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1940 (12) TMI 29

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..... le to this Case; Rules applicable to Case III, 1. The tax shall extend to - (a) .... any annuity or other annual payment whether such payment is payable within or out of the United Kingdom..... It is clear that an annuity or other annual payment falls to be struck with tax as being an annual profit or gain , and this is the reason why it becomes necessary to examine the nature of an annual payment in order to see whether it is in truth an income or a capital payment-a question which cannot be answered merely by pointing to the fact that it is annual. Questions of this kind are notoriously difficult and give rise to distinctions of a highly artificial character. The present case is no exception. It is no doubt true to say that in order to answer the question the real nature of the transaction must be ascertained. This proposition has an engaging appearance of simplicity; but it is not so simple as it sounds. For the expression the real nature of the transaction is ambiguous. It may mean the real nature of the legal relationship of the parties which results from the transaction - a matter which may not be in doubt; or it may include as well the real nature of the transaction .....

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..... will be self-evident from the figures themselves. It may even be stated in terms. The financial result of the transactions is therefore clear : at the end of the period B will have received an amount equal to his capital, plus a certain addition for interest, and if each annual payment is struck with tax he will in one sense be paying tax on capital. Nevertheless, it has throughout been assumed by the Courts that such payments are liable to tax. (See for example Coltness Iron Co. v. Black (1881) 1 Tax Cas. 287, Jones v. Commissioners of Inland Revenue (1920) 7 Tax Cas. 310, and Perrin v. Dickson (1930) 14 Tax Cas. 608. The reasoning in Scobles Case (1903) 4 Tax Cas. 618 seems to be based upon the same view). In Perrin v. Dickson (1930) 14 Tax Cas. 608, on the other hand, this Court felt itself at liberty to hear extrinsic evidence as to the method of calculating the payments which feel to be made, and upon the facts so ascertained, coupled with a particular term of the contract, to hold that they were of a capital nature. I must confess that I find the reasoning of the judgments in that case difficult to follow. In the events which happened the liability to make the annual payme .....

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..... he recipient will have received an amount equal at least to what he paid I feel bound to treat as irrelevant. Nor do I think it can make any difference if this result is stated on the face of the transaction. Perrins Case (1930) 14 Tax Cas. 608 decides at any rate that the absence of such a statement cannot prevent the annual sums paid being capital since extrinsic evidence was admitted : it appears to me to follow that the presence of such a statement cannot prevent them being income. I need not set out in detail the terms of the present contract. It bears upon its face statements to the effect that the result of its operation will be that the annual payments made under it will in the aggregate amount at the least to the sum paid by Mr. Sothern, while if Mr. Sothern were to live long enough they would exceed it. But the contract is in reality a contract to pay an annual sum to him during his life, with the added provision that in a certain event the payments will continue annually until an ascertainable date is reached, that date being fixed by reference to the amounts paid to him in this lifetime. In other words the contract is to pay an annual sum for an ascertainable period .....

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..... ments made to her were annual instalments of a fixed capital sum in respect of which the company became indebted to her, under the contract, on the death of the contracting party. It was not necessary to decide whether the payments made under the contract to Mr. Sothern during his life were chargeable to Income Tax as annuities. From the wording of clause 9 in the Special Case I should gather that the Special Commissioners regarded all the annual sums payable under the contract as falling within the description of annuities and accordingly chargeable to Income Tax. Lawrence, J., refrained from dealing with any question arising upon the sums paid by the company to the original contracting party. Similar questions to the present have been before the Courts on many occasions, but the principles to be applied in considering whether in a particular case periodical payments are or are not chargeable to tax under the Acts are well established, though not always easily applicable to the particular circumstances. I do not propose to examine the earlier authorities, but merely to take the statement of these principles as enunciated in this Court in the case of Perrin v. Dickson (1930) 14 .....

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..... Commissioners. The first line of attack made on this position by counsel for the respondent was to argue boldly that the term annuity in the Acts meant, and meant only, life annuity , and he pointed out that the present contract involved obligations on the company which were not terminated by the falling of a life, if the life fell before the period when the sums paid by the company reached the figure of the original cash consideration. It seems to me to be a sufficient answer that if annuity in the Acts means life annuity there was a short and conclusive argument available both in Foley v. Fletcher (1858) 28 L.J. Ex. 100 : 3 H. N. 769 and in Scobles Case (1903) 4 Tax Cas. 618 to defeat the claim that the periodical payments in those cases, which had no reference to life, were taxable as annuities, and the elaborate arguments in those two cases were superfluous and unnecessary. There was, however, a further and, if I may say so, far more plausible argument put forward, and it was as follows : It was said that if the premiums or the sum of the premiums paid by the so-called annuitant must, under the terms of the contract, in any event be returned to him, that circumstance .....

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..... y the company to the contractor in the case of Perrin v. Dickson (1930) 14 Tax Cas. 608 were held not to be chargeable to Income Tax made it necessary for this Court to hold the like in the present case. The decision in Perrin v. Dickson (1930) 14 Tax Cas. 608 was based on the fact that each member of the Court was satisfied that in that case the sums paid by Bishop Perrin were mere investments of capital received and in due course repaid by the company; that the transaction was merely one of a deposit of a fund with the company on the terms that the deposit should be repaid in one event without interest, but in the event of the whole scheme working out as anticipated, with compound interest calculated at 3 per cent. If that is the true view of the contract in question in Perrin v. Dickson (1930) 14 Tax Cas. 608, no doubt the repayments were not taxable but only the compounded interest. But it seems to me impossible to take a like view of the contract in the present case for the reasons I have given. Whether the view taken by the Court in Perrins Case (1930) 14 Tax Cas. 608 of the nature of the contract was consistent with the circumstance that if Bishop Perrin failed to keep up th .....

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..... poses and an annual payment which is in truth a capital payment, whether in discharge of a pre-existing debt or not, has repeatedly been emphasised, and no sure or simple test has or can be laid down for the solution of this problem. The only principle that I can deduce from the cases is that the Court must have regard to the true nature of the transaction from which the annual payment arises and ascertain whether or not it is the purchase of an annual income in return for the surrender of capital. If it is the purchase of an income it is taxable; if it is a capital payment it is not, though in the latter case if the annual sum represents a payment, or a return of capital, coupled with interest, the sum may be dissected and tax charged on so much as represents interest. Now in the case of a whole life annuity the sum paid is not in truth a return of capital plus interest. The annual payment is calculated on the grantees expectation of life. He is to receive during his life an annual sum considerably in excess of the normal interest that he would obtain on an investment, while the grantor takes the risk of the life being prolonged beyond a period which will yield a profit to him on .....

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