Commissioners of Inland Revenue v Lebus

 

Commissioners of Inland Revenue v Lebus

TAXATION; Income Tax, Surtax

KING’S BENCH DIVISION

MACNAGHTEN J

23 JULY 1945

COURT OF APPEAL

LORD GREENE MR, SOMERVELL AND COHEN LJJ

19, 20, 21, 22 FEBRUARY 1946

Income Tax – Sur-tax – Widow of deceased partner entitled under his will to share of profits – Continuing partners unable to pay share of profits during year of assessment – Widow not liable – Income Tax Act, 1918 (c 40), Sched D, Case III, r 1 (a), All Schedules Rules, r 19.

A partner in a firm of cabinet manufacturers, by his will bequeathed to his trustees (his widow and the continuing partners) one-quarter share of the profits of the business on trust to pay what they received in respect of it to the widow. For the year ending 5 April 1939, the widow’s share of the profits amounted to a considerable sum, but the business, owing to financial stringency, was unable to pay that sum or any part of it. The widow was assessed to sur-tax for that year and the question for determination was whether the assessment ought to include the sum representing her share in the profits of the business:—

Held – The widow was not a partner in the business and none of its assets belonged to her, nor was there any ground for saying that the partners were trustees of the business or of any of its assets for her; she could, therefore, not be said to have received any income unless and until she had received her share of the profits, and consequently she was not liable to sur-tax in respect of the amount in question.

Dewar v Inland Revenue Comrs followed.

Inland Revenue Comrs v Hamilton-Russell’s Exors distinguished.

Notes

Much of the difficulty of this case arose from the unusual sense in which the word “goodwill” was used by the testator. Goodwill has been defined many times, from the well known definition of Lord Eldon, in Crutwell v Lye (1810), 17 Ves 335), as “nothing more than the probability that the old customers will resort to the old place,” to the dictum of Lord MacNaghten, in IR Comrs v Muller & Co’s Margarine Ltd [1901] AC 217: “It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom.” The testator in this case, however, uses it in the sense of profit-earning capacity, which is not an item of property. The widow, therefore, has no beneficial interest in the partnership business and assets: she has at most a right to call upon the partners to pay her a share of the profits. Since she is not a partner, there is not in her case, as there is in the case of partners, a liability to income tax on profits though not drawn. Such profits form an accretion to the value of the partnership assets, but in this accretion the widow does not realise a profit in the income tax sense. There is also no indication of a trust which she can enforce against the partners as a person beneficially interested in the partnership business and assets: her right, which she could enforce in equity, is merely to call for one quarter share of the profits and receive it. When she received a payment the widow would be receiving an “annual payment” charged under Case III, Sched D, and within r 19, in the sense of the Shaftesbury Homes case, on which she would not be directly assessable.

As to Taxation of Income due but not received, see Halsbury, Hailsham Edn, Vol 17, p 249, para 503; and for Cases, see Digest Supp. As to Goodwill, see Butterworth’s Words and Phrases, Vol 2, pp 425–427 [1215].

Cases referred to in judgments.

Inland Revenue Comrs v Muller & Co’s Margarine Ltd [1901] AC 217, 39 Digest 278, 627, 70 LJKB 677, 84 LT 729, affg, SC sub nom Muller & Co’s

Margarine Ltd v Inland Revenue Comrs [1900] 1 QB 310.

Dewar v Inland Revenue Comrs [1935] 2 KB 351, Digest Supp, 104 LJKB 645, 153 LT 357, 19 Tax Cas 561.

R v Income Tax Special Comrs, Ex p Shaftesbury Homes & Arethusa Training Ship [1923] 1 KB 393, 28 Digest 84, 480, 92 LJKB 152, 128 LT 463, 8 Tax Cas 367.

Psalms and Hymns (Baptist) Trustees v Whitwell (1890), 3 Tax Cas 7, 28 Digest 84, 479.

Williams v Singer, Pool v Royal Exchange Assurance [1921] AC 65, 28 Digest 78, 425, 89 LJKB 1151, 123 LT 632, 7 Tax Cas 387.

Inland Revenue Comrs v Hamilton-Russell’s Exors [1943] 1 All ER 474.

Appeal

Appeal by the Crown, by way of case stated, from a decision of the Commissioners for the Special Purposes of the Income Tax Acts. The facts are fully set out in the judgment of MacNaghten J.

D L Jenkins KC, J H Stamp and Reginald P Hills for the appellants.

J Millard Tucker KC, H Wynn-Parry KC and J H Bowe for the respondents.

23 July 1945. The following judgment was delivered.

MACNAGHTEN J. The respondents in this case are the executors of the late Mrs Harris Lebus, who died on 17 March 1942. She was assessed to surtax for the year ending 5 April 1939, and the question at issue on this appeal is whether the assessment ought to include a sum for her share of the profits of a business carried on under the style of Harris Lebus. The Special Commissioners decided that it should be excluded from the assessment, and against that decision this appeal is brought.

Mrs Lebus was the widow of one Harris Lebus, who died on 27 September 1907, leaving two sons and six daughters him surviving. For many years before his death Harris Lebus carried on business as a cabinet manufacturer in partnership with his brother, Solomon, under the style of Harris Lebus. Under the articles of partnership Harris Lebus was entitled to four-fifths of the profits of the business and Solomon was entitled to the remaining one-fifth. Their shares in the capital of the business were in about the same proportion. The articles of partnership between Harris Lebus and his brother provided that, in the event of his death during the continuance of the partnership, he, Harris Lebus, could by his will introduce his two sons into the partnership, and that the business should be continued for a period of 10 years from the date of his death and that his share of the capital should remain in the business for that period.

By his will, dated 18 April 1905, Harris Lebus appointed his wife, Sarah, and his two sons, Louis and Herman, and his brother, Solomon, to be his executors and trustees. In cl 5 of his will he recited the provisions contained in the articles of partnership between himself and his brother, Solomon, and that he was anxious to make the provisions set out in his will with respect to his capital in the business and his share of the profits and to introduce his two sons as partners, and that, so far as such provisions might not be in accordance with any powers under the articles of partnership, the same should take effect under the doctrine of election and should be binding on his brother Solomon and his personal representatives as well as on his sons and all other persons beneficially interested under the will. By cl 6 he directed that an account should be taken of the amount of his capital in the business, and by cll 7 and 8 he gave directions to his trustees with regard to the withdrawal of his capital from the business. By cl 9 of the will he provided that on his death his brother Solomon should be considered as entitled to and he thereby bequeathed to him in addition to his capital and loan in the business and in lieu and in full discharge of the profits or share of profits in the articles of partnership one equal fourth part or share of the goodwill of the partnership, which Solomon was to accept in full discharge of such profits or shares of profits. By cl 10 he introduced his sons, Louis and Herman, as partners in the said business as from his death, and he bequeathed to each of them one equal fourth part or share of the goodwill of the business. By cl 11 he provided as follows:

‘I bequeath the remaining one equal fourth part or share of the said goodwill of the said business to the trustees hereinbefore named during the life of my said wife upon trust that the trustees or trustee shall pay the one fourth part or share of profits representing or received in respect of the same to my said wife during her life for her separate use without power of anticipation.’

The question in the case is as to the meaning and effect of the bequest of the one-fourth part or share of the goodwill of the said business to his trustees during the life of his wife.

The business was a large and prosperous business. During the first world war it was changed from making cabinets to making munitions and after the termination of that war it was entirely re-organised. It was converted into a mass production business and this involved the expenditure of very large sums of money in providing the necessary plant and machinery for that purpose; and there was the sum representing the amount of the capital of Harris Lebus in the business which was to be paid to his trustees. The result was that the partners were unable to pay to the trustees of Harris Lebus’ will the onefourth share of the profits to which Mrs Harris Lebus was entitled under her husband’s will. They paid 4 per cent upon the arrears that were due to her, but the arrears mounted up year by year and at the close of 1938 a considerable sum was due to her in respect of the arrears. For the year in question her share of the profits amounted to £31,689, but the partners were unable to pay it. Mrs Lebus pressed, and pressed severely, for payment of her share of the profits, but she was not willing to proceed to extremities. Considering that the interests of herself and her children depended upon the continuance of the business, she naturally was unwilling to wreck it.

Those are the facts which the Special Commissioners have found to be proved and it is in these circumstances, the business being unable, owing to its financial stringency, to pay this sum of £31,689, or any part of it, that the question arises whether she ought to be assessed to sur-tax in respect of it. The point was put by counsel for the respondents that, if the £31,689 was merely a debt payable by the partners to the executors of Harris Lebus, there could be no ground for saying that his widow should be assessed to sur-tax in respect of it since, in spite of her efforts, she had been unable to obtain payment; but if, on the other hand, the partners held the money as trustees for her, she must include it as part of her total income and would be assessable to sur-tax in respect of it.

The case for the Crown, if I apprehend the argument rightly, is that the provisions of cl 11 of the will of Harris Lebus did constitute the partners trustees for Mrs Harris Lebus of one-fourth share of the annual profits of the business. It is, therefore, necessary to consider the precise meaning of the provisions contained in cl 11 of the will of Harris Lebus. It is difficult to understand what was meant by the gift of a share of the goodwill of a business to a person who has no part or lot in the business, since the goodwill of a business cannot be separated from it (Inland Revenue Comrs v Muller & Co’s Margarine Ltd). If and when the business, which belonged to the three partners and belonged to them alone, was sold and part of the price paid for the business by the purchaser was properly attributable to goodwill, then, if that event did happen, the trustees of the will of Harris Lebus might perhaps claim one-fourth part of so much of the price that was paid by the purchaser of the business as was attributable to the item goodwill. That, however, was an event which Harris Lebus, it is plain, never contemplated; and, although Mrs Lebus survived her husband for 35 years, it did not happen in her lifetime and has not in fact happened down to the present time.

I am unable to appreciate the argument that, because cl 11 of the will uses the expression “one-fourth part or share of the goodwill of the business,” it thereby makes the partners trustees for the widow. The parties concerned acted on the footing that they had a contractual obligation to pay one-fourth of the profits to Mrs Lebus during her life. There is no doubt or dispute about that. Solomon and his two nephews entered into a deed of partnership dated 29 July 1909, extending the partnership as from the date of the death of Mr Harris Lebus. The three partners entered into a bond to pay to Mrs Harris Lebus the one-fourth share of the profits. Those documents treated the obligation as a contractual obligation, and I can see no reason for holding that the partners were in any sense trustees for Mrs Lebus. I, therefore, come to the conclusion that the decision of the Special Commissioners was right and that the appeal must stand dismissed with costs.

Appeal dismissed with costs.

Solicitors: Solicitor of Inland Revenue (for the appellants); Robertson, Martin & Co (for the respondents).

Appeal

Appeal by the Crown, by way of case stated, from a decision of the Commissioners for the Special Purposes of the Income Tax Acts.

From this decision the appellants appealed.

D L Jenkins KC, J H Stamp and Reginald P Hills for the appellants.

J Millard Tucker KC, Gerald Upjohn KC and J H Bowe for the respondents.

22 February 1946. The following judgments were delivered.

LORD GREENE MR. When the rather intricate argument in this case is 􀂭 478􀀉 unravelled, the answer to the question which we have to decide does not appear to me to admit of doubt. I hope I may be forgiven if I say that much of the apparent difficulty has been due to a certain ambiguity and lack of definition in some of the phraseology employed on behalf of the Crown. That criticism, which is no criticism of counsel who advanced these arguments, will, I hope, be made good in the course of this judgment.

It is not necessary for me to recapitulate the facts set out in the case stated. I may, however, in order to get it out of the way, make one observation on the phraseology of the will of Harris Lebus which relates to the rather curious use which he makes of the word “goodwill.” In one part of the will he appears to use the word in its proper sense; in other parts of the will he seems to be personifying under that expression what I may call the profit-earning capacity of the business, which he regards himself as able to dispose of by virtue partly of his interest in the business as a partner under the original partnership deed, and partly by virtue of the application of the doctrine of election. It will be found on a close examination (which I do not propose to make now in great detail) that in a great many cases he is using the phrase in that sense.

The paragraph of the will which deals with the interest of Mrs Lebus now in question is para 11. It is in the following terms: ‘I bequeath the remaining one equal fourth part or share of the said goodwill of the said business to the trustees hereinbefore named during the life of my said wife upon trust that the trustees or trustee shall pay one fourth part or share of profits representing or received in respect of the same to my said wife during her life for her separate use without power of anticipation.’

The words “share of profits” representing or received in respect of “onefourth part of the goodwill” seem to me to show that, when here he is using the word “goodwill,” he is really using it in the sense of profit-earning capacity; a thing which is not an item of property in the legal sense. However, the net effect of it is, I think, quite clear. He is bequeathing to his trustees one quarter share of the profits of the business upon trust to pay what they receive in respect of it to his wife. In the rest of that part of the will he is sharing out what he calls the “goodwill” equally among the three new partners, his two sons and Solomon Lebus, as the third partner, who was also to get his share.

One thing which may be noticed about this will is that never, from the beginning to the end of it, does he refer to the new partners as being in any sense of the word “trustees” for anybody. They are partners in the ordinary sense. They take over the assets of the old partnership and they are liable to pay out the testator’s capital in accordance with the provisions there laid down. But that they are regarded by the testator as being partners in every relevant sense of the word, both as to ownership of the assets and the ownership of the real goodwill and everything else, to my mind is beyond question. However, that, as will appear, does not involve the view that there is not, in certain respects and for certain purposes, imposed on the partners a trust obligation. What I mean by that will appear later.

I think the most convenient way of approaching the question we have to decide is to examine briefly but, I hope, adequately, the arguments presented onbehalf of the Crown who are the appellants here. Their first proposition is this. Mrs Lebus is the beneficial owner of, or is beneficially entitled to, one-fourth of the profits of the business. That, as I may venture to point out without, I hope, any disrespect, is a question-begging phrase. If it means she is entitled to some specific existing identifiable fruit of the business in any given year, that is one thing; if, on the other hand, all it means is that she, through the medium of the will trustees, is entitled to call upon the partners to hand her one-fourth of the profits of any year, that is a totally different thing. Unless these two meanings are kept quite distinct, confusion is likely to arise. To say that a person is the owner of something is a phrase which is no doubt convenient but often vague. A man may be said to own the credit balance in his banking account, but, from the legal point of view, that is an entirely incorrect expression.

Similarly, in the present case, if to say that Mrs Lebus owns a share of profits means nothing more than that she is entitled to call upon the partners to pay her a share of the profits, that is a totally different conception from the implication which appears to me to be inherent in the argument of the Crown—that she, in some way, has a proprietary interest in something 􀂭 479􀀉 identifiable, of which it can be predicated that she has received it.

The argument proceeds somewhat in this way. It is said that, where partners carry on business and make profits, they are assessable to income tax in respect of those profits, whether they take them out of the business and divide them or whether they do not. For example, a partnership has had a very profitable year. The whole of its property may be so locked up in its assets that it is quite impossible in that year to get any money out to pay to the partners their shares or the whole of their shares of the profits. That is a thing which commonly happens. But, in assessing a partnership in respect of the profits of its business, what you do is to take the account as between the Revenue and the partners and say: “In this year the partners have made so much profit; it belongs to those partners, and the fact that they cannot pay themselves out in cash has nothing in the world to do with it, for the very simple reason that the partners own the entirety of the assets, and they have themselves realized those profits in the sense that the profits have resulted in an accretion to the value of their assets which belong to the partners. For income tax purposes it is their profit on taking the proper income tax account.” In the case of partners that is perfectly clear. The fact that the profits are not released and paid over in cash to the partners has nothing to do with it from the income tax point of view. From the income tax point of view, they have made profits and are taxable.

Now, says the Crown: “That is really what has happened here. The three partners have made profits and they are taxable even though they did not draw those profits out of the business.” Similarly, the Crown says: “Mrs Lebus has made some profits and it makes no difference whether she draws the profits out of the business or does not.” But there is all the difference in the world between the two cases, because Mrs Lebus is not a partner, and the assets of the partnership do not belong to her. It is, therefore, impossible to say as against her what can be said as against the partners—that she has in the accretion to the value of the partnership assets realised a profit in the income tax sense. She has not realised a profit unless and until the profit is paid to her. It is a completem confusion, with great respect to the argument, to put her in the same position as if she had been a partner.

The Crown endeavoured to get out of the difficulty by saying that in some sense—I hope I am not putting it inaccurately—the partners carried on the business as trustees for her. It is said they are trustees for her of one-quarter share of the profits of the business. What does that mean? If it means that she is beneficially interested in the business and its assets, that is one thing; but, with all respect, it is quite untrue. She is not. If, on the other hand, all it means is that she is entitled to call for one-quarter share of the profits and receive it, it means something totally different. If it means only the latter, then I cannot myself see how she can be said to have received any income, unless and until she has received her share of the profits. The Crown puts her, in substance, in exactly the same position as if she had been a partner for these purposes. The argument failed to realise why it is that a partner who has not received his share of profits nevertheless is liable to taxation in respect of those profits. It is because he is a joint owner of the business and its assets. As soon as the accounts show a profit the partnership has made a profit for income tax purposes. On the other hand, a person who is only entitled to payment by the partners of a share of the profits has no proprietary interest in anything whatsoever unless and until it is paid over. That does not mean that there is no element of trust in the matter. I have said that, on the face of this will, the new partners are regarded as being partners in every sense, and there is no reference to any trust obligation upon them; but I am prepared to accept the view that there is a trust obligation which the court will raise against them, for this reason. The right to receive one-quarter share of the profits by the will trustees from the partners is not a common law right. It is not a contractual right. It can only be given effect to in equity. The machinery that equity would use for giving effect to those rights is to raise a trust. I myself am prepared to agree, without investigating the matter further, that these partners are trustees for Mrs Lebus through the intermediary of the will trustees.

What exactly does that mean? What is the nature of the trust? As I see it, there is no ground whatever for saying that they are trustees of the 􀂭 480􀀉 business or of any of its assets for her. The only trust that one can extract from the provisions in this will, as it seems to me, is a trust to pay to the trustees for her one-quarter of the profits, if any. If partners are carrying on a business subject to a trust obligation to pay one-quarter of the profits to A, I ask myself:

How can A be said to have received any income if the partners make default? That seems to me to be all that there is in this case. The Crown’s argument breaks down by reason of the fact that it assimilates the position of Mrs Lebus to the position of a partner, and there is no justification for that either on the language of the will or in any of the other documents or in any principle of law. In fact, it seems to me to fly in the teeth of the principles of law which distinguish the position of partners vis-a-vis the partnership assets and the position of outsiders.

I think it will be convenient now if I turn to the arguments put on behalf of the respondent, Mrs Lebus. The argument there approached the matter from a different angle. The proposition of counsel for the respondent, shortly stated, I think is this. Mrs Lebus is assessable to sur-tax in respect, and in respect only, of her income. In order, therefore, that you may bring into charge for sur-tax an element of income, you must show that it is her income in respect of which she would have been liable to direct assessment if it had not been for the fact that the tax had been paid by somebody else when the income was on its way to her.

Case III, r 1, (a) provides:

‘The tax shall extend to (a) any interest of money, whether yearly or otherwise, or any annuity, or other annual payment, whether such payment is payable within or out of the United Kingdom, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation thereout, or as a personal debt or obligation by virtue of any contract, or whether the same is received and payable half-yearly or at any shorter or more distant periods.’

Counsel for the respondents said, in my opinion, rightly, that the other cases of Sched D are excluded. If Case III is the right case, that operates to exclude Case VI. Under that, he says, Mrs Lebus, if she had been liable to direct assessment would have been assessable; that is to say, in respect of her receipts, if and when she received the same in respect of her share of profits, she would have been directly assessable under that case. But what in fact would come to her would be a share in a fund which had been already taxed as partnership income. Under r 10 of the rules applicable to Cases I and Ii, the partnership income is taxed by means of a joint assessment in the partnership name. That is exactly what happened here. The whole of the profits of this partnership were properly taxed under r 10 in the partnership name. She becomes entitled to one-fourth. When she receives it she is not liable to direct assessment in that sum, as that sum in her hands has already borne tax, and, says counsel for the respondents, r 19 of the All Schedules Rules would apply. I think it is correct that, unless it can be shown that income received in respect of this one-fourth share would have been her income liable to direct assessment, if tax had not already been paid by somebody else, she cannot be assessable to sur-tax in respect of it. Can she be made assessable to sur-tax in respect of income which she has never received? It is not disputed that, as a result of Dewar v Comrs of Inland Revenue if it can be said of this piece of income, that she has never received it, actually or constructively, she cannot be assessed.

The Crown, of course, tries to get out of that difficulty by saying: “She has received her share of profits in precisely the same way that the partners have received their shares of profits in respect of which they are liable to tax, although they have not received their shares in cash, or drawn it out of the business.”

In the same way they say she has received her share of profits, and, therefore, Dewar’s case does not apply. I have already dealt with that aspect of the argument. Counsel for the respondents places great reliance on R v The Special Comrs of Income Tax (Ex p Shaftesbury Homes and Arethusa Training Ship). That is an authority which seems to me very powerfully to support his argument. Certain trustees of a will were carrying on the business of a testator. They were, of course, in the eye of the law, partners, and the profits of the business were assessable in the ordinary way under r 10 as the profits of that partnership. The trusts were to the effect that, after the payment of certain annuities, the 􀂭 481􀀉 balance of the profits of the business should be paid over to the trustees of the charity. The question arose under sect 105 of the Income Tax Act, 1842, and sect 37(1)(b) of the Act of 1918, which are in substantially the same terms. The provisions of sect 105 enabled trustees for charitable purposes to claim a certain exemption from income tax, and to reclaim tax which had been paid. The actual language of the section, so far as relevant, was that they were entitled to exemption and to repayment of:

‘… the amount of the duties which shall have been paid by [the charity] in respect of such interest or yearly payment either by deduction from the same or otherwise.’

What had happened was this. The will trustees, who were carrying on the business, had been assessed to income tax and had paid it. The result of that was that, when they came to hand over to the charity trustees the balance in their hands, that balance had been diminished by reason of the tax which had been paid. The question before the court was: was the balance of profits of the business which was handed over by the will trustees to the charity trustees a yearly payment within the meaning of that section? It was held that these payments were quite clearly yearly payments. A distinction was drawn between certain earlier cases where the business had been carried on by the trustees of the charity themselves. That brings out a very important distinction. In those days—I

fancy it has been changed now—if trustees of a charity were carrying on a business themselves and were assessed to tax and had paid the tax, they could not

recover the tax because in those times the exemption from tax did not extend to trading profits of a charity. Therefore, in order to obtain their exemption from tax, the charity trustees had to show that what they received from the will trustees was a yearly payment. The distinction was drawn quite clearly in the judgments between the case where the charity trustees themselves are carrying on the business and the case where the business is being carried on by somebody else, who is under a trust obligation to pay over the balance of the profits to the charity trustees. The application of that case to the present is, I think, pretty clear. The distinction between charity trustees, who own and carry on a business, and charity trustees, whose only right is to call upon the will trustees who are carrying on the business to hand over the profits, is of great importance in the present case, because all that Mrs Lebus is entitled to demand is that the will trustees, as trustees for her, shall call upon the partners to hand over her share of the profits. Lord Sterndale MR said this (8 Tax Cas 367, at p 376):

‘Therefore, the only question we have to consider is: is this an annual payment to the charity? That seems to me to depend almost entirely upon one question, and that is this: were the charity (which means, I suppose, the committee of the charity) carrying on this business?’ I pause there to say that the Crown’s argument was in effect that Mrs Lebus was carrying on this business, or the trustees of the will were carrying on this business, because they were interested in one-quarter of the profits. Lord Sterndale MR goes on: ‘If they were then they were not getting an annual payment; they were merely getting the profits of the business that they were carrying on, and they would then come within the four corners of the decision, which seems to me to be quite right, in the Trustees of Psalms & Hymns v. Whitwell. Some case have been cited, I am bound to say we have had a great many cases, which had very distant relevance, if any, to the point we are arguing; other cases have been cited, which no doubt are relevant, as to the relation of trustee and cestui que trust in regard to income tax, chiefly Williams v. Singer.

The principle of that case and the principle of the other cases as to trustee and cestui que trust is said to establish this, that these trustees who are carrying on the business [that is to say, the will trustees] were carrying it on for the committee of the charity, and that, therefore, the committee of the charity were carrying it on themselves.’

That has a very striking resemblance to a part of the argument in the present case. Lord Sterndale MR goes on: ‘I can only say that those cases do not seem to me to establish anything of the kind, and, in my opinion, looking at the will under which the trustees are carrying on the business, and looking at what is happening with regard to the carrying on of the business, the committee of the charity are not carrying on this business themselves. That is at the root of the whole thing, I think. If they are not carrying on the business themselves 􀂭 482􀀉 then they are not receiving the profits of a business carried on by them, and, if they are not doing that, then they are receiving an annual sum that is paid to them by somebody else. In those circumstances it does not seem to me to matter whether the amount which they are receiving is fixed at so much per year, or whether it is fixed by reference to the profits of the business which the person who has to pay it to them is carrying on. It does not become a receipt by them of profits of business if it is not their own business, and if it be payment, then it does not matter in the least that that payment arises out of the profits of a business that is carried on by somebody else.’

Applying that to the present case, when Mrs Lebus receives something in respect of her share of profits, she is receiving an annual sum from the persons who are carrying on the business. Counsel for the respondents then links up the argument with r 19 in this way, I think it is quite fair to say that the language of the All Schedules Rules, r 19, was primarily directed to a different type of case, the common case, of course, where a person is liable under some contract, or some provision of a will, to pay what is in terms a gross sum, and is entitled to deduct tax when he pays it. But I can find nothing in the language of r 19 which excludes such a case as this. Although the court in the Shaftesbury Homes case was not dealing with r 19 it quite clearly came to the conclusion that the phrase “annual payment” in sect 105 included such a case, and that is the very expression used in r 19. I can see no justification myself for attributing to the phrase in r 19 a different meaning to that which the court attributed to it in sect 105. R 19 says this:

‘Where any yearly interest of money, annuity, or any other annual payment [if I may read in what I have here just stated, the sum payable by the partners to the will trustees for Mrs. Lebus is “an annual payment”]… is payable wholly out of profits or gains brought into charge to tax [that sum will be paid out of the fund which has borne tax, to wit, the profits of the partnership which are assessed in the hands of the partners, and which paid the full quota of their tax] no assessment shall be made upon the person entitled to such interest, annuity, or annual payment [that is to say, although it is the income of Mrs. Lebus, no direct assessment is to be made on her] but the whole of those profits or gains shall be assessed and charged with tax on the person liable to the interest, annuity or annual payment, without distinguishing the same …’

That has this effect in such a case as this. When the partners are being assessed to tax, they are not entitled to say: “You must exclude from our taxable profits one-quarter because we are bound to pay that over to Mrs Lebus.” They cannot say that. They have got to submit to taxation on the whole of their profits.

Then the rule goes on:

‘… and the person liable to make such payment, whether out of the profits or gains charged with tax or out of any annual payment liable to deduction, or from which a deduction has been made, shall be entitled, on making such payment, to deduct and retain thereout a sum representing the amount of the tax thereon at the rate or rates of tax [and now under the Act at present in force] in force during the period through which the said payment was accruing due.’

In the present case those words may not be necessary, for the simple reason that what the partners are dividing up is a fund which has already been taxed. But, though not particularly appropriate, there is nothing there, so far as I can see, which would justify us in saying that r 19 does not apply to the present case. The same observation applies to the concluding words which are directed obviously to the common case where a person is entitled to the gross income whether by way of interest, or something of that kind, and is bound to suffer deduction of tax. The rule continues:

‘The person to whom such payment is made shall allow such deduction upon the receipt of the residue of the same, and the person making such deduction shall be acquitted and discharged of so much money as is represented by the deduction, as if that sum had been actually paid.’

In the present case that may be quite unnecessary, but, anyhow, it does show that Mrs Lebus would not be entitled to go to the partners and say: “Why have you deducted something from my share of profits? My share of profits, according to your accounts, is £1,000, and you have only paid me £500. Where is the other £500?” The answer to her would be: “We have paid tax on that, and under r 19 all we are bound to do is to pay you the net sum.” It seems to me to fit in exactly with the Shaftesbury Homes’ case. If, in the Shaftesbury Homes’ case the residue of the profits had belonged to an individual and the charity trustees had been trustees for that individual, it seems to me 􀂭 483􀀉 that that individual would have been a person who could say: “I have an annual payment within the meaning of r 19. I am not liable to direct assessment, and I have only received a net sum.”

There is one more passage that I must refer to in the Act, and that is the passage in Sched 5, which sets out the contents of the necessary declarations and statements of total income. It is headed “XVII” in Sched 5. The declarant has to make these declarations:

‘First. Declaration of the amount of value of property or profits or gains returned, or for which the claimant has been, or is liable to be, assessed.’ That applies to the case of direct assessment—income in respect of which the taxpayer is liable to direct assessment. Then:

‘Second. Declaration of the amount of rents, interests, annuities, or other annual payments, in respect of which the claimant is liable to allow the tax, with the names of the respective persons by whom such payments are to be made, distinguishing the amount of each payment.’

There again you have the phrase “annual payment”, and, applying the Shaftesbury Homes’ case the receipt by Mrs Lebus is an annual payment. If she has received an annual payment, it seems to me in her return of total income she should have to bring it in under that head. If she had not to bring it in under that head, there is no head in this form under which she would have to bring it in, and, therefore, it must fall under that head. The third head is:

‘Declaration of the amount of interest, annuities, or other annual payments to be made out of the property or profits or gains assessed on the claimant, distinguishing each source.’

That is a deduction for the purposes of total income because it is deducting from the income of the declarant something which is not his income but is the income of the person who is entitled to receive from him an annual payment. The fourth head is merely a statement of the figure which that sum would bring out. You add 1 and 2, and you deduct 3, and you state the result under head 4. It is a perfectly simple conception. That seems to me to make the whole thing hang together. Counsel for the respondents says: “You cannot, on the authority of Dewar’s case, treat a person as having received an item of income when she has not received it, however much she may be entitled to call for it, and however much her right to call for it is due to a trust obligation.”

Counsel for the appellants protests that this conclusion which I have come to is one which involves disagreeing with the decision of this court in Comrs of Inland Revenue v Exors of Hamilton-Russell. With all respect to him, it seems to me that it does nothing of the kind. That was a totally different case. There the trustees were trustees of a trust fund, and they were directed to accumulate the income of the trust fund during the settlor’s life, and to hold the fund and income for the testator—he was the person concerned in that case—until he attained 21 years of age. When he attained 21, he was entitled, as a matter of law, to call upon the trustees to hand over the fund, and all the accumulations, but he did not do so. He left the accumulations in the hands of the trustees, and his executors were assessed to sur-tax on the income. Of course, they were. He was the beneficial owner of a definite, ascertained, concrete piece of property, to wit, the dividends and income of a trust fund which had been received by his trustees. The trustees had got it. Of course, the receipt of the trustees, as trustees for him, was for income tax purposes a receipt by him. It is totally different to the present case where the income never has been received by Mrs Lebus, or by the will trustees. Therefore, it seems to me that that authority does not assist the Crown’s argument, nor is it any reason at all for throwing doubt on the conclusion to which I have come in this case.

SOMERVELL LJ. I agree. Although we are supporting the judge, the reasons which have influenced this court are rather different from those which influenced him. I would, therefore, like to state, shortly I hope, how I view the issues which arise. The judge based himself, I think, mainly on the existence of the subsequent, what has been called, profit bond, and regarded that as showing that this was a purely contractual or personal right. I think there may be a difficulty about using the bond in that way, because in the recital it is said to be 􀂭 484􀀉 entered into “for the purpose of securing one-fourth part of share of the profits bequeathed by the testator,” and therefore it may be said that, if there were any other rights of an equitable character before the bond was entered into, they remain.

I will not repeat the facts, but I will read one sentence in the case to show how this matter arises. This is in para 10. Mrs Lebus

‘… had frequently asked for the share of profits she was entitled to and had been told that the firm was not in a position to pay her. She pressed severely for payment, but did not proceed to extremes as she did not want to wreck the business. Louis Lebus told her that the firm would pay her as soon as they were in a position to do so. There was never any arrangement with the firm that she should leave some of the money with them on loan.’

That last sentence is the reason why no suggestion was put forward, nor indeed, could it be put forward in this case, that the money being left in the business ought to be treated as a disposal by Mrs Lebus of money to which she was entitled, and, therefore, she ought to be treated as having been paid constructively.

I agree with Lord Greene MR and it seems to me fundamental to the decision in this case, that in para 11 of the will, the testator is using the expression “goodwill” as meaning the profit-earning assets of the business. That is a conception which is unknown to the law as a form of property. Therefore, in my view, one has to read para 11 as giving, and only giving, a right to the trustees to receive a share of the profits. It may follow from that—and I am perfectly prepared to accept this—that the result of that is that partners who elected to come in and to carry on under this will were carrying on the business upon trust to pay to the trustees for Mrs Lebus a quarter share of the profits. That phrase follows very closely the phrase which was considered by this court in the Shaftesbury Homes’ case. To my mind it is quite clear that persons who have a share of profits, or an interest in a share of profits, or a right, indeed, to receive the whole of the profits, but are not themselves partners, or are not themselves carrying on a business, are altogether outside assessment under Case 1 of Sched

I suppose it is possible to imagine an income tax code which had our Case 1 of Sched D, namely, a provision for assessing the profits of a business, into which you put, not only those who carried on business, but those who had an interest in or a right to a share of the profits. But it seems to me quite clear that that is not our income tax code. I think that was so decided on very similar facts quite plainly in the Shaftesbury Homes’ case. Therefore, the assessment which was made on the partners in respect of the profits of the business was something with which neither the widow Mrs Lebus, nor her trustees had anything to do. It was not in any way an assessment of her income or of anything she had a right to, or was entitled to, or might receive. It is quite clear she has to come in somewhere, because what she is going to get, if it is paid, as it was at any rate in part, is clearly income. If there were any difficulty about putting it under Case III, then it would come under Case VI.

But, speaking for myself, once it is established, as I believe it is, that these rights of hers are entirely outside the trading assessment under Case 1, I would be inclined to take the view that it is unnecessary to examine what her equitable rights against the partners would be. It might indeed be unnecessary to examine whether Case III and r 19 precisely fitted this case. Whether it does, or whether one has to go to Case VI, it seems to me to be clearly a position of the same nature as that which has been dealt with in such cases as Dewar’s case, namely, a position where you do not assess for sur-tax until payments are actually made. Counsel for the appellants said that was, or might be, inconvenient. I rather doubt that. After all, the partners here ought to pay punctually as the profits are earned. I think it might be much more inconvenient that Mrs Lebus, or somebody else in a similar position, should have to pay sur-tax on a sum of money which she had tried to get but had been unable to get, than that there should be a re-adjustment of an earlier assessment when the sum is actually paid.

For these reasons, I agree that the appeal should be dismissed.

COHEN LJ. I agree with the conclusion to which my brethren have come, and with the reasons they have given for their conclusions; but, out of respect to the interesting argument which counsel for the appellants addressed to us, I will state, I hope quite shortly, my reasons for thinking that that argument cannot be sustained.

In answer to Lord Greene MR I think I am right in saying that counsel for the appellants admitted that it went to the root of his argument to establish that the partners were trustees for the will trustees of such portion of the assets as might represent one-fourth of the profits. It seems to me that there is nothing in the will which justifies us in coming to the conclusion that the partners are in any sense trustees of any part of the assets at any time for the will trustees, or for Mrs Lebus. Indeed, such a conclusion would lead to the strange result that the partners would be trustees or not according as to whether the business was for the moment being carried on at a profit or at a loss. I think that the true effect of the will, and of the exercise by the partners of the election to which they were put by the will, is to create, as Lord Greene MR said, an obligation enforceable in equity on the partners to pay to the trustees what is called one-fourth of the profits, which I think means a sum equal to one-fourth of the profits. If that be the true view, if the partners performed the obligation to pay the will trustees, no doubt Mrs Lebus would be liable, whether or not the will trustees had paid it over to her. I think that is in accordance with the principle of Williams v Singer, but I can see no justification for holding the share of profits, or the sum representing the same, to be her income before the partners pay it away either to her or to the will trustees. I agree with my brethren that the case seems to be covered by such decisions as Dewar’s case.

I would add one observation on the application of r 19, though it has perhaps no direct relevance. It is perhaps of interest that, when the partners try to give effect to what they conceive to be their obligations by executing a document of 29 July 1909, which was called, I think, the profit bond, what they covenanted to pay was “one equal fourth part or share of the net profits of the said business of Harry Lebus without any deduction except imcome tax.” That seems to me to fit in with the idea that Lord Greene MR has suggested, that r 19 can be applicable to such a case as this.

For the reasons I have stated, I agree with my brethren that this appeal should be dismissed. 

Appeal dismissed with costs.

Solicitors: Solicitor of Inland Revenue (for the appellants); Robertson, Martin & Co (for the respondents).

P J Johnson Esq and F Guttman Esq Barrister.

[1946] 1 All ER 486