[HOUSE OF LORDS.]

AND

Revenue - Income tax - Avoidance of liability to taxation - Transfer of assets to company abroad - Income enjoyed by residents in United Kingdom - Income "payable" to company by virtue of transfer - Inclusion of partnership profits - Finance Act, 1936 (26 Geo. 5 & 1 Edw. 8, c. 34), s. 18, sub-s. 1.

By s. 18 of the Finance Act, 1936: "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 the Income Tax Acts."

By an agreement executed in 1933 four Englishwomen resident in England, one of whom was the wife of the appellant, sold to a company which was formed and registered under the laws of Rhodesia, a two-thirds share in a partnership in a mining enterprise situated there. The remaining one-third share was vested in M., a resident in Rhodesia, who carried on the enterprise in partnership with the company. By the agreement the two-thirds share of the women was transferred to the company in consideration of 10,000 shares of 1l. each and 250,000 non-interest-bearing debentures of 1l. each. No dividend was ever paid on the shares, but the company applied its profits in redeeming debentures:-

Held, that the share of the partnership profits received by the company was income which became "payable" to the company within the meaning of s. 18 of the Act, and since by means of the transfer of assets whereby it became so payable the appellant's wife acquired rights by virtue of which she had power to enjoy income of the company, that income was to be deemed

hers for the purposes of the Income Tax Acts, so that the appellant incurred liability in respect of it.

Observations by Viscount Simon L.C. on tax avoidance.

Decision of the Court of Appeal [1942] 1 K. B. 299 affirmed.

APPEAL from the Court of Appeal.

The facts, stated by VISCOUNT SIMON L.C., were as follows: There existed in Rhodesia a partnership firm called John Mack & Co., which owned and worked an enterprise known as the Golden Valley Mine. Mr. Mack, who lived in Rhodesia, owned a one-third share. Four women, namely, the appellant's wife, her two daughters, and Mrs. Jane Johnson, owned the rest. On March 20, 1933, by an agreement of that date, these four women, being all at that time resident in the United Kingdom, sold as from April 1, 1932, their shares in the partnership to a limited company formed for the purpose and registered on the same date under the laws of Southern Rhodesia. The company was named the Latjohn Trust, Ld., The consideration was 260,000l., satisfied by the issue to the sellers of ten thousand 1l. shares, and 250,000 debentures of 1l. each. The debentures carried no interest, and there was no provision as to period of redemption. The appellant's wife was entitled to one-sixth of the consideration, namely, 1667 shares and 41,667 debentures. Latjohn Trust, Ld., proceeded to carry on business in partnership with Mr. Mack, and the accounts showed the sums receivable by the company in the various years in respect of its two-third share of the profits of John Mack & Co. Latjohn Trust, Ld., never declared a dividend, but applied its profits in redeeming debentures. It was the practice of the four women to borrow money from the company in anticipation of the redemption of debentures which they held. Until the Finance Act, 1936, came into force, Mrs. Latilla, as the result of these arrangements, was able to obtain for herself a share in the profits which the Latjohn Trust, Ld., derived from the partnership business, without incurring for herself or for her husband, the appellant, any liability to British income tax. The appellant, as the person assessable in respect of his wife's income, contended that the provisions of that Act had not altered the position. The Crown claimed that, under s. 18, sub-s. 1, of that Act, income tax and sur-tax were payable by the appellant in respect of the income of Latjohn Trust, Ld., which Mrs. Latilla had "power to enjoy" and assessments to sur-tax and income tax were, accordingly, made on him. The Special

Commissioners confirmed the assessments, finding that the transfer "was effected mainly for the purpose of avoiding British taxation and was not a bona fide commercial transaction." Lawrence J. dismissed an appeal by the appellant, and the Court of Appeal (Lord Greene M.R., Clauson and du Parcq L.JJ.) affirmed his decision. The appellant appealed to the House of Lords.

Tucker K.C. and Donovan for the appellant. The only transfer of assets within the provisions of s. 18, sub-s. 1, of the Finance Act, 1936, is a "transfer 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." These words are apt to describe, not the transfer of a business, but rather a transfer of stocks and shares. The profits which accrued to Latjohn Trust, Ld., were earned by the subsequent trading activities of the Latjohn Trust, Ld., or its agents and were not produced by the transfer. Further, the phrase "income becomes payable" is not apt to describe the earning of trading profits. It presupposes that there is a person who pays and a person who receives a sum of money impressed with the character of income. Trading profits are never payable by anybody to anybody. They result merely from an account taken between what has been spent and what has been lost by depreciation set against gross receipts. In the present case the money received from the sale of minerals is only an item in finding out the amount of the profits. The words of the section are not "money becomes payable," but "income becomes payable," and they must be given their ordinary meaning which is distinguished from such words as "income accrues" or "income arises." The company has had income, but this has not been paid to it: see Trustees of Psalms and Hymns v. Whitwell (1) and Rex v. Special Commissioners of Income Tax. Ex parte Shaftesbury Homes and Arethusa Training Ship (2). Further, the absence of any rules in s. 18 of the Act providing appropriate machinery for the computation of trading profits, such as those which appear in cases 1 and 2 of sch. D to the Income Tax Act, 1918, and the absence of any provisions for the carry-forward and set-off of losses or for deductions on account of wear and tear of machinery indicate that the legislature did not intend to make

(1) (1890) 7 T. L. R. 164; 3 Tax Cas. 7.

(2) [1923] 1 K. B. 393.

the profits of a trade wholly carried on abroad, whether alone or in partnership, the subject of tax. The section was carefully drawn and where a wide meaning was intended wide language was used, but in the material part of the section a narrow expression was chosen [They referred to Lord Howard de Walden v. Inland Revenue Commissioners (1) and Colquhoun v. Brooks (2).] Further, one partner cannot be a debtor to another in respect of the partnership business or the money of the partnership, nor can he be a creditor of the partnership or of his co-partner in respect of the sum representing the share of profits of the partnership to which that partner is entitled. Moneys which have come to the partnership already belong to both partners. A partner already owns his share of the partnership profits. He cannot pay himself or his co-partner out of those profits any more than a person can pay himself out of the profits of his own business. Accordingly, no income became "payable" to Latjohn Trust, Ld., since that would presuppose a hand to pay and a hand to receive (i.e., a debtor and a creditor or a trustee and a cestui que trust) and could not cover the case of a person drawing money already belonging to him jointly with his co-partner. The difference in partnership law between England and Scotland, a partnership in Scotland having an existence apart from its members, is not fatal to this contention. Under s. 18 the court is always dealing with a person outside the United Kingdom and so no conflict can arise between English and Scots law. [They referred to Richardson v. Bank of England (3) and Rodriguez v. Speyer Brothers (4).]

Sir Donald Somervell A.-G., J. H. Stamp and R. P. Hillsfor the respondents. The assessments made on the appellant rightly included the income of the Rhodesian company which his wife had power to enjoy within the meaning of s. 18 of the Act, since it fell within the class of income to which the section applied. That section is designed to prevent avoidance of tax by a transfer of assets abroad. Accordingly, the words "income becomes payable" have a wide, popular meaning covering any sort of income. There is no distinction here between income "payable" and "arising," since, as appears from their context, the words were meant to take in a wide

(1) [1942] 1 K. B. 389, 395.

(2) (1889) 14 App. Cas. 493, 501, 503.

(3) (1838) 4 My. & Cr. 165.

(4) [1919] A. C. 59, 87, 89.

field and a variety of transactions. Rights have been transferred to the company as a result of which it receives from year to year sums of money. The share of the partnership profits to which it is entitled come to it under the terms of the partnership, and it is entitled to call on the other partner to do whatever is necessary, e.g., by signing a cheque on the partnership banking account, to enable it to obtain that share. That share is in every sense "payable" to the company. Further, it was the transfer of assets which produced the income. The activities of the partners were "associated operations" within s. 18, sub-s. 1, these words being wide enough to cover the operation of turning to account the assets which are the subject of the transfer. [They referred to Colquhoun v. Brooks (1).]

Tucker K.C. replied.

The House took time for consideration.

Feb. 11. VISCOUNT SIMON L.C. 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 succeed, 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. The question in the present appeal is whether s. 18 of the Finance Act, 1936, has the result of checkmating the design of avoiding income tax and sur-tax which was the main purpose of certain highly artificial dispositions made in 1933.

(1) 14 App. Cas. 493.

The appellant contended before the Special Commissioners, before Lawrence J. and before the Court of Appeal that the avoidance of British taxation was not the main purpose of these arrangements. He failed in this contention at each stage. One of the reasons adduced in his printed case to this House is that the scheme adopted in 1933 "was a bona fide commercial operation not designed for the purpose of such avoidance." If this were true, the scheme would have come within the exemption provided, as the law then stood, for operations not effected for the main purpose of avoiding liability to taxation, and the appellant would escape tax. Counsel for the appellant prudently decided to drop the contention. The contrary finding adopted by the Special Commissioners and affirmed by both courts below, is, as the Master of the Rolls says(1), "quite unassailable." Nevertheless, if the Crown is unable to bring the scheme of 1933 within the range covered by s. 18 of the Finance Act, 1936, the appellant must succeed. The issue turns on a comparison of the particular arrangements now before us with the language of the section.

It is manifest that the debentures were brought into existence merely that their redemption might serve as a means, from time to time, of transferring part of the profit of the mine to these women in the form of capital. Admittedly, by receiving sums in redemption of her debentures, the appellant's wife has "power to enjoy" income of Latjohn Trust, Ld.: see sub-s. 3 of s. 18 of the Finance Act, 1936. The decisive question is whether the right by virtue of which she has this power to enjoy has been acquired by means of the sort of transfer to which s. 18 applies. The appellant correctly argues that "any such transfer" in sub-s. 1 means any "transfer of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations income becomes payable" to the company. He then contends - and this is the pinch of the case - that trade profits made by a partnership cannot be said to be income a share of which "becomes payable" to one of the partners. One partner, it is said, is not a creditor of the partnership. The share of partnership profits to which Latjohn Trust, Ld., became entitled could not, in this view, be described as income which "became payable" to the company. The answer to this argument is to be found in the powerful judgment of

(1) [1942] 1 K. B. 299, 303.

Lawrence J., and again in a passage from the judgment of the Master of the Rolls which I would respectfully adopt as expressing with the greatest clearness and precision the true view of the application of s. 18 to the facts of this case. Speaking for the Court of Appeal, Lord Greene declared his disagreement with the appellant's arguments, and continued(1): "The share of the profits of the partnership to which the company is entitled is that share which comes to it in accordance with the terms of the partnership. The company is entitled to call upon its partner to do whatever may be necessary, for example, by signing a cheque on the banking account of the partnership to enable the company to obtain its share. In the partnership accounts the company's undrawn share of profits would appear as a debt owing to the company. If the profits were under the control of the other partner, the company could by appropriate proceedings compel him to pay over its share. If this is not income 'payable' to the company, we do not know what it is. With regard to the argument that it was not the transfer of assets which produced the income but the activities of the partners, we agree with the argument submitted by the Attorney-General that those activities are 'associated operations' within the definition of that phrase in sub-s. 2. By that sub-section, so far as is relevant, 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,' words of the widest import which, in our judgment, clearly cover the operation of turning the assets to account."

These words of the Master of the Rolls completely justify the conclusion that the appellant's attempt to avoid British income tax and sur-tax by these artificial arrangements has been frustrated by the Act of 1936. This is not a case requiring an examination of previous authority, but I may add that, in my opinion, the two decisions cited by the appellant on the meaning of "annual payment" in s. 105 of the Income Tax Act, 1842 (Trustees of Psalms and Hymns v. Whitwell (2), and Rex v. Special Commissioners of Income Tax. Ex parte Shaftesbury Homes and Arethusa Training Ship (3)) have no bearing here. The recent decision of this House in Commissioners for General Purposes of Income Tax for City of

(1) [1942] 1 K. B. 299, 304.

(2) 7 T. L. R. 164; 3 Tax Cas. 7.

(3) [1923] 1 K. B. 393.

London v. Gibbs (1) goes to show that the technical view of the nature of partnership in English law cannot always be taken in applying the law of income tax. I move that the appeal be dismissed, with costs.

My Lords, I am authorized by my noble and learned friends, LORD ATKIN and LORD RUSSELL OF KILLOWEN, to say that they concur in the opinion which I have delivered.

LORD THANKERTON. My Lords, I concur.

LORD PORTER. My Lords, the conclusion which your Lordships have to reach in this case depends on the construction and effect of s. 18 of the Finance Act of 1936. That section contains a proviso exempting cases where the subject shows to the satisfaction of the Special Commissioners that the transfer dealt with was effected for some purpose other than avoiding liability to taxation. This proviso was amended in 1938 so as to have a stricter application, but whether the earlier or later provisions be applicable the Commissioners have found (and it is now conceded that we are bound by their finding) that in the present instance they are not so satisfied.

The main argument, however, presented to your Lordships was centred on the words "payable to." It was said that those words necessitated the existence of a payer and a payee, and that income could not become "payable" out of partnership funds to a company which was a member of the partnership. A partner, it was contended, was already the owner, among other things, of his share of the partnership profits and could no more pay himself out of those profits than an individual could pay himself out of the profits of his own business.

No doubt, it is true to say that an individual cannot pay himself, if "pay" be used in its strict sense, but no question of an individual's ability to do so arises here. The only question is whether income can be said to be payable to a partner out of the partnership assets. I think it can. "Payable" is not a term of art, and, though a partner cannot sue the partnership or the partners individually for the purpose of recovering partnership assets, yet, as the Master of the Rolls points out, he has at his disposal means whereby he can ensure that his share reaches his hands, In such circumstances it seems to me that the word "payable" is appropriately

(1) [1942] A. C. 402.

used and accurately conveys the process by which the income finds its way into the pocket of the individual. It would, I think, not inaccurately be described as having been paid to him out of the partnership funds.

The appellants, however, sought to support their argument by the suggestion that, though cases 1 and 2 of sch. D have provided appropriate machinery for calculating what the profit of a business is, no such machinery exists in the case of s. 18 of the Act of 1936. They maintained that this omission showed that moneys earned by the personal carrying on of a business abroad, whether alone or in partnership, were not intended to be subject to tax under this section. No doubt, this is a matter for consideration, but it is an element only and not a very important one. I can see no reason why a proper estimate cannot be made where the case requires it.

As the Lord Chancellor has already observed, the principles laid down in Trustees of Psalms and Hymns v. Whitwell (1) and Rex v. Special Commissioners of Income Tax. Ex parte Shaftesbury Homes and Arethusa Training Ship (2), are not applicable here. They deal with different wording, and in those instances no partnership existed. Whatever may be the true view in the circumstances which existed in them, they do not touch the case where money is receivable by a partner out of partnership property.

I agree that the appeal should be dismissed.

Solicitors for appellant: Birkbeck, Julius, Edwards & Co.

Solicitor for respondent: Solicitor of Inland Revenue.

(1) 7 T. L. R. 164; 3 Tax Cas. 7.

(2) [1923] 1 K. B. 393.