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TMI Blog1947 (3) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... r it to the Revenue in so far as the payment is not made out of profits or gains brought into charge (Rule 21 of All Schedules Rules). The facts which give rise to this question may be shortly stated as follows: The appellant had an agreement with one Ridsdel that, in consideration of the appellant introducing to him a transaction for the purchase of a block of shares, Ridsdel would pay to the appellant half of any profits which he realised on the resale of the shares. Ridsdel resold the shares at a profit, but fraudulently pretended that the sum which he thereafter paid over represented the whole of the appellant's share of the profit. Later, the appellant ascertained that the profit of which he was to receive one half was much greater than Ridsdel had represented, and after Ridsdel's death he brought an action before Oliver, J., against the respondents as judicial truetees of Ridsdel's estate for the balance due to him, which was ascertained to be a sum of £ 36,255. The judge, exercising his power under Section 3 of the Act of 1934, in addition to giving judgment in the appellant's favour for this amount, awarded an additional sum of £ 10,028, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct income tax from the interest he was ordered to pay. He is reported as saying (p. 651) that it is not a question of contract at all and that the order made had (1)[1899] 2 Ch. 629.(2)[1929] 14 Tax Cas. 580 the effect that the company had had its capital withheld and had suffered damages equivalent to 5 per cent. per annum for that reason. The judge added: "I can see no reason why it should not get the whole of the damages back. It is called 'interest' but it is really damages for withholding its capital from the company." These observations have long been considered as of doubtful validity and the time has come to say that they are wrong. If damages are increased by adding interest on a principal sum, that does not prove that such interest is not liable to tax. Simpson v. Executors of Bonner Maurice(1) was of a very special character. It arose under article 297 of the peace treaty with Germany after the 1914-1918 war. Article 297 provided that the nationals of allied and associated powers should be entitled to compensation in respect of damage or injury inflicted upon their property, rights or interests in Germany. Before the war a British subject had deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 3(1), and included pursuant to that section in the total sum for which judgment in the King's Bench Division was given in favour of the appellant, is "interest of money" within the meaning of the Income Tax Act, 1918, Schedule D, para. 1(b), which enacts, inter alia, that tax under this schedule shall be charged in respect of "(b) all interest of money." The appellant brought the action against the judicial trustees of one Ridsdel, claiming one half of the profits realised by Ridsdel by the sale on joint account with the appellant of certain shares in 1936. The action was commenced in 1939 when the appellant discovered that Ridsdel had not disclosed the true amount of the profit realised. The judge at the trial by his judgment given on May 17, 1943, found in favour of the appellant, holding that £ 36,255 was due on balance to him and in addition awarded him £ 10,028 in exercise of his discretion under the Act, as being interest at 4 per cent. per annum on £ 36,255 from June 14, 1936, when the profits were realised by Ridsdel, to May 14, 1943. The Court of Appeal affirmed that judgment. The respondent claimed that he had satisfied the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation whether the compensation was liquidated under an agreement or statute, as, for instance, under the Bills of Exchange Act, 1882, Section 57, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest. For reasons that go back far in history the distinction between interest proper as it has been called, that is, interest due under a contract, statute or the like, and interest by way of damages, that is, not due under an agreement express or implied has since very early days been recognised in England whether in the ecclesiastical or common law courts. Moneylending was condemned by the mediaeval mind as usurious (Tawney, Religion and the Rise of Capitalism, at pp. 54 and 55). The reproach of usury was not answered by saying the interest was due under a contract. Tawney state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f what is called interest proper, under a contract or the like, so that the interest particularly dealt with by the Act is what has been called interest by way of damages. The category (c) included in Section 3 (1) of the Act was necessary to exclude interest awarded on the dishonour of a bill of exchange the award of which, though often described as damages, is now statutory. The award is not in the discretion of the court where the interest is payable as of right. It is clear that the Act used the word "interest" in its widest sense, including both interest proper and interest by way of damages. It is not a consolidating Act, but a reforming or amending Act. It is intended to enlarge the powers of the court. In 1893 this House reviewed the then existing position as it stood at common law and the established principle up to that date. Lord Herschell, L.C., in London, Chatham & Dover Railway Co. v. South Eastern Railway Co. [1893] A.C. 429, at p. 440 said that the words of Lord Tenterden's Act (the Act of 1833) kept claims for interest within very narrow limits which to him seemed too narrow for the purposes of justice, but he held that the authorities which he cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be found in Glenboig Union Fireclay Co., Ltd. v. Inland Revenue Commissioners [1922] 12 Tax Cas. 427, in which it was held that the sum there awarded was, in truth, though described as interest, only a method of determining the value of the fireclay sterilized in the hands of the company for which it was entitled to compensation. That was a payment on capital account. It was for the destruction of a capital asset, which was indeed the source of profits but could not be regarded as income. On the other side of the line is Inland Revenue Commissioners v. Barnato [1936] 20 Tax Cas. 455 where the payment was a sum of compound interest which had been made to the taxpayer in commutation of his share of profit in a partnership. It was a sum of profit, not capital. I need not go through the numerous cases which have been cited to illustrate the circumstances under which a sum has been taxed as income or has been held immune on the ground that, whether called interest or not, it was really a payment on capital account. In regard to some of these decisions opinion may differ as to the exact result arrived at on the facts, but they all agree in using the word "interest" and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pound; 10,420 already received by the appellant and £ 46,675, i.e., one half of the profit of £ 93,350 admittedly made by Ridsdel), together with a further sum of £ 10,028 (making £ 46,283 in all) which the judge in the exercise of his discretion awarded as interest under the section to which I have referred. This sum of £ 10,028 represents interest at 4 per cent. per annum on £ 36,255 from June 14, 1936 (when that sum should have been paid), to May 14, 1943 (the date of judgment). From this judgment the respondent appealed to the Court of Appeal, but his appeal was dismissed. In July and August, 1943, the respondent paid the appellant sums amounting to £ 41,269, made up of the sum of £ 36,255, of a sum for interest on the judgment after the date of judgment and of a sum of ? 5,014, being the sum of £ 10,025 included in this judgment as interest after deduction of income tax therefrom at the standard rate then prevailing of 10s. in the £. For this balance of £ 5,014 the respondent held itself accountable to the Crown. The respondent made this deduction under the All Schedules Rules of the Income Tax Act, 1918, Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment: Provided that nothing in this section-(a) shall authorise the giving of interest upon interest; or (b) shall apply in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise; or (c) shall affect the damages recoverable for the dishonour of a bill of exchange. (2) Sections 28 and 29 of the Civil Procedure Act, 1833, shall cease to have effect." My Lords, I do not think that it could readily have occurred to anyone that interest awarded under this section was not "interest of money" within the taxing provision, were it not that behind it there lies a history to which I must shortly refer. Taken by itself, the section provides in unambiguous terms that, where judgment is given for a principal sum, the court may order that it shall be an interest-bearing principal sum. The principal sum is " money " and the interest on it is "interest of money." I can see no reason why it should not be "interest of money" for the purposes of tax. That the word "interest&qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of "interest" simpliciter, but, by Section 29, provided for the giving of "damages in the nature of interest." I should not be prepared to concede that it makes any difference for the purposes of income tax whether a sum of money is called "interest." or "damages in the nature of interest" or "interest in the nature of damages," but the appellant's argument ties him to Section 28 which refers to the allowance of "interest" and nothing else. I come then to the second stage and ask : What is the character of interest allowed under the Act of 1833, Section 28? Here the argument is that, call it interest or what you will, it is damages and, if it is damages, then it is not "interest in the proper sense" or "interest proper," expressions heard many times by your Lordships. This argument appears to me fallacious. It assumes an incompatibility between the ideas of interest and damages for which I see no justification. It confuses the character of the sum paid with the authority under which it is paid. Its essential character may be the same, whether it is paid under the compulsion of a contract, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest, James, L.J., said [1880] 15 Ch. D. 169, at p. 174: "A policy of assurance does not bear interest. That is conceded on all hands. In itself, there is neither an express nor an implied contract to pay interest on the amount payable. Under the Act, 3 and 4 Will. 4, c. 42, whether it comes within any common law principle or not, anything in the nature of interest can only be given, in my view, as damages for the wrongful detention of money which ought to have been paid." These and similar observations, which I might multiply (e.g., in a line of cases concerned with "specially indorsed" writs, see Ryley v Master [1892] 1 Q.B. 674) were cited on behalf of the appellant to show that a sum awarded as interest under the Act of 1833, Section 28, is in essence not "interest proper" but damages. But, to my mind, the answer is given by Evershed, J., in his judgment in words which I cannot improve on and, therefore, adopt: "...the proposition that interest is awarded as damages or by way of damages, as in the case of Cook v. Fowler [1874] L.R. 7 H.L. 27, imports the justification for the award or for the rate awarded, but does not affect the qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Lord President where he says [1924] 8 Tax Cas. 595, at p. 612: "if the decree was substantially one of damages, the interest ordered to run on it was just part of the damages, and not therefore chargeable to income tax." Again in Glenboig Union Fireclay Co., Ltd. v. Inland Revenue Commissioners [1922] 12 Tax Cas. 427, the claim to tax was rejected because, though certain sums were described as interest, yet in substance a capital sum of compensation was awarded, the element of interest being introduced in modum aestimationis. So, also, in Simpson v. Executors of Bonner Maurice [1929] 14 Tax Cas. 580 tax was held not to be exigible on any part of a sum which was paid by way of compensation under article 297(e) of the Treaty of Versailles. It is sufficient to cite a sentence from the judgment of Lawrence, L.J., in that case to show how different were its circumstances from those where interest was allowed under the Civil Procedure Act, 1833, or is ordered under the Act of 1934. He said [1929] 14 Tax Cas. 580, at p. 605: "Article 297 of the Treaty says nothing about the payment of interest, and the money paid under the direction of the Mixed Arbitral Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to 5 per cent. per annum and that he saw no reason why it should not get the whole of the damages back. He concluded [1899] 2 Ch. 629, at p. 651: "It is called 'interest' but it is really damages for withholding its capital from the company. I have tried to find some authorities on the question, but I am unable to find any." I agree with counsel for the appellant that, if this case was rightly decided, he is entitled to succeed here, but the reasoning of Wright, J., cannot, in my opinion, be supported and his decision must be overruled. It was further urged on behalf of the appellant that the interest ordered to be paid to him was not "interest of money" for the purpose of tax because it had no existence until it was awarded and did not have the quality of being recurrent or being capable of recurrence. This argument was founded on certain observations of Lord Maugham in Moss Empires, Ltd. v. Inland Revenue Commissioners [1937] A.C. 785, at p. 795 in regard to the meaning of the word "annual." It would be sufficient to say that we are here dealing with words in the Income Tax Act which do not include either "annual" or &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scots cases cited by counsel. Claims for interest may arise in Scots law ex pacto, ex lege or ex mora. Interest ex pacto is beyond question income in the hands of the recipient. The same may be said of interest ex lege, and it was so decided in Sweet v. Macdiarmid [1920] 7 Tax Cas. 640. Interest ex mora corresponds to the interest awarded to the present appellant under the Law Reform (Miscellaneous Provisions) Act, 1934, Section 3. That interest ran from the date at which the principal sum was first wrongfully withheld from the appellant and it is wrongful retention of the debt from the creditor that is the legal ground for an award of interest ex mora in Scotland (Carmichael v. Caledonian Railway Co. 8 M., H.L. 101, at p. 131, Lord Westbury). The correspondence is not complete-for example, interest is awarded by the Scottish courts as of right, whereas in England the award depends on the exercise of a discretion which the statute has committed to the jury or the court. Nevertheless, the principle of the decision in this appeal will apply to interest awarded ex mora in Scotland. The retention of the principal sum in the present instance was fraudulent, but the award of interest e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich case it would have been subject to income tax, and when it did reach their hands I think they were equally bound to apply it in accounting with the beneficiaries as income, and I am unable to see any sound reason for holding that it did not become liable to income tax in the hands of the trustees when received." Lord Johnston, in the course of his opinion, took occasion to say that where a pursuer recovers damages with interest from the date of decree he did not think that that interest was chargeable. I do not agree with Lord Johnston on this point, and I am of opinion that in such a case the interest, even if it is properly to be considered as part of the damages, is nevertheless received as income by the creditor in the judgment-debt. However that may be, Schulze v. Bensted [1915] 7 Tax Cas. 30, at p. 34 is authority for the proposition that interest awarded ex mora, even in an action of damages, is income and not capital in the hands of the creditor and is subject to income tax. In short, it decided practically the same point as has arisen in the present appeal and it decided it in complete accordance with the opinion which has been expressed by my noble and learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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