friend, Lord Radcliffe. I agree so entirely with his conclusions and with the reasons he gives for thinking this appeal must be allowed that I shall only detain your Lordships long enough to say that I prefer not to express any opinion as to whether surtax enters into the calculation of treble tax until that point arises. I would allow the appeal. LORD KEITH OF AVONHOLM. My Lords, the judgment of the Court of Appeal would seem to have proceeded on a false premise, namely, that after the false return was made by the respondent he was assessed on the return so made and that there was a balance of income undisclosed on which he had not been assessed. But that was not the position. The discovery by the Revenue of the undisclosed income was made after the return had been made and before any assessment was made. Mr. Hinchy was then assessed, after deduction of due allowances, on the full amount of income subject to assessment, including the Post Office Savings Bank interest which he had failed to disclose. Thereafter proceedings were taken for recovery of penalty in respect of the incorrect return. The Court of Appeal, in my opinion correctly, say that the offence is committ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, what is meant by the words in subsection (3), "treble the tax which he ought to be charged under this Act." There are a number of penalty sections under the Act, all of which were referred to in the course of the argument. They do not provide any coherent or intelligent code, and in the confines sometimes of even a single section apparent anomalies can be discovered. It will be convenient to consider these sections in three groups according to the variation of language by which the penalty is imposed. In the first group I place section 18 and section 25, omitting for the time being the sections to which section 25 applies; in the second group section 48 and section 49; and in the third group paragraph 4 of Schedule VI. Section 18 and section 25 read as follows: "18.--(1) It shall be the duty of every person who is chargeable to income tax for any year of assessment to give notice to the surveyor that he is so chargeable at or before the end of that year: Provided that no such notice need be given by any person as respects any year for which he has delivered a statement of his profits and gains in accordance with the provisions of this Act. (2) If any per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioners shall also proceed to assess or cause to be assessed every such person who makes default as aforesaid. (5) If any person who is required to deliver a list, declaration, statement or return on behalf of any other person delivers an imperfect list, declaration, statement or return and declares himself unable, within the time limited, to deliver a more perfect list, declaration, statement or return and states the reasons for his inability, he shall not, if the General Commissioners are satisfied with his explanation and grant further time for delivery, be liable to the penalty prescribed by this section if he delivers, within the further time granted, as perfect a list, declaration, statement or return as the nature of the case permits. (6) If a person delivers to any surveyor a list, declaration or statement on a form prepared for the purpose by direction of the Commissioners of Inland Revenue, he shall be deemed for the purposes of this section to have been required by a notice under the preceding provisions of this Chapter to prepare and deliver that list, declaration or statement, and the time limited for the delivery thereof shall be deemed for the purposes of this se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latory meaning, so that, if the taxpayer makes an incorrect return, the tax which he ought to be charged under the Act is limited to tax on the amount of the undisclosed income? This is the view, I think, taken by the Court of Appeal. I find it impossible to put such a construction on words which seem to me to be quite unambiguous. So limited the tax would be only part of the tax which he ought to be charged under the Act. It was conceded by the learned Attorney-General that the penalty is to be measured only by tax on income which is the subject of direct assessment, a concession which I am disposed to think could not be withheld. Income from which tax is deducted under Schedule D is not income charged to tax in the hands of the recipient. Nor is it contended for the Revenue that the tax to be charged includes surtax, for reasons which I do not find it necessary to examine. It may be noted also in passing that the non-fraudulent offender has a method of escape from the stringency of the penalties, under, section 55 of the Act, which gives opportunity for rectification of returns and other relief. Sections 48 and 49 of the Act, are as follows: 48.--(1) Where a person who ought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any gross or wilful neglect, charge that person, in respect of such excess, in a sum not exceeding treble the amount of the tax on the amount of the excess. (2) If the person to be charged has neglected or refused to deliver a statement or schedule, the said commissioners may charge him in a sum not exceeding treble the amount of the tax with which, in their judgment, he ought to be charged, and such sum shall be added to the assessment and applied in the same manner as other increased charges are applied." The proviso to sub-section (1) of section 48 clearly limits the penalty to treble the tax on the amount of income undisclosed where a charge has already been made on the disclosed amount. There may be observed, however, several new features in the matter of penalty. There is no ? 20 penalty. There is no provision for proceedings for penalty in a court. The penalty is a fixed penalty or treble tax, not a maximum within which the commissioners have a discretion to operate. Lastly, if the fraud is discovered before any tax is imposed the penalty is treble tax. Only where tax has already been charged does the tax- payer escape with treble tax measured by what he has frau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against or deducted from, or was entitled to charge against or to deduct from, another person; or (c) fraudulently makes a second claim for the same clause, shall forfeit the sum of twenty pounds and treble the tax chargeable in respect of all the sources of his income as if such claim had not been allowed. (2) A person who knowingly and wilfully aids or abets any person in committing an offence under this paragraph shall forfeit the sum of ? 500." Here your Lordships find a further variation of penalty in cases of fraudulent claims for relief, reflecting often relatively small results in the matter of tax liability. The penalty here is the severest of all. The ? 20 penalty makes its appearance again; treble tax is mandatory and it is imposed in respect of all the sources of his income as if such claim had not been allowed." It is thus not limited as in sections 18, 25 and 48 to income subject to direct assessment. I have referred to these sections because they all disclose in the circumstances to which they apply a variety of penalties which present no intelligible pattern and which, in relation to one another, seem often highly inequitable. Nor does the general p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
