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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 ..... he deceased, Sir Arthur Munro Sutherland, was 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case and, further, it is submitted that in relation to the construction placed on the words "contingent liability" it was wrongly 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case and In re Duffy [1949] Ch. 28. As to profits tax, a similar argument applies. 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 groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no contingent liability, there is simply the future possibility of a liability which is not included in section 50 at all. If the expression "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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of the assets. All that is required is that the commissioners express an opinion as to what the assets would be likely to fetch if sold in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all probable or all possible liabilities? [Reference was also made to section 30 of the Bankruptcy Act, 1914, and to Asher v. Seaford 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be subject to a balancing charge. I need not consider profits tax because the argument is the same as for income tax with a minor difference which, in my view, is not material in this case. The question depends 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 allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax if the law had not been altered, and if when the question arose there was in existence a Finance Act determining the rate of income tax. So there were two contingencies which had to be fulfilled or conditions which had to be purified before tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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...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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company's profits for the year 1942-43. This artificial method of valuation led to trouble. The taxpayer sought to bring in as a contingent liability of the company a proportion of its income tax for the year 1943-44, because the earning of profits during the year 1942-43 had engendered a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the company to realise the value of the ships without having immediately to pay away as tax a large proportion of what it received. So it would be a fiction to say that the full value of the ships could be regarded as swelling the assets of the company. But the deduction will not be the sum of £ 270,079 which would have been 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act, 1940, must be taken into account. Those liabilities include contingent liabilities which are to be computed by the commissioners on a reasonable estimation. It is clear that these contingent liabilities are of a very special kind, which are not capable of precise ascertainment, but are capable of reasonable estimation. 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate 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 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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; (b) the aggregate value of all the shares and debentures of the company issued and outstanding at the death of the deceased shall be taken to be the same as the net value of the assets of the company; (c)...(d) the value of any share, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the wide meaning which can be given to these words. It is true that, from the accountancy point of view, any provisions which the directors of a company as businessmen think it prudent to make for something which may not happen can be entered in a balance-sheet as a liability. In ordinary speech no doubt one often uses the words "contingent liabilities" in this sense. I do not think in their context these words can have such an extended meaning nor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a liability until a subsequent date. That also was an estate duty case. It concerned the basis of valuation of the shares of a company on the death of the deceased, Joseph Duffy. The shares had to be valued for the purpose of calculating duty in the manner laid down in section 55 of the Finance Act, 1940. The executors sought to deduct as a contingent liability a sum equivalent to income tax on the proportion of the profits of the company applicable to that part of the company's financial year 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 Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence and which is admittedly outside the scope of a contingent liability for the purposes of the section; and I find it impossible to define or limit the scope of a liability such as is contended for by the appellants. They have established vulnerability, no doubt, but not contingent liability. I will not deal at length with the subsidiary arguments presented on behalf of the appellants. Accepting the distinction between liability and assessment drawn by Lord Dunedin in Whitney v. Inland 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 292 of the Income Tax Act, 1952, giving rise to additional income tax and profits tax liability. The five ships were in fact sold during the year of assessment 1953-54 for £ 1,070,505 and a balancing charge arose on the sum of £ 548,318 giving rise to additional income tax liability and profits tax liability respectively of £ 246,743 and £ 123,371. The appellants claimed that in arriving at the value for estate duty purposes of the shares, they were entitled to receive an allowance under section 50(1) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 50(1) refers both to liabilities which have not matured at the date of death and to contingent liabilities. Contingent liabilities must, therefore, be something different from future liabilities which are binding on the company, but are not payable until a future date. I should define a contingency as an event which may or may not occur and a contingent liability as a liability which depends for its existence upon an event which may or may not happen. A contingent obligation has in Scots law a perfectly well-known meaning. I quote from Erskine's Institute 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 contingen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was free not to carry on business in the relevant year and that as the company could terminate its liability to income tax by its own voluntary act by not trading, it could not be described as a liability. It is not necessary to come to a conclusion as to whether In re Duffy [1949] Ch. 28 was rightly decided. The facts of the present case are different and more favourable to the taxpayer than they were in Duffy [1949] Ch. 28. The claim for initial allowances for what has been described as depreciation is the voluntary choice of the taxpayer, but, once he has obtained such allowances, he is automatically 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 bei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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