William Dickinson & Co Ltd v W Bristow (Inspector of Taxes)

 William Dickinson & Co Ltd v W Bristow (Inspector of Taxes)

TAXATION; Income Tax

COURT OF APPEAL

LORD GREENE MR, SOMERVELL AND COHEN LJJ

18, 19 FEBRUARY 1946

Income Tax – Profits from trade and trade receipts – Part recovery of debts previously written off as bad – Amounts so received to be included in computation

of profits – Amounts taxable in year of receipt – Income Tax Act, 1918 (c 40), Sched D, Cases I and II, r 3 (i).

The appellant company was engaged in export trade and had, for many years, made deliveries of coal and coke to customers in Spain. Between December

1935, and June, 1936, the Spanish customers became indebted to the appellant company in sums amounting to £10,710. These debts were included at their

full value as trace receipts in the computation of the appellant company’s profits for the purposes of income tax. Owing to the outbreak of the Spanish

revolution the debts were considered irrecoverable and written off as bad, and, in accordance with the practice of the Board of Inland Revenue, the sums so

written off were allowed as trading losses for the years ended 5 April 1938, and 5 April 1939. In 1940 the British Government advanced a loan to the Spanish

Government to facilitate the payment of debts owing by Spanish nationals to traders in this country, and a clearing house for Spanish debts was set up. In the

appellant company’s years ending 31 March 1941, and 31 March 1942, the appellant company recovered the sums of £5 115 9s 6d and £333 3s 11d

respectively through the clearing house in respect of Spanish debts due to them. On appeal, the question for the determination of the court was whether those

sums ought to be treated as trading receipts in the years in which they were paid by the clearing house to the appellant company, assessments having been

made upon the appellant company on the footing that the sums should be so included as trading receipts:—

Held – In the assessments made upon the appellant company the amounts received from the clearing house must be included as trading receipts in the years in

which they were received.

Judgment of MacNaghten J ([1945] 2 All ER 678), affirmed.

Dicta of Lord Simon LC, Lord Atkin and Lord Porter, in Absalom v Talbot followed.

Notes

The Court of Appeal affirm the court below, following the opinions of Lord Simon, Lord Atkin and Lord Porter, expressed in Absalom v Talbot. Lord Greene

MR, examines the language of rule 3 (i) of the Rules applicable to Sched D, Cases I and II, and finds full justification for the practice of the Revenue of

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allowing bad debts to be deducted as trading losses in the year in which they are written off. According to the opinion of Lord Porter in Absalom v Talbot it

follows from this practice that if a debt which has been written off is subsequently paid it may be charged to tax in the year in which it is paid. This was the

position in the case under consideration, and the decision of the Court of Appeal is in accordance with this opinion.

As to Trade Receipts and Expenses: Period of Account to which Referable and as to Bad Debts, see Halsbury, Hailsham Edn, Vol 17, pp 118–120, 161,

162, paras 223–225, 328; and for Cases, see Digest, Vol 28, pp 49, 50, Nos 253, 254.

Cases referred to in judgments

Gleaner Co Ltd v Assessment Committee [1922] 2 AC 169, 28 Digest 49, n.

Absalom v Talbot [1944] 1 All ER 642, [1944] AC 204, 113 LJKB 369, 171 LT 53.

Anderton & Halstead Ltd v Birrell [1932] 1 KB 271, Digest Supp, 101 LJKB 219, 146 LT 139.

Appeal

Appeal by the taxpayer from an order of MacNaghten J dated 18 October 1945, and reported ([1945] 2 All ER 678). The facts are fully set out in the judgment

of MacNaghten J in the court below.

F Grant KC and J Charlesworth for the appellants.

The Solicitor General (Sir Frank Soskice KC) and Reginald P Hills for the respondent.

19 February 1946. The following judgments were delivered.

LORD GREENE MR. The point raised by this appeal is one which might fairly be described as singularly devoid of merit. We have to decide a bare 􀂭 448􀀉

question of law. Put in diagrammatic form, so to speak, the question may be thus formulated. A trading company in the year 1 sells goods on credit. The

amount so owing to it is brought into account in the computation of its profits and gains for the year 1. In the years 2 and 3 events happen which, first of all,

depreciate the value of that debt, and later on destroy its value altogether. In the accounts for the years 2 and 3, the Revenue accept the view that the

depreciation and final devaluation of the debt should be made the subject of an allowance in those respective years. In the year 4 further events happen of a

quite unusual and, indeed, unexpected nature, which have the effect of converting the debt, which has been treated as bad, into a perfectly good debt which is

paid in the year 4. The Revenue then says: “In taking the account of your profits and gains for the year 4, you must bring in that sum as a receipt. You have

received it in the year 4, and you must accordingly bring it into account.” It is not a question of revising or amending, by additional assessment or otherwise,

any of the assessments for the years 1, 2 or 3. The claim of the Revenue is to treat that receipt as a receipt of income for the year 4.

The only statutory provision which bears on this question to which I need refer is the Income Tax Act, 1918, Sched D, cases I and II, r 3 (i). That

sub-rule is as follows:

‘In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of … (i) any debts, except bad debts proved to

be such to the satisfaction of the commissioners and doubtful debts to the extent that they are respectively estimated to be bad.’

Then there is a provision as to bankruptcy or insolvency:

‘In the case of the bankruptcy or insolvency of a debtor, the amount which may reasonably be expected to be received on any such debt shall be

deemed to be the value thereof.’

There is one curious point about that provision which I only note in passing. It finds its place in a series of sub-rules, all of which appear to deal with

deductions, such as disbursements, expenses or losses, whereas this particular sub-rule prohibits the deduction of any debts. A debt would obviously only be

the subject of deduction if the taxpayer was entitled to say to the Revenue: “Although I keep my profit and loss account on the basis of treating debts as being

equivalent to receipts, yet as between me and the Revenue I am entitled to deduct debts because I have not yet been paid.” The effect of the rule is to treat the

account, which has to be taken for income tax purposes, on the same basis as a commercial account, and to prohibit the deduction of debts on the ground that

they still remain to be paid and consequently ought to be brought into account in the year in which they are paid. The practice always has been, and rightly,

having regard to that language, to treat debts in the ordinary commercial way, as though they were receipts of the year, and bring them into the account

accordingly.

The first question which falls to be decided in examining this matter is one on the true construction of that sub-rule. In Gleaner Co v Assessment

Committee, a case in the Privy Council on appeal from Jamaica arising out of the Jamaica income tax law, it is said that a provision similar in terms to this one

did not justify the giving of an allowance in respect of a doubtful or have debt save on the occasion when the debt was first brought into the account. For

instance, the reasoning of that decision, if it applied to the present case, would have produced this result, that the allowances granted by the Revenue in years 2

and 3 would not have been authorised by the language of this sub-rule. The allowances could only have been made in respect of the debt in the year 1. In the

year 1 there was no ground at all for writing it down, much less for treating it as altogether bad, and, therefore, nothing fell to be done about it. The

consequence would have been, if that view applied, that the allowances granted by the Revenue in the years 2 and 3 would have been merely voluntary

allowances not made pursuant to any provision of the statute. It was further said in that case ([1922] 2 AC 169, at p 175):

‘If, therefore, debts decided to be doubtful in one year were found to be good at a later date, apart from the provisions of sect. 30 [that is of the

Jamaica Act] there are no means whatever of obtaining further income tax upon the amount, nor, if their value further diminish, could they be the

subject of reassessment.’

􀂭 449􀀉

That language, if it were applicable to the present case, would preclude the Crown from maintaining the claim it now makes, namely, to have the receipt

in the year 4 brought into account in respect of that year. But in the recent case of Absalom v Talbot in the House of Lords, the effect of sub-rule (i) was

considered in that connection. It is right to say that the observations to which I am about to refer were by way of dicta only. But of the five Lords who were

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sitting on that appeal, three, namely, Lord Simon LC Lord Atkin and Lord Porter, emphatically and clearly dissented from the view which had been expressed

by the Privy Council in the Gleaner case, and held—I repeat by way of dictum only—that it was legitimate for the Revenue to make allowance in a subsequent

year in respect of a debt which, in the earlier year, had been treated as a perfectly good debt. The other two Lords, Lord Thankerton and Lord Russell Of

Killowen, appear to have been inclined to take the opposite view, although they did not express any concluded opinion. We have, therefore, 3 clearly

expressed statements in that case as to the true construction of this sub-rule. We are not bound, of course, to follow them. I think it falls to us to decide

whether, in our opinion, those expressed opinions are in accordance with the true meaning of the sub-rule. If we came to the conclusion that they were not,

and that the view of the Privy Council in the Gleaner case was preferable, the result of this case might well have been different to what I consider it should be,

because then the allowances would have been purely ex gratia allowances. But, in my opinion, the views expressed by those three members of the House in

Absalom v Talbot are correct.

I think I am right in saying that no one of the three Lords thought it necessary to examine carefully the language of the sub-rule, in order to show how and

why the construction of it admitted the making of such allowances as we have to consider in this case. But it seems to me that that task is not really a difficult

one, for this reason. When one looks at the language, it starts, first of all, by prohibiting a deduction in respect of a debt. That would appear to mean, as I

have said, that a taxpayer cannot come and say: “Exclude this debt from the computation because it has not yet been paid.” But in this case, in the years 2 and

3 the company was in effect saying to the Revenue: “We claim a deduction in those two years in respect of this debt; the reason being that in those years 2

and 3 something has happened to it which has had the result, first, of reducing it in value, and subsequently destroying the value altogether, on the ground that

it was bad.” The company claiming to make that deduction in respect of the debt in the years 2 and 3 is entitled to the relief which the sub-rule allows,

namely, that, if it is a bad or doubtful debt proved to be such to the satisfaction of the Commissioners, a deduction may be made. That is exactly what

happened.

The contrary view, of course, is that the only occasion when the question of badness or doubtfulness of debts falls to be considered is the occasion when

the debtor is bringing his debt into the account. But I cannot see that the language of this sub-rule necessarily leads to that result. It applies to any deduction

claimed in respect of any debt, at any time in any year it seems to me, and such a claim was precisely the claim that was made by the company in this case. I

am accordingly of opinion that we ought to follow the dicta of the majority of the House in Absalom v Talbot. That is the first question to be considered.

The next question is: what is to be done where, in a subsequent year, the debt having, in the meanwhile, become a good debt, is paid? In the Gleaner

case as I have said, it was regarded as a consequence of the early part of the decision, that a receipt in a subsequent year of a debt previously treated as bad

could not be treated as something to be brought into account in that year, or as a ground for revising or reopening the earlier assessments. In the Absalom case

that consequence was not referred to, save by Lord Porter. He said this ([1944] 1 All ER 642 at p 652):

‘Your Lordships’ attention, however, has been drawn to the practice in the past of the Inland Revenue authorities of making an allowance in respect

of losses for bad or doubtful debts as and when they occur, though the debt itself was originally treated as being of its face value in a previous year’s

accounts. Such a practice necessitates, I think, the corresponding obligation on the part of the taxpayer to submit in a later year to an increase in the sum

at which a debt previously treated as bad or doubtful should be brought into account if in fact a payment greater than the assumed value had been

obtained or seems likely to be obtained, on a later occasion.’

􀂭 450􀀉

That appears to mean that, in Lord Porter’s view, a subsequent improvement in the debt in a later year could be given effect to, notwithstanding that the

debt had not in fact been paid, because he uses the phrase “seems likely to be obtained.” I am not sure that I would accept that view; but we have not to

consider it here because we are now dealing with a case where the debt has in fact been paid. Then he refers to Anderton & Halstead Ltd v Birrell. He says:

‘The decision in that case turned upon a different point, namely, whether the debt could be treated as having been mistakenly valued at too low a

figure in the years in which the value had been written down, so that the profits of those years could be recalculated, the value written up, and the sum,

upon which tax was payable, increased.’

That was a demand by the Crown to get what it wanted by a different method, namely, by re-opening the earlier assessment. Lord Porter goes on:

‘The argument that it could be so treated was held to be unsound, but nothing was said to throw doubt upon the right of the subject to have the value

of a debt reduced at any time as and when it was discovered to be bad or doubtful, or of the Crown to have it increased in some future year, if it proved

to be of greater value than had been assumed in an earlier year when it was brought into account or valued.’

Lord Porter took the view that, if the debt was paid in the subsequent year in whole or in part, that payment was a matter to be brought into account; but he

also seems to have taken the rather more extreme view that, even if it were not paid, a mere change of its value would justify giving effect to that change in the

account of the year in which it took place. As I have said, I am not prepared, without further consideration, to accept that.

If one looks at the position when the company in the year 4 received this sum, the first question that occurs to one to ask is this: as between the Revenue

and the taxpayer, has the sum so received in any shape or form been brought into account for tax purposes? Leading counsel for the appellants says: “Yes, it

has. It was brought into account in the form of a debt in the year 1, according to the ordinary practice, and, having been brought into account in the form of a

debt in the year 1, it is not possible to strike it with tax in the year 4 when it is received.” The reason why a receipt is not taxed in the year of receipt, I

apprehend, is that it has already been taxed in the form of a debt in the year to which the debt is referable. But, in the present case, it seems to me impossible

to disregard what has happened in the years 2 and 3 as affecting the position of the taxpayer, on the one hand, and the Crown on the other, in respect of this

particular receipt. It seems to me, looking at the whole of what has happened, it is quite impossible to say that this receipt ought to be treated as having been

previously brought into account for tax at all. It is perfectly true that it was originally brought into account in its then shape of a debt; but the effect of what

happened in years 2 and 3 appears to me to have reversed that position altogether. The net result is that, at the end of the year 3, it is untrue to say that this

particular item has been brought into account for tax purposes because, although it was brought in in calculating the profits in the year 1, it was taken out again

in calculating the profits of the years 2 and 3. Here is a receipt in year 4. Why should not it be struck with tax when it has not so far been brought into

effective computation? It is not like an ordinary trading debt which, when it is received, would not be taxed a second time. This is a peculiar debt, having

regard to its history, of which it is impossible to say that, at the time when it was received, it had been brought into account for tax purposes while it was still

only a debt. You cannot put what happened in the year 1 into a sort of watertight compartment and disregard what happened in the years 2 and 3. In my

opinion, you must look to the result of all the transactions, and ask yourself in the year 4: what is the status of this receipt as between the taxpayer and the

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Revenue? Is it a receipt which must be excluded from computation on the ground that it has already come in in another form, namely, the form of a debt, or is

it to be treated as something which has never been brought into account at all owing to the particular provisions of sub-rule 3 (i), and to what, in fact, was done

under those provisions? In my opinion, the Crown’s contention is right in this matter.

Junior counsel for the appellants pointed out that the receipt in the year 4 had its origin, from the commercial point of view, in the coal contract made in

the year 1. No doubt that is perfectly true, but the question we have to decide is: what is the status of this receipt as between the taxpayer and the Revenue

having regard to the events which have happened? Clearly, as counsel 􀂭 451􀀉 points out, it in year 1 there had been a debt which, for some reason, had been

omitted, and then in year 4 the amount of that debt was paid, the proper course, according to the ordinary practice, would be not to treat that as a trading

receipt of year 4, but as a trading receipt of year 1, when it ought to have appeared in the accounts in its then form of a debt. That is perfectly true, but the

proper remedy in that case is to re-open, by proper procedure, the account of year 1. But that is not this case at all. That is a case of mere omission. This is a

case where the whole position of the debt has been completely revolutionised by what happened in years 2 and 3. I can see no reason for saying that, as

between the taxpayer and the Revenue, this receipt must be attributed to the year 1.

In my opinion, the judge, who took that view contrary to the view of the Commissioners, was perfectly right and the appeal must be dismissed with costs.

SOMERVELL and COHEN LJJ agreed.

Appeal dismissed with costs. Leave to appeal to the House of Lords.

Solicitors: Hyde, Mahon & Pascall agents for Wilkinson & Marshall, Newcastle-upon-Tyne (for the appellants); Solicitor of Inland Revenue (for the

respondent).

F Guttman Esq Barrister.

[1946] 1 All ER 452