He affirmed this statement of the purpose of the section in Lord Howard de Walden v. Inland Revenue Commissioners, 25 T.C. 121, 132. Macnaghten J. at first instance, at pp. 128-129, had given his analysis of the section which brings out very clearly that it must be the transferor who acquires rights (cf. also Kanga and Palkhivala, The Law and Practice of Income Tax, 7th ed. (1976), p. 725, on the corresponding Indian Section).

The pronouncements of Lord Greene were made in December 1941 – i.e. just before the settlement was executed. [*1177] When Latilla came before this House [1943] A.C. 377 Viscount Simon L.C. opened his speech with these words, at p. 381:

“My Lords, of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succed, is, of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuvres. Another consequence is that the legislature has made amendments to our income tax code which aim at nullifying the effectiveness of such schemes.”

So we have a clear, identifiable and substantial mischief against which the section, as I would now construe it, was certainly directed. Then are we to suppose that the section must also have been directed against cases where a person transfers assets abroad for the benefit of a child or grandchild: and is it incredible that Parliament should not have covered that case?

My Lords, to extend so penal a section so as to catch future generations is not merely something which logically follows from penalising transferors themselves, but is something which appears to me to introduce a new dimension – indeed an innovation in our tax law Are we to deduce from an evident intention to tax (and penalise) transferors of assets one to visit their offence upon their children – or their grandchildren? Surely such an extension, which would certainly have attracted debate, if not criticism, in Parliament, would have been spelled out and not left to be deduced from such cryptic words as have been used. I find in the section, if directed at transferors, and benefits taken by them, an ample and powerful anti-avoidance instrument and I feel not only no need, but a great reluctance, in view of the wording used, to extend it against any beneficiary, child, or grandchild, or descendant.

I recognise that there is always the possibility of “overkill.” Parliament itself may not have consciously intended to go beyond the transferor, yet words may have been used which are so wide as to do so. Such cases exist in modern fiscal legislation (cf. Inland Revenue Commissioners v. Cleary [1968] A.C. 766). But then I think that the courts, if they are satisfied that the words used, on one interpretation, go o far as to create extreme injustices and departure from fiscal propriety, are well entitled to take another interpretation which does not do this. and in this case, the other interpretation can be found without straining words or writing anything in.

[*1178] My Lords, the discretion conferred by the Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234 is a general one. We should exercise it sparingly and try to keep it governed by stated principles. But the fact that the circumstances of one particular case cannot be brought precisely within the formulae used in others, of a different character, should not be fatal to its exercise – or the discretion would become ossified. I regard this case as one where a previous decision has been given on facts of a particular type without consideration being given (and there is no shred of criticism in saying this) to the possible consequences in a wider type of situation. Of course it is generally true that, when a decision of principle is given, the fact that those who gave it did not have every possible situation in mind does not prevent the decision being applied to new and unforeseen facts. The doctrine of precedent and the interest of certainty require that it should be. But if, as I believe to be the case here, extension of a limited decision to totally different situations involves a new dimension which itself embraces administrative and constitutional difficulties of a high degree, I think that this House ought to use its discretion to refuse the extension. The only choice is then between overruling the previous decision so far as the principal ratio is concerned or confining it to its, or similar, facts.

My Lords, we have not, I hope, in recent years become so habituated to fiscal severities or to “overkill” sections as to be insensitive to those proprieties which were so eloquently stressed by Walton J. in his judgments. It is respect for these and for the fabric of our fiscal law which persuade me that Congreve v. Inland Revenue Commissioners [1948] 1 All E.R. 948, as to its principal ratio and the following cases, should be departed from or overruled and the section interpreted as applying only where the person sought to be charged made, or, may be, was associated with, the transfer. If your Lordships do not follow me so far, then, in view of the consequences which would result from the extension of Congreve into a case where there are discretionary beneficiaries, I would hold that it cannot be applied to such a case, that no method for levying the tax in such cases has been prescribed by Parliament, that this gap cannot be filled by administrative decision and that the tax and the assessments of it fail.

I would dismiss the appeals and allow the cross-appeals. [*1179]

[*1180] VISCOUNT DILHORNE.

My Lords, in these consolidated appeals the respondent Ronald Arthur Vestey is the son of Sir Edmund Vestey Bt. The respondent Edmund Hoyle Vestey is Ronald’s son and the respondents J. R. Baddeley and James C. Payne are Ronald’s sons-in-law. The respondents Lord Vestey and Mark William Vestey are great-grandsons of the first Lord Vestey. By a settlement dated March 25, 1942, Sir Edmund Vestey and the first Lord Vestey conveyed a large number of properties outside the United Kingdom to trustees and on March 26, 1942, the trustees leased the trust property to Union Cold Storage Ltd. for 21 years at an annual rent of £960,000. By a further lease dated April 10, 1963, the trust property was again leased to that company at that rent. The trustees of the settlement, who have at all times been resident out of the United Kingdom, also held all the shares in three companies, in two as subscribers for their shares and in the third, the Commercial Insurance Corporation Ltd., by purchasing the shares.

Under the settlement the trustees were to receive the income of the properties conveyed to them and of property representing the same during a prescribed period and to invest it so as to form a capital fund, called the rental fund. During the prescribed term the income of the rental fund was to be divided into two moieties and held on the trusts applicable to what were called Edmund’s fund and Samuel’s fund. From and after the end of the prescribed term the trustees were to divide the rental fund into two moieties, Edmund’s fund and Samuel’s fund and hold them on the trusts declared with regard thereto.

The settlement provided that the trustees might be directed by “Edmund’s manager,” who was the respondent Ronald Arthur Vestey, to accumulate for such period or periods within the period specified in the deed, the whole or any part of the income of Edmund’s fund and that subject to the power of accumulation and to other provisions of the deed the trustees should hold the income upon trust for Ronald Arthur Vestey and his issue or, if no issue of his should be living, for the issue of Sir Edmund Vestey in such amounts or shares as Edmund’s manager might direct. Similar provisions were made with regard to Samuel’s fund and Samuel’s manager was, until his death in 1944, William Howarth Vestey, the grandson of the first Lord Vestey. He was followed as Samuel’s manager by Mr. Brown and then in 1966 the third Lord Vestey was appointed to that office. On August 30, 1942, Samuel’s manager directed the trustees to accumulate the whole of the income of Samuel’s fund by investing it. On September 14, 1942, a similar direction was given by Edmund’s manager in relation to the income of Edmund’s fund.

The settlement gave Edmund’s manager power within the specified period to direct the trustees to appropriate and realise capital and to pay it to Ronald Arthur Vestey and his issue and in default to the issue of Sir Edmund Vestey in such shares and such manner as Edmund’s manager might direct. A similar power to direct the trustees to distribute capital as he might direct among the issue of the first Lord Vestey was given to Samuel’s manager.

In the exercise of these powers the trustees were directed to distribute and did distribute between the respondents Ronald Arthur Vestey, [*1181] Edmund Hoyle Vestey, Lord Vestey and Mark Vestey and also Mrs. Payne and Mrs. Baddeley, daughters of Ronald Arthur Vestey, the sum of £2,608,000 on various dates between October 1962 and November 1966.

The revenue then raised assessments on the six respondents. It is not necessary to state in detail the amount of each assessment. Two examples will suffice. Ronald Arthur Vestey received a total of £365,000 from the trustees, £ 215,000 on October 29, 1962, and £150,000 on November 18, 1964. He was consequently assessed to income tax and surtax for the years 1963-64, 1964-65, 1965-66 and 1966-67 amounting to £888,500. Mr. Baddeley, as the husband of Mrs. Baddeley who received £100,000 on May 2, 1966, was in consequence of that assessed to tax for 1963-64 in the sum of £62,088.71, for 1964-65 in the sum of £64,818.14, in 1965-66 in the sum of £84,667.75. In none of those years had Mrs. Baddeley received anything from the trustees. For 1966-67 Mr. Baddeley was assessed in the sum of £62,547.35. So in consequence of the receipt by his wife of £100,000 in 1966, he was assessed to tax in the sum of £274,121.95.

The respondents appealed from these assessments to the special commissioners without success. They then appealed to the High Court and Walton J. allowed their appeals and remitted the cases to the special commissioners for them to consider whether the assessments were justified under section 412 (1) of the Income Tax Act 1952. They had been made under section 412 (2). The special commissioners concluded that the assessments were justified under section 412 (1) and the respondents’ appeal from that decision was heard by Walton J. who allowed their appeals. The revenue now appeal direct to this House from Walton J.’s decisions by virtue of section 12 of the Administration of Justice Act 1969.

Section 412 commences with what has been called a preamble. That and what is contained in subsection (1) of that section was first enacted by the Finance Act 1936, section 18. Subsection (2) was added by the Finance Act 1938, section 28.

These parts of section 412 read as follows:

“For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfers of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled out of the United Kingdom, it is hereby enacted as follows: – (1) Where such an individual has by means of any such transfer, either alone or in conjunction with associated operations, acquired any rights by virtue of which he has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled out of the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all the purposes of this Act. (2) Where, whether before or after any such transfer, such an individual receives or is entitled to receive any capital sum the payment whereof [*1182] is in any way connected with the transfer or any associated operation, any income which, by virtue or in consequence of the transfer, either alone or in conjunction with associated operations, has become the income of a person resident or domiciled out of the United Kingdom shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be the income of that individual for all the purposes of this Act.”

The respondents contended that these provisions only applied where the taxpayer assessed had made the transfer of assets by virtue or in consequence of which income became payable to a person resident or domiciled out of the United Kingdom or where he had caused such a transfer to be made. This argument was put forward without success in Congreve v. Inland Revenue Commissioners, 30 T.C. 163. The respondents now contend that that decision of this House should be distinguished and, alternatively, if it cannot be distinguished, should now be reviewed and not followed.

The facts of that case were very complicated. It will suffice to say that Mr. Glasgow, Mrs. Congreve’s father, had prior to the enactment of the Act of 1936 transferred assets to a foreign company. Mrs. Congreve had done so too and it was not disputed that she had acquired rights by virtue of which she had power to enjoy income payable to a number of foreign companies. Lord Simonds in his speech with which the other members of the House agreed posed the question, at p. 203:

“…whether the transfer of assets, upon which either alone or in conjunction with associated operations the liability is founded, must be (as the appellants contend) a transfer effected by Mrs. Congreve or her agent or may be (as the respondents contend) effected by anyone, father, friend, or company in which she has an interest great or small, so long as the result is reached that she has power to enjoy the relevant income.”

Lord Simonds, at p. 204, said that he did not know what better words could have been used in the section if the legislature intended to define its purpose as covering a transfer of assets by A by means of which B avoided liability to tax. He regarded the language of the section as plain and said, at p. 205:

“If there has been such a transfer as is mentioned in the introductory words, and if an individual has by means of such transfer (either alone or in conjunction with associated operations) acquired the rights referred to in the section, then the prescribed consequences follow.”

This was in my view clearly the ratio decidendi of the House in this case. It was also the ratio decidendi of the Court of Appeal, 30 T.C. 163 where the judgment of the court was given by Cohen L.J. as he then was. Both this House and the Court of Appeal clearly rejected the contention that the section only applied to the individual who had by himself or through an agent made such a transfer.

I can see no ground for distinguishing that case from this, so unless the House is prepared to hold that that case was wrongly decided, the appellants must in my opinion succeed on this issue.

[*1183] Cohen L.J. with whose judgment Lord Simonds agreed on all points treated the words “such an individual” in subsections (1) and (2) as meaning an individual ordinarily resident in the United Kingdom. Their meaning does not appear to have been debated in the House. A possible meaning appears to me an individual ordinarily resident who has sought to avoid liability to income tax by means of a transfer of assets abroad. If that was their meaning, then the scope of section 412 is limited. If, on the other hand, the words just mean an individual ordinarily resident in the United Kingdom, the decision of this House in Congreve v. Inland Revenue Commissioners, 30 T.C. 163 was I think right.

Lord Simonds in the course of his speech did not refer to subsection (8) of the section. It states, inter alia: “For the purposes of this section – (a) a reference to an individual shall be deemed to include the wife or husband of the individual; …” These words have considerable significance and importance if “such an individual” means an individual ordinarily resident in the United Kingdom who has sought to avoid income tax by the transfer of assets abroad. If the decision in Congreve is right, it is not easy to attach significance to them. Mr. Nolan suggested that they might have been inserted to cover a case where a husband and wife jointly but not separately had control of a company. I find it difficult to accept that this provision was inserted by Parliament to meet that situation. I think it is much more likely that they were inserted to secure that the wife or the husband of the transferor was brought within the scope of the section and I consequently regard this provision as an indication that by

“such an individual&£148; is meant an individual who has sought to avoid tax by the transfer of assets abroad.

In Congreve the House did not have to consider, and so far as one can see did not when construing the section consider, the operation of subsections (1) and (2) when there was more than one individual who had acquired rights giving power to enjoy income of a person resident or domiciled abroad, and more than one individual had received or was entitled to receive a capital sum connected with the transfer of assets abroad. Walton J. [1979] Ch. 177, 184, when considering subsection (2), said that if its provisions were taken literally, the income of the person resident or domiciled abroad was to be deemed without limit of time to be the income of each individual who received or was entitled to receive such a capital sum “… so that the Crown is, at the end of the day, entitled to multiple tax, the multiplier being the number of different appointments made.”

He refused to believe that Parliament can ever have so intended, and, relying on a passage from Lord Loreburn L.C.’s speech in Drummond v. Collins [1915] A.C. 1011, he thought he was entitled to treat subsection (2) as so amended as to secure that the individual who received or was entitled to receive the capital sum was taxable only to the extent to which the capital sum comprised income which by virtue of a transfer of assets had become the income of a foreigner. Such a radical alteration of the plain language of this part of the subsection is one that in my opinion can only be made by Parliament. Mr. Potter for the respondents suggested another amendment of the subsection. If made, I am not at all sure that it would work as he desired but again such an alteration as he proposed could in my view be made by Parliament alone.

[*1184] In Inland Revenue Commissioners v. Hinchy [1960] A.C. 748 where the revenue contended that Mr. Hinchy was liable under section 25 (3) of the Income Tax Act 1952 to pay a penalty of treble the whole tax with which he ought to be charged for the relevant year for failing to disclose in his return the receipt of £32 19s. 9d. in interest, Lord Reid, at p. 767, gave instances of that penalty being “grossly and extravagantly disproportionate to the offences” and said:

“Difficulties and extravagant results of this kind caused Diplock J. and the Court of Appeal to search for an interpretation which would yield a more just result. What we must look for is the intention of Parliament, and I also find it difficult to believe that Parliament ever really intended the consequences which flow from the appellants’ contention. But we can only take the intention of Parliament from the words which they have used in the Act, and therefore the question is whether these words are capable of a more limited construction. If not, then we must apply them as they stand, however unreasonable or unjust the consequences, and however strongly we may suspect that this was not the real intention of Parliament.”

He concluded that the words were not capable of a more limited construction.

My Lords, I see no escape from the conclusion, if Congreve v. Inland Revenue Commissioners, 30 T.C. 163 was rightly decided, that each individual who receives or is entitled to receive a capital sum of the character referred to in subsection (2) must be deemed to have the income of the foreigner with the result, as Walton J. [1979] Ch. 177, 184, said “… that the Crown is, at the end of the day, entitled to multiple tax …” If Congreve is right, subsection (1) would produce the same result if a number of individuals had acquired rights giving them power to enjoy a part of the income of a foreigner.

I share Walton J.’s view that Parliament cannot have intended that a person, it might be unborn at the time of the transfer of assets, should be chargeable to tax on the whole of the income of the foreigner if he acquired rights giving him power to enjoy part of that income or received or was entitled to receive a capital sum coming within subsection (2) and without limit of time or that the revenue should be able to recover multiple tax if there were a number of such individuals.

None of these consequences would arise if the persons deemed to have the income of the non-resident were the individuals who had sought to avoid income tax and, by virtue of subsection (8) (a), his wife or her husband. It would not be unjust that they should be chargeable to income tax on the income enjoyed by the non-resident in consequence of the individual’s transfer of assets abroad to avoid tax. Further, the omission to make any provision in the section when, if Congreve is right, a number of individuals have to be deemed to have the income of the non-resident is, I think, very significant.

The choice lies between the section having a limited application, applying only to the individual who has sought to avoid income tax and his or her spouse and a wide application to all individuals who have rights bringing them within subsection (1) or who have received a [*1185] capital sum within subsection (2), however innocent of tax avoidance an individual might be and without regard to the amount which he might have power to enjoy or which he has received or is entitled to receive as a capital sum.

The limited application would leave, it is said, “a yawning gap.” Persons who transfer assets abroad may do so for the benefit of their families and not for their own benefit. With this construction their descendants would not come within the section. Gaps when they are found in our tax laws are usually speedily filled. The wider application is productive of such manifest injustices that in my view Parliament cannot have intended it.

I have therefore come to the conclusion that the decision in Congreve v. Inland Revenue Commissioners, 30 T.C. 163 on this question was wrong, though the actual decision of the case can be upheld on the alternative ground stated by Cohen L.J. in his judgment.

The revenue has not in this case sought to assess each respondent on the whole of the income of the non-resident trustees. They have apportioned each year that income in proportion to the capital sum received by each individual between October 1962 and November 1966, so, if the revenue are right, the extent of Mr. Baddeley’s liability to tax depended on the amounts received by the others. In their case the revenue say that it has always been their practice to apportion the income between the individuals concerned in what seems the most appropriate manner. Although an individual has the right to appeal against an assessment made on him, this right is worthless if the amount of his assessment depends solely on the discretion of the revenue. “This practice,” it was said, “may be justified either on the ground that the section does impose multiple liability, but that the “revenue” are not required, as a matter of law, and ought not as a matter of proper administration, to recover tax on the income more than once, or on the ground … that the” revenue “are not entitled to tax the same income more than once.”

In the course of his judgment in relation to subsection (1) Walton J. said [1979] Ch. 198, 213 that the Crown had submitted that

“… if the conditions of the section were satisfied then the taxpayer was chargeable in respect of the whole of the income of the non-resident … and that none the less because there might also be somebody else who was in precisely the same situation.”

This, if the decision in Congreve was right, must be so. Has the revenue then any right or power to mitigate the gross injustice that results? I think not. The section is mandatory. It says that the income of the non-resident “… shall … be deemed to be income of that individual for all the purposes of this Act.” The income of each individual to whom the section applies must be deemed to include the income of the non-resident. There is no question of the income of any individual being taxed more than once.

On this view the consequences to each individual may be even worse than they are to the respondents in this case and in my opinion the revenue has no power to override the clear provisions of this section.

[*1186] I now turn to the question whether, if as I think the decision of this House in Congreve v. Inland Revenue Commissioners, 30 T.C. 163 was wrong, it should not now be followed. That case was decided 31 years ago. It was followed and not questioned in Bambridge v. Inland Revenue Commissioners [1954] 1 W.L.R. 1460; [1955] 1 W.L.R. 1329 and it does not appear to have been questioned in any subsequent case.

In Reg. v. National Insurance Commissioner, Ex parte Hudson [1972] A.C. 944 the decision of this House in Reg. v. Deputy Industrial Injuries Commissioner, Ex parte Amalgamated Engineering Union, In Re Dowling [1967] 1 A.C. 725 was challenged and the question whether it should be overruled was considered by a committee of seven, four of whom came to the conclusion that the case had been wrongly decided but four of whom held that it should not be overruled, my noble and learned friends Lord Wilberforce, Lord Diplock and I thinking that it should be. Lord Reid said, at p. 966, that in his opinion

“… the typical case for reconsidering an old decision is where some broad issue is involved, and that it should only be in rare cases that we should reconsider questions of construction of statutes or other documents. In very many cases it cannot be said positively that one construction is right and the other wrong. Construction so often depends on weighing one consideration against another. Much may depend on one’s approach. If more attention is paid to meticulous examination of the language used in the statute the result may be different from that reached by paying more attention to the apparent object of the statute so as to adopt that meaning of the words under consideration which best accord with it. Holding these views, I am firmly of opinion that Dowling’s case ought not to be reconsidered. No broad issue of justice or public policy is involved nor is any question of legal principle. The issue is simply the proper construction of complicated provisions in a statute. There must be a large number of decisions of this House of this character. Possibly some of your Lordships may think the decision in Dowling’s case more wrong than most of them. But a decision to reconsider Dowling’s case would I think encourage those who would like to see others of such decisions reversed to think that litigation for that purpose might be worth while and would have a rather far-reaching tendency to impair existing certainty.”

Lord Morris of Borth-y-Gest thought it wholly inappropriate not to treat Dowling’s case as a binding authority. “It was,” he said, at p. 973, “essentially a decision which involved questions of construction of the statutory provisions.”

“If a tenable view taken by a majority in the first appeal could be overruled by a majority preferring another tenable view in a second appeal, then the original tenable view could be restored by a majority preferring it in a third appeal. Finality of decision would be utterly lost.”

[*1187] Lord Simon of Glaisdale, while thinking the decision in Dowling’s case wrong, thought that it would be wrong to depart from it for a number of reasons, one of which was, at p. 1024:

“A variation of view on a matter of statutory construction – so much a matter of impression – would, I should have thought, rarely provide a suitable occasion – by itself, that is to say, for it would be different if it were convincingly shown that a previous construction, clearly demonstrated to be wrong, was causing administrative difficulties or individual injustice.”

My Lords, it is clear that our power to depart from previous decisions is one that should rarely be exercised. None of their Lordships in Reg. v. National Insurance Commissioner, Ex parte Hudson [1972] A.C. 944 said that it should never be exercised in relation to the construction of a statute but the passages from the speeches which I have cited indicate that in such cases it should be exercised very rarely indeed. Here the choice is not between a literal construction and what is now not infrequently called a purposive construction. Here, as Walton J. showed, the construction placed on the section in Congreve v. Inland Revenue Commissioners, 30 T.C. 163, can be productive of very great injustice to persons like Mr. Baddeley and many others. I would myself be reluctant to assert that any decision of this House on a question of law was not a tenable view, and when this House has reconsidered a previous decision, there is always the possibility, remote though I think it is, that in a further appeal the first decision would be restored. Indeed where a decision on construction has been reconsidered, I would have thought that the possibility of this House reconsidering it again was very remote indeed.

Is this one of those very rare cases in which it would be right to depart from the construction placed on the subsection in Congreve? At one time I thought not and that it should be left to the legislature to remedy the injustice but on further consideration I have come to the conclusion that it is.

There is no indication in the judgments in Congreve or in the speech of Lord Simonds that in the course of that litigation any consideration was given to subsection (8) (a) or to the fact that the construction this House accepted meant that the income of the non-resident was to be deemed the income of as many individuals as had rights giving them power to enjoy any income of the non-resident or as had received any capital sum, however small, coming within subsection (2). If these matters had been adverted to, it is, I think, inconceivable that Lord Simonds would not have referred to them in his speech. It is these matters which have led me to think that the decision in Congreve was wrong, and if these matters had been brought to the attention of the House in that case, it might well be that a different conclusion would then have been reached.

In my opinion the decision in Congreve should be overruled with the consequence that none of the assessments in the present case should be upheld.

[*1188]If, however, a majority of your Lordships take a different view and hold that despite the injustice that can ensue that decision should be followed, in my view the assessments made on Mr. Baddeley for the years 1963- 64, 1964-65 and 1965-66 should in any event be discharged. While the income of the non-resident trustees would be deemed to be income of his wife on her receipt of the £100,000 on May 2, 1966, in that and subsequent financial years, I see nothing in subsection (2) which gives it retroactive effect. It does not provide that the income of the non-resident in any year before a person receives or is entitled to receive is to be deemed that person’s income. Assessments totalling £449,782 were made on him for those three years. Mr. Payne is in the same position as Mr. Baddeley as his wife received £100,000 on the same date and in my view the assessments made on him for those years should also be discharged.

Mr. Potter for the respondents contended that the capital sums received were not within subsection (4) associated operations as those sums originated from the accumulations of income derived from accumulations of income made by the trustees. That subsection is in very wide terms and reads as follows:

“For the purposes of this section, ‘an associated operation' means, in relation to any transfer, an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets.”

This submission was rejected by Walton J. [1979] Ch. 177, 186-187, and I think rightly for the reasons he gives. I would, however, point out that, whether or not the distribution of capital was an associated operation, a capital sum which comes within subsection (2) is one which is “… in any way connected with the transfer or any associated operation, …” In my opinion the capital sums in this case were clearly so connected.

Mr. Potter also contended that the income of the three companies in which the non-resident trustees held all the shares was not to be regarded as the income of the non-resident trustees. The revenue conceded that the income of the Commercial Insurance Corporation Ltd. was not to be treated as the income of the trustees as they had purchased all the shares but I see no ground for not treating the income of the two companies, the shares in which were subscribed for by the trustees, as part of their income.

Mr. Potter did not pursue the point he took in relation to the Hon. Mark Vestey before Walton J. and on which he failed.

I now turn, on the basis that Congreve v. Inland Revenue Commissioners, 30 T.C. 163, is followed, to the revenue’s alternative claim under subsection (1). Section 412 was amended by section 33 of the Finance Act 1969 to read as follows:

[*1189] “(1) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy,” etc.

The effect of this amendment was to make it unnecessary for the revenue to establish that the individual had acquired any rights. It sufficed, to bring him within the subsection, to establish that he had “power to enjoy.”

Mr. Potter contended that no rights giving a power to enjoy had been acquired and that there was no power to enjoy. Walton J. [1979] Ch. 198, 206, held, again in my opinion rightly, that “… none of these discretionary beneficiaries had any ‘right' to anything at all which could possibly bring the subsection into play prior to the Finance Act 1969.” I need not repeat the reasons he gave for that conclusion with which I agree. Before the second hearing before him assessments for the year 1968-69 were added to those under consideration at the first hearing by agreement between the parties in order to obtain a decision on the effect of the amendment of section 412.

“Power to enjoy” is given a very wide meaning by subsection (5). So far as material that subsection reads as follows:

“An individual shall, for the purposes of this section, be deemed to have power to enjoy income of a person resident or domiciled out of the United Kingdom if – … (c) the individual receives or is entitled to receive, at any time, any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income; or (d) the individual has power, by means of the exercise of any power of appointment or power of revocation or otherwise, to obtain for himself, whether with or without the consent of any other person, the beneficial enjoyment of the income, or may, in the event of the exercise of any power vested in any other person, become entitled to the beneficial enjoyment of the income; …

Subsection (8) (c) provides that “benefit” includes a payment of any kind.

I can see no ground for holding that the capital sums received were not provided “out of the income of the trustees or out of monies available” for that purpose by reason of the effect or successive effects of the associated operations nor do I see any ground for holding that when Edmund’s manager and Samuel’s manager exercised the power vested in them of directing the trustees to make the capital payments, the recipients of the capital sums did not become entitled to the beneficial enjoyment of the income. In my view (c) and (d) apply.

So, in my opinion, if Congreve v. Inland Revenue Commissioners, 30 T.C. 163, is followed, the assessment for the years 1963-64, 1964-65, 1965-66 and 1966-67 cannot be sustained under subsection (1) but the assessments for 1968- 69 can be sustained under that subsection as amended. It is common ground that an individual cannot be assessed [*1190] under subsection (1) and also under subsection (2) though the assessments made under section 412 may be justified under either subsection.

My Lords, in this complicated case at least one thing is clear and that is the urgent need for the reconsideration by Parliament of the terms of section 412 as amended (now re-enacted by section 478 of the Income and Corporation Taxes Act 1970). If the conclusion I have reached as to the construction of the section is accepted, then there is indeed a gap to be filled for then the section only applies to the individual who has sought to avoid tax and to his or her spouse and others who may benefit from the tax avoidance will not be penalised even though they participated in the tax avoidance. I need not dilate on the injustice which may be suffered by a number of individuals if the Congreve construction is applied. They would not I think have grounds for complaint if they were only assessed to tax on the sums they received or were entitled to receive or had power to enjoy though a distinction might be drawn between those who participated in the tax avoidance and those who did not. The former category might continue to be liable to be assessed to tax on the whole income of the non-resident.

Consideration of the penalty provisions in section 25 of the Act of 1952 in Inland Revenue Commissioners v. Hinchy [1960] A.C. 748 led to the law being changed in the next Finance Act. I hope that, in consequence of the light now thrown on section 412, that section may equally speedily be amended. In my opinion it certainly should be.

LORD SALMON.

My Lords, I agree so completely with everything stated in the luminous speech of my noble and learned friend Lord Wilberforce that I find it impossible to add anything. I would dismiss the appeals and allow the cross-appeals.

LORD EDMUND-DAVIES.

My Lords, these appeals and cross-appeals arise from assessments to income tax and surtax made upon each of the respondents under section 412 of the Income Tax Act 1952, which contained provisions formerly in section 18 of the Finance Act 1936. They were some (but not all) of the potential beneficiaries under a discretionary settlement of March 25, 1952, the nature of which has been helpfully summarised in the speeches of my noble and learned friends, Lord Wilberforce and Viscount Dilhorne. The assessments were made on the basis that section 412 deemed the income of the non-resident trustees of that settlement to be the income of each respondent for all the purposes of the Income Tax Acts. None of the respondents was, either directly or indirectly, a settlor of the settlement. The primary point of substance is whether the Commissioners of Inland Revenue can, as they assert, apply section 412 to a person or persons other than the individual who made the transfer contemplated by the settlement. The point can best be dealt with by asking two questions: (1) Was Congreve v. Inland Revenue Commissioners [1948] 1 All E.R. 948 correctly decided by this House? (2) Even if it was wrong, should your Lordships nevertheless follow it?

[*1191] By way of a preface, reference should first be had to the earlier decision in Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389; 25 T.C. 121 which, like Congreve, turned on section 18 of the Act of 1936, but which, unlike Congreve and the instant case, related only to the liability to tax of the actual transferor of assets to foreign companies and did not deal with the position of later beneficiaries under the settlement. Upholding Macnaghten J.’s finding that such a transferor was liable to be assessed to income tax and surtax, Lord Greene M.R. said in his extemporary judgment, at pp 396-397:

“If, as it seems to us, the language of the section clearly does not limit the income of the non-resident in respect of which the taxpayer is charged to the actual benefit which he draws from the income of the non-resident – a construction, be it observed, which would largely defeat the expressed purpose of the section – it is illegitimate to force on that language a strained construction merely because it may otherwise lead to a result which to some minds may appear to be unjust. But … we are not prepared to say that it is necessarily as unjust as [the taxpayer’s counsel] contends. The section is a penal one, and its consequences, whatever they may be, are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. For years a battle of manoeuvre has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. … It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers.”

And, again speaking of the transferor himself, Lord Greene M.R. added, at p. 398: “… the father will be taxed on the companies’ income because he is the person against whom the deterrent action of the section is directed.&\148; (Emphasis added in both citations.) The actual decision in Lord Howard de Walden turned on the amount of the assessments appealed against, which were based on the view that the whole income of the foreign companies were, under section 18, to be deemed to be the transferor’s income for the purposes of the Income Tax Acts. Notwithstanding that the transferor himself received and enjoyed far less, the Court of Appeal held that the whole income was to be deemed his, since the companies&\146; income was traceable to the assets he had transferred. The decision has been criticised, notably by Buckley L.J. who described it in Lord Chetwode v. Inland Revenue Commissioners [1976] 1 W.L.R. 310, 328 as “extremely harsh” and expressed difficulty in accepting that the construction of section 18 had received adequate consideration. and in the instant case Walton J. [1979] Ch. 198, 215, regarded it as “wrong,” but added, at pp. 215, 217:

“I do not see how I can escape the straitjacket … Standing Lord Howard de Walden v. Inland Revenue Commissioners [1942] 1 K.B. 389, my own fundamental conception of the rule of law is deeply offended. The only alternative is for the Crown to tax all who could possibly under any circumstances be recipients of any sliver of income [*1192] upon the whole of that income – a suggestion equally as offensive. Being bound by that case I am, unhappily, in no position to right a clearly perceived wrong.”

But, although I confess to entertaining considerable sympathy with those views, we are not presently concerned to determine the correctness of the Lord Howard de Walden decision. Right or wrong, its present importance lies in the fact that it was within the framework of that case that Congreve v. Inland Revenue Commissioners was considered, both the Court of Appeal [1947] 1 All E.R. 168and the House of Lords [1948] 1 All E.R. 948 citing it with apparent approval. The primary holding in the latter case was that section 18 applied if the transfer was procured by the taxpayer, even though not actually executed by him. So far, so good. But more important for present purposes was the further holding that section 18 was not directed solely against such a taxpayer, Cohen L.J. saying [1947] 1 All E.R. 168, 172:

“We do not think the words ‘by means of' [in the preamble to section 412] connote activity by the individual concerned … [The words] are fully satisfied if the avoidance of tax is effected through the instrumentality of the transfer by whosoever it is executed.”

Any doubt as to the ambit of those words was removed in the House of Lords, Lord Simonds saying [1948] 1 All E.R. 948, 952-953:

“My Lords, on this question I agree at all points with the unanimous judgment of the Court of Appeal which was delivered by Cohen L.J. The preamble or introductory words of the section which state its purpose do not, in my view, assist the contention, which was developed on its operative words, that the avoidance by an individual of liability to tax must be achieved by means of a transfer of assets effected by that individual. They are, on the contrary, in the widest possible terms, and I do not know what better words could be used if the legislature intended to define its purpose as covering a transfer of assets by A, by means of which B avoided liability to tax … If there has been such a transfer as is mentioned in the introductory words, and if an individual has by means of such transfer (either alone or in conjunction with associated operations) acquired the rights referred to in the section, then the prescribed consequences follow.”

Your Lordships were invited to hold that these passages were merely obiter dicta and, as such, need not now be applied. But it is an invitation that, for my part, I find it impossible to accept. On the contrary, they appear to me to contain the true ratio decidendi of both courts. There is accordingly no escape from the problem of whether it can and should now be departed from, and this is particularly so when regard is had to its application by this House in Bambridge v. Inland Revenue Commissioners [1955] 1 W.L.R. 1329 and by the Court of Appeal in Philippi v. Inland Revenue Commissioners [1971] 1 W.L.R. 1272.

My Lords, the correctness of the general proposition enunciated in Congreve v. Inland Revenue Commissioners [1947] 1 All E.R. 168; [1948] 1 All E.R. 948 can be tested by applying it to facts which, while markedly different from those which were there being considered, may (as the Inland [*1193] Revenue Commissioners contend) nevertheless be regarded as falling completely within its ambit. Although Congreve dealt with the tax liability of a single beneficiary of a settlement giving rise to the transfer of assets abroad, the appellants submit it applies with full force to the instant case of multiple beneficiaries, none of whom played any part in the transfer. The astounding consequences of assessing some (but not all) of them in accordance with that submission were condemned in understandably strong language by Walton J., and they have been closely considered in the speeches of my noble and learned friends Lord Wilberforce and Viscount Dilhorne. So startling and unattractive do I find them that I gladly abstain from covering the same ground. Instead, I content myself with recalling that learned counsel for the appellants informed your Lordships at one stage: “We accept that the result of applying Congreve to the taxpayers here may be disastrous,” while, at another stage, he submitted that a strict application of section 412 would have entitled them to assess a single beneficiary on the basis of the total income of the settlement in the year of apportionment of the capital sums, and this regardless of the amount of benefit actually received by him. The commissioners never went as far as to do that, but one solitary example should serve to illustrate the breathtaking implications of even a modified application of their basic contention. In 1966-67 Mrs. Baddeley, one of the beneficiaries, received a capital sum of £100,000 from Edmund’s fund; as a result, her husband was assessed in the following amounts of surtax and income tax: