TMI Blog1947 (3) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of profits or gains brought into charge (Rule 21 of All Schedules Rules). The facts which give rise to this question may be shortly stated as follows: The appellant had an agreement with one Ridsdel that, in consideration of the appellant introducing to him a transaction for the purchase of a block of shares, Ridsdel would pay to the appellant half of any profits which he realised on the resale of the shares. Ridsdel resold the shares at a profit, but fraudulently pretended that the sum which he thereafter paid over represented the whole of the appellant's share of the profit. Later, the appellant ascertained that the profit of which he was to receive one half was much greater than Ridsdel had represented, and after Ridsdel's death he brought an action before Oliver, J., against the respondents as judicial truetees of Ridsdel's estate for the balance due to him, which was ascertained to be a sum of 36,255. The judge, exercising his power under Section 3 of the Act of 1934, in addition to giving judgment in the appellant's favour for this amount, awarded an additional sum of 10,028, being the equivalent of interest on 36,255 at 4 per cent. per annum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not a question of contract at all and that the order made had (1)[1899] 2 Ch. 629.(2)[1929] 14 Tax Cas. 580 the effect that the company had had its capital withheld and had suffered damages equivalent to 5 per cent. per annum for that reason. The judge added: I can see no reason why it should not get the whole of the damages back. It is called 'interest' but it is really damages for withholding its capital from the company. These observations have long been considered as of doubtful validity and the time has come to say that they are wrong. If damages are increased by adding interest on a principal sum, that does not prove that such interest is not liable to tax. Simpson v. Executors of Bonner Maurice(1) was of a very special character. It arose under article 297 of the peace treaty with Germany after the 1914-1918 war. Article 297 provided that the nationals of allied and associated powers should be entitled to compensation in respect of damage or injury inflicted upon their property, rights or interests in Germany. Before the war a British subject had deposited securities, stocks and shares in banks in Germany. He died during the war, and as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given in favour of the appellant, is interest of money within the meaning of the Income Tax Act, 1918, Schedule D, para. 1(b), which enacts, inter alia, that tax under this schedule shall be charged in respect of (b) all interest of money. The appellant brought the action against the judicial trustees of one Ridsdel, claiming one half of the profits realised by Ridsdel by the sale on joint account with the appellant of certain shares in 1936. The action was commenced in 1939 when the appellant discovered that Ridsdel had not disclosed the true amount of the profit realised. The judge at the trial by his judgment given on May 17, 1943, found in favour of the appellant, holding that 36,255 was due on balance to him and in addition awarded him 10,028 in exercise of his discretion under the Act, as being interest at 4 per cent. per annum on 36,255 from June 14, 1936, when the profits were realised by Ridsdel, to May 14, 1943. The Court of Appeal affirmed that judgment. The respondent claimed that he had satisfied the judgment by a payment of 41,269, which was arrived at after deduction of 5,014 representing income tax on the sum of 10,028 pursuant to the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time when payment should have been made, in breach of his legal rights, and interest was a compensation whether the compensation was liquidated under an agreement or statute, as, for instance, under the Bills of Exchange Act, 1882, Section 57, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest. For reasons that go back far in history the distinction between interest proper as it has been called, that is, interest due under a contract, statute or the like, and interest by way of damages, that is, not due under an agreement express or implied has since very early days been recognised in England whether in the ecclesiastical or common law courts. Moneylending was condemned by the mediaeval mind as usurious (Tawney, Religion and the Rise of Capitalism, at pp. 54 and 55). The reproach of usury was not answered by saying the interest was due under a contract. Tawney states: What remained to the end unlawful was interest as a fixed payment stipulated in advance for a loan of money or wares without risk to the lender. The profits should go, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded in Section 3 (1) of the Act was necessary to exclude interest awarded on the dishonour of a bill of exchange the award of which, though often described as damages, is now statutory. The award is not in the discretion of the court where the interest is payable as of right. It is clear that the Act used the word interest in its widest sense, including both interest proper and interest by way of damages. It is not a consolidating Act, but a reforming or amending Act. It is intended to enlarge the powers of the court. In 1893 this House reviewed the then existing position as it stood at common law and the established principle up to that date. Lord Herschell, L.C., in London, Chatham Dover Railway Co. v. South Eastern Railway Co. [1893] A.C. 429, at p. 440 said that the words of Lord Tenterden's Act (the Act of 1833) kept claims for interest within very narrow limits which to him seemed too narrow for the purposes of justice, but he held that the authorities which he cited made it impossible to reopen the question or to hold that in the circumstances before the House in that case interest could be awarded. The interest in question was an instance of what has been called in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining the value of the fireclay sterilized in the hands of the company for which it was entitled to compensation. That was a payment on capital account. It was for the destruction of a capital asset, which was indeed the source of profits but could not be regarded as income. On the other side of the line is Inland Revenue Commissioners v. Barnato [1936] 20 Tax Cas. 455 where the payment was a sum of compound interest which had been made to the taxpayer in commutation of his share of profit in a partnership. It was a sum of profit, not capital. I need not go through the numerous cases which have been cited to illustrate the circumstances under which a sum has been taxed as income or has been held immune on the ground that, whether called interest or not, it was really a payment on capital account. In regard to some of these decisions opinion may differ as to the exact result arrived at on the facts, but they all agree in using the word interest and in drawing as the relevant distinction that between capital and income. This distinction depends on substance, not on the mere name. Of some minor contentions which have been raised, I shall briefly advert to one. It was said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as interest under the section to which I have referred. This sum of 10,028 represents interest at 4 per cent. per annum on 36,255 from June 14, 1936 (when that sum should have been paid), to May 14, 1943 (the date of judgment). From this judgment the respondent appealed to the Court of Appeal, but his appeal was dismissed. In July and August, 1943, the respondent paid the appellant sums amounting to 41,269, made up of the sum of 36,255, of a sum for interest on the judgment after the date of judgment and of a sum of ? 5,014, being the sum of 10,025 included in this judgment as interest after deduction of income tax therefrom at the standard rate then prevailing of 10s. in the . For this balance of 5,014 the respondent held itself accountable to the Crown. The respondent made this deduction under the All Schedules Rules of the Income Tax Act, 1918, Rule 21, and it is common ground that the deduction, if permissible, must be made under this rule. The appellant, however, contended that the deduction was not permissible and threatened to levy execution under the judgment unless the balance of 5,014 was paid to him. To avert this event the respondent commenced an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent or otherwise; or (c) shall affect the damages recoverable for the dishonour of a bill of exchange. (2) Sections 28 and 29 of the Civil Procedure Act, 1833, shall cease to have effect. My Lords, I do not think that it could readily have occurred to anyone that interest awarded under this section was not interest of money within the taxing provision, were it not that behind it there lies a history to which I must shortly refer. Taken by itself, the section provides in unambiguous terms that, where judgment is given for a principal sum, the court may order that it shall be an interest-bearing principal sum. The principal sum is money and the interest on it is interest of money. I can see no reason why it should not be interest of money for the purposes of tax. That the word interest is used in no unusual sense plainly appears from provisos (a) and (b) where it can only have its familiar meaning. It has, however, been urged by counsel for the appellant that this view of the section, simple and straightforward as it is, ought not to be entertained by your Lordships, and, as I have said, he invokes the history of this branch of the law to support his argument. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and nothing else. I come then to the second stage and ask : What is the character of interest allowed under the Act of 1833, Section 28? Here the argument is that, call it interest or what you will, it is damages and, if it is damages, then it is not interest in the proper sense or interest proper, expressions heard many times by your Lordships. This argument appears to me fallacious. It assumes an incompatibility between the ideas of interest and damages for which I see no justification. It confuses the character of the sum paid with the authority under which it is paid. Its essential character may be the same, whether it is paid under the compulsion of a contract, a statute, or a judgment of the court. In the first case it may be called interest, and in the second and third cases damages in the nature of interest, or even damages, but the real question is still what is its intrinsic character, and in the consideration of this question a description due to the authority under which it is paid may well mislead. I will illustrate my meaning by a citation from Lord Herschell's speech in London, Chatham and Dover Railway Co. v. South Eastern Railway Co. [1893] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g., in a line of cases concerned with specially indorsed writs, see Ryley v Master [1892] 1 Q.B. 674) were cited on behalf of the appellant to show that a sum awarded as interest under the Act of 1833, Section 28, is in essence not interest proper but damages. But, to my mind, the answer is given by Evershed, J., in his judgment in words which I cannot improve on and, therefore, adopt: ...the proposition that interest is awarded as damages or by way of damages, as in the case of Cook v. Fowler [1874] L.R. 7 H.L. 27, imports the justification for the award or for the rate awarded, but does not affect the quality of interest as such... Perhaps the position may become even clearer if for damages the word compensation is substituted. It would be difficult, I suppose, in a case where a man, being deprived of the use of his money, was awarded interest by way of compensation, to say that what he was awarded was not interest but something else. That is the very language of equity: of Vyse v. Foster [1872] 8 Ch. App. 309. In that case as James, L.J., points out the executors or trustees had committed a breach of trust by allowing trust money to remain outstanding on the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not to be exigible on any part of a sum which was paid by way of compensation under article 297(e) of the Treaty of Versailles. It is sufficient to cite a sentence from the judgment of Lawrence, L.J., in that case to show how different were its circumstances from those where interest was allowed under the Civil Procedure Act, 1833, or is ordered under the Act of 1934. He said [1929] 14 Tax Cas. 580, at p. 605: Article 297 of the Treaty says nothing about the payment of interest, and the money paid under the direction of the Mixed Arbitral Tribunal was paid as compensation and not as interest. Numerous cases also were cited which fell on the other side of the line, i.e., in which sums of money described and paid or received as interest were held to be interest of money and taxable as such. I will mention only two of them. In Schulze v. Bensted [1915] 7 Tax Cas. 30 the question was as to the liability to tax of interest on a sum which a negligent trustee had failed to get in and which he had been ordered to make good to the trust estate, a state of affairs strictly comparable with that to which I referred when observing on Vyse v. Foster [1872] 8 Ch. App. 309. The trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m was not interest of money for the purpose of tax because it had no existence until it was awarded and did not have the quality of being recurrent or being capable of recurrence. This argument was founded on certain observations of Lord Maugham in Moss Empires, Ltd. v. Inland Revenue Commissioners [1937] A.C. 785, at p. 795 in regard to the meaning of the word annual. It would be sufficient to say that we are here dealing with words in the Income Tax Act which do not include either annual or yearly, but in any case I do not understand why a sum which is calculated on the footing that it accrues de die in diem has not the essential quality of recurrence in sufficient measure to bring it within the scope of income tax. It is surely irrelevant that the calculation begins on one day and ends on another. It is more important to bear in mind that it is income. Finally, it is right to say a very few words on a point taken by du Parcq, L.J., in his judgment and for that reason, but, as I understand it, for that reason only, put forward in this House on behalf of the appellants. The learned Lord Justice expressed a doubt, which argument did not dispel, whether a defendant who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onian Railway Co. 8 M., H.L. 101, at p. 131, Lord Westbury). The correspondence is not complete-for example, interest is awarded by the Scottish courts as of right, whereas in England the award depends on the exercise of a discretion which the statute has committed to the jury or the court. Nevertheless, the principle of the decision in this appeal will apply to interest awarded ex mora in Scotland. The retention of the principal sum in the present instance was fraudulent, but the award of interest either under the statute in England or ex mora in Scotland does not depend on proof of fraudulent retention or of negligent retention of the principal. The commonest example, indeed, of an award of interest ex mora is a decree for interest from the date of citation in an action in which the pursuer has successfully sued for the disputed amount due to him on an open account, where there is neither averment nor proof of fraud or negligence (Blair's Trustees v. Payne [1884] 22 Sc. L.R. 54). The wrongful withholding is then merely the refusal of the creditor's demand contained in the summons and the implied denial of his right. Even when there is no proof of fraud or negligence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved as income by the creditor in the judgment-debt. However that may be, Schulze v. Bensted [1915] 7 Tax Cas. 30, at p. 34 is authority for the proposition that interest awarded ex mora, even in an action of damages, is income and not capital in the hands of the creditor and is subject to income tax. In short, it decided practically the same point as has arisen in the present appeal and it decided it in complete accordance with the opinion which has been expressed by my noble and learned friend. There are cases in which a calculation of interest is used as a means of arriving at a capital sum of damages. Inland Revenue Commissioners v. Ballantine [1924] 8 Tax Cas. 595 is an example. In that case an arbiter having a duty to award a sum as compensation for outlays and loss assessed it in the form of annual interest, and it was held that, though the compensation was described as interest and though it was calculated as interest is calculated, the creditor received it as capital. Similarly, in Glenboig Union Fireclay Co. v. Inland Revenue Commissioners [1922] 12 Tax Cas. 427, a sum received by a company as compensation for deprivation of a capital asset and calculated on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
