United Kingdom House of Lords Decisions

Viscount Cave—This is an appeal by the trustees of the late Lord Inverclyde from a decision of the Second Division of the Court of Session upon a Case stated by the Commissioners for the General Purposes of the Income Tax Acts for the City of Glasgow. During the tax year ending on 5th April 1921 the appellants received interest on Government securities to the amount of £72,231, without deduction of tax, and under the provisions of the Income Tax Act 1918, Schedule D, and particularly under Rules 1 ( f) and 2 of the Rules applicable to Case iii under that Schedule, they became liable to be assessed to tax in respect of that sum in the following tax year, namely, the year 1921–22. In the latter year the appellants paid in respect of interest on unpaid estate duty a sum of £21,847, that sum being paid in accordance with the provisions of section 18, sub-section (1) of the Finance Act 1896, without deduction for income tax. In making their return for income tax for the tax year 1921–22 they deducted that sum of £21,847 from the £72,231 received for interest on Government securities, and returned the balance only, namely, £50,384, as liable to assessment for income tax. Tax was duly assessed and paid on this sum of £50,384, but an additional assessment was made on the appellants for tax on the sum of £21,847 which had been deducted in the return. Against that additional assessment the appellants appealed to the Commissioners, who rejected the appeal and confirmed the additional assessment, but on the application of the appellants stated a Case for the opinion of the Court of Session as the Exchequer Court.

The question of law which was submitted for the opinion of the Court of Session was formulated by the Commissioners as follows:—“The question of law for the opinion of the Court is whether for the purpose of assessment under Schedule D (Case iii) of the Income Tax Act 1918 the appellants are entitled to deduct from the £72,231, being interest received for the year ending 5th April 1921, the sum of £21,847 of interest paid on estate duty for the same period.” The Court of Session unanimously affirmed the decision of the Commissioners, and thereupon the present appeal was brought.

Upon the argument of the appeal before your Lordships counsel for the appellants did not insist upon the view that the appellants had a right, for the purposes of income tax, to “deduct” (in the strict sense of the word) the £21,847 from the income which they had received, and indeed such a contention would be plainly untenable. The case does not fall within any of the categories under which deduction (in the strict sense) is allowed by the Act. The trustees of course did not carry on any business. The payment of interest on estate duty was not an outgoing necessary for obtaining the income from the investments. The interest on estate duty was not legally charged upon or payable out of the sum received for dividends, but was payable out of any moneys in the hands of the appellants as trustees. It did not fall within the deductions allowed by section 36 or any other section of the Act of 1918, and section 209 of the Act expressly provides that “in arriving at the amount of profits and gains for the purpose of income tax ( a) no other deduction shall be made than such as are expressly enumerated in this Act.” Deduction therefore, in the ordinary sense, is out of the question.

But your Lordships have not held the appellants strictly to the question as formulated by the Commissioners, and Mr Mon-crieff, in an ingenious argument, put his case in two other and alternative ways. First he said that the sum of £21,847 paid for interest on estate duty included income tax on that amount, and that although the appellants were prohibited by section 18 of the Finance Act 1896, from deducting tax from the interest paid, they were entitled, in bringing into computation for the purposes of income tax their untaxed interest

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