TMI Blog1947 (3) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... d 1940 respectively and turns on the proper interpretation and application of Rule 3 of Case III of Schedule D of the Income Tax Act of 1918. That Rule provides as follows: 3.(1) Where an assurance company not having its head office in the United Kingdom carries on life assurance business through any branch or agency in the United Kingdom, any income of the company from the investments of its life assurance fund (excluding the annuity fund, if any), wherever received, shall, to the extent provided in this rule, be deemed to be profits comprised in this Schedule and shall be charged under this Case. (2) Such portion only of the income from the investments of the life assurance fund for the year preceding the year of assessment shall be so charged as bears the same proportion to the total income from those investments as the amount of premiums received in that year from policy holders resident in the United Kingdom and from policy holders resident abroad whose proposals were made to the company at or through its office or agency in the United Kingdom bears to the total amount of the premiums received by the company: Provided that in the case of an assurance company having its head o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volved around this point and consequently your Lordships have now to decide two questions, first, what is the proper construction and application of Rule 3 when an assurance society which falls within that Rule holds investments exempt from income tax among the investments of its life assurance fund; and, secondly, what is the right decision in the case now before us where the revenue has in effect made the concession that the existence of exempted income makes a difference to the calculation? The present Rule 3 had its origin in Section 15 of the Finance Act, 1915 (5 6 Geo. 5, c. 62). As junior Crown Counsel pointed out to us, before the Act of 1915 there was much difficulty in getting income tax from a life assurance company resident abroad with a branch here. Such a company could avoid United Kingdom income tax on its income from investments, even though it had a branch in the United Kingdom, by so arranging its affairs that its investments were foreign investments, the proceeds of which were not caught by United Kingdom income tax. It is true that the company might be regarded as carrying on in this country a trade through its branch, but there was much practical difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems to me to be equally clear. Its effect is to secure that the company's contribution by way of tax under the rule shall be abated, or even wiped out altogether, to the extent to which the company is charged to tax independently of the rule. But there is no justification for reading the words where a company has already been charged to tax as though they meant where the company would be charged to tax if the investments it held were not investments the produce of which is exempt from tax. The relief given by sub-section (4) arises from the company paying tax apart from the rule, not from the company holding exempted investments. From 1915 to 1938, as I understand, the practice of the Revenue, acquiesced in or at any rate not challenged in litigation by life assurance companies with their head office abroad and a branch in the United Kingdom was to charge tax on the conventional sum thus arrived at, treating as immaterial the fact that the life assurance fund might contain investments the proceeds of which were not subject to tax. But in 1938 this House decided the appeal of Hughes v. Bank of New Zealand*, upholding a decision in the Court of Appeal given in December, 1936, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessment of profits of Cadbury Bros. must be made by excluding the annual value of certain lands, notwithstanding that these lands of the taxpayer were, by a statute of 1660, exempt from every form of taxation and therefore could not be charged to tax under Schedule A. To do otherwise would be to impose tax on an income which was in terms not to be taxed. This decision also does not, as it seems to me, afford guidance in the present case, for the reason already indicated. Once it is accepted that Rule 3 of Case III is not one which taxes income from investments, whether exempted or not, but one which taxes a conventional sum calculated as the rule directs, it becomes reasonably clear that the sum to be taxed is not varied by inquiring whether one of the elements in the calculation contains income from exempted investments. If variation is required on this ground, it must be provided by legislation. Section 21 of the Finance Act, 1940, ought not, I think, to be read as establishing that the effect of the previous law was otherwise than as above stated, vetoes the suggested variation for the future, as far as Section 46 of the Act of 1918 is concerned, but I do not thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefit of the British revenue in respect of the part of their business carried on at their English branch. As it was difficult to assess their profit in the ordinary method, Rule 3 was devised as a rough and ready way of imposing some tax on their British profits by assessing a definite proportion of their income from the securities of their life assurance fund. The proportion was arrived at by a ratio based on the comparison between one part of their liability (which may be described as British liability) that is their liability on life assurance policies effected on proposals made in Britain or of which the holders are in Britain and the total amount of their liability on all life assurance policies. This is a conventional charge ; the ratio which in this case is roughly one-twentieth of the total premium receipt on life assurance business is fixed and artificial. In the year of assessment 1936-1937, this ratio when applied to the total sum of the life assurance fund, gave a figure of 230,684, as the British income of the respondent society on the basis directed by Rule 3. No specific investments were taxed. The rule provided that the income from the fixed specified percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the clauses considered in the Bank of New Zealand Case(1). It was on the contrary a charging provision intended to charge the society on the basis of a fixed percentage of the total income. That was merely a convenient mode of imposing some charge on the assurance company in consideration of the privilege it enjoyed in trading in this country. The charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge was a tax on the investment income only as a machinery to tax the general profits of the British business, and as a manner of measuring the charge by an arbitrary figure derived from a percentage of the investment income. In this connection it was not material to distinguish between exempted and unexempted income. All that was needed was a yardstick. This is borne out by the actual language of Rule 3. It is positive in its terms: the only qualification is to be found in sub-section (4) which provides for a set-off of charges on the society outside Rule 3. The effect of the sub-rule is to secure that the fixed and conventional assessment under Rule 3 is to be reduced proportionately if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is imposed upon a purely notional sum of profits. They point out that if an assurance company is resident in this country they can either assess it under Case III of Schedule D upon the income from its investments or under Case I of that Schedule upon the profits of the business which it carries on and agree that if the former alternative is adopted the interest derived from its tax- exempt investments must be excluded in computing what its income is. Indeed I understood them to be prepared to concede that the exclusion of such interest cannot be avoided if the alternative method of taxing the company on its profits is adopted, since it is not permissible by any device to levy tax on such investments either directly or indirectly (see Hughes v. Bank of New Zealand [1938] A.C. 366; 6 I.T.R. 636). Similarly, if tax is being levied upon profits, the taxable value of tax free land must be excluded from the credit side of the account in ascertaining what these profits are (see Sinclair v. Cadbury Brothers [1933] 18 Tax Cas. 158). In each of these cases, however, the object was to determine what sums were to be brought into computation in ascertaining the actual profits; in the former ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any rate indirectly in being compelled to pay upon the income of its other securities which have not been brought into this country and should be exempt from taxation imposed here. This criticism would, I think, have force if applied to such circumstances as existed in the Bank of New Zealand(1938] A.C. 366; 6 I.T.R. 636) and in the Cadbury Cases(1933] 18 Tax Cas. 158) in both of which the tax was imposed on actual profits and the tax-free asset was part of the assets of the branch or company upon whom it was imposed. But it has no application to a case where the profits or income, the subject of charge, is a notional sum calculated in a conventional way nor do I think it matters whether it is or is not established that the tax-exempt investments are assets of the branch carried on in this country. The stress of the respondents' argument was laid upon the words shall be charged under this case , i.e., under Case III and it was said that those words mean that it is to be charged upon the income of investments as such. I cannot think so. In the first place it is not accurate to say that Case III is concerned only with investment income. The general description of the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance fund in tax-exempt securities, it would pay tax on the conventionally apportioned sum without any reduction and would be no better off than if the statutory proportion were wholly liable to tax. I agree that this is a hardship but it does not entitle your Lordships to disregard the plain meaning of the rule. So long as the words are in their present form the result must be looked upon as the price which non-resident assurance companies have to pay for engaging in business in this country. I would only add that even if the arguments for the respondents were accepted in principle I find difficulty in seeing why the whole of the taxexemption should be regarded as owed to the English branch. In the case of a bank such as the Bank of New Zealand and in circumstances such as existed in that case any quantity of tax-free securities might have been held by the business as a whole but exemption was only given to the English branch in respect of those held as part of that branch's assets and brought into account in calculating the amount of profits earned here. Both the Bank of New Zealand Case(1) and Cadbury's Case(1933] 18 Tax Cas. 158) do, in my opinion, decide that, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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