[HOUSE OF LORDS.]

AND

Revenue - Profits tax - Investment company - Direction by special commissioners - Computation of company's actual income - Deduction of amount payable by company for profits tax - Whether profits tax "payable" before election - Meaning of "payable" - When tax "falls to be computed" - Finance Act, 1947 (10 & 11 Geo. 6, c. 35), s. 31 (3) - Whether direction required if nil actual income - "Payable" - Finance Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 33), s. 68 - Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 262.

Revenue - Surtax - Company.

Section 68 (1) of the Finance Act, 1952, provides: "Where ... the actual income from all sources of a body corporate ... falls to be computed under paragraph 6 of the First Schedule to the [Finance Act, 1922] or subsection (3) of section two hundred and fifty-five of the [Income Tax Act, 1952], then, if any amount is payable by the body corporate by way of the profits tax or the excess profits levy, respectively, for any chargeable accounting period falling wholly or partly within that year or period, a deduction shall be allowed, in computing the said actual income, of such an amount as would, after deduction of income tax at the standard rate in force for the year of assessment during which the said year or period ends, be equal to so much of the amount so

payable by the body corporate as is apportionable to the said year or period: ..."

An investment company, to which section 245 of the Income Tax Act, 1952, applied, required the Special Commissioners to make a direction pursuant to section 262 of that Act in respect of the company's income for the period April 6 to May 7, 1953. The Special Commissioners refused to make a direction on the ground that when the actual income of the company was computed, including a deduction in respect of the company's liability to profits tax, to which it had been assessed, a nil sum resulted and that there was no obligation upon them to make a direction in respect of a nil actual income. The company claimed to be entitled to require an order of mandamus to issue to the Special Commissioners requiring them to make a direction. In that event it would escape payment of £16,421 profits tax by electing to pay surtax on a sum not exceeding £8,920:-

Held, that profits tax, having been assessed, was "payable" within the meaning of section 68 (1) of the Act of 1952 notwithstanding that no profits tax would ultimately be payable if, after a direction under section 262, and a consequent apportionment, an election was made under section 31 (3) of the Finance Act, 1947. A pending appeal to the House of Lords against that assessment to profits tax could be disregarded in this respect, since it only raised again the same question now before the House, and must fail if the present appeal was allowed. Accordingly, the Special Commissioners were not obliged to make the direction, since a necessary preliminary to a direction and apportionment was the computation of the company's actual income from all sources and, in computing it, a deduction must be made in respect of any profits tax payable by the company during the relevant period. There was no obligation to make a direction in respect of non-existent income and no possibility of "apportioning" nothing. Therefore there was no right to an order of mandamus.

Per Lord Denning. The making of an election was not a condition precedent to the profits tax being payable, but a condition defeasant.

Dicta of Lord Dunedin in Whitney v. Inland Revenue Commissioners [1926] A.C. 37, 52; 42 T.L.R. 58, and of Lord Porter and Lord Morton of Henryton in Inland Revenue Commissioners v. John Dow Stuart Ltd. [1950] A.C. 149, 163, 169-170; [1950] 1 All E.R. 1 applied.

Decision of the Court of Appeal sub nom. Reg. v. Income Tax Special Commissioners, ex parte Linsleys (Established 1894) Ltd. [1957] 2 Q.B. 78; [1957] 2 All E.R. 167 reversed.

APPEAL from the Court of Appeal (Jenkins, Hodson and Sellers L.JJ.).

This was an appeal from an order of the Court of Appeal made on March 6, 1957, dismissing the appeal of the appellants, the Commissioners for the Special Purposes of the Income Tax

Acts, from an order of the Divisional Court of the Queen's Bench Division (Lord Goddard C.J., Hallett and Donovan JJ.) made on October 19, 1956, whereby it was ordered that the commissioners should forthwith, and they were commanded to, give a direction under sections 245 and 262 of the Income Tax Act, 1952, in respect of the period from April 6, 1953, to May 7, 1953 (both inclusive), in relation to the respondent company, Linsleys (Established 1894) Ltd. (the applicants), and that the respondents' costs of the motion be paid by the appellants to the respondents, such costs to be taxed; and it was further ordered that the proceedings therein be stayed for 14 days from the date of the order and that if within that time the appellants gave notice of appeal and entered the same, then the proceedings be further stayed until the determination of the appeal.

The facts, stated by Lord Reid, were as follows: The respondent, hereinafter called "the company," was at all material times under the control of not more than five persons of whom some, but not all, were individuals. Until 1952 the company carried on trade as beer, wine and spirit merchants, but on April 1 of that year it sold its business. Thereafter it was an investment company. On May 7, 1953, it went into voluntary liquidation. In respect of its last chargeable accounting period from April 1 to May 7, 1953, the company was assessed to profits tax in the sum of £18,987, mainly on account of distribution charges in respect of assets distributed in the liquidation. If no account were taken of this assessment, its actual income for the period April 5 to May 7, 1953, was not more than £8,920. If this assessed amount of profits tax were treated as an expense, its actual income for that period was nil, being arithmetically a minus quantity. In this action the company sought an order of mandamus against the appellants, the Special Commissioners; and by a judgment of the Divisional Court, affirmed by the Court of Appeal, the Special Commissioners were ordered to give a direction under sections 245 and 262 of the Income Tax Act, 1952, in respect of the period April 6 to May 7, 1953. The present appeal was brought against that order. The result of that order would be that the company would not be bound to pay that part of the profits tax attributable to that period, i.e., £16,421, but that the actual income of the company, i.e., £8,920, or such less sum as might ultimately be determined, would be deemed to be the income of its members, so that surtax would be payable in respect of what would be apportioned to individual members

and other additional tax would be payable in respect of the part apportioned to corporate members of the company.

Sir Reginald Manningham-Buller Q.C., A.-G., and E. B. Stamp for the appellants. This case involves consideration of the relationship between the statutory provisions dealing with the profits tax code and those dealing with the cases where a company's income is to be treated as income of the members for surtax purposes. The chargeable accounting period of the company was from April 1 to March 31. As the liquidation was on May 7, 1953, the last chargeable accounting period was from April 1, 1953, to May 7, 1953.

By section 30 (2) of the Finance Act, 1947, relief (called "non-distribution relief") was provided by way of reduction of the rate of profits tax on so much of the taxable profit as was not covered by the "net relevant distributions to proprietors" (ascertained in a specified way). Thus the full burden could be avoided by delaying distribution to a subsequent year. By section 30 (3) it was provided that if, in the case of a trade or business, the net relevant distributions for any chargeable accounting period were greater than the profits thereof for that period, there should be charged for that period, in addition to any other profits tax, profits tax on the amount of the difference, provided that a greater amount of such excess should not be taxed under the subsection than the amount which previously escaped tax by reason of non-distribution relief in an earlier period. These additional charges were called "distribution charges" and were in fact payment of relief accrued in earlier years.

Thus the £18,987 assessed on the company in respect of the period from April 1, 1953, to May 7, 1953, represented distribution charges, or relief secured through non-distribution in earlier years. If this had been an ordinary company, no question would have arisen, but on the ground that not more than five persons controlled it and it was an investment company to which section 245 of the Income Tax Act, 1952, applied, it was claimed that it could escape payment of the sum which it would have had to pay if distribution had been made in earlier years. This was sought to be achieved by the company surtax provisions. Ever since 1922 Parliament has made special provision for companies controlled by not more than five persons: see section 21 of the Finance Act, 1922, section 20 (1) and (3) of the Finance Act, 1936, and section 14 of the Finance Act, 1939.

National defence contribution (later profits tax) started in 1937, and by section 25 (1) of the Finance Act, 1937, it was to be deducted as an expense in computing profits and gains for income tax purposes. It was clear from the start that the amount "payable" must be ascertained before the amount of income was finally determined. Profits tax must be deducted in order to arrive at income tax.

Section 245 of the Income Tax Act, 1952 (replacing section 21 of the Finance Act, 1922), deals with the power to direct that the income of certain bodies corporate (defined by section 256) is to be deemed to be the income of their members. The section refers to "actual income," and that must be income after deducting profits tax: see section 141 (3). The actual income is to be apportioned, and that would be very hard if it included profits tax liability.

Since the amount of profits tax liability must be deducted as an expense from the company's income under section 141, it had no income for the period in question and so could not come within the words of section 257 of the Act of 1952 defining investment companies.

The application for mandamus is based on section 261 (1) and on the ground that the company was within section 256 and that its income during the relevant period was investment income; the subsection, it is said, is mandatory. For the Crown it is contended that the amount of the profits tax assessment was £18,987 and the amount of the company's receipts was not more than £8,920, and that, the former being allowed as a deduction, the company had no actual income for the relevant period, so that section 262 and section 245 cannot apply. That is the position under the Income Tax Act, 1952, and the Finance Act, 1952, makes no real difference.

If, as here, there is a nil income, one cannot divide nought, for, if there is no income, there can be no increase of the surtax liability of the members of the company. It would be strange if Parliament had placed on the commissioners the duty of doing what is now suggested when the whole object of the provisions relied on was to prevent the avoidance of the payment of surtax. Before one can determine whether section 262 applies, the company's income must be ascertained.

The Finance Act, 1952, made some important changes in the law. By section 33 profits tax was no longer deductible for income tax purposes. But section 68 (1), dealing with the case

of companies such as this, has the effect of relieving the members of such companies from paying surtax on that income paid for income tax on the amount of profits tax liability. Section 68 (2) amends the proviso to section 262 (2) (a). So, although by section 33 profits tax is no longer deductible for income tax purposes, it must still be deducted (or grossed up) for the purposes of the company surtax provisions. It would be unfair if members of a company within section 245 or section 262 were compelled to pay surtax on amounts which were paid in profits tax and which they never received. Yet that would be the effect of the decision of the Court of Appeal. As to the repeal of section 141 of the Income Tax Act, 1952, see section 76 (8) and Schedule XIV of the Finance Act, 1952.

The importance to the respondent company of getting a direction under section 262 arises from the provisions in section 31 (1) (2) and (3) of the Finance Act, 1947, exempting individuals and partnerships of individuals from profits tax. The effect of that section would be that if, by virtue of an order of mandamus, a direction were obtained in relation to the period in question and that direction were followed by apportionment, the right of election would arise, that right being exercisable by the corporate body jointly with the non-individual members. The effect of election would be that the respondent company would not be chargeable to profits tax, that is, would avoid paying the £16,421 and by election for the year 1952-53 would avoid paying the £18,987. The effect would also be a division of profits and losses among those to whom apportionments were made. The income, £8,920, would be divided and the profits tax liability would be extinguished, the members paying surtax on a sum not exceeding £8,920.

There is only a contingent right of election arising if the anterior conditions are fulfilled.

As to the stages in the imposition of a tax, see Whitney v. Inland Revenue Commissioners.¹ As to the meaning of "actual income," see Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue Commissioners.²

The right order is not first to make a direction and then to compute the income. In cases of a direction under section 245 of the Income Tax Act, 1952, one must first ascertain in relation to the company whether a "reasonable part of its actual income"

1 [1926] A.C. 37, 52; 42 T.L.R. 58.

2 [1940] 3 All E.R. 657, 660; (H.L.) [1942] A.C. 643, 657-658; [1942] 1 All E.R. 619.

has been distributed, and in order to do that one must first ascertain the whole income. Further, in order to be an investment company, a company's income must consist mainly of investment income (see section 257 (2)), and so, if there is no actual income, it is not an investment company for the purposes of these sections. The expression the "whole of the actual income" in section 262 (1) imports that there must be an actual income before a direction can be made, and it must be determined whether all or part of the income is estate or trading income: see section 262 (3) and (4). So, alike under sections 245 and 262, computation of income must precede and not follow direction.

On the view of the courts below, section 262 (2) of the Income Tax Act, 1952, and section 68 of the Finance Act, 1952, would never apply, for section 31 (2), (3) and (4) of the Act of 1947 would apply to every possible class of company to which section 262 applied. Surtax payers would lose an advantage which Parliament intended them to have. If there is no deduction before apportionment, there is no machinery for rectifying apportionment. In section 68 (1) the word "payable" covers both profits tax and excess profits levy and has the same meaning in relation to each. Section 68 (4) shows that the word is equivalent to liability based on current assessments for the chargeable accounting period. The word "payable" may have different meanings according to the context. The reference to excess profits levy in section 68 shows that there it means the amount for which the company is liable at the moment of computation; so, too, in the case of profits tax. In relation to section 262 of the Income Tax Act, 1952, the moment is before direction; see also sections 19, 24 (1) and Schedule V, paragraph 1, of the Finance Act, 1937. The profits tax is now "payable" within section 68 because the distributions made by the respondents in liquidation attracted profits tax under section 30 (3) of the Act of 1947 and the amount has been particularized by an assessment.

There are six years in which to apportion and assess for surtax under section 245. It may be done in year 6. The question arises: Can a company in year 1 appeal against an assessment to profits tax on the ground that at any time within the next five years there may be an apportionment and election and that the tax is consequently not payable in year 1? As matters stand, there is liability to profits tax and the assessment would be valid; the tax must be paid notwithstanding that in certain contingencies the liability may be terminated. There would be a present liability to pay profits tax and it is payable down to the date of

election, so that an appeal against assessment would be out of place. There is no difference between cases where there "may" be a direction and there "must" be a direction. In neither case "must" there be an election. Profits tax is payable notwithstanding there may be an apportionment. It is not the apportionment which destroys the liability but the subsequent election. The direction and apportionment proceed on the amount payable at the time of computation.

It was not the intention of the legislature to give the company and its corporate members the choice of paying profits tax or of escaping it by casting an increased surtax liability on its members. The object of the relevant provisions was to deter distribution. There can be an election to escape profits tax only where there is in fact a liability to surtax.

Under section 245 before giving a direction the Special Commissioners must know the actual income and when it was distributed; therefore the income falls to be computed before they can give a direction. Again, under section 262 there must be "actual income" before direction and it must be known to what extent it is estate or trading income, so that there the income falls to be computed before direction.

Before the Finance Act, 1952, the deduction of profits tax was a necessary condition precedent to the determination of income tax and other liabilities. Since then profits tax and income tax are ordinarily assessed independently, but section 68 requires profits tax to be deducted in company surtax cases.

Although it is contended that actual income falls to be determined before direction, it is sufficient for the appellants' purposes if it is to be computed after direction but before apportionment. Whenever it is computed, the profits tax payable must be deducted.

Profits tax is payable within the meaning of section 68 (1) and will cease to be payable on the happening of a certain event, that is, election. If that does not happen, it remains payable. The situation is not that it will only become payable on a certain event not happening. In the same way a vested interest does not cease to be so because it is liable to be divested on the happening of a future event. If, by reason of an apportionment, profits tax ceases to be payable, the amount deducted in respect of it can be covered by an additional apportionment.

If it be contended that the profits tax is not payable because the company has appealed against the profits tax assessment, the answer is that the commissioners cannot compute the actual

income until the appeal is determined and so cannot be compelled to apportion before that.

The liability is not contingent any more than was the liability in Inland Revenue Commissioners v. John Dow Stuart Ltd.³ The reasoning of that decision supports the appellants' submissions.

If the actual income of a company is nil, there can be no direction, no apportionment and no liability to surtax. Whatever is apportioned is deemed by statute to be the income of the members. There is no machinery by which that can be reversed. What has once been deemed to be the income of the members cannot be undeemed. If a company's total income were £2,000 and the profits tax £500, the income for income tax purposes would be £1,500. In those circumstances there should be an apportionment of £1,500, and afterwards if, and only if, there were an election, there should be an additional apportionment of £500. It would be wrong to apportion the whole £2,000 on the ground that election might destroy liability to profits tax.

The respondents want the House of Lords to shut their eyes to section 68 (1) and (2) of the Finance Act, 1952. If they are right, it could never apply. But the appellants have given effect to it as Parliament required.

In summary, a necessary preliminary to a direction and apportionment is the computation of the company's actual income within section 262 (1) of the Income Tax Act, 1952. In that computation any profits tax payable by this company for the relevant period, "grossed up" in accordance with section 68 of the Finance Act, 1952, must be deducted. The amount of the profits tax so payable is £16,421 and the gross sum to be deducted is £29,856. When this is deducted, the company's actual income is reduced to nil. There is no obligation under section 262 to make a direction in regard to non-existent income, and nought cannot be "apportioned." Thus section 262 (1) imposes on the appellants no duty for the relevant period.

E. B. Stamp following. It is no doubt anomalous that if the actual income is £1, there must be a surtax direction resulting in relief from profits tax, while if the actual income is nil, there can be no direction and no relief. But no point can be made against us on this, because, depending on the figures, the same anomaly will arise whether or not you ought to deduct profits tax in making the surtax direction. Profits tax must be "payable"

3 1948 S.C. 686, 693, 696; 31 T.C. 274, 280, 283; [1950] A.C. 149, 159-160, 161, 163, 166-167, 182.

notwithstanding that a direction may ultimately fall to be given. Otherwise a trading company could, arguing that it had not become payable, resist payment of profits tax until the time for making a surtax direction six years later had expired, when it would be too late to make a profits tax assessment.

Cyril King Q.C. and Hubert Monroe for the respondent company. The courts below were right. The appellants have no discretion in this matter and the provisions relied on by the respondent company are mandatory that the apportionment must be made as between all the members of the company. No charge is laid on by the apportionment. There is a right of appeal against apportionment involving considerations of the accuracy of the actual income which has been apportioned: see Inland Revenue Commissioners v. Kered Ltd. Same v. Sigma Trust Ltd. Same v. Willant Trust Ltd.⁴ After apportionment the last step is assessment which imposes the charge to surtax.

In relation to profits tax the first thing to be done is for the company to determine whether to avail itself of the right of election given by section 31 (3) of the Finance Act, 1947. If it is so decided, no deduction need be made in respect of profits tax in the calculation of the actual income, but otherwise the amount of the profits tax is vital in finding out what is the amount of the actual income. In section 35 of the Finance (No. 2) Act, 1945, dealing with relief for deficiencies of profits in relation to excess profits tax and national defence contribution, there is no time limit.

Profits tax is "payable" if it becomes finally payable in the last resort, having regard to the relevant sections of the whole tax code. The sum of £16,421 profits tax is not here "payable" within section 68 of the Finance Act, 1952, which is only designed to apply to a certain group of persons. The language of that section leaves in abeyance the question whether or not profits tax is payable, and profits tax is not payable within that section unless the amount thereof has been finally determined and must ultimately be paid. Among the relevant sections of the taxing statutes, which must be considered in determining that, is section 31 of the Finance Act, 1947. No profits tax is ever payable by the company if after a direction under section 262 of the Income Tax Act, 1952, and a consequent apportionment, the company and the corporate members thereof exercise their right of election under section 31. By refusing to give a direction the appellants

4 [1939] 1 K.B. 402; [1939] 1 All E.R. 45.

have deprived the respondent company and its members who are not individuals of their statutory right to elect whether for the period in question the company shall be chargeable to profits tax, since that right of election can follow only on a direction. Further, in the present case the profits tax assessments are still under appeal, and accordingly they are not final and the tax is not payable.

There is no provision in the legislation enabling profits tax paid to be recovered if, at a later stage, it is found not to have been payable.

As to the computation of "actual income," see section 255 (3) of the Income Tax Act, 1952, in relation to surtax directions on undistributed income. During the period in question the respondent company had an actual income from all sources.

Even if a deduction in respect of profits tax falls to be made, the commissioners are not absolved from the performance of their statutory duty to give a direction on the ground that the effect of the deduction would be to reduce the actual income of the company to nil. Notwithstanding this, the statutory provisions require the making of a direction.

As to what Lord Dunedin said in Whitney v. Inland Revenue Commissioners,⁵ and also the decision in Inland Revenue Commissioners v. John Dow Stuart Ltd.,⁶ see the judgment of the Court of Appeal in the present case.⁷ The court did not consider that it followed that where the legislation charging a tax gave taxpayers a right of election which, if exercised, would exempt them from liability for the tax, references in the legislation to the tax as "payable" were to be taken as meaning that the tax must be treated as payable, notwithstanding the existence of the right of election.

One must not be startled by the anomalies thrown up by these enactments in any view of the matter, but those inherent in the Crown's submissions are striking. Thus, if the amount of the profits tax is to be deducted in computing the income apportioned, and afterwards, because of the apportionment, profits tax ceases to be payable, the sum deducted would be retained by the company unapportioned and would not be chargeable to surtax. Further, on the Crown's submissions, if the profits tax was less than the company's actual income, even by a very small sum, the whole of the actual income would be treated on a surtax basis and no profits tax could be demanded, assuming that the right

5 [1926] A.C. 37, 52.

6 [1950] A.C. 149.

7 [1957] 2 Q.B. 78, 105; [1957] 2 All E.R. 167.

to election is exercised or that it is a case under section 31 (2); but if the profits tax was greater than the company's actual income, even by a little, the whole would have to be handed over as profits tax.

Hubert Monroe following. The problem is to fit section 68 of the Finance Act, 1952, into a logical scheme with section 31 of the Finance Act, 1947. Section 68 applies to companies on which a direction and apportionment are being made for surtax purposes. So, prima facie, the company is liable to income tax, profits tax and surtax. So lar as income tax is concerned, the assessment may be on the profits of a trade, or, in the case of an investment company, the income tax may be deducted at source. Until 1952, in computing under Schedule D the income tax liability of a trading company, profits tax was a deduction, but section 33 of the Finance Act, 1952, altered the practice, arriving at the same result in a different way. That has no bearing on section 68 of the Act, which is concerned with a different problem, the computation of the actual income of a company from all sources. In the case of investment companies it preserves the previous position with a variation in that it allows the deduction of grossed-up profits tax. The purpose and effect of the section is to give a measure of relief from double taxation, since, but for that, taxation might exceed 20s. in the pound. The relief granted under this section is to be contrasted with that under section 31 of the Act of 1947.

Profits tax is payable in respect of a particular chargeable accounting period when all the circumstances relevant to that particular period are known. Where there is a true condition subsequent, the Finance Acts provide machinery for dealing with it. The fact that none is provided here shows that the right of election is not a true condition subsequent. There is nothing unusual in postponing the actual assessment of tax payable. The imposition of liability is the horse which draws the cart after it, the amount. The horse must go before the cart. There is no difficulty in the respondent company's contentions which cannot be adjusted by the machinery provided by the Acts.

Their Lordships took time for consideration.

January 23, 1958. VISCOUNT SIMONDS. My Lords, I have had the advantage of reading the opinion which my noble and learned friend, Lord Reid, is about to deliver, and I agree so fully in his reasoning and conclusions that I do not think it

necessary to add anything. In accordance with it, I move that the appeal be allowed and the appropriate declaration made; the respondents must pay the appellants' costs in the Divisional Court; each party will bear their own costs in the Court of Appeal and this House.

LORD MORTON OF HENRYTON. My Lords, I have had the privilege of reading in print the opinion which is about to be delivered by my noble and learned friend, Lord Reid. That opinion sets out fully the facts leading up to this appeal, and the relevant statutory provisions, and I agree with it; but as your Lordships are differing from the unanimous conclusion of the Court of Appeal and of the Divisional Court, I shall state shortly, in my own words, my reasons for thinking that the appeal should be allowed.

For the purpose of stating the respective contentions of the parties, I borrow, with only trifling alterations, the language of Donovan J. in delivering the judgment of the Divisional Court.¹ Counsel for the Crown contend that the Special Commissioners are not obliged to give a direction under section 262 (1) of the Income Tax Act, 1952, followed by an apportionment, because (1) a necessary preliminary to a direction and apportionment is the computation of the respondent company's actual income from all sources in accordance with the terms of section 255 (3) of the same Act; (2) in computing that income, any profits tax payable by the company for the relevant period (April 6 to May 7, 1953) "grossed-up" in accordance with section 68 of the Finance Act, 1952, must be deducted under the mandatory provisions of the same section; (3) the amount of the profits tax so payable is £16,421, and the gross sum to be deducted is £29,856; (4) when this sum is deducted, the result is that the actual income from all sources of the company for the relevant period is reduced to nil; (5) there is no obligation under section 262 to make a direction in regard to non-existent income and no possibility of "apportioning" nothing; (6) therefore section 262 (1) imposes no duty upon the Special Commissioners for the relevant period.

Counsel for the company attack the third stage in this reasoning. They submit that the sum there mentioned is not "payable" within the meaning of section 68 of the Finance Act, 1952, because profits tax is not "payable" within the meaning

1 [1957] 2 Q.B. 78, 85; [1956] 3 All E.R. 577.

of that section unless the amount thereof has been finally determined and must ultimately be payable, having regard to all relevant sections of the taxing statutes, including section 31 of the Finance Act, 1947; and no profits tax will ever be payable by the company if, after a direction under section 262 of the Income Tax Act, 1952, and a consequent apportionment, the company and the corporate member thereof exercise their right to "elect" under section 31 (3) of the Finance Act, 1947.

To this argument counsel for the Crown reply that profits tax is now "payable" within the meaning of section 68 of the Finance Act, 1952, because the distributions made by the company in liquidation attracted profits tax under the charge imposed by section 30 (3) of the Finance Act, 1947; and the amount of tax payable has been particularized by an assessment made upon the company. Thus the decision of this appeal turns upon the question whether this sum of tax is or is not "payable," within the meaning of section 68 of the Finance Act, 1952, in the circumstances of the present case.

My Lords, I express no opinion upon the question whether a particular sum of profits tax can be said to be "payable" within the meaning of section 68 before there has been an assessment, but in the present case I am of opinion that the contentions of counsel for the Crown are well founded. In the case of an investment company, to which section 262 of the Income Tax Act, 1952, applies, it may not be necessary for the Special Commissioners to make any computation of the actual income from all sources of the company before giving a direction, because the direction is to be given under section 262 (1) "without considering whether or not the company has distributed a reasonable part of its said income." To this extent the position under section 262 differs from the position under section 245; but it seems to me impossible for the commissioners to apportion the actual income from all sources of the company among the members of the company without first computing what that actual income is. This computation must be carried out in accordance with the provisions of section 255 (3) of the Income Tax Act, 1952, and section 68 of the Finance Act, 1952, and no election under section 31 (3) of the Act of 1947 can take place until there has been an apportionment of the income. Thus the order of events is first, computation, secondly, apportionment, and thirdly, election, and, in my view, the provisions of section 68 compel the commissioners to deduct, at the first stage, the sum of £29,856

already mentioned. The reasons which lead me to this result are as follows:

(a) This sum has already been assessed upon the company and is, I think, "payable" in any ordinary sense of the word. This view is supported by the observations of Lord Dunedin in Whitney v. Inland Revenue Commissioners² and by members of your Lordships' House in Inland Revenue Commissioners v. John Dow Stuart Ltd.³

(b) The words "the amount payable" appear in subsection (4) (a) of the same section 68 and in that subsection the word "payable" cannot mean "finally determined," because it is contemplated that the amount "payable" may be reduced by reason of a deficiency of profits for a subsequent period. It seems to me that the same meaning should be given to the word "payable" in subsections (1) and (4). If so, the possibility of a subsequent election under section 31 (3) of the Act of 1947 would not relieve the commissioners from the duty to deduct the sum now in question in accordance with section 68 (1) of the Act of 1952.

(c) The contention of counsel for the company would result in section 68 (1) having a very limited application, whereas it appears to me to be intended to be a general relieving section for the benefit of the taxpayer.

(d) It might well happen in many cases that the company would have paid the sum assessed by way of profits tax before the commissioners came to make their computation under section 68, and it would seem strange if a sum which had actually been paid, and properly paid, should be held not to be "payable" within the meaning of the section.

(e) Although both sides could point to certain anomalous results if their contention were rejected, the most striking anomaly arises from the argument on behalf of the respondent company. For if that argument were correct, an investment company having an investment income of (e.g.) £10, and being liable for profits tax amounting to a very large sum, could get rid of the liability for profits tax by insisting upon a direction being given by the commissioners under section 262 (1), followed by an apportionment of the £10, thus bringing into effect the provisions of section 31 (2) or 31 (3) of the Finance Act, 1947.

I have not overlooked the fact that an appeal against the relevant assessment to profits tax is still pending, but that appeal

2 [1926] A.C. 37, 52; 42 T.L.R. 58.

3 [1950] A.C. 149, 163, 169-170; [1950] 1 All E.R. 1.

only raises again the question which is now before this House. I agree with my noble and learned friend, Lord Reid, in thinking that in these circumstances the fact that this appeal is still pending can be disregarded, and I join with him in refraining from expressing any opinion on a case in which the assessment is attacked on some other ground.

I agree with the motion proposed by my noble and learned friend on the Woolsack.

LORD REID, having stated the facts, continued: My Lords, the difficulty in this case arises from the interrelation of provisions by which the income of certain companies can be deemed to be the income of their members, beginning with section 21 of the Finance Act, 1922, and provisions dealing with profits tax which began as the national defence contribution in the Finance Act, 1937. Under the Act of 1922, if it appeared to the Special Commissioners that a company to which these provisions applied had not distributed a reasonable part of its actual income (i.e., its income for the year in question estimated on income tax principles), they could direct that the company's actual income should be deemed to be the income of its members and apportion that income among the members. As a result surtax (then super-tax) had to be paid by the company on the whole of the company's actual income at rates at which its members would pay the surtax, although the income had not been distributed to the members. Then the Finance Act, 1939, made even more stringent provisions regarding certain investment companies: section 14 (1) required the Special Commissioners to give such a direction whereby the whole actual income of such companies (subject to special provisions for any part of it which might be estate or trading income) was deemed to be the income of the members whether or not a reasonable part had been distributed.

The Finance Act, 1937, s. 19, charged national defence contribution on profits in each chargeable accounting period from trade or business and included investment companies within the scope of the charge. But by section 25 it allowed national defence contribution to be deducted as an expense in computing profits for income tax purposes. By the Finance Act, 1947, extensive alterations were made. This tax had been renamed profits tax; the rate was increased to 25 per cent.; and provision was made for non-distribution relief and for a distribution charge when profits which had enjoyed that relief were ultimately

distributed. Moreover, individuals and partnerships were relieved from this tax which thereafter only applied to companies and corporate bodies. The provision which allowed national defence contribution to be deducted as an expense for income tax purposes remained in force for profits tax. The previous enactments dealing with income tax were consolidated in the Income Tax Act, 1952. Thereafter further amendments were made by the Finance Act, 1952, whereby, in the general case, profits tax was no longer allowed to be deducted as an expense in computing income for income tax purposes; but special provision was made to permit deduction of profits tax in cases where directions were to be given by the Special Commissioners.

The difficulty which arises in the present case can only arise if profits tax payable by an investment company in respect of a particular period exceeds the profits of the company for that period. That can happen, and has happened in this case, because in the past the company has enjoyed non-distribution relief in respect of profits not then distributed to its members; and then when those profits come to be distributed, as happened here in the liquidation, the company has to pay distribution charges, corresponding to the earlier non-distribution relief, in addition to profits tax payable in respect of the actual profits for the period in question. The drafting of the various statutory provisions suggests that this possibility was overlooked, but that is hardly surprising. We are therefore confronted with the not unusual problem of applying statutory provisions to circumstances which they were not designed to meet. In such a case it appears to me to be necessary to make a rather wide survey, because one can easily reach a wrong conclusion if attention is concentrated only on those provisions which are immediately applicable to the particular case.

Two general points call for notice. In the first place, in cases where the Special Commissioners direct that the whole actual income of a company is to be deemed to be the income of its members, such income would be subject to triple taxation unless special provision were made - it would be subject to income tax, profits tax and surtax, notwithstanding the fact that surtax is a tax on individuals and that individuals are not subject to profits tax. And, secondly, the matter is complicated by the fact that the provisions regarding profits tax and surtax might seem to be at cross-purposes. Non-distribution relief in respect of profits tax is calculated to discourage companies from making a full distribution of profits to their members; whereas the provisions

with regard to directions by the Special Commissioners are calculated to encourage such distribution by imposing heavy, and indeed penal, liabilities on companies which fail to make sufficiently large distributions.

It seems appropriate first to consider sections 245 and 262 of the Income Tax Act, 1952 (which replaced section 21 of the Finance Act, 1922, and section 14 (1) of the Finance Act, 1939). The relevant parts of those sections ale as follows:

"Section 245. - Power to direct that income of bodies corporate is to be deemed to by income of their members.

"With a view to preventing the avoidance of the payment of surtax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted that where it appears to the Special Commissioners that any company to which this section applies has not, within a reasonable time after the end of any year or other period for which accounts have been made up, distributed to its members, in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of surtax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that, for purposes of assessment to surtax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members."

"Section 262. - Investment companies; directions to be given automatically for all years in certain cases.

(1) Subject to the provisions of this section with respect to companies with estate or trading income, the whole of the actual income from all sources, for every year of assessment, of every investment company to which section two hundred and forty-five of this Act applies shall, however much or however little thereof has been distributed to its members, be deemed for the purposes of assessment to surtax to be the income of the members of the company, and accordingly the Special Commissioners shall give a direction under the said section two hundred and forty-five in respect of each year of assessment in relation to every such company without considering whether or not the company has distributed a reasonable part of its said income. (2) The provisions of this Chapter shall apply, with the necessary modifications, in cases in which directions are

given by virtue of subsection (1) of this section as they apply in cases in which directions are given by virtue of the last preceding section with respect to a year of assessment: Provided that - (a) no deduction shall be allowed in computing the actual income from all sources of the company which would not be allowable in computing the total income of an individual for the purposes of this Act, other than deductions for any profits tax payable by the company or for any such sums disbursed by the company as expenses of management as the Special Commissioners consider reasonable, having regard to the requirements of the company's business and, in the case of directors' fees or other payments for services, to the actual services rendered to the company; ..."

"Actual income" is defined as follows, by section 255 (3): "In computing, for the purposes of this Chapter, the actual income from all sources of a company for any year or period, the income from any source shall be estimated in accordance with the provisions of this Act relating to the computation of income from that source? except that the income shall be computed by reference to the income for such year or period as aforesaid and not by reference to any other year or period."

The procedure for apportionment of income is set out in section 248 as follows: "(1) Where a direction has been given under section two hundred and forty-five of this Act with respect to a company, the apportionment of the actual income from all sources of the company shall be made by the Special Commissioners in accordance with the respective interests of the members. (2) Notice of any such apportionment shall be given by serving on the company a statement showing the amount of the actual income from all sources adopted by the Special Commissioners for the purposes of the said section 245 and either the amount apportioned to each member or the amount apportioned to each class of shares, as the Commissioners think fit."

It will be seen that section 245 is the leading section. Under it the giving of a direction is within the discretion of the Special Commissioners and before giving a direction they must determine whether or not a reasonable part of the company's actual income has been distributed. It would seem to be clear that they cannot determine whether a reasonable part of the actual income has been distributed unless they know what the actual income was. There appears to be no means whereby a direction once given can later be cancelled or withdrawn and therefore it would not be

right for the commissioners to make their determination until they had before them all the facts from which the actual income could be computed and had made the necessary computation. When this section was enacted profits tax was still a permissible deduction for income tax purposes, and it would require an exceedingly cogent argument to persuade me that the commissioners were not required to deduct profits tax in computing the actual income which they must have in mind when determining whether a reasonable part of it has been distributed.

Section 262 applies to a particular class of the companies to which section 245 applies. When it applies the commissioners have no discretion. They are required to give a direction, which is a direction under section 245, whether or not a reasonable part of the actual income has been distributed. Again it would require an exceedingly cogent argument to persuade me that "actual income" in this section has a different meaning from "actual income" in section 245.

In the present case the taxpayer, the company, seeks to compel the commissioners to issue a direction under this section. It must be very unusual for a taxpayer to take this course, but I think that it is open to the company provided it can show that the section does apply. But in my judgment the section cannot apply unless there is some "actual income" for the period in question. Subject to an exception which does not arise in this case, the section provides that the whole actual income for every year of assessment shall be deemed to be the income of the members of the company, and the giving of a direction is merely for the purpose of achieving this object. It would be quite unreasonable to read this section as requiring the commissioners to give a direction as regards a year when the company had no actual income and there was nothing which could be deemed to be the income of its members. Moreover, a direction must be followed by an apportionment. Directions given by virtue of section 262 are directions under section 245, and section 248 requires that every such direction must be followed by a statement showing the amount of the actual income adopted by the commissioners for the purposes of section 245 and the amount apportioned to each member or each class of shares. It would be even more unreasonable to read this as requiring the commissioners to apportion a non-existent income by attributing nil to each member or class of shares.

I have said that this company was an investment company. A point was taken that, by reason of the definition, a company

can only be an investment company so long as it has an actual income, and that if this company had no actual income during the period in question it ceased to be an investment company during that period. I find it unnecessary to deal with the point and only mention it to avoid any misunderstanding.

The question, therefore, is whether for the period in question the company had any actual income. If the profits tax of £16,421 was not a proper deduction, then the company had an actual income, and the commissioners were bound to give a direction and to apportion that income. But if the profits tax was deductible in ascertaining the actual income, then the company had no actual income, the commissioners were not bound to give a direction, and this appeal must succeed.

It is, I think, clear that any profits tax which was "payable" by the company at the time when the computation of actual income was made must be deducted in making that computation. That is, in effect, enacted by the proviso to section 262 (2) which I have already quoted. The Finance Act, 1952, by section 33, provided that in general profits tax should not be a deduction, but special provision was made by section 68 to cover cases involving directions. The relevant parts of that section are: "(1) Where for the purposes of section twenty-one of the Finance Act, 1922, or Chapter III of Part IX of the Income Tax Act, 1952 (which provide for the payment of surtax, in certain cases, on undistributed income of companies), the actual income from all sources of a body corporate for a year or period ending after the end of the year nineteen hundred and fifty-one falls to be computed under paragraph 6 of the First Schedule to the said Act of 1922 or subsection (3) of section two hundred and fifty-five of the said Act of 1952, then, if any amount is payable by the body corporate by way of the profits tax or the excess profits levy, respectively, for any chargeable accounting period falling wholly or partly within that year or period, a deduction shall be allowed, in computing the said actual income, of such an amount as would, after deduction of income tax at the standard rate in force for the year of assessment during which the said year or period ends, be equal to so much of the amount so payable by the body corporate as is apportionable to the said year or period: ... (2) Paragraph (a) of the proviso to subsection (2) of section two hundred and sixty-two of the Income Tax Act, 1952 (which relates to the deductions allowable in computing the actual income from all sources of an investment company in relation to which a direction is in force

under subsection (1) of that section), shall have effect as if instead of authorizing a deduction for profits tax payable by the company it authorized a deduction, in relation to any amount payable by the company by way of profits tax or the excess profits levy, of such an amount as would, after deduction of income tax at the standard rate in force for the year of assessment in respect of which the direction is given, be equal to the first-mentioned amount. ... (4) If - (a) the amount payable by a body corporate in respect of the excess profits levy for any chargeable accounting period is reduced by reason of a deficiency of profits for a subsequent period; and (b) the amount deducted under the preceding provisions of this section in computing the actual income from all sources of the body corporate was arrived at without regard to the reduction and is excessive in view thereof, such apportionments, assessments or additional assessments to surtax shall be made as are necessary to counteract the excessive deduction and may be so made notwithstanding that the time limited by law for making assessments or additional assessments has expired."

Again, a deduction is to be made if any amount is "payable" by way of profits tax. The amount of the deduction is not the sum payable as profits tax but that sum "grossed up." But no point arises on that in this case.

I hope that I state the company's contention accurately when I say that it is that the profits tax which has been assessed on the company was not and is not now "payable" within the meaning of these provisions, because if a certain event should happen the company would be under no obligation to pay the tax. To understand this contention it is necessary first to consider the provisions of section 31 of the Finance Act, 1947. Subsection (1) provides (subject to modifications which do not affect the present question) that section 19 of the Finance Act, 1937 (the section which charges profits tax) shall not apply to any trade or business unless it is carried on by a body corporate, unincorporated society or other body. Having so provided, it then was logical and reasonable to make special provisions for the case where a business is carried on by a body corporate, but, by reason of a direction by the Special Commissioners, the actual income of the body corporate must be deemed to be the income of its members so as to attract surtax. Profits tax was now only a tax on bodies corporate; surtax was and is only a tax on individuals. So it would not have been appropriate to charge both profits tax and surtax in respect of the same income. The

remaining provisions of section 31 appear to be intended to avoid this double taxation, so far as possible. Those provisions, so far as relevant to this matter, are as follows: "(2) The said section nineteen shall not apply to any trade or business carried on by a body corporate during any chargeable accounting period if, for a year or period which includes, or for years or periods which together include, the whole of the chargeable accounting period, the actual income of the body corporate from all sources is apportioned under or for the purposes of section twenty-one of the Finance Act, 1922, and all the persons to whom it is apportioned are individuals. (3) If, for a year or period which includes, or for years or periods which together include, the whole of a chargeable accounting period of a trade or business carried on by a body corporate, the actual income of the body corporate from all sources is apportioned under or for the purposes of the said section twenty-one, and some (but not all) of the persons to whom the income is apportioned are individuals, then if by notice in writing given to the Commissioners within six months from the end of that chargeable accounting period, or such longer time as the Commissioners may in any case allow, the body corporate and the persons other than individuals to whom the income is apportioned jointly so elect as respects that chargeable accounting period and each subsequent chargeable accounting period the whole of which is included in a year or period or years or periods for which the said actual income is so apportioned to those persons and persons who are individuals, the provisions of this Part of this Act shall apply as if - (a) the trade or business had been carried on, during that and each such subsequent chargeable accounting period, in partnership by the persons to whom the income is apportioned, and the share of any one of them of the profits and losses of the trade or business therefor had been equal to the proportion of the income apportioned for the year or period or years or periods in question which is apportioned therefor to that one of them; ... and the body itself shall not be chargeable to profits tax for that or any such subsequent chargeable accounting period."

Subsection (2) deals with the case where all the members of the company are individuals, and, before coming to the more complicated provisions of subsection (3), I think it desirable to deal with subsection (2). Its provisions are somewhat complicated because the periods in respect of which profits tax and surtax are calculated are not the same. But I do not think that any light

is thrown on the present question by considering this complication. Omitting it, the subsection provides that the section charging profits tax "shall not apply ... if ... the actual income of the body corporate ... is apportioned under or for the purposes of section 21 of the Finance Act, 1922" (now section 245 of the Income Tax Act, 1952). That appears to me to mean that the section charging profits tax does apply unless and until the actual income has been apportioned, but that it ceases to apply if and when the apportionment is made. That can be illustrated in this way: The Special Commissioners who deal with directions do not deal with profits tax, and in the general case of a trading company a considerable time may elapse before they are in a position to decide whether to give a direction. In the meantime profits tax may well have been assessed and on a demand being made for payment of the assessed profits tax it would, in my opinion, be no answer for the company to say that the profits tax is not payable because the Special Commissioners may later give a direction, which would be followed by an apportionment and consequent relief from the tax. The profits tax must be paid, but, if later a direction is given by the Special Commissioners and is followed by an apportionment, then the section charging profits tax does not apply and the tax which has been paid must be repaid. Any other view would mean that the recovery of profits tax from "section 21" trading companies would be held up for years until it was clear that the Special Commissioners could not give directions to them under section 245.

If I am right so far, then it appears to me necessarily to follow that, at least as regards trading companies where the commissioners have a discretion whether or not to give a direction, profits tax which has been assessed is "payable" in every ordinary sense of that word and therefore must be allowed as a deduction by the commissioners in computing the actual income which they adopt when considering whether the sums which have been distributed to the members amount to a reasonable part of the company's actual income. Otherwise there might be grave injustice. The commissioners' decision whether a reasonable part of the actual income has been distributed must depend in large measure on the figure which they adopt as the amount of the actual income. If this figure is inflated by neglecting the liability for profits tax because it is not yet "payable," the commissioners might see fit to give a direction which they would not have given if the amount of actual income which they had in mind had been the lower figure resulting from deduction of the

amount of profits tax. It appears to me to be an inadequate answer to say that, although the commissioners are not entitled to deduct profits tax in computing actual income because it is not yet "payable," yet they make allowance for profits tax as a potential liability in considering whether the amount of the actual income which has been distributed is reasonable.

The terms of section 68 of the Finance Act, 1952, appear to me to give strong support to the view which I have expressed. But the Court of Appeal took a different view of this section and it is therefore necessary to examine it with some care. It directs that where for the purposes of Chapter III of Part IX of the Income Tax Act, 1952, the actual income of a company "falls to be computed" under section 255 (3), then, if any profits tax or excess profits levy is payable, a deduction shall be allowed. The Court of Appeal held that the actual income did not fall to be computed until after a direction had been given. With all respect, I am unable to agree. Chapter III includes all the provisions with regard to the giving of directions to which I have referred. Section 255 (3) is merely the definition of "actual income." I have already given my reasons for thinking that the provisions of Chapter III require the commissioners to determine the amount of actual income before they decide whether or not to give a direction in cases where they have a discretion, and therefore it appears to me that the actual income does "fall to be computed" within the meaning of section 68 at that stage. And the same must apply to investment companies because, for the reasons I have stated, directions can only be given to those companies if they have an actual income, and before giving a direction there must be a computation to determine whether there is any actual income. Moreover, under section 248 the commissioners must apportion the amount of the actual income adopted by them for the purposes of section 245. There is no provision for a computation of actual income after the direction but before the apportionment and that again appears to me to require a computation before a direction is given.

The Court of Appeal also relied on the terms of section 68 (2). That subsection deals with the amount of a deduction. The difficulty does not arise from the enacting words but from the words in brackets which purport to describe the proviso to section 262 (2) of the Income Tax Act, 1952. Those words could well be held to support the view of the Court of Appeal, but they seem to me to be a misdescription of the proviso to section 262 (2). This is one of the places where I think that obscurity has resulted

from a failure of the draftsman to anticipate a case like the present - as I have said, a very natural failure. In fact the proviso merely deals with the deductions to be allowed in computing actual income. But the words in brackets in section 68 (2) refer to deductions in computing the actual income of a company "in relation to which a direction is in force" under section 262 (1). It would seem that these words have crept in because the draftsman assumed that a direction would always be given automatically to an investment company and did not realize that a computation must first be made to determine whether the company has in fact any actual income. Whether that be the true explanation or not, I cannot regard the presence of these words in brackets, which are mere description, as of much weight in comparison with the other considerations to which I have referred.

It therefore appears to me that section 68 has enacted that when a computation of actual income is being made by the commissioners before they consider whether or not to give a direction, then, if any amount is payable as profits tax, a deduction shall be allowed. But the argument for the company is that at that stage no profits tax can ever be "payable" because the tax cannot be finally payable until the commissioners have decided that no direction is to be given. If the company's argument is right I cannot imagine any possible case where profits tax could be "payable," in the sense of finally payable, at that stage, and no such case was suggested in argument: so this provision of section 68 would be meaningless.

A further argument was submitted for the company. If the amount of profits tax is deducted in computing the income apportioned and thereafter by reason of the apportionment profits tax ceases to be payable, then the sum so deducted will be retained by the company unapportioned and will not be chargeable to surtax. If this were so, it would support the company's contention, but the Attorney-General submitted an argument that this sum would not escape taxation but could be covered by an additional apportionment.

Section 68 also deals with excess profits levy. Some argument was based on the provisions which deal with this tax. For what they are worth in this connexion they appear to me to support the appellants' contention because they make it clear that excess profits levy is "payable" within the meaning of this section although not finally payable because events in subsequent years may cause the amount "payable" to be ultimately reduced.

I can now turn to section 31 (3) of the Finance Act, 1947, under which the present question arises. This subsection applies where, as in the present case, not all the members of the company subject to direction are individuals, some being corporate bodies. Giving a direction imposes a liability on the company to pay surtax, but it does not directly affect individual members unless they choose to relieve the company by paying their shares of the surtax. It does, however, affect the tax position of non-individual members and it was apparently thought that such members required special protection. Accordingly, a direction given to a company with non-individual members is not followed automatically by relief from profits tax, as it would be if all the members were individuals. Such relief only arises if the company itself and its non-individual members jointly elect to claim it. One might suppose that it would always be in their interest to claim the relief, but we were informed that there are cases where that is not so, in view of the fact that the election to claim relief, once made, applies not only to the period in question but to all subsequent periods.

Basically, the schemes under subsections (2) and (3) of section 31 are the same. Under whichever subsection the case falls, no question of relief from profits tax can arise until there has been a direction and consequent apportionment of the actual income of the company. There cannot be a direction unless the company has an actual income, and in determining whether the company has an actual income there must be deducted profits tax which is payable and will remain payable if no direction is given. The only difference is that, whereas under subsection (2) relief from profits tax is automatic once a direction is given, under subsection (3) there is a further stage and there must be an election before relief is granted. If all the members of this company had been individuals there would have been no automatic relief from profits tax, for the reasons which I have given; and for the same reasons there is no right to elect that there shall be relief. It would be somewhat strange if it were otherwise. If the company were right they would escape payment of £16,421 by electing to pay surtax on a sum not exceeding £8,920. Such a result might follow from the construction of numerous and complicated enactments but it could hardly have been intended.

It only remains to note a further argument for the company. In this case the profits tax was assessed but the assessment is still under appeal, and it was said that, whatever might be the effect when such an assessment had become final, the tax cannot

be "payable" before that. I do not intend to express any opinion about a case where there has been no assessment or where the amount payable is in dispute. But it appears that the only ground for the appeal in the present case is that nothing is "payable" - the same ground as the company maintains before your Lordships. If this appeal is allowed it follows that the appeal against the assessment must fail and therefore I think that it is proper to disregard the fact that that appeal is still pending.

In my judgment this appeal should be allowed. I agree with what my noble and learned friend has just said about costs.

LORD SOMERVELL OF HARROW. My Lords, where the actual income of companies liable to surtax falls to be computed, section 68 of the Finance Act, 1952, allows a deduction if any amount is payable by the company by way of the profits tax or the excess profits levy. Section 31 of the Finance Act, 1947, gives exemption from profits tax to such companies if certain conditions are fulfilled. Under section 31 (2), if the actual income from all sources is apportioned and all the persons to whom it is apportioned are individuals, the section which charges the profits tax is not to apply. Under section 31 (3), if the actual income from all sources is apportioned and some but not all of the persons to whom it is apportioned are individuals, then the company is not chargeable to profits tax if, by notice, the company and the persons aforesaid, other than individuals, so elect. The election binds those concerned for the current and all subsequent chargeable accounting periods. There are other provisions which I need not summarize.

The question turns on the construction of section 68 and in particular on the word "payable." The taxpayer submits that no deduction is to be made unless and until it is clear that the conditions of section 31 providing for exemption cannot be fulfilled. In other words, "payable" means payable in the last resort. As apportionment is a condition precedent to the exemption under section 31, there can, on this view, be no deduction before or for the purpose of apportionment. There is an initial difficulty, to my mind, in that there must be computation before apportionment and, on the face of it, the deduction is to be made when the actual income falls to be computed.

The Crown submits that the profits tax is payable within the section notwithstanding that later events may give exemption. The courts below have accepted the taxpayer's contention. It is,

no doubt, a possible meaning of "payable," a meaning which certain contexts might make plainly right.

It is therefore necessary to consider the context. Beginning with trading companies under section 245 of the Income Tax Act, 1952, the first computation of the actual income from all sources would be in order that the commissioners may decide whether the company has or has not distributed a reasonable amount of its income. In considering that question, it would be absurd to disregard the liability to profits tax. If the commissioners decide that there has been no failure to distribute a reasonable amount, no exemption under section 31 will arise. The taxpayer's submission does not make sense at that stage. This stage does not exist in the case of investment companies where the direction is automatic (section 262 of the Income Tax Act, 1952). If the commissioners decide to make a direction and apportionment, and all the members are individuals, the taxpayer's construction works more simply than the Crown's. If the actual income is £2,000 and the profits tax £500, the Crown has to make two bites at the cherry, although under section 31 (2) there can be no ultimate liability to profits tax. When one comes to section 31 (3) the Crown would on the above figures apportion £1,500, and then have to have an additional apportionment of £500 if, but only if, the election were exercised. On the taxpayer's construction the whole £2,000 would be apportioned, since the election might destroy liability to profits tax. The Attorney-General submitted that there would be no machinery if the election were not exercised for withdrawing the original apportionment and substituting one for £1,500. In his view, surtax would be levied on the whole £2,000 and the taxpayer would in addition have to pay £500 profits tax. If I had thought the taxpayer's construction was right, there would, in my opinion, be no difficulty in implying a power to make the necessary adjustment to carry out the substantive effect of the Act.

If one considers consequences, the results of the taxpayer's construction would be remarkable. In the present case, however small the actual income and however large the distribution charges, the apportionment of the former would relieve the taxpayer of all liability for the latter if all members were individuals or if the election were exercised. Benevolent as at times financial provisions may be, it is impossible to believe that such capricious benevolence could have been intended. Unhappily the Crown's submission has its own anomaly, though perhaps a lesser one. On the Crown's contention, if the profits tax is less than the

actual income by however small a sum, the whole of the actual income is treated on a surtax basis and no profits tax is exigible. I am assuming that either it is a section 31 (2) case or the election is exercised. If, on the other hand, the profits tax exceeds the actual income by however small a sum one would have expected the actual income to be treated on a surtax basis, the excess of the profits tax over that amount being payable as profits tax. This is not the result on the Crown's contention. The whole has to be handed over as profits tax, the taxpayer not retaining what would be left out of the actual income after surtax.

Context and consequences do not, in my opinion, give any sufficient support to the taxpayer's construction. The ordinary meaning of "payable" is, I think, that for which the Crown contend, that is, payable at the time of computation disregarding the fact that subsequent events may destroy the liability.

I would, therefore, allow the appeal.

LORD DENNING. this case depends on the meaning of the word "payable" in section 68 of the Finance Act, 1952. The courts below have held that profits tax is not "payable" within that section until it has been ascertained that no election can or will be made under section 31 (3) of the Finance Act, 1947.

It seems to me that this treats the making of an election as a condition precedent to the profits tax being payable; whereas, on the true construction of the statute, it is not a condition precedent but a condition defeasant. The profits tax is "payable" when everything has happened to make it payable, that is to say, when it is duly assessed on the taxpayer. It may thereafter cease to be payable if an election is made: but, that being a condition defeasant, the legal position is that right up till that moment it is payable. The result is that in computing the "actual income" of these surtax companies - so as to see whether a direction or apportionment should be made - the profits tax (grossed up) must be deducted before the direction or apportionment is made. This is a sensible and practical way of working the Act.

I would allow the appeal.

Solicitors: Solicitor of Inland Revenue; Smith & Hudson for Rollitt, Farrell & Bladon, Hull.

F. C.