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TMI Blog1938 (2) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first case, the' judge reversed their decision; in the second, he affirmed it. The facts have some complexity, and are related to the claims of the company to relief under Section 27 in respect of the seven income-tax years 1924-25 to 1930-31 inclusive. Fortunately, it has been agreed that the facts with regard to the year 1928-29 can be treated as sufficiently illustrating the principles to be observed in applying the provisions of Section 27; and that agreement was observed in the King's Bench Division and in the Court of Appeal, and was continued in the hearing before your Lordships. 2. The company is a company incorporated in England under the Companies Act, with an authorised share capital of £1,500,000, of which at the material times £250,000 had been issued and paid up. It has also issued in the United Kingdom debentures at varying rates of interest secured on its uncalled capital. The amount of the debentures outstanding at September 30,1927, was £782,275 9s. 9d., and the amount of the interest paid in the year ending on that date was £39,321 11s. 10d. 3. The business of the company in the main consists in lending money in New Zealand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force in the two countries. The relief afforded is in respect of double taxation, and is then given as a relief from United Kingdom income-tax. It is necessary to prove (i) payment of or liability to pay United Kingdom income-tax for a year of assessment on a part of the payer's income, and (ii) payment of Dominion income-tax for that year in respect of the same part of his income. This involves the ascertaining of those "parts" in the two countries, by excluding from the statutory income in the two countries items, which do not satisfy the conditions according to the true construction of the section. For brevity, I shall call the part in the United Kingdom in regard to which the taxpayer can prove that he has paid Dominion tax in respect of the same part "the United Kingdom comparative income," and I shall call the similar part in respect of which he has paid New Zealand tax "the New Zealand comparative income." The problems to be solved are the amounts of these two comparative incomes. As will appear later, it is the smaller of the two in respect of which relief is afforded by the section. For the year 19'28-29, the profits of the trade of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .....(h) interest, except so far as the commissioner is satisfied that it is payable on capital employed in the production of the assessable income." "83 (1). When any land in which a taxpayer owns an interest, or any portion of such land, has throughout the income year or any portion thereof been actually used by the taxpayer exclusively for the purposes of his business or for the purpose of deriving rent, royalties, or other profits therefrom, he shall be entitled, by way of special exemption, to deduct from the assessable income derived by him during the income year, so far as derived from such use of the land, a sum computed in respect of the period of such use at the rate of 5 per cent per annum on the capital value for the time being of his interest in the land or in the portion thereof so actually used by him, as the ease may be, and income-tax shall be assessed and payable accordingly." "84 (2). Subject to the provisions of this Act, all income derived from New Zealand shall be assessable for income-tax, whether the person deriving that income is resident in New Zealand or elsewhere. (3) Subject to the provisions of this Act, no income which is nei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount so paid from his principal, or may deduct the amount from any moneys in his hands belonging or payable to his principal." 9. In computing the assessable income of the company in New Zealand, a deduction had been allowed [Section 80 (h)] for the interest on so much of the debenture capital as had been employed in the production of the assessable income, namely, the sum of £34,779. A special exemption was allowed under Section 83, amounting to £ 9,998. The dividends from New Zealand companies, the interest on New Zealand War Loan, and certain income earned in the United Kingdom, were also excluded. 10. The company was accordingly assessed to tax in New Zealand in respect of its business and assets there in the sum of £ 26,592, after making all the various deductions and exemptions above referred to. It was, however, also bound under Section 116 to make returns, and it was made liable to pay, and has paid, income-tax "in respect of all income derived by" the debenture holders from all the debentures it had issued. This is expressly stated in Section 116 to be done "as agent of all debenture holders, whether absentees or not.'' Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e United Kingdom comparative income to £34,470. The question here is whether that contention is correct. 12. My Lords, two points of principle have been argued in this House on behalf of the Crown, First, it is. contended that it is necessary for the purposes of Section 27 to investigate the component elements of the income as computed and assessed under the taxing Act of each country, and to eliminate elements not common to each system of taxation, i.e., elements which, not being included in the income as computed for the tax of each country, had not been the subject-matter of taxation by the law of each country. By this contention, it is sought to deduct the sum of £9,998 from the United Kingdom comparative income. Secondly, it is contended that the interest paid to the debenture holders was their income, for which the company has been taxed as agent for those debenture holders, and that the income in question does not fall within the expression "his income'' in Section 27 (1). If this contention were to prevail, the (adjusted) sum of £33,609 (paid in respect of debenture interest) could not be treated as part of the income of the company in New Ze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lord Buckmaster, which may be cited as throwing some light on the present case. He said, at p. 531 : "Taking the words (of the section) in order, there can be no doubt the company did pay "United Kingdom income-tax" on the full amount. 'The income-tax charged in accordance with the provisions of the Income-Tax Act' was charged on the whole of its profits and gains. Nothing less would have been accepted and no other person was liable to make the payment. But it is urged that even if this be accepted, to the extent of the debenture interest the payment was made on behalf of the debenture holders. To this extent that is true-namely, that, having paid, the company was entitled to deduct the tax from the debenture interest, and to the extent of that deduction, it was the debenture holders' tax that was thus discharged. But it was not the debenture holders who made the payment but the company." 15. Lord Warrington of Clyffe, at p. 536, put the same conclusion in other words when he said that the contention of the Crown required the words of the section to be read in a sense other than their ordinary and natural meaning, as, for example, "paid" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in a different position from that of allowances for repairs, or for wear and tear, or for bad debts. As was pointed out by Greene, L.J., at p. 33 : "It must have been present to the mind of the legislature that uniformity in the method of assessing business profits is not to be found throughout the Empire." 20. It is only necessary to read through the 13 clauses of the Income Tax Act, 1918, Schedule D, Cases I and II, Rule 3, to see how arbitrary are some of the provisions as regards deduction from profits and gains to be charged, and how improbable an event it would be to find the same clauses in force in the Dominions. The reasons given in the Assam Case, as well as the reasons given by Romer and Greene, L.JJ., are sufficient to show that rules which determine in the United Kingdom or in a Dominion the allowances or deductions which are permissible for the purposes of assessing a tax-payer to income-tax in either country must be disregarded in determining the comparable incomes in those countries, provided that the incomes are derived from the same source : (see the opinion of my noble and learned friend Lord Wright in the Assam Case, at p. 459). 21. To avoid mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is only being taxed as agent. As I understand the judgments in the Court of Appeal on this point, their conclusion on it would be the same as it was even if the debentures had been issued in New Zealand, and the interest being payable there, the company had deducted the whole or the tax in respect of the debenture interest. This may be the right view, but it does not seem to me to be necessary at the present time to decide the case on that ground. In the circumstances I have suggested it might perhaps be a true conclusion to draw from the New Zealand Act that the tax paid there in respect of the interest on the debentures was not taxed in respect of the company's income, and so not within the words of the section "has paid Dominion income-tax..................... in respect of the same part of his income," giving due emphasis to the possessive pronoun. 23. In the present case, the circumstances are different from those I have suggested. There cannot be a real agency without a principal, and I am unable to see how the company can be in any true sense an agent to pay tax for debenture holders who are not liable to pay it. The company has been allowed under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lord Maugham, L.C; and with regard to his opinion on the debenture interest question I also desire to reserve my opinion on the wider ground to which he has referred, and to confine myself to the facts of this present case. Lord Russell of Killowen : My Lords, I agree. Lord Macmillan : My Lords, in the fiscal year 1928-29 the respondent company paid income-tax both in the United Kingdom and in the Dominion of New Zealand. The question is to what extent this fact entitles them to relief from United Kingdom income-tax under the Finance Act, 1920, Section 27. 29. It is a condition of relief under that section that the taxpayer shall have paid tax both in the United Kingdom and in the Dominion in respect of the same part of his income and for the same year. 30. In the present case, no question arises as to the identity of the year of charge. Both here and in the Dominion the respondents were taxed in the same fiscal year-1928-29-on the basis of their accounts for their own financial year to September 30, 1927. The computation of their statutory income for tax purposes in both countries was thus based on the same set of figures. However, the methods of computation of income for tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal either directly or by deduction from any moneys in his hands belonging to or payable to his principal. The tax which the company has to pay as agent is calculated on the basis of the tax payable by the recipients of the debenture interest. While, therefore, the respondents' assessable income was reduced to £26,592 by the deduction, inter alia of £33,609 of debenture interest, they were nevertheless served with a separate notice assessing them for income-tax on this latter sum in precisely the same terms as those of the notice of assessment in respect of the £26,592, except that the words "as agent for debenture holders" were written below the amount brought out as due. 33. The respondents duly paid, as they were in law bound to pay, the amounts of tax brought out in both notices of assessments. The question is whether they can be said to have paid Dominion income tax on the £33,609 of debenture interest within the meaning of the Finance Act, 1920, Section 27. In my opinion, they can. It is true that the theory of the New Zealand Act seems to be that the debenture interest is to be regarded as income of the recipients, and that the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und; 33,609 of debenture interest has, both here and in New Zealand, been subjected, though under different schemes, to the full burden of income-tax. I may remind your Lordships that the view was at one time taken in this country by high authorities that a company paying income-tax on its profits did so as agent for its shareholders: Ashton Gas Co. v. Att. Gen. and Inland Revenue Commissioners v. Blott per Viscount Cave, (1921 A.C. at p. 201). 35. I have not hitherto adverted to the circumstance that in this particular case the respondents are unable in fact to exercise the right of recoupment conferred on them by the New Zealand statute, and consequently cannot reimburse themselves for the tax which they have paid "as agents", inasmuch as the contracts under which the interest was payable were made in the United Kingdom. Thus ultimately as well as primarily, the burden of the New Zealand tax rests upon them. I understand that your Lordships regard this special circumstance as affording the most satisfactory ground for holding that the respondents' claim to relief has been justified, without finding it necessary to adopt in this case the more general ground which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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