TMI Blog1962 (3) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of profits made from dealings in stocks and shares, were properly included in the computation of the appellant company's profits assessable to income tax under Case I of Schedule D by the additional assessment for the year 1955-56 and the assessment for the year 1956-57; (2) whether there was a discovery within the meaning of section 41 of the Act so as to enable the inspector to raise the additional assessment for the year 1955-56. The facts, stated in the opinion of Viscount Simonds, were summarised by him from the case stated as follows: The appellant company was registered on October 12, 1953. It carried on business as a dealer in stocks and shares and was assessable to income tax under Case I of Schedule D in respect of any profits arising from such dealing. On October 20, 1953, the appellant acquired the whole issued share capital of Henry White (Sutherland House) Ltd. (hereinafter called Henry White ) for 72,000. Henry White carried on the business of ladies' outfitters and had previously realised a profit from the sale of some of its freehold property which was a capital profit and not assessable to income tax in its hands. On November 2, 1953, Henr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this appeal.) P. Shelbourne and J. Holroyd Pearce for the appellant company. While all dividends paid by a company resident in the United Kingdom are received by the shareholder as income, they are, under the Income Tax Acts, taxable in the hands of the shareholder, if at all, only by the deduction of income tax by the paying company pursuant to section 184 of the Income Tax Act, 1952, which implies an exemption that dividends are not chargeable in the hands of anyone. Whatever the nature of the profit out of which the dividend is paid, in the hands of the paying company, no dividends paid by a company resident in the United Kingdom can on authority be subject to assessment to income tax in the hands of the shareholder under Schedule D or at all. This dividend is exempt from tax altogether in whosesoever hands it may be. What Lord Phillimore said in Bradbury v. English Sewing Cotton Co. Ltd. is the fonset origo of the law on this subject and of the relevant proposition on which the appellant company is relying. He is saying that all dividends are clearly income, new income, and, because they are new income there could be no true double taxation in taxing them, but that such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempting them from tax in the hands of shareholders who receive them, so that they are exempted from tax under any other Case and cannot be brought into computation. The ratio in Gimson's case was approved in Neumann's case. Tax can always be deducted from dividends and it matters not that they came into the hands of a finance company or a company dealing in stocks and shares. Where a sum has been taxed under a Schedule it is there and then established as income automatically and cannot be anything else. There cannot be an exception which keeps out Case VI and lets in Case I. According to previous decisions of this House what is good for Case VI is good for everything else. If an ordinary person sells his house at a profit he does not pay tax on that profit because he does not deal in houses, and the profit is not a profit of his trade; but it is otherwise in the case of a property dealer. But dividends are income for everybody. So in the first instance status is relevant but not in the case of a dividend receipt. The reasoning of Donovan L.J. in the Court of Appeal in the present case is founded on no authority and, indeed, is contrary to authority. Dividends cannot come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that their Lordships did not require to hear argument for the respondent on the discovery point.] Roy Borneman Q.C. and Alan Orr for the Crown. The dividend in question was, and is admitted to have been income of the appellant company's trade of dealing in stocks and shares. The appellant company's argument approaches the matter from the wrong angle, since the question is not to find how the Crown can bring the dividend into the computation of the profits but how the taxpayer can keep it out. What has the statute to say? Section 127 prima facie compels the conclusion that all the profits of this company (which, it is common ground, deals in stocks and shares) must come into computation as such. There must be brought in as trading receipts for income tax purposes all fruits of carrying on the trade and deployment of the company's capital, including profits on sales realisations (deducting losses), all incomings in the way of income, including receipts in liquidation and all dividends. These must be brought into account unless they are taxed under some other Schedule or specifically kept out by some statutory provision. The appellant company resists the claim that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing in the Act to keep out of computation this dividend income which is a receipt of a trade. The appellant company relies on glosses put on the Act by some judicial dicta, but section 184 cannot be read as giving rise to this anomaly. If it is accepted that the receipt of this money, although labelled dividend, is a receipt of the trade, there would have to be some specific statutory authority if it is to be kept out of computation, but there is none. P. Shelbourne in reply. Section 127 of the Act of 1952 does not advance the issue here, which is whether the amount in question is properly chargeable. The fact that section 184 is a machinery provision is not decisive. The taxpayer is here putting forward a consistent theory because all dividends are to be taken out of computation: see Bradbury's case*, the Canadian Eagle Oil case** and Cull's case. It is common ground that there is no charge on dividends as such, but those words do not make a vital difference: see Hughes v. Bank of New Zealand#. As to the ground of the exemption, see Neumann's case. The decision of the Court of Appeal in the present case is based on a false analogy to the cases of a private cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under some other Schedule or because it is exempt from tax altogether in whosesoever hands it may be. The first reason for exclusion is not advanced: on the contrary, it is claimed that the dividend is not liable to tax under Schedule D or any other Schedule. It is the second reason that was urged with much ingenuity by counsel for the appellant. My Lords, it is a familiar fact that the statutory provisions in regard to the payment of dividends by any body of persons (which expression includes a limited company) have from time to time caused difficulties and created anomalies. But first it must be observed that no other section is relied on for affording exemption from tax than section 184 of the Act, and this section will be searched in vain for any least suggestion that, where a dividend has been paid by a company out of profits and gains which have not been assessed to tax, it is to be exempt in the hands of the shareholders. On the contrary, it does nothing more than require that the company shall be assessed to tax on the full amount of its profits and gains before any dividend is paid and entitles it to do no more than deduct from the dividend tax at the standard rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or adjustment for the tax that has been paid. I agree with the learned Lord Justice in thinking that there is no specific provision of any statute which prescribes such an adjustment. It can only arise out of the recognition by the Crown that it is necessary in order to avoid double taxation of the same subject-matter. It is, in any case, no justification for exempting from taxation a dividend paid out of profits which have not borne tax. I come to the second question which turns upon the true construction of section 41(1) of the Act. That sub-section provides: [His Lordship read the subsection and continued: ] In the present case the single question is whether the word discovers covers the case where no new fact has come to light but the revenue authorities have formed the opinion that upon a mistaken view of the law the taxpayer has been undercharged in his original assessment. Upon this question the Court of Appeal followed a previous decision of the court in Commercial Structures Ltd. v. Briggs. In that case the court, preferring a decision of Finlay J. in Williams v. Grundy's Trustees to that of Rowlatt J. in Anderton and Halstead Ltd. v. Birrell*, and following a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate item: it would not fall within any of the first five Cases of Schedule D and would have to be assessed, if at all, under Case VI. In the case of a trader it would not be treated as a separate item: like any other trading receipt it would be taken into account in determining the balance of profits and gains assessable under Case I. The appellant maintains that this difference is immaterial: the respondent says it is all-important. It is therefore necessary to see why dividends are not assessable in the hands of a non-trader. It is not because Case VI is not wide enough to catch them, and it is not because of any express statutory provision to that effect. The appellant says that it results from the provisions of section 184 of the Act of 1952, which can be traced back to section 54 of the Act of 1842. But that section and its predecessors do not even mention the shareholder who receives a dividend: they merely entitle the company paying a dividend out of profits to deduct tax in paying it, and they are silent about a dividend which is not paid out of profits charged to tax. It is, however, argued that, by reason of the decisions of this House to which I have referred, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle, and that other judges well versed in income tax law also denied any equitable principle. I am inclined to think that the rule cannot be fully explained without recourse to practice based on equity or, perhaps, on the old theory that the company pays tax on behalf of the shareholders, and not on any specific provision in any statute. The matter becomes much more difficult when tax could not be and is not deducted by the company when paying the dividend, and I can find no satisfactory explanation of why an individual who receives such a dividend is not assessable in respect of it. It cannot then be said that, because the company has already paid tax on this money, it would be unjust if the shareholder had to pay again. Neumann's case and Gimson v. Inland Revenue Commissioners, which was approved in Neumann's case, were both dealing with surtax or super- tax which introduced other complications. The surtax position was made clear. Lord Tomlin said in Neumann's case: It is not disputed that if a dividend is paid out of the profits produced by a sale of a capital asset it is not made out of profits or gains charged on the company, and therefore no deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case is that the Cenlon Finance Co. Ltd. carried on in the United Kingdom the trade of a dealer in stocks and shares: and it is therefore chargeable with tax under Case I of Schedule D in respect of that trade. If the Cenlon Finance Co. Ltd. had not been a dealer in stocks and shares but a butcher or baker or anything else, it would not have been chargeable with tax on this dividend: for the simple reason that by a positive rule of law (to be found in judicial decisions and not in the statute) dividends as such are not liable to tax. The justice of this rule is obvious when the dividend is paid out of a fund which has already been brought into charge for tax. It is not so obvious where the dividend is what is called a capital dividend, that is, a dividend paid out of a capital profit which has not been brought into charge for tax. I should have thought that in the ordinary way any dividend on shares would be income in the hands of the recipient, and it would have been chargeable under Case VI as an annual profit or gain, were it not for the positive rule of law which exempts it. But I see no reason why this positive rule of law should extend to a dealer in stocks and sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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