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TMI Blog1961 (10) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... the owner of 98,700 1 shares in the capital of B.J. Sutherland Co. Ltd., of which company he had had control during the five years ending with his death. Consequently, for purposes of estate duty, the shares had to be valued by reference to the net value of the assets of the company, in accordance with the provisions of sections 50 and 55 of the Finance Act, 1940, instead of by reference to the then open market value of the shares pursuant to section 7(5) of the Finance Act, 1894. The assets of the company at the date of the deceased's death included five ships, the value of which at that date had been agreed with the Estate Duty Office to be 1,150,000. The cost of these ships to the company for income tax purposes had been agreed to be 847,907, and at the date of the deceased's death the company had received capital allowances under the provisions of Part X of the Income Tax Act, 1952, leaving expenditure unallowed (as defined by section 297 of the same Act) of 290,749. In the event of a sale of the ships for a sum in excess of the amount of such expenditure unallowed, under section 292 of the Income Tax Act, 1952, a balancing charge would be imposed of an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly decided having regard to subsequent authorities. It is irrelevant because it was concerned with income tax on profits and gains for the purposes of Schedule D and not with balancing charges. Further, the question there at issue would be decided differently if it arose for decision today since the reasoning of the Court of Appeal in that case [1949] Ch. 28; 64 T.L.R. 545; [1948] 2 All E.R. 756, C.A. as to income tax as an existing liability is inconsistent with that of this House in British Transport Commission v. Gourley [1956] A.C. 185; [1956] 2 W.L.R. 41; [1955] 3 All E.R. 796, H.L. It is plain that but for In re Duffy [1949] Ch. 28. Danckwerts J. [1960] Ch. 134, 142, 143; [1961] 41 I.T.R. (E.D.) 1. would have found in the appellant's favour; his view that in Duffy's case [1949] Ch. 28. the words contingent liability were given too narrow a meaning is adopted. The appellants adhere to their proposition, which was rejected by the Court of Appeal [1960] Ch. 611, 622. , that the sole and express statutory hypothesis on which the valuation falls to be made under section 55 and section 50 of the Finance Act, 1940, is a notional sale of the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The charging section imposing liability for profits tax remains section 19 of the Finance Act, 1937: see section 31(1)(a) of the Finance Act, 1947. The charge there imposed does not require any further Act to perfect it. Subsequent Finance Acts only prescribe that rate of tax payable for the relevant year. Balancing charges in relation to profits tax are dealt with by paragraph 2 of the Eighth Schedule to the Act of 1947. [Reference was also made to section 7(5) of the Finance Act, 1894, sections 122, 280 and 323 of the Income Tax Act, 1952, and section 13 of the Finance Act, 1953.] Watson following. On analysis it will be seen that the true certainty here is that once a trading company has elected to take the benefit of a capital allowance there will ultimately be a reckoning between the trader and the Revenue. This machinery is designed to adjust any over or under allowance of capital allowances. The set of circumstances which attract the reckoning in section 292 is well-nigh exhaustive. The only possibility which is not provided for is that the whole tax machinery falls to the ground and that, therefore, there will be no liability. Furthermore, there are all the elements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression contingent liabilities is to be construed as widely as the appellants contend the question arises, where does one draw the line? Presumably it includes every probable liability. It is submitted that section 50 is aimed primarily at the contractual obligations of the company and not at obligations arising under a statute. On the true construction of section 50 there must be a legal liability existing at the date of death. At the time of the deceased's death no one could foretell whether the ships would be sold then or whether the business would be continued for a considerable time and the ships then sold at a time when their sale would give rise not to a balancing charge but to a balancing allowance. The commissioners are not bound to assume that the ships would be sold shortly after the death. It is conceded that as soon as an allowance is accepted there arises an obligation to pay in certain circumstances, but whether the sum in question is ever payable depends on the volition, and is under the control, of the company as to when it sells the assets. It is this factor of volition which impressed Roxburgh J. who determined In re Duffy at first instance Unrepor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open market: see per Lord Evershed M.R. [1960] Ch. 611, 624 and Upjohn L.J. Ibid. 628, 629 Section 7(5) is concerned with the market value of the assets and not with the net amount that comes into the hands of the vendor. Contrast section 9 of the Finance Act, 1912, which concerns estate duty on timber where the valuation is related to the net moneys, after deducting all necessary outgoings. See also Tyser v. Attorney-General [1938] Ch. 426; 54 T.L.R. 481; [1938] 1 All E.R. 657; 2 E.D.C. 623 , where Simonds J. construed the expression proceeds of sale in section 40(2) of the Finance Act, 1930, as meaning net proceeds of sale. As to the authorities, British Transport Commission v. Gourley [1956] A.C. 185 has no relevance here for it concerned damages for loss of earnings actual and prospective and the prospective liability to tax on such prospective earnings. Lord Dunedin's dictum in Whitney v. Inland Revenue Commissioners [1926] A.C. 37, 52 does not assist the appellants for he assumes the existence of income tax in the relevant year. There cannot be a charge to tax until the tax is in existence and a rate in respect thereof prescribed. The appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court Estates Ltd. [1950] A.C. 508; 66 T.L.R. (Pt. 1) 945; [1950] 1 All E.R. 1018, H.L. ] Stamp following. In English law the word liable means bound or obliged by law or equity: see the Oxford Dictionary. The word liability has a corresponding meaning. Was this company at the date of the deceased's death under an obligation in law or in equity in respect of the payment of a balancing charge? That is the question. Was the company under a liability? That is the question which section 55 of the Act of 1940 poses, and then one turns to section 50 to see how that is quantified. The fact that section 50 uses the word contingent cannot give a different colour and meaning to the word liabilities as understood in English law. By a contingent liability in English law is meant a legal liability which will only be performed or be required to be performed in certain circumstances. There is no necessity to extend the meaning of liabilities in section 55 in order to cover contingent liabilities in section 50(1). It matters not for present purposes that the performance of the liability is prospective, provided that at the basis of the liability there is an existing bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimately on the proper construction of the words contingent liabilities in section 50(1) of the Finance Act, 1940, but before coming to that subsection I must briefly refer to certain other provisions. Section 55 of that Act provides that, where there pass shares of a company of which the deceased had control, the principal value of the shares ...shall be estimated by reference to the net value of the assets of the company in accordance with the provisions of the next succeeding subsection. (2) For the purposes of such ascertainment as aforesaid--(a) the net value of the assets of the company shall be taken to be the principal value thereof estimated in accordance with the said subsection (5), less the like allowance for liabilities of the company as is provided by subsection (1) of section fifty of this Act in relation to the assets of a company passing on a death by virtue of section forty-six of this Act, but subject to the modification that allowance shall be made for such a liability as is mentioned in paragraph (b) of that subsection unless it also falls within paragraph (a) thereof;... Section 50(1) provides: In determining the value of the estate for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be demanded from the company: the sums received for the ships must exceed the unallowed expenditure, and there must be no relevant change in the law and no failure to enact a Finance Act. The question is whether in these circumstances there was a contingent liability of the company to pay tax. No doubt the words liability and contingent liability are more often used in connection with obligations arising from contract than with statutory obligations. But I cannot doubt that if a statute says that a person who has done something must pay tax, that tax is a liability of that person. If the amount of tax has been ascertained and it is immediately payable it is clearly a liability; if it is only payable on a certain future date it must be a liability which has not matured at the date of death within the meaning of section 50(1). If it is not yet certain whether or when tax will be payable, or how much will be payable, why should it not be a contingent liability under the same section? It is said that where there is a contract there is an existing obligation even if you must await events to see if anything ever becomes payable, but that there is no comparable obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t him till it actually exists; so that the condition of an uncertain event suspends not only the execution of the obligation but the obligation itself...Such obligation is therefore said in the Roman law to create only the hope of a debt. Yet the granter is so far obliged, that he hath no right to revoke or withdraw that hope from the creditor which he had once given him. So far as I am aware that statement has never been questioned during the two centuries since it was written, and later authorities make it clear that conditional obligation and contingent liability have no different significance. I would, therefore, find it impossible to hold that in Scots law a contingent liability is merely a species of existing liability. It is a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more of certain events occur or do not occur. If English law is different--as to which I express no opinion--the difference is probably more in terminology than in substance. I must now turn back to the provisions of section 50(1) of the Finance Act, 1940. It directs the commissioners to make an allowance for (or deduction in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contingent liability for tax for 1943-44. As pointed out by Roxburgh J. in a judgment Unreported which I find convincing, it had done nothing of the kind. Whether the company would have to pay tax for the year 1943-44 depended entirely on whether they chose to carry on trade during that year and the profits for 1942-43 were merely the measure of their tax liability if they chose to do so. I doubt if the taxpayer could even have stated a plausible case if the old three years' average rule had still applied. It seems to me to be verging on the absurd to say that a trader had, in June, 1942, incurred a contingent liability to pay tax for a year which only began nine months later. But the importance of Duffy's case [1949] Ch. 28 to the respondents lies in certain general observations of Lord Greene M.R. in the Court of Appeal. Dealing with section 50(1) he said Ibid. 36 : The words in brackets deal with two sub- classes of liabilities. Neither of those subclasses can go beyond the head class of liabilities, and then he went on to consider the natural and ordinary meaning of the words apparently on the assumption that contingent liabilities is not a phrase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een payable in tax if the ships had been sold at the date of the death of the deceased. I agree with your Lordships and the Court of Appeal in rejecting the appellants' argument for this. In my view, the case must go to the commissioners in order that they may make the estimation required by section 50(1) on the footing that, at the date of death, liability to pay under a balancing charge was a contingent liability which would become an immediate liability of the company if they sold or otherwise ceased to trade with the ships and received sums exceeding the expenditure still unallowed. It would not be right for me to suggest to the commissioners how they should carry out their task: they will no doubt have regard to all relevant facts. In my judgment, this appeal should be allowed and the case remitted to a judge of the Chancery Division to proceed as accords. LORD TUCKER. My Lords, I have had the advantage of reading in print the speech which is to be delivered by my noble and learned friend, Lord Hodson. I am in complete agreement with the conclusion he has reached that this appeal should be dismissed, and the reasoning by which he has arrived at that result. In particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contingent liability for which the appellants contend in this case arises in this way. At the date of Sir Arthur Sutherland's death the assets of the company which fell to be valued included five ships which had cost the company 847,907 but were now worth over a million pounds. The company had received capital allowances under the provisions of the Income Tax Act, 1952, and the amount of the capital expenditure still unallowed was 290,749. In the light of the provisions of section 292 of the Act of 1952, it was clear that if the ships were sold for anything like their true value, a balancing charge would be imposed, and a liability for income tax and profits tax would follow as a matter of course. The ships were not sold at the date of the death of Sir Arthur but were sold some months later. A balancing charge was imposed with the result that an assessment was made for income tax and profits tax amounting to 370,114 13s. The question is: Was this liability to pay tax arising out of the balancing charge a contingent liability within the meaning of section 50(1) of the Finance Act, 1940? It was clearly in accordance with the provisions of the Income Tax Act, 1952, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's death included five ships, the value of which at that date had been agreed with the Estate Duty Office to be 1,150,000. The cost of these ships to the company for income tax purposes had been agreed to be 847,907, and at the date of the deceased's death the company had received capital allowances under the provisions of Part X of the Income Tax Act, 1952, leaving expenditure unallowed (as defined by section 297 of the same Act) of 290,749. In the event of a sale of the ships for a sum in excess of the amount of such expenditure unallowed, under section 292 of the Income Tax Act, 1952, a balancing charge would be imposed of an amount equal to such excess, resulting in an assessment to income tax and profits tax at the rates appropriate to the year in respect of which such assessment was made. The ships were in fact sold between November, 1953, and February, 1954, for sums amounting in the aggregate to 1,070,505. This gave rise to balancing charges of 548,318, resulting in an additional income tax assessment on the company for the year 1953-54 at 9s. in the pound, amounting to 246,743 2s., and an additional profits tax assessment at the rate of 22 per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are, or of any debenture, or of a share or debenture of any class, shall be a rateable proportion, ascertained by reference to nominal amount, of the net value of the assets of the company as determined under paragraph (a) of this subsection,...as the case may be. Section 50: (1) In determining the value of the estate for the purpose of estate duty the provisions of subsection (1) of section seven of the Finance Act, 1894, as to making allowance for debts and incumbrances shall not have effect as respects any debt or incumbrance to which assets of the company passing on the death by virtue of section forty-six of this Act were liable, but the Commissioners shall make an allowance from the principal value of those assets for all liabilities of the company (computed, as regards liabilities which have not matured at the date of the death, by reference to the value thereof at that date, and, as regards contingent liabilities, by reference to such estimation as appears to the Commissioners to be reasonable) other than--(a) liabilities in respect of shares in or debentures of the company; and (b) liabilities incurred otherwise than for the purposes of the business of the company who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indeed do the appellants contend that they should, for they expressly disclaimed that they would seek to take into account liabilities which may exist in the future, but they have endeavoured to say that there is, as it were, in gremio a liability which was contingent since once the voluntary allowances have been accepted the acceptor runs the risk of attracting liability to refund the allowances. This is no doubt true, but in my judgment the risk of attracting liability is not enough and the argument involves a misconception of what is meant by contingent liabilities in their context. There may be no day of reckoning; the ships may never be sold; if there is a sale there may be a balancing allowance not a balancing charge. It is only when section 292 of the Income Tax Act, which provides for balancing charges and balancing allowances, comes into operation that any question can arise. One must start with the word liability which prima facie connotes a legal liability. When one adds to it the adjective contingent one is not entitled to sail into an uncharted sea and to take into account not only contingent liabilities but all other kinds of liabilities which may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear which preceded the death of the deceased. Two points were taken by the Crown, first that the tax was imposed annually, secondly, that the trader is only liable if he carries on his trade into the next year. The tax not having been imposed, although admittedly there was a moral certainty that it would be, there was no liability and the Court of Appeal decided the case on this ground. Roxburgh J. in his judgment Unreported. , which the Court of Appeal upheld, based himself on the second point taken by the Crown. He put the matter in this way: Mr. Stamp gave a graphic illustration which really seems to me to illuminate the problem. It was this. The fact that you have got a live dog on December 31, 1947, does not make you liable, contingently or other- wise, to pay for a dog licence in 1948. Of course, the probability is very great that you will not kill your dog overnight. Likewise, the probability was very great that this company would not go out of business immediately after the testator's death. But the fact that you are unlikely to kill your dog before January 1 cannot convert into a liability that which otherwise is not a liability, and it is quite plain that if you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Revenue Commissioners [1926] A.C. 37, 52; 42 T.L.R. 58; 10 Tax Cas. 88, H.L. I see no distinction between sections 1 and 292 of the Act of 1952 which enables the appellants to say that here there was a liability existing at the date of death. Further, I think that mutatis mutandis the same arguments apply to profits tax and there is no distinction to be drawn between profits tax and income tax. Annual imposition is necessary for both. Reliance was also placed on the case of British Transport Commission v. Gourley [1956] A.C. 185; [1956] 2 W.L.R. 41; [1955] 3 All E.R. 796, H.L. which shows that a prospective tax burden should be taken into account in assessing damages in an action of tort. No assistance can be gained from the speeches delivered in that case which had to do with prospective earnings and not with liabilities, actual or contingent. I would dismiss the appeal. LORD GUEST. My Lords, upon the death of Sir Arthur Sutherland on March 29, 1953, the property passing for the purposes of estate duty included 98,700 shares of 1 each in B.J. Sutherland Co. Ltd. The deceased had control of the company during the five years ending with his death and the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Finance Act, 1940, by taking into account the balancing charges attaching to the sale of the ships. In the courts below the appellants' claim has been refused, but it is not unfair to say, at any rate so far as Danckwerts J. is concerned, that, if they had not considered themselves bound by authority to decide otherwise, they might have decided in the appellants' favour. The argument presented by the appellants was presented from two angles. First, it was argued that section 7(5) of the Finance Act, 1894, envisaged a notional sale of the ships as at the date of the deceased's death and that from the price in the open market as provided for in section 7(5) the balancing charges must be deducted. The second aspect of the argument was that the liability for balancing charges was a contingent liability within the meaning of section 50(1) of the Finance Act, 1940, and that the commissioners must make an allowance for the balancing charges from the principal value of the assets. The first argument was, in my opinion, rightly rejected by the Court of Appeal. The purpose of section 7(5) of the Finance Act, 1894, is to value the property. It does not , as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of The Law of Scotland, 3rd ed., vol. 2, Book III, Title 1. section 6, p. 587: A conditional obligation, or an obligation granted under a condition, the existence of which is uncertain, has no obligatory force till the condition be purified; because it is in that event only that the party declares his intention to be bound, and consequently no proper debt arises against him till it actually exists; so that the condition of an uncertain event suspends not only the execution of the obligation but the obligation itself. In Gloag on Contract, 2nd ed., pp. 271-272, future obligations are contrasted with contingent obligations. An obligation is future when though not presently exigible it is dependent on no other condition than the arrival of the day of payment. An obligation is contingent if its enforceability is dependent on an event which may or may not happen. I see no reason why these principles should not be applicable to a United Kingdom statute and no authority was quoted to show that English law differed in any way. The Crown argued that the case of In re Duffy [1949] Ch. 28 was a barrier to the Appellants' success and the learned judges of the Court of Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omatically involved by the operation of law in the payment of balancing charges, if the assets are parted with at a price greater than the written down value in the circumstances defined in section 292 of the Income Tax Act, 1952. In the present case as at the date of the deceased's death the ships in question had a value on the open market considerably in excess of that written down value. The liability for such a balancing charge was, in my view, a contingent liability within the meaning of section 50(1) of the Act of 1940, the liability being contingent upon the ships being sold at a price in excess of their written down value. The courts below have, in my opinion, put too narrow a construction on the words contingent liabilities. The commissioners will, under section 50(1), require to make an estimation of the contingent liabilities as appears to them to be reasonable. The allowances to be made will not be the full extent of the balancing charges. I therefore agree that the appeal should be allowed and the case dealt with in the way in which my noble and learned friend on the Woolsack proposes. Appeal allowed. Solicitors : Hyde, Mahon Pascall for Keenlysid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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