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TMI Blog1969 (7) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... llant for eight chargeable accounting periods between January 1, 1958, and December 31, 1962. In each case the appellant's title to relief arises because it is liable to United Kingdom income tax and profits tax on dividends which it receives from sources in the U. S. A. and Canada, which dividends have suffered tax in those countries or have been paid out of profits which have suffered tax there. The facts and issues are the same in both appeals and I need deal, therefore, only with the first. Section 51(1) of the Finance (No. 2) Act, 1945, provided that where arrangements had been made with governments of territories outside the United Kingdom for relief from double taxation, an Order in Council might declare that this has been done, and that it was expedient that the arrangements should have effect to the extent specified in the said section 51(1). This provision is now to be found in section 347(1) of the consolidated Income Tax Act, 1952. Such arrangements have been concluded with numerous other countries. So far as the U. S. A. and Canada are concerned they were made in 1946 ; and are attested as aforesaid by Orders in Council No. 1327 and 1885 of that year. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied period nor out of specified profits, the profits of the last period for which accounts of the body corporate were made up which ended before the dividend became payable : Provided that if, in a case falling under sub-paragraph (a) or subparagraph (c) of this paragraph, the total dividend exceeds the profits available for distribution of the period mentioned in the said sub-paragraph (a) or the said sub-paragraph (c), as the case may be, the relevant profits shall be the profits of that period plus so much of the profits available for distribution of preceding periods (other than profits previously distributed or previously treated as relevant for the purposes of this paragraph) as is equal to the excess ; and for the purposes of this proviso the profits of the most recent preceding period shall first be taken into account, then the profits of the next most recent preceding period, and so on. " The present dispute arises from the different constructions given by the appellant and the revenue to the expression " the relevant profits " ; and it involves a considerable sum. If the expression refers to the profit shown in the Canadian and U. S. A. subsidiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany's accounts (but also as diminished by the U. S. A. tax). Thus : 3,000 ------- X $ 4,000 tax =$ 2,400 tax 5,000 attribuable to a net dividend of $ 3,000. i.e., at a rate of 44.4 per cent. There is no dispute between the parties that the construction of a fraction, and its application to the amount of the U. S. A. tax, is a proper method for discovering the amount of double taxation relief to be afforded ; but it will be seen that the dispute over what should be the proper denominator of the fraction affects the quantum of the relief to be given by means of a credit against United Kingdom income tax. The dispute arises, as I have said, over the rival interpretation of the expression in paragraph 9 " the relevant profits " already referred to. All the courts below have decided that it means the profits shown in the relevant account, and not the profits to the extent that they have been assessed to the foreign tax. I also have reached this conclusion, and will state my reasons briefly. Section 347 and Schedule 16 are of general application and have to be worked in relation to all double taxation agreements. Different countries which have concluded these agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y are profits available for dividend ; and I do not see, in the argument that the directors may be able to decide the amount of such profits, any sufficient ground for departing from that view. The decision of the Court of Appeal in Sterling Trust Ltd. v. Inland Revenue Commissioners [1925] 12 T. C. 868] was also relied upon. There the company had two kinds of income ; one which had come from other companies which had suffered corporation profits tax on their profits ; and the other income which was assessable to that tax in the company's own hands. The first kind of income was immune from further corporation profits tax ; and to keep this fund intact, the company argued that it was entitled to treat its management expenses and the debenture interest which it had to pay, as having come out of its income which still had to bear corporation profits tax so as to diminish that income and consequently the bill for tax. It was held that it was entitled so to do. So, says the appellant, it should here be allowed to treat the dividends as paid out of the profits assessed to tax. But there are not two funds here as in the Sterling Trust case. There is only one, and none the less so bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the year ended December 31, 1959, a profit of $ 2,359,151. But after adjustments have been made to take account of capital cost allowances and other matters, tax is payable only on $ 1,298,166. On this latter figure the tax charge is $ 641,833. The company contends that the rate of foreign tax to be credited is 641,833/1,298,166, namely, 49.44 per cent. The revenue contends that it is 641,833/2,359,151, namely, 27.21 per cent.-the larger figure being, obviously, more favourable for the appellant. The question, therefore, resolves itself into this : which is the correct denominator of the fraction, the numerator being the same ? This translated into legal terms, means which are the relevant profitsthe profits computed for the foreign tax, or the profits as shown in the company's profit and loss account ? The governing provision, paragraph 9 in Schedule 16 to the Income Tax Act, 1952, has been set out and it uses the expression " relevant profits. " Which profits are these ? This is simply a matter of construction of the section. Before I examine the language, it is appropriate to ask, generally, whether the rule ought to be approached with any predisposition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . which the company is free to distribute. This conception of relevant profits as those profits which constitute a fund out of which a distribution may be made is confirmed in the definitions (a), (b) and (c) which follow. In each case the profits referred to clearly are distributable profits, for a period, or as identified on the distribution : equally clearly they cannot be the computed profits. Indeed, these latter may be computed in respect of quite a different period from that for which the dividend is paid. If any doubts linger, they are dispelled by the proviso which, as I read it, reflects back the words " available for distribution " into the preceding (a) or (c), making it clear that these are the profits considered " relevant " in those cases. It was contended by the appellant that if the " relevant profits " means profits as shown in the company's accounts, the reference in the proviso to profits available for distribution would be tautologous and that the use of these words in the proviso presupposes that " relevant profits, " earlier used, means something else. I am unable to agree with this : I prefer to read the rule a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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