[HOUSE OF LORDS.]

AND

Revenue - Income tax - Profits of trade - Dividends - Exclusion - Capital profits dividend - Dealer in stocks and shares - Whether dividend taxable as profits - Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 184.

Revenue - Income tax - Dividends - Exemption from taxation as such - Judge-made rule - Capital dividend received by trader in securities - Income Tax Act, 1952, s. 184.

Revenue - Income tax - Assessment - Agreement of computation by inspector - Subsequent additional assessments - No new fact discovered - Error in law - Whether "discovery" by inspector - Income Tax Act, 1952, s. 41.

By section 41 (1) of the Income Tax Act, 1952: "If the surveyor discovers - that any properties or profit chargeable to tax have been omitted from the first easement; or that a person chargeable has not delivered any statement, or has not delivered a full and proper statement, or has not been assessed to tax, or has been undercharged in the first easement; or that a person chargeable has been allowed, or has obtained from and in the first assessments, any allowance, deduction, exemption, abatement or relief not authorised by this Act," an additional first assessment shall be made on the person chargeable in the manner prescribed.

By section 184: "(1) The profits or gains to be charged on any body of persons shall be computed in accordance with the provisions of this Act on the full amount of the same before any dividend thereof is made in respect of any hair, right or title thereto, and the body of persons paying the dividend shall be entitled to deduct tax at the standard rate for the year in which the amount payable becomes due. (2) Subsection (1) of this section shall, in relation to a dividend paid by any body of persons, be construed as authorising the deduction of tax from the full amount paid out of profits and gains of the said body which have been charged to tax or which, under the provisions of this Act, would fall to be included in computing the liability of the said body to assessment to tax for any year if the said provisions required the computation to be made by reference to the profits and gains of that year and not by reference to those of any other year or period."

The appellant company which was registered on October 15, 1953, carried on business as a dealer in stocks and shares and was assessable to income tax under Case I of Schedule D in respect of any profits arising from such dealing. On October 20, 1953, it acquired for £72,000 the whole share capital in W. Ltd., which from the sale of freehold property had previously realised a capital profit not assessable to income tax in its hands. On November 2, 1953, W. Ltd. made the appellant company a distribution of £25,000 out of that capital profit. On December 4, 1953, the appellant company sold its shares in W. Ltd. for £27,500. These figures were included in the appellant company's accounts for the period from October 16, 1953, to April 15, 1955. On July 1, 1955, these accounts were submittsd to the inspector of taxes together with a computation of profits adjusted for the purposes of Case I of Schedule D in which the £25,000 was excluded from the profits. Details of these dividends were asked for by the inspector and supplied.

On August 8, 1955, the inspector agreed the computation and

later he issued a notice of assessment for the year 1955-56 in accordance with it. Subsequently a new inspector came to the conclusion that the sum of £25,000 should have been included as a trading receipt and raised an additional assessment for 1955-56 and an assessment for 1956-57 in which it was treated as assessable profits. He had before him no facts additional to those which his predecessor had:-

Held, (1) that by a positive rule of law (to be found in judicial decisions and not in the statute) dividends as such are not liable to tax (post, pp. 793, 797, 798); but that this rule does not extend to exempt from taxation under Case I of Schedule D a dividend received by a trader as a trading receipt; and that, accordingly, the £25,000 dividend should have been included in the computation of profits for the purposes of Case I of Schedule D.

Bradbury v. English Sewing Cotton Co. Ltd. [1923] A.C. 744; 39 T.L.R. 590, H.L.; Neumann v. Inland Revenue Commissioners [1934] A.C. 215; 50 T.L.R. 246, H.L.; Canadian Eagle Oil Co. Ltd. v. The King and Selection Trust Ltd. v. Devitt [1946] A.C. 119; 61 T.L.R. 577; [1945] 2 All E.R. 499, H.L. considered.

(2) That there was a discovery by the inspector of taxes within the meaning of section 41 notwithstanding that no new fact had been discovered; that section was wide enough to include any case in which for any reason it appeared that the taxpayer had been undercharged (post, pp. 794, 799).

Decision of the Court of Appeal [1961] Ch. 634; [1961] 3 W.L.R. 242; [1961] 2 All E.R. 369, C.A. affirmed.

APPEAL from the Court of Appeal (Holroyd Pearce, Upjohn and Donovan L.JJ.).

This was an appeal from that part of an order of the Court of Appeal dated May 1, 1961, relating to the additional assessment for the year 1955-56 and the assessment for the year 1956-57 on the appellant company, Cenlon Finance Co. Ltd., allowing an appeal by the respondent, J. H. G. S. Ellwood (inspector of taxes) from an order of the High Court (Cross J.) dated July 29, 1960, whereby an appeal by the appellant company on a case stated by the Commissioners for the Special Purposes of the Income Tax Acts was allowed and the determination of those commissioners was reversed.

The two questions arising on this appeal were: (1) whether dividends, from which tax was not deductible under section 184 of the Income Tax Act, 1952, paid by a company resident in the United Kingdom to the appellant company, which was assessable under Case I of Schedule D in respect of profits made from dealings in stocks and shares, were properly included in the computation of the appellant company's profits assessable to income tax under Case I of Schedule D by the additional assessment for

the year 1955-56 and the assessment for the year 1956-57; (2) whether there was a discovery within the meaning of section 41 of the Act so as to enable the inspector to raise the additional assessment for the year 1955-56.

The facts, stated in the opinion of Viscount Simonds, were summarised by him from the case stated as follows: The appellant company was registered on October 12, 1953. It carried on business as a dealer in stocks and shares and was assessable to income tax under Case I of Schedule D in respect of any profits arising from such dealing. On October 20, 1953, the appellant acquired the whole issued share capital of Henry White (Sutherland House) Ltd. (hereinafter called "Henry White") for £72,000. Henry White carried on the business of ladies' outfitters and had previously realised a profit from the sale of some of its freehold property which was a capital profit and not assessable to income tax in its hands. On November 2, 1953, Henry White made to the appellant a distribution of £25,000 out of that capital profit. On December 4, 1953, the appellant sold its holding of shares in Henry White for £27,500. These figures were included in the appellant's accounts for the period October 16, 1953, to April 15, 1955. On July 1, 1955, those accounts were submitted to H.M. Inspector of Taxes for St. Martin's district, together with a computation of the profits adjusted for the purposes of Case I of Schedule D in which the sum of £25,000 dividends received from Henry White was deducted and excluded from the profits. Details of these dividends were then asked for and given in correspondence between the appellant's accountants and the inspector. On August 8, 1955, the inspector wrote to the accountants agreeing their computation. On November 24, 1955, the inspector issued a notice of assessment for income tax Schedule D for the appellant for the year 1955-56 in accordance with the agreed computation. In May, 1956, a new inspector succeeded to the charge of the St. Martin's district, and having received a tax memorandum from the chief inspector of taxes, and having read the relevant correspondence and documents, he came to the conclusion that the dividend of £25,000 received from Henry White should have been included as a trading receipt in the computation of the appellant's profits for the purposes of Case I of Schedule D. He subsequently raised the additional assessment for 1955-56 and the assessment for 1956-57 whereby the dividend from Henry White was included in the assessable profits. He did not have any facts in relation to the appellant's

affairs before him additional to those before his predecessor in 1955.

The Court of Appeal held (1) that a company trading in stocks and shares must bring in as part of the profits of its trade for assessment to tax, a capital distribution by way of dividend by a United Kingdom company in the same way as such a company had to bring in profits made by its dealings which in the hands of a non-trader would be capital profits; and (2) that as regarded the year 1955-56 there was a discovery within section 41 of the Act so as to enable the inspector to raise the additional assessment. (As regarded the additional assessments for the years 1953-54 and 1954-55 questions were raised under section 510 in the courts below but were not raised in this appeal.)

P. Shelbourne and J. Holroyd Pearce for the appellant company. While all dividends paid by a company resident in the United Kingdom are received by the shareholder as income, they are, under the Income Tax Acts, taxable in the hands of the shareholder, if at all, only by the deduction of income tax by the paying compound pursuant to section 184 of the Income Tax Act, 1952, which implies an exemption that dividends are not chargeable in the hands of anyone. Whatever the nature of the profit out of which the dividend is paid, in the hands of the paying company, no dividends paid by a company resident in the United Kingdom can on authority be subject to assessment to income tax in the hands of the shareholder under Schedule D or at all. This dividend is exempt from tax altogether in whosesoever hands it may be.

What Lord Phillimore said in Bradbury v. English Sewing Cotton Co. Ltd.¹ is the fons et origo of the law on this subject and of the relevant proposition on which the appellant company is relying. He is saying that all dividends are clearly income, new income, and, because they are new income there could be no true double taxation in taxing them, but that such de facto double taxation would destroy company enterprise and so the payment of income tax by a company is treated as the sole and only method of taxing dividends. See also Gimson v. Inland Revenue Commissioners²; Neumann v. Inland Revenue Commissioners³; Cull v. Inland Revenue Commissioners⁴; Canadian Eagle Oil Co.

1 [1923] A.C. 744, 769; 39 T.L.R. 590, H.L.

2 [1930] 2 K.B. 246, 252-253.

3 [1933] 1 K.B. 728, 742; 49 T.L.R. 212, C.A.; [1934] A.C. 215, 228, 233, 235-236, H.L.

4 [1940] A.C. 51, 56-57, 64, H.L.

Ltd. v. The King⁵ and Inland Revenue Commissioners v. Reid's Trustees.⁶

The effect of the cases is to show that dividends from a United Kingdom company are not subject to income tax under any Case or Schedule. The Revenue, however, is seeking to isolate this case, saying that one can look at the independent status of the recipient as a dealer in shares so that a new taxing process is set off. The cases decide that there is no new tax-paying status. It is admitted that each shareholder is distinct from the company, but the effect of the Crown's argument would be to destroy company enterprise. Dividend income is treated as distinct from other sorts of income. That is based on section 184 of the Act of 1952, which is a complete, self-contained code for charging dividends and has the same force as Schedule C. Here the Crown is in effect asking for the reversal of a whole line of authorities. Its underlying fallacy is to give a separate status in this case, though in no others, to the recipient of a dividend. The dividend is income in the hands of a shareholder but can only be taxed by deduction under section 184. Much reliance is placed on Neumann's case.⁷ It is not enough to say that there is here a receipt of the trade. War loan interest may be a receipt of the trade. Dividends of United Kingdom companies are a special sort of income which cannot be taxed under any head except section 184. War Loan interest cannot be taxed save under Schedule C. Where a company is dealing in property any rents received are trading income, but they fall to be taxed under Schedule A. Dividends are not assessable in the hands of a non-trader because of the express provisions of section 184, which go back to section 54 of the Income Tax Act, 1842. Liverpool, London, Globe Insurance Co. v. Bennett⁸ only says that the Revenue can opt between Cases. Thompson v. Trust and Loan Co. of Canada⁹ was a case under Schedule C to which different principles apply. Hughes v. Bank of New Zealand¹⁰ indicates that section 184 must be treated as referring to all dividends and as exempting them from tax in the hands of shareholders who receive them, so that they are exempted from tax under any other Case and cannot be

5 [1946] A.C. 119, 130, 150, 157; 61 T.L.R. 577; [1945] 2 All E.R. 499, H.L.

6 [1949] A.C. 361, 371-372, 377; [1949] 1 All E.R. 354, H.L.

7 [1934] A.C. 215.

8 [1913] A.C. 610; 29 T.L.R. 757, H.L.

9 [1932] 1 K.B. 517, 529; 48 T.L.R. 209, C.A.

10 [1937] 1 K.B. 419, 428, 451; 53 T.L.R. 258; [1936] 3 All E.R. 975, C.A.; [1938] A.C. 366, 374; 54 T.L.R. 542; [1938] 1 All E.R. 778, H.L.

brought into computation. The ratio in Gimson's case¹¹ was approved in Neumann's case.¹² Tax can always be deducted from dividends and it matters not that they came into the hands of a finance company or a company dealing in stocks and shares. Where a sum has been taxed under a Schedule it is there and then established as income automatically and cannot be anything else. There cannot be an exception which keeps out Case VI and lets in Case I. According to previous decisions of this House what is good for Case VI is good for everything else. If an ordinary person sells his house at a profit he does not pay tax on that profit because he does not deal in houses, and the profit is not a profit of his trade; but it is otherwise in the case of a property dealer. But dividends are income for everybody. So in the first instance status is relevant but not in the case of a dividend receipt. The reasoning of Donovan L.J. in the Court of Appeal in the present case is founded on no authority and, indeed, is contrary to authority. Dividends cannot come into a Case I computation because they are taxed under a separate code.

As to the point under section 41 (1), this was only kept open in the other courts because of Commercial Structures Ltd. v. Briggs,¹³ which was wrongly decided. See also Nash v. Tamplin & Sons Brewery, Brighton, Ltd.¹⁴ The matter turns on the meaning of the word "discover," which in the Oxford English Dictionary, vol. III, p. 432, is defined: "To obtain sight or knowledge of (something previously unknown) for the first time; to come to the knowledge of, to find out." It is accepted that it means "to find out." Here there was no "discovery" within the meaning of section 41 and, therefore, the additional assessment for the year 1955-56 was not competent. For there to be a discovery within the meaning of the section, the inspector of taxes must find out some new facts. It is not enough to find out some new law, because everyone, including the inspector, must be regarded as knowing the law. Unless there are new facts a change of mind can only involve a new approach to the law. It would be quite wrong to put the taxpayer in peril for six years when, as in this case, he has made known all the facts to the Revenue at the start of the day. Unless the conception of finding out is confined to facts, it is unjust to the taxpayer. Anderton and Halstead Ltd. v. Birrell¹⁵ is to be preferred to Williams v. Grundy's

11 [1930] 2 K.B. 246.

12 [1934] A.C. 215, 229.

13 [1948] 2 All E.R. 1041; 30 T.C. 477, C.A.

14 [1952] A.C. 231; [1951] 2 T.L.R. 834; [1951] 2 All E.R. 869, H.L.

15 [1932] 1 K.B. 271; 47 T.L.R. 528.

Trustees.¹⁶ See also British Sugar Manufacturers Ltd. v. Harris,¹⁷ in particular the verbatim report in the Tax Cases of what was said after the judgment. It appears that had the Court of Appeal there delivered a judgment on the point here in question, it would have followed the former case rather than the latter. Inland Revenue Commissioners v. Mackinlay's Trustees¹⁸ should be overruled together with the Commercial Structures case.¹⁹ In Nash v. Tamplin do Sons Brewery, Brighton, Ltd.²⁰ the point was considered but not decided. On the side of the taxpayer there are the Anderton case²¹ and the British Sugar case,²² and against the taxpayer are the Williams' case,²³ the Mackinlay case²⁴ and the Commercial Structures case.²⁵ There is no authority binding on the House of Lords. One should follow the fundamental first principle that one cannot rely on a submission that one of the litigants was ignorant of the law. He cannot be said to find out the law, annealed to find out a fact.

[VISCOUNT SIMONDS intimated that their Lordships did not require to hear argument for the respondent on the discovery point.]

Roy Borneman Q.C. and Alan Orr for the Crown. The dividend in question was, and is admitted to have been, income of the appellant company's trade of dealing in stocks and shares. The appellant company's argument approaches the matter from the wrong angle, since the question is not to find how the Crown can bring the dividend into the computation of the profits but how the taxpayer can keep it out. What has the statute to say? Section 127 prima facie compels the conclusion that all the profits of this company (which, it is common ground, deals in stocks and shares) must come into computation as such. There must be brought in as trading receipts for income tax purposes all fruits of carrying on the trade and deployment of the company's capital, including profits on sales realisations (deducting losses), all in comings in the way of income, including receipts in liquidation and all dividends. These must be brought into account unless they are taxed under some other Schedule or specifically kept out by some statutory provision. The appellant company resists

16 [1934] 1 K.B. 524.

17 [1938] 2 K.B. 220, 237-238; [1938] 1 All E.R. 149; 21 T.C. 528.

18 1938 S.C. 765, 769, 770; 22 T.C. 305.

19 [1948] 2 All E.R. 1041, 1044, 1045, 1048; 30 T.C. 477, 488, 489, 493.

20 [1952] A.C. 231.

21 [1932] 1 K.B. 271.

22 [1938] 2 K.B. 220.

23 [1934] 1 K.B. 524.

24 1938 S.C. 765; 22 T.C. 305.

25 [1948] 2 All E.R. 1041; 30 T.C. 477.

the claim that these dividends must be brought in, not on the ground that they are not income, nor on the ground that they were not received in the course of trade as a trading receipt, but on the ground that there is a statutory provision that keeps dividends inviolate from being treated as a receipt of trade. But trading profits are computed on the principles of commercial accountancy: see Whimster & Co. v. Inland Revenue Commissioners.²⁶ The appellant company relies on section 184, but that depends on its being a charging section. It is not a charging section but machinery only, intended to give effect to Lord Phillimore's quasi-partnership conception expressed in the Bradbury case.²⁷ It deals only with dividends paid out of profits liable to tax and affords no ground for saying that dividends are not taxable as trading receipts. The main charging section in the Income Tax Acts is section 1 of the Act of 1952, and nowhere is it suggested that section 184 is a charging section. Compare the provisions of section 184 with section 54 of the Income Tax Act, 1842. Section 184 contains provisions formerly found in rule 20 of the General Rules as modified by section 39 (1) of the Finance Act, 1927, and section 7 (1) of the Finance Act, 1931. It is merely a machinery section and is found in the middle of a fasciculus of machinery sections. It only purports to deal with dividends paid out of profits which have been charged to tax. See the judgment of Donovan L.J. in the Court of Appeal.²⁸ It would be strange if an alleged exhaustive code did not deal with all dividends. In Neumann's case,²⁹ which was principally relied on by the appellant company, it is evident that the House of Lords were saying that dividends are not taxable as such under Schedule D. There is nothing specific in the Act bringing dividends in or cutting them out. In the cases there is a body of dicta saying that dividends as such cannot be charged to tax, but there are no authorities which suggest that the receipt of dividends by a trading financier are not to be brought into charge. In Cull v. Inland Revenue Commissioners³⁰ Lord Atkin was only speaking of the bringing in of dividends as such. As to Hughes v. Bank of New Zealand³¹ the House of Lords was there dealing with a specific statutory exemption from tax in general and unqualified terms. But section 184 does not confer such an

26 1926 S.C. 20, 25-26; 12 T.C. 813, 823.

27 [1923] A.C. 744, 769.

28 [1961] Ch. 634, 653-654; [1961] 3 W.L.R. 242; [1961] 2 All E.R. 369, C.A.

29 [1934] A.C. 215, 227-228, 233, 235-237.

30 [1940] A.C. 51, 56.

31 [1938] A.C. 366.

exemption, and there is nothing in the Act to keep out of computation this dividend income which is a receipt of a trade. The appellant company relies on glosses put on the Act by some judicial dicta, but section 184 cannot be read as giving rise to this anomaly. If it is accepted that the receipt of this money, although labelled "dividend," is a receipt of the trade, there would have to be some specific statutory authority if it is to be kept out of computation, but there is none.

P. Shelbourne in reply. Section 127 of the Act of 1952 does not advance the issue here, which is whether the amount in question is properly chargeable. The fact that section 184 is a machinery provision is not decisive. The taxpayer is here putting forward a consistent theory because all dividends are to be taken out of computation: see Bradbury's case,³² the Canadian Eagle Oil case³³ and Cull's case.³⁴ It is common ground that there is no charge on dividends as such, but those words do not make a vital difference: see Hughes v. Bank of New Zealand.³⁵ As to the ground of the exemption, see Neumann's case.³⁶ The decision of the Court of Appeal in the present case is based on a false analogy to the cases of a private citizen and a property dealer respectively selling their houses at a profit. But this case is fundamentally different, for what is exempt here is income, not profits. If in Hughes v. Bank of New Zealand³⁷ the War Loan issued to the bank had risen in value, there would have been a chargeable profit.

Their Lordships took time for consideration.

March 1. VISCOUNT SIMONDS. My Lords, I am so fully in agreement with the judgments of the Court of Appeal in this case that I can state my opinion shortly upon the only question which it fell to them to consider. But there is a second question upon which they were constrained to follow an earlier decision of the court and upon this question it will be necessary to state the facts in some detail.

The appeal relates to an additional assessment for the year 1955-56 and an assessment for the year 1956-57 made upon the appellant in the circumstances appearing in the case stated by the special commissioners which can be summarised as follows. [His Lordship stated the facts and continued:]

32 [1923] A.C. 744, 769, 772.

33 [1946] A.C. 119, 139.

34 [1940] A.C. 51, 56.

35 [1937] 1 K.B. 419, 432.

36 [1934] A.C. 215, 236.

37 [1938] A.C. 366.

It will be noticed that no question arises on the assessments for the years 1953-54, or 1954-55. The reason for this is irrelevant. But in regard to the additional assessment for the year 1955-56 and the assessment for the year 1956-57 the question is whether a sum paid by way of dividend out of so-called capital profits and received by the appellant as a trader in stocks and shares ought to be included in the computation of his liability under Case I of Schedule D of the Income Tax Act, 1952, in respect of that trade. A second question arises only upon the additional assessment for the year 1955-56. I will deal with this hereafter. It does not arise if the first question is answered in favour of the appellant. That question was decided against the appellant by the special commissioners. Their decision was reversed by Cross J. but restored by the unanimous judgment of the Court of Appeal.

My Lords, it is beyond doubt that under Case I of Schedule D and the applicable rules the dividend in question must be included in the receipts of the appellant's trade for income tax purposes unless it is excluded by statutory provision or (perhaps I should add to do justice to the contentions of the appellant) by judicial interpretation of the relevant statute. Such exclusion could arise either because the dividend is made subject to income tax under some other Schedule or because it is exempt from tax altogether in whosesoever hands it may be. The first reason for exclusion is not advanced: on the contrary, it is claimed that the dividend is not liable to tax under Schedule D or any other Schedule. It is the second reason that was urged with much ingenuity by counsel for the appellant.

My Lords, it is a familiar fact that the statutory provisions in regard to the payment of dividends by any body of persons (which expression includes a limited company) have from time to time caused difficulties and created anomalies. But first it must be observed that no other section is relied on for affording exemption from tax than section 184 of the Act, and this section will be searched in vain for any least suggestion that, where a dividend has been paid by a company out of profits and gains which have not been assessed to tax, it is to be exempt in the hands of the shareholders. On the contrary, it does nothing more than require that the company shall be assessed to tax on the full amount of its profits and gains before any dividend is paid and entitles it to do no more than deduct from the dividend tax at the standard rate for the year in which the amount payable becomes due.

There is no resemblance here, my Lords, to such cases as

Hughes v. Bank of New Zealand,¹ where in respect of certain securities specific and express exemption from tax was provided.

It is, however, upon observations that have been made in this House in other tax cases that reliance was placed. It is not clear to me whether they are to be regarded as interpretations of section 184 though that section and its predecessors were not mentioned, or as expositions of some underlying principle which governs the liability to tax of sums received by way of dividend by any person in any circumstances. My Lords, I have read, not for the first or second time, the many cases that were cited to us, of which I name only Bradbury v. English Sewing Cotton Co. Ltd.,² Neumann v. Inland Revenue Commissioners,³ Canadian Eagle Oil Co. Ltd. v. The King and Selection Trust Ltd. v. Devitt.⁴ These cases establish that a dividend as such is not taxable in the hands of its recipient. So be it. But it is not a logical step from that to say that a sum paid out of untaxed profits and received by a trader in respect of his trade is to be excluded from the computation of his profits and gains. Nor is there any warranty for it in any speech in your Lordships' House that I have read, unless it be in a dictum made per incuriam in the speech of Lord Wright in Neumann's case.⁵

I will add two more observations. First, it is true that the Selection Trust case,⁶ where the shareholder was a trader in stocks and shares, might have been shortly disposed of upon the grounds on which I would dismiss this appeal. But the case had been linked with the Canadian Eagle Oil Co. case⁶ which had been brought to this House to dispose of that long-standing sore in the administration of the revenue, Gilbertson v. Fergusson.⁷ That point having been determined in favour of the Crown, it was unnecessary to discuss any other question. Secondly, I would affirm what was said by Donovan L.J. (than whom no one has a wider knowledge of revenue law) about the treatment by a trading company of dividends from which tax has been deducted at the source. There is no doubt that the practice is and, so far as I know, always has been to include such dividends in the computation of profits taxable under Case I of Schedule D, and to make an allowance or adjustment for the tax that has been paid. I agree with the learned Lord Justice in thinking that there is no

1 [1938] A.C. 366; 54 T.L.R. 542; [1938] 1 All E.R. 778, H.L.

2 [1923] A.C. 744; 39 T.L.R. 590, H.L.

3 [1934] A.C. 215; 50 T.L.R. 246, H.L.

4 [1946] A.C. 119; 61 T.L.R. 577; [1945] 2 All E.R. 499, H.L.

5 [1934] A.C. 215.

6 [1946] A.C. 119.

7 (1881) 7 Q.B.D. 562, C.A.

specific provision of any statute which prescribes such an adjustment. It can only arise out of the recognition by the Crown that it is necessary in order to avoid double taxation of the same subject-matter. It is, in any case, no justification for exempting from taxation a dividend paid out of profits which have not borne tax.

I come to the second question which turns upon the true construction of section 41 (1) of the Act. That subsection provides: [His Lordship read the subsection and continued:] In the present case the single question is whether the word "discovers" covers the case where no new fact has come to light but the revenue authorities have formed the opinion that upon a mistaken view of the law the taxpayer has been undercharged in his original assessment. Upon this question the Court of Appeal followed a previous decision of the court in Commercial Structures Ltd. v. Briggs.⁸ In that case the court, preferring a decision of Finlay J. in Williams v. Grundy's Trustees⁹ to that of Rowlatt J. in Anderton and Halstead Ltd. v. Birrell,¹⁰ and following a decision of the Court of Session, Inland Revenue Commissioners v. Mackinlay's Trustees,¹¹ held that discovery had the wider meaning for which the Crown contended and contends in this case. I think that that decision was clearly right and find the judgment of Lord President Normand wholly convening. I can see no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered. The words are apt to include any case in which for any reason it newly appears that the taxpayer has been undercharged and the context supports rather than detracts from this interpretation.

The appeal should, in my opinion, be dismissed with costs.

LORD REID. My Lords, the appellant is a company which deals in stocks and shares and it is therefore assessed to income tack under Schedule D, Case I. So any sum coming to it from its trading assets must enter into the computation of its profits for income tax purposes unless either that sum is separately assessable under some other Schedule (for example, Schedule C), or that sum is exempt from taxation (as was the case in Hughes v. Bank of New Zealand¹².

The appellant owned as part of its trading assets all the shares

8 [1948] 2 All E.R. 1041; 30 T.C. 477, C.A.

9 [1934] 1 K.B. 524.

10 [1932] 1 K.B. 271; 47 T.L.R. 528.

11 1938 S.C. 765; 22 T.C. 305.

12 [1938] A.C. 366.

of another company, Henry White, and it received a dividend of £25,000 from that company. That dividend was paid out of capital profits realised by Henry White on the sale of its freehold property. Accordingly, that capital profit was not taxable in the hands of Henry White, and Henry White was not entitled to and did not deduct income tax in paying that dividend to the appellant. The question in this case is whether that sum must now be taken into account in determining the trading profits of the appellant. The appellant maintains that it must be excluded because it is exempt from taxation.

There is not in the Income Tax Act or anywhere else any express general exemption of dividends from taxation in the hands of those who receive them. But the appellant founds on a series of decisions in this House which establish that no dividend received by a person who is not a trader can be taxed in his hands. The appellant maintains and the respondent denies that these decisions apply to the present case.

The difference between a case like the present and the case of a non-trader receiving a dividend is this. In the hands of a non-trader a dividend would have to be treated as a separate item: it would not fall within any of the first five Cases of Schedule D and would have to be assessed, if at all, under Case VI. In the case of a trader it would not be treated as a separate item: like any other trading receipt it would be taken into account in determining the balance of profits and gains assessable under Case I. The appellant maintains that this difference is immaterial: the respondent says it is all-important.

It is therefore necessary to see why dividends are not assessable in the hands of a non-trader. It is not because Case VI is not wide enough to catch them, and it is not because of any express statutory provision to that effect. The appellant says that it results from the provisions of section 184 of the Act of 1952, which can be traced back to section 54 of the Act of 1842. But that section and its predecessors do not even mention the shareholder who receives a dividend: they merely entitle the company paying a dividend out of profits to deduct tax in paying it, and they are silent about a dividend which is not paid out of profits charged to tax. It is, however, argued that, by reason of the decisions of this House to which I have referred, the section must now be treated as referring to all dividends and as exempting them from tax in the hands of shareholders who receive them. The short answer to that appears to me to be that there is no mention of this section or its predecessors in any of the passages

in the speeches in this House which are founded on by the appellant. No doubt a good deal has been read into various provisions of the income tax code from time to time, but I find it difficult to believe that anyone could ever have intended to attribute that meaning to these provisions.

To reach a solution of the present problem I find it necessary to start from the ordinary case of a dividend paid out of profits under deduction of tax. Why is the shareholder not taxed on what he receives? It is part of his income, or if he is a trader it is a trading receipt. But it seems always to have been recognised that an individual does not pay income tax on it (I do not refer to surtax), and a trader does not include it as a trading receipt in determining his taxable profits. At one time it was thought that a company pays tax on behalf of, or as agent for, its shareholders, and if that were so, the explanation would be obvious. But that idea has long been discarded.

The fullest explanation is that given by Lord Phillimore in Bradbury v. English Sewing Cotton Co. Ltd.,¹³ which was approved and amplified by Lord Tomlin in Neumann v. Inland Revenue Commissioners.¹⁴ These passages are too long to quote: they give an explanation of the rule as stated by Lord Cave in Inland Revenue Commissioners v. Blott¹⁵: "If a dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of the tax previously paid by the company; and in that case the payment by the company operates in relief of the shareholder."

Lord Phillimore said in the passage to which I have referred: "But the law is not founded upon the introduction of some equitable principle as modifying the statute; it is founded upon the provisions of the statute itself." He does not say to which provisions he refers: he only says that the statute carries the matter further in entitling a shareholder with a small income to recover from the Revenue part of the tax which the company deducted and retained when paying his dividend to him. In spite of the fact that Lord Phillimore denies the introduction of any equitable principle, and that other judges well versed in income tax law also denied any equitable principle, I am inclined to think that the rule cannot be fully explained without recourse to practice based on equity or, perhaps, on the old theory that the company pays tax on behalf of the shareholders, and not on any specific provision in any statute.

13 [1923] A.C. 744, 770.

14 [1934] A.C. 215, 233.

15 [1921] 2 A.C. 171, 201; 37 T.L.R. 762, H.L.

The matter becomes much more difficult when tax could not be and is not deducted by the company when paying the dividend, and I can find no satisfactory explanation of why an individual who receives such a dividend is not assessable in respect of it. It cannot then be said that, because the company has already paid tax on this money, it would be unjust if the shareholder had to pay again.

Neumann's case¹⁶ and Gimson v. Inland Revenue Commissioners,¹⁷ which was approved in Neumann's case,^17a were both dealing with surtax or super-tax which introduced other complications. The surtax position was made clear. Lord Tomlin said in Neumann's case¹⁸: "It is not disputed that if a dividend is paid out of the profits produced by a sale of a capital asset it is not made out of profits or gains charged on the company, and therefore no deduction from the dividend is authorised and the dividend itself is not liable to be taken into account in fixing the liability to surtax of the shareholder." But I can find neither in that case nor elsewhere any clear statement of the reason why a shareholder cannot be assessed to income tax in respect of a dividend paid out of money which has not borne tax in the hands of the company. He does not receive the dividend as capital and it has not been "franked" by payment of tax on it by the company. But nevertheless he does not pay tax on it. All that Lord Tomlin said¹⁹ was that "having regard to ... the general scheme and operation of the Income Tax Acts in regard to dividends, I am unable to accept the view that dividends as such are taxable under Sch. D."

The words "as such" cannot be disregarded. They were repeated by Lord Warrington.²⁰ And when the rule has been restated in later cases it has almost always been qualified in a similar way. For example, Lord Macmillan said in Cull v. Inland Revenue Commissioners²¹: "... it is now well settled that the shareholders of a company are not liable to be directly charged with income tax at the standard rate on the dividends which they receive from the company."

So the position is this. The dividend in question was received as income and is for ordinary commercial or accounting purposes a trading receipt. Therefore, it cannot be left out of account in computing the appellant's profits for income tax purposes unless

16 [1934] A.C. 215.

17 [1930] 2 K.B. 246.

17a [1934] A.C. 215.

18 Ibid. 228-229.

19 Ibid. 228.

20 Ibid. 223.

21 [1940] A.C. 51, 64; 55 T.L.R. 1049; [1939] 3 All E.R. 761, H.L.

there is some good ground in law for doing so. There is nothing in the Act to require this, and, if this be relevant, there is no ground in equity for doing it as there is where a dividend has already borne tax in the hands of the company. So the only ground left to the appellant is the rule as stated in this House with regard to dividends. But on the face of it that rule is so stated that it only applies to the assessment of dividends "as such." So the appellant's last resort is that the reason behind the rule requires that it should be more widely stated. But I have been unable to find any reason behind the rule which would justify such an extension, even if it were now open to us to extend its rule.

On the matter of discovery I agree with what my noble and learned friend, Lord Simonds, has just said. So I agree that this appeal should be dismissed.

LORD DENNING. My Lords, the key to this case is that the Cenlon Finance Co. Ltd. carried on in the United Kingdom the trade of a dealer in stocks and shares: and it is therefore chargeable with tax under Case I of Schedule D in respect of that trade.

If the Cenlon Finance Co. Ltd. had not been a dealer in stocks and shares but a butcher or baker or anything else, it would not have been chargeable with tax on this dividend: for the simple reason that by a positive rule of law (to be found in judicial decisions and not in the statute) dividends as such are not liable to tax. The justice of this rule is obvious when the dividend is paid out of a fund which has already been brought into charge for tax. It is not so obvious where the dividend is what is called a "capital" dividend, that is, a dividend paid out of a capital profit which has not been brought into charge for tax. I should have thought that in the ordinary way any dividend on shares would be income in the hands of the recipient, and it would have been chargeable under Case VI as an "annual profit or gain," were it not for the positive rule of law which exempts it.

But I see no reason why this positive rule of law should extend to a dealer in stocks and shares. He is chargeable with tax under Case I of Schedule D "on the full amount of the profits or gains of the year." The dividends which he receives are certainly part of his profits or gains. They are the very life-blood of his trade. Take this very case. The Cenlon Finance Co. Ltd. bought shares for £72,000. Two weeks later it received a "capital" dividend of £25,000. This, of course, lowered the

value of the shares. One week later the company sold the shares for £27,500. Can anyone suppose that, in computing his profits or gains, it can bring in his loss on the resale of the shares and omit its profit from the dividends? It would not only give an entirely false picture of its trade. It would make a breach in the revenue laws through which a regiment of share dealers would soon pass.

I would agree, of course, that, if a share dealer receives a dividend which has been taxed at source, that is to say, if it is paid out of a fund which has already been brought into charge for tax, he should not be taxed again on it. The tax bill against him should be adjusted, as Donovan L.J. said, on equitable grounds, so as to allow for the tax suffered at source, even though there is nothing in the statute about it. But when a dividend has not been taxed at source, as for instance, when it is a "capital" dividend, I think it is part of his profits as a share dealer and it must be brought into his tax bill in full.

Mr. Shelbourne suggested that there was an implied exemption in the statute to the effect that dividends were not chargeable to tax in the hands of anyone. If there were such an exemption, no doubt a share dealer could take advantage of it. But I cannot read the statute in that way. Section 184 certainly gives no such exemption. Nor do the cases. There are observations here and there which, taken out of their context, give some slight support for the argument: but none do so when read fairly in their context.

Mr. Shelbourne took another point. He said that the inspector of taxes, with full knowledge of the facts, at first allowed this dividend to pass untaxed: and that his successor in office cannot be allowed to bring it into the assessment, simply because he takes a different view of the legal position. He must "discover" an under-assessment. Mr. Shelbourne said that "discovery" means finding out something new about the facts. It does not mean a change of mind about the law. He said that everyone is presumed to know the law, even an inspector of taxes. I am afraid I cannot agree with Mr. Shelbourne about this. It is a mistake to say that everyone is presumed to know the law. The true proposition is that no one is to be excused from doing his duty by pleading that he did not know the law. Every lawyer who, in his researches in the books, finds out that he was mistaken about the law, makes a discovery. So also does an inspector of taxes. On this point I find myself in full agreement

with the judgment of Lord Normand in the Court of Session²² and Tucker L.J. in the Court of Appeal.²³

I would therefore dismiss this appeal.

LORD MORRIS OF BORTH-Y-GEST. My Lords, I concur, and my noble and learned friend, Lord Guest, has asked me to say that he also concurs.

Solicitors: Manches & Co.; Solicitor of Inland Revenue.

F. C.

22 Inland Revenue Commissioners v. Mackinlay, 1938 S.C. 765; 22 T.C. 305.

23 Commercial Structures Ltd. v. Briggs [1948] 2 All E.R. 1041; 30 T.C. 477, C.A.