Leahy v Attorney-General

December 18. Viscount Simonps. My Lords, I am so
fully in agreement with the opinion of my noble and learned
friend, Lord Keith of Avonholm, that I can be very brief in stating
my own views. Nor shall I occupy your Lordships' time in
stating the many sections of the Income Tax Act, 1952, to which
reference was made in the course of the argument. The Act
contains over 500 sections and 25 Schedules. A considerable
number of them were relied on by one side or the other. The
question is in fact a very short one. It is whether the amount
in respect of which a so-called balancing charge was properly
made upon the respondent company under sections 292 (1) and
323 (4) of the Act was part of its actual income from all sources
for the relevant period within the meaning of section 245 of the
Act. If so, that amount was apportionable among the members
of the respondent company, and the apportionment made by the
Special Commissioners was properly made. But it has been
held by Harman J. upon a case stated by the commissioners and,
for different reasons, by the Court of Appeal, that the amount in
question ought not to be regarded as part of its actual income for
the period in question.

The argument was twofold: first, as was held by the Court of
Appeal, that no statutory enactment provided that the amount
on which the balancing charge was assessed should be deemed to
be income of the company for income tax purposes; and, secondly,
that, in any case, it was not part of the actual income of the

31 [1901] A.C. 26, 35. 32 [1955] A.C. 696, 712.

501

H. L. (BE)
1958

INLAND
REVENUE
CoMMIS-
SIONERS
v.
Woop
BROTHERS
(BIRKEN-
HEAD) Lp.

502 HOUSE OF LORDS [1959 |

H. L. (E.) company from all sources. If the first argument prevailed,
1958 the second argument was unnecessary: it was not suggested
that the amount in question could be actual income of the

INLAND are :

Revenue company if it was not income at all.

eee My Lords, it appears to me that the construction placed by
CE the Court of Appeal upon the relevant sections of the Act is too

pee narrow. The purpose of the balancing charge is not in doubt.

(Brrxen- J respectfully adopt the language of my noble and learned friend,
meAD) TD. Tord Morton of Henryton, in the recent case of Kirkness v. John
Viscount = Hudson & Co. Ltd.*: '' Conversely, if the moneys received on the
'sale were in excess of the written-down value of the asset, a
''* balancing charge' was imposed, in order to restore to the
'"" public revenue the amount by which the past allowances were
'' shown to have been excessive.'' The allowances were made in
respect of the computation of profits or gains for purposes of
income tax; the part of the public revenue affected was that which
was derived from income tax, and the balancing charge is made
in order to restore to that tax an amount by which it has been
mistakenly reduced. Call it notional or artificial or what you will.
It is an amount which, for the purpose of income tax, is as truly
part of the subject's income as is, for instance, the notional or
artificial amount which is under Schedule A regarded as his
income. My noble and learned friend, Lord Keith of Avonholm,
will exhaustively examine the relevant sections. I hope, there-
fore, I may not be thought to be wanting in respect to those who
take a different view, if I say that, in my opinion, the solution of
the problem lies in remembering that in the Act the word
"income "' has a special meaning, namely, a sum which is by the
Act charged to income tax and measured in accordance with its
provisions and that, specifically, where Case I of Schedule D is in
question, "' profits and gains '' is an expression synonymous with
'""income.'' It is because the amount, on which the balancing
charge is assessed, falls within that Case that it is brought into
charge as income. I do not wish to elaborate what my noble and
learned friend will say, but I cannot refrain from observing upon
the incongruity of the conclusion to which, in the case of a com-
pany, the Court of Appeal has come with the result in the case of
an individual trader. His surtax liability appears to be concluded
by section 524 (4) of the Act. I agree, too, that no little weight
should be attached to the language of section 270 (6) (c). In that
subsection, quite naturally and, in my opinion, rightly, that

1 [1955] A.C. 696, 716; [1955] 2 W.L.R. 1185; [1955] 2 All E.R. 845.

A.C. AND PRIVY COUNCIL.

'

'which is the subject of a balancing charge under this Chapter "'
is called '' income.'' So, in my opinion, it is for all the purposes
of the Act.

But it remains to determine whether it is '' actual '' income
within section 245. This expression is defined in section 255 (8).
I do not think it necessary to look beyond its terms. It clearly
has a purely temporal significance: it means income as defined,
computed and measured by the Act but by reference to a par-
ticular period. That is in accordance with what Lord Atkin said
in Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue Com-
missioners," and it is perhaps permissible to add that, if it means
anything else, there is no guide to what it does mean.

I would only add that I agree with the observations of my
noble and learned friend, Lord Morton of Henryton, upon what
Lord Uthwatt said in Lord Howard de Walden v. Inland Revenue
Commissioners.*

I would, therefore, allow this appeal, but, as I understand that
the majority of your Lordships think otherwise, it must be
dismissed.

Lorp Morton or Henryton. My Lords, the parties in this
case agree: (1) that a '' balancing charge '' was properly made
upon the respondent company under sections 292 and 328 (4) of
the Income Tax Act, 1952; (2) that '' the amount on which the
'"balancing charge is made '' was correctly computed, under the
same provisions of that Act, at the sum of £18,675; (8) that on
the true construction of the Act, once the amount on which the
balancing charge is made has been ascertained, the balancing
charge is income tax on that amount at the appropriate rate.

The one question which remains for decision is whether the
sum of £18,675 already mentioned is or is not part of the "' actual
''income from all sources'' of the respondent company for the
relevant period, within the meaning of section 245 of the Act. If
this question is answered in the affirmative, it follows that a
direction and apportionment has been properly made under section
245, with the result that the members of the company are liable
to pay any appropriate amount of surtax on the sums apportioned
to them respectively.

Counsel for the company submitted, first, that the £18,675
was not '' income "' of the company within the meaning of section

2 [1942] A.C. 643; [1942] 1 All 3 [1948] 2 All E.R. 825; 30 T.C.
E.R. 619. 345.

503

13) SBE (6s19)
1958

INLAND
REVENUB
CoMMIS-
SIONERS
v.
Woop
BROTHERS
(BIRKEN-
HEAD) Lp.

Viscount
Simonds.

504

BL. (EB)
1958

INLAND
REVENUE
CoMMIS-

SIONERS

v.
Woop
BROTHERS
(BIRKEN-
HEAD) LTD.

Lord Morton
of Henryton.

HOUSE OF LORDS [1959 |

245, and, secondly, that, if this sum could properly be described
as income, it was not actual income within the meaning of the
section.

My Lords, I would accept counsel's first submission.

I have had the pleasure of reading the speech which is about
to be delivered by my noble and learned friend, Lord Reid. I
entirely agree with his reasoning and conclusion, and I shall only
add some observations upon certain passages in speeches
delivered in this House which were much discussed in the course
of the argument. In Thomas Fattorini (Lancashire) Ltd. v.
Inland Revenue Commissioners* Lord Atkin said: '' Actual
'"income does not mean the specific receipts that come in from
'' time to time, but the ' income tax income ' as calculated at the
'"end of the year of assessment. To hold otherwise would make
'* nonsense of the section when applied to commercial companies,
'"who use their receipts as soon as they come in, and hardly
'"ever have left for distribution the actual incomings as sought
'""to be defined in the argument.'' In Lord Howard de Walden
v. Inland Revenue Commissioners *® Lord Uthwatt said: "' My
'"Lords, for myself I am content to take the view that in light
''of the context the words 'actual income' can mean only
''income which is in some real sense capable of distribution.
'" Apart from that context, indeed, the phrase ' actual income'
""ig hardly apt to include fictional income, and non-existent
'income composed of amounts deemed to be income is fictional
'"income.'' In each case these observations were directed to the
words "' actual income "' in section 21 of the Finance Act, 1922,
but the wording of that section does not differ in any material
particular from the wording of section 245 in the Income Tax Act,
1952, and paragraph 6 of Schedule I to the Finance Act, 1922,
is reproduced in section 255 (3) of the Act of 1952.

My Lords, when Lord Atkin, in Fattorini's case,* used the
words which I have just quoted, he was dealing with an argument
which had been pressed on the House by counsel for the appel-
lant, and he was concerned only to reject the contention that
'"' actual income '' meant the specific receipts of the company.
It would not be right to construe his words as an expression of
opinion that every sum upon which income tax is payable is
necessarily "' actual income '' within the meaning of the section,
and unless his words can be so construed they do not assist the

'

'

4 [1942] A.C. 643, 658. § [1942] A.C. 648, 658.
5 [1948] 2 All E.R. 825, 881; 30
T.C. 345, 370.

A.C. AND PRIVY COUNCIL.

argument of counsel for the appellant in the present case. In
the Howard de Walden case' Lord Uthwatt was dealing with a
contention that where actual income from all sources of company
No. 1 is attributed to company No. 2 as the result of an appor-
tionment, that attributed income is part of the actual income
from all sources of company No. 2, so that it could be further
apportioned, under section 21 of the Finance Act, 1922, to the
shareholders of company No. 2. In rejecting that contention,
he pointed out, as did Asquith L.J. (as he then was) in the Court
of Appeal, that if the contention were right, section 82 of the
Finance Act, 1927, which provides for such sub-apportionment,
would have been unnecessary. I do not think it would be right
to treat the words of Lord Uthwatt which I have quoted as
amounting to a decision on any question wider in its scope than
the question with which he was dealing, and it is noteworthy that
he did not refer in his speech to the provisions as to computing
the '' actual income '' which were then contained in paragraph 6
of Schedule I to the Finance Act, 1922, and are now in section
255 (38) of the Income Tax Act, 1952.
I would dismiss the appeal.

Lorp Reip stated the facts and continued: My Lords, The
question whether a sum on which a balancing charge is made
is or is not part of '' actual income '' depends on the proper
interpretation of the sections of the Act which deal with those
matters; but it will, I hope, make my subsequent observations
rather more intelligible if I first try to indicate in outline the
apparent purpose of the Act in providing for balancing charges.

Before 1945 there was statutory provision for allowances for
depreciation or wear and tear of plant and machinery under rule 6
of the rules applicable to Cases I and II of Schedule D. If
one assumes values in money remaining stable, the amount of
the allowances on any item ought to be such that, when the
trader comes to sell it, the price which he receives is equal to
the price which he paid for it less the aggregate amount of the
allowances which he has received in respect of it. If on selling
the item he receives more than that amount, then, neglecting the
effect of inflation, it could be said that the allowances made to
him had been too large, and, as these allowances had been
deducted year by year before assessment of his trading profits, he
had therefore paid too little in income tax. Before 1945 there was

7 [1948] 2 All E.R. 825; 30 T.C. 345.
A.C. 1959. 33

505

H. L. (E.)
1958

INLAND
REVENUE
CoMMIS-
SIONERS
v.
Woop
BROTHERS
(BiIRKEN-
HEAD) Lp.

Lord Morton
of Henryton.

506

He Ts. (Bs)
1958

INLAND
REVENUE
CoMMIS-
SIONERS
0.
Woop
BROTHERS
(BirRKEN-
HEAD) LTD.

Lord Reid.

HOUSE OF LORDS [1959 |

no provision in the Income Tax Acts which enabled the Revenue
to recover anything from the trader when the price which he
received on the sale of an item showed that the trader had bene-
fited in the past at the expense of the Revenue by having been
granted too large allowances. And in the converse case, where
the price received on sale showed that past allowances had been
too small, there was no provision to enable the trader to receive
a further allowance.

To put this right was clearly one of the objects of the elaborate
code enacted in the Finance Act, 1945, and now set out in Part X
of the Act of 1952. '' Balancing charges ''' were introduced to
meet the case where the trader had received too large allowances
in the past, and '' balancing allowances '' were introduced to meet
the converse case. The provisions of the Act of 1952 are so
elaborate that the scheme may appear more clearly if I only quote
those parts of the sections which appear to me to be directly
relevant in the present case. Balancing charges and allowances
are first dealt with in section 292, which provides: '' (1) Subject
'""to the provisions of this section, where any of the following
"events occurs in the case of any machinery or plant in respect
"of which an initial allowance or an annual allowance has been
""made for any year of assessment to a person carrying on a
'' trade, that is to say, either—(a) the machinery or plant is sold,
'' whether while still in use or not; or . . . and the event in
"" question occurs before the trade is permanently discontinued,
""an allowance or charge (in this Chapter referred to as 'a
'""*)balancing allowance' or 'a balancing charge ') shall, in the
"" circumstances mentioned in this section, be made to, or, as the
"" case may be, on, that person for the year of assessment in his
"basis period for which that event occurs . . . (2) Where there
""are no sale, insurance, salvage or compensation moneys or
'"" where the amount of the capital expenditure of the person in
'question on the provision of the machinery or plant still un-
"allowed as at the time of the event exceeds those moneys, a
"balancing allowance shall be made, and the amount thereof
"shall be the amount of the expenditure still unallowed as afore-
"said, or, as the case may be, of the excess thereof over the said
'""moneys. (8) If the sale, insurance, salvage or compensation
"moneys exceed the amount, if any, of the said expenditure still
"unallowed as at the time of the event, a balancing charge shall
'"be made, and the amount on which it is made shall be an
"amount equal to the excess or, where the said amount still
'"unallowed is nil, to the said moneys: .. .'' Subsection (4)

'

A.C. AND PRIVY COUNCIL.

then provides that in no case shall the amount on which a
balancing charge is made exceed the aggregate of the allowances
previously made to him in respect of the machinery or plant sold.

That section determines the amount on which a balancing
charge is to be made. The way in which a balancing charge or a
balancing allowance is made is provided by sections 301 and 823,
of which the relevant parts are as follows:

"301.—(1) Any allowance or charge made to or on any person
"under the preceding provisions of this Chapter shall . . . be
"" made to or on that person in charging the profits or gains of his
"* trade.

" 323.—(1) Any claim by a person for an allowance falling
'to be made to him under any of the provisions of this Part of
'"' this Act in charging the profits or gains of his trade shall be
"included in the annual statement required to be delivered under
"this Act of the profits or gains thereof, and the allowance shall
"be made as a deduction in charging those profits or gains. .. .
"" (4) Any charge falling to be made under any of the provisions
"" of this Part of this Act on a person for any year of assessment
""in charging the profits or gains of his trade shall be made by
"means of an assessment on the profits or gains of that trade
"for that year of assessment in addition to any other assessment
'* falling to be made thereon for that year.''

'

I must now set out section 245 of the Act, under which the
commissioners gave their direction, and section 255 (3), which
deals with the manner of computation of the actual income of the
company—the question at issue in the present case. Those
sections are as follows: '' 245. With a view to preventing the
'"" avoidance of the payment of surtax through the withholding
'"'from distribution of income of a company which would other-
'' wise be distributed, it is hereby enacted that where it appears
'to the Special Commissioners that any company to which this
'' section applies has not, within a reasonable time after the end
'* of any year or other period for which accounts have been made
''up, distributed to its members, in such manner as to render
''the amount distributed liable to be included in the statements
'"to be made by the members of the company of their total
'' income for the purposes of surtax, a reasonable part of its actual
'"income from all sources for the said year or other period, the
'* Commissioners may, by notice in writing to the company, direct
'' that, for purposes of assessment to surtax, the said income of
'' the company shall, for the year or other period specified in the

507

H. L. (E.)
1958

INLAND
REVENUE
CoMMIS-

SIONERS

Or
Woop
BROTHERS
(BirKEN-
HEAD) Lp.

Lord Reid.

508

Eley Li)
1958

INLAND
REVENUE
COMMIS-
SIONERS
0.
Woop
BROTHERS
(BIRKEN-
HEAD) Lip.

Lord Reid.

HOUSE OF LORDS [1959 |

'' notice, be deemed to be the income of the members, and the
'amount thereof shall be apportioned among the members."'

'' 955.—(8) In computing, for the purposes of this Chapter,
'' the actual income from all sources of a company for any year
'or period, the income from any source shall be estimated in
'' accordance with the provisions of this Act relating to the com-
''putation of income from that source, except that the income
'« shall be computed by reference to the income for such year or
'' period as aforesaid and not by reference to any other year or
'* period."'

With regard to the meaning of the phrase "' actual income
'' from all sources,'' counsel referred to Fattorini's case * and the
Howard de Walden case.® But the circumstances in those cases
were quite different from those in the present case, and I can get
little assistance from what was said by Lord Atkin in the former
case and by Lord Uthwatt in the latter case. It appears to me
that in the present case I must take section 255 (8) and determine
whether, in making a computation of the actual income of the
company from all sources in the manner there directed, the sum
subject to the balancing charge does or does not fall to be
included. If it does, then the appellants succeed, but if it does
not, then this appeal must be dismissed.

Nothing turns in this case on the last part of this subsection,
but this part of the subsection may afford an explanation of the
choice of the word "' actual'' in the phrase '' actual income "'
in this subsection and in section 245. This subsection was
originally paragraph 6 of Schedule I to the Finance Act, 1922,
which by section 21 first enacted the provisions which now form
section 245 of the Act of 1952. In 1922 trading profits were
still computed on a three years' average and the last part of this
subsection then read "' except that the income shall be computed
"by reference to the income for such year or period as aforesaid
"and not according to an average of more than one year or by
'reference to any year or period other than such year or period as
'""aforesaid.'' So it is possible that the phrase '' actual income "'
was there used to emphasise the fact that the income to be con-
sidered under section 21 was the income for a particular year
and not income computed on a three years' average. But
whether that be so or not, section 255 (3) in effect provides a
definition of what is meant by "' actual income '': it directs how
actual income is to be computed and, in my opinion, nothing can

'

8 [1942] A.C. 648. 9 [1948] 2 All E.R. 825; 30 T.C.
345.

A.C. AND PRIVY COUNCIL.

be included in actual income unless it can be brought within the
words ''income from any source . . . estimated in accordance
"with the provisions of this Act relating to the computation of
"income from that source."'

It was argued for the appellants that the sum made subject
to the balancing charge was income and that its source was the
trade carried on by the company. Even if that were so, the
question would still arise—Was this sum income estimated in
accordance with the provisions of this Act relating to the com-
putation of income from the company's trade? The ordinary
provisions relating to the computation of trading income are those
which relate to Schedule D, Case I, and they have nothing to
do with balancing charges. So it appears to me that the question
then is this—Can the provisions of sections 292, 301 and 323
properly be regarded as provisions of the Act relating to the
computation of income from trade? I do not wish to overstress
what has so often been said in this House to the effect that no
tax can be imposed on a subject without words in an Act clearly
showing an intention to lay a burden on him. If it appears
by clear implication that the provisions of these sections should
be so regarded, that would, I think, be sufficient, and I shall
therefore turn back to these sections to consider whether their
terms afford sufficient ground for any such implication.

Section 292 deals with the computation of the sum on which
a balancing charge is to be made. Three things are to be taken
into account in the case of a sale of plant or machinery—the
price originally paid for it, the price received for it on sale, and
the aggregate of past allowances made in respect of it. The
original cost less the past allowances is the '' expenditure still
'* unallowed.'' The sum made subject to the balancing charge is
not in any normal sense income. The machinery or plant with
reference to which it is calculated was a capital asset, and the
cost of acquiring it was capital expenditure. So far as I can
see, the only way in which the sum made subject to the balancing
charge is related to income in the ordinary sense is that it repre-
sents a part, or it may be the whole, of the allowances made in
past years, and that in those years those allowances were brought
in as deductions after profits had been computed so as to reduce
the trader's taxable income. So it has a relation to the trader's
taxable income in past years but no relation to his "' actual
''income "' for the year in question. This section does not provide
expressly or by clear implication that the sum on which a balanc-
ing charge is made is to be deemed to be, or to be treated as, a

509

H) L. (B.)
1958

INLAND
REVENUE
ComMISs-
SIONERS
0.
Woop
BROTHERS
(BIRKEN-
HEAD) Lrp.

Lord Reid.

510

H; L. (BE)
1958

INLAND
REVENUE
Commtis-
SIONERS
0.
Woop
BROTHERS
(BirkEN-

HEAD). Lirp.

Lord Reid.

HOUSE OF LORDS [1959 |

trading receipt, nor does it provide that it is to be part of or to be
ageregated with the trading income for the year in question.
So far as this section is concerned this sum is left to stand by
itself.

This is in striking contrast with the provisions of section 387,
which deals with a comparable matter, the sale of an asset repre-
senting scientific research expenditure of a capital nature.
There it is provided by subsection (2) (b) that, if the proceeds of
sale plus the allowances exceed the original cost, the excess or
the amount of the allowances, whichever is the less, '' shall be
" treated as a trading receipt of the trade accruing at the time of
"the sale.'' That provision was first enacted by the Finance
Act, 1944, section 29, and it was therefore before the eyes of
the draftsman and of Parliament when balancing charges were
first introduced.

The other two sections on which the argument for the appel-
lants was chiefly founded are sections 301 and 323. They must,
I think, be taken together. They deal not with computation but
with the method of assessment of the balancing charge. The
former provides that the charge is to be made in charging the
profits or gains of the trade, and this is expanded by section 323
(4), which provides that it is to be made by means of an assess-
ment on the profits and gains and that this assessment is to be in
addition to any other assessment thereon for the year.

To my mind, the question is whether these sections clearly
designate the sum made subject to the balancing charge as part
of the trading income for the year in question, or whether they
merely provide, as a matter of machinery, that the balancing
charge shall be charged and assessed as if it was a charge on that
trading income. It is, I think, of some importance that the
assessment by means of which the charge is made is to be
separate from the assessment in respect of trading profits. If
it was intended that the sum made subject to the balancing charge
should be treated for all purposes as part of the trading income for
the year in question, counsel were unable to suggest any reason
why there should be this double assessment, and no reason occurs
to me. Indeed, it would rather seem that the draftsman has
deliberately avoided anything that could suggest that sums made
subject to balancing charges are part of trading income for the
year in question.

Then an argument was founded on section 1 of the Act. This
section links the annual Finance Acts with the Income Tax Act
by providing that tax at the rates there enacted shall be charged

A.C. AND PRIVY COUNCIL.

for each year in respect of all property, profits or gains described
or comprised in the Schedules. It was argued that unless the
sum made subject to a balancing charge could be said to be
described or comprised in Schedule D—it could not be in any
other Schedule—then no tax on it could be recovered. So it
was said that the intention must have been to make this sum a
part of the trading income for the year in question—the only
way in which it could become comprised in Schedule D. I am
not at all satisfied that that is so. I think that a sufficient link
between a balancing charge and the annual Finance Acts could
be found in the provisions of section 323 (4) that the charge shall
be made by means of an assessment on the profits or gains of the
trade for that year. An assessment for a particular year can
only be at the rates enacted in the current Finance Act. And
if the intention was not to enact that the sum made subject to
a balancing charge is to be deemed to be income for all purposes,
but merely to enact that for the particular purpose of this assess-
ment it should be treated as if it were trading income of the year
in question, then I think that those provisions were appropriate
for that purpose.

Then it was argued that anything made subject to income tax
must necessarily be income for all the purposes of the Act.
Reference was made to the familiar passage in Lord Macnaghten's
speech in London County Council v. Attorney-General *° begin-
ning: '' Income tax, if I may be pardoned for saying so, is a tax
''on income. It is not meant to be a tax on anything else."'
No doubt that was so in 1901. Apart from Schedule A every-
thing that was taxed at that date was income in the ordinary
sense, and if a landowner, instead of drawing income from rent,
occupied his own property, he was enjoying money's worth of an
income character. But now income tax is sometimes meant to
be a tax on something which is not income. For example, section
318 charges income tax in certain circumstances on capital
sums received for the sale of patent rights and it does so by
making such sums chargeable under Case VI of Schedule D.

I do not think that much can be inferred from any general
statement equating sums charged to income tax with income.
For some purposes it may be convenient and not incorrect to do
this. Counsel for the appellants attached importance to the fact
that section 270 (6) (c) refers to '' income which is the subject
'* of a balancing charge under this Chapter.''. The context there

10 [1901] A.C. 26, 35; 17 T.L.R. 181.

dll

H. L. (B.)
1958

INLAND
REVENUE
ComMMIS-
SIONERS
0.
Woop
BROTHERS
(BirkKEN-
HEAD) Lp.

Lord Reid.

512

H. L. (E.)
1958

INLAND
REVENUB
CoMMIS-
SIONERS
0.
Woop
BROTHERS
(BrrkKEN-

HEAD) Lp.

Lord Reid.

HOUSE OF LORDS [1959 |

is that certain allowances are to be available primarily against
'the following income,'' and then there are specified incomes
taxed under Schedule A and certain income taxed under Schedule
D, Case VI. This appears to be the only place in the Act where
the word '' income '' is used in connection with sums made sub-
ject to balancing charges. The word appears to me to be used
here as mere description and to signfy no more than that the
sums in question are chargeable to income tax. But even if the
use of the word "' income '' in this rather unimportant subsection
had some general significance, it would not go to the real point
in this case. The question in this case is not whether a sum
made subject to a balancing charge is income in some general
sense but whether it is actual income within the meaning of
sections 245 and 255 (3). After a close examination of all the
sections relied on, in light of the argument submitted for the
appellants, I can find nothing sufficient to bring sums made
subject to a balancing charge within the scope of the term
" actual income "' in section 245.

My Lords, I fear that I have taken up much time with
technical argument. I have done so because income tax is a
highly technical subject. But if I took a broader view of the
case, I should reach the same result. Under section 245 it is the
commissioners' duty to determine whether the company has
within a reasonable time distributed to its members a reasonable
part of the income to which the section applies. One would
therefore expect the section to apply to income which is in fact
capable of distribution, and this expectation would be confirmed
by the fact that the section purports to deal with '' actual
""income.'' It is true that when one comes to section 255 (8)
one finds by its terms actual income can include some items
which, although they are income in the sense in which Lord
Macnaghten used the word, are not money in the hands of the
company capable of immediate distribution. But it is a long
step from that to find that the section also includes in actual
income a new kind of subject which was not chargeable to income
tax when the section was first enacted, and which is not income
in any ordinary sense of the word. Of course, if Parliament has
made it clear that the section is to apply, then the section must
be applied, though it is not easy to see how the commissioners,
acting reasonably as they must, could take such a sum into
account in carrying out their duty under the section to consider
whether a reasonable part has been distributed. This novel kind
of "' income '' has been made chargeable to income tax, no doubt

A.C. AND PRIVY COUNCIL.

for good reasons. But I would not think that that fact raises
any presumption that section 245 also applies to it. Regarding
the whole matter in this way, far from finding any clear indica-
tion of an intention to bring these sums within the scope of
section 245, I would not find it possible to reach that result with-
out devious and dubious argument. I am, therefore, of opinion
that this appeal should be dismissed.

Lorp Keira or AvonHoitm. My Lords, we are concerned here
with a direction and apportionment made by the Special Commis-
sioners under sections 245 and 248 of the Income Tax Act, 1952,
with reference to undistributed income of the respondent company,
which went into voluntary liquidation on April 16, 1952. Much
discussion has centred on the meaning of '' actual income "' in
these sections. In my opinion, " actual'' here has a temporal
significance and relates to income from all sources for the year
or period to which the direction relates and not to income com-
puted by reference to any other year or period. This, I think, is
clear from the language of section 255 (8) of the Act. The
accounts of the company since April 29, 1950, had not been
certified by the company's auditors prior to the liquidation, and
it is common ground that the relevant period under consideration
is April 29, 1950, to April 16, 1952, by reason of the terms of
section 253 of the Act. Under that section the income of the
company for that period is, for the purposes of section 245,
deemed to be income available for distribution to the members
of the company.

The short question in the case is whether money received by
the company from the sales of certain plant and machinery in
excess of the written-down value from allowances previously given
for purposes of tax is income of the company for the relevant
period within the meaning of sections 245 and 253 of the Act.
The company sold-its business and ceased trading on April 28,
1951. The plant and machinery was sold on the cessation of its
business. It is common ground that in respect of this sale a
balancing charge falls to be made on the sum of £18,675 under
the provisions of sections 292, 301 and 823 of the Act of 1952.
The year of assessment for the balancing charge is fixed by refer-
ence to the company's "' basis period'' for which the event
occurred, in this case April 6 to April 28, 1951.

My Lords, it would seem that the income of the company
from all sources means income of the company from any source
brought into charge for income tax under the Act of 1952. The

513

ESE ® (Ei)
1958

INLAND
REVENUE
COMMIS-
SIONERS
v.
Woop
BrotHers
(BIRKEN-
HEAD) Lrp.

INLAND
REVENUE
CoMMIS-
SIONERS
v.
Woop
BROTHERS
(BIRKEN-

HEAD) Lp.

Lord Keith

of Avonholm.

HOUSE OF LORDS [1959 |

only source suggested in the present case is the trade of the com-
pany, the profits or gains of which are brought into charge under
Schedule D. The Revenue say the subject-matter of the
balancing charge, namely, £18,675, is such a profit or gain. The
respondent company say it is not. This sum represents excess
allowances that have been given to the company in previous years
under the provisions of the Act of 1952, or previous Acts, includ-
ing the Income Tax Act, 1918, making to traders allowances in
respect of the capital cost of machinery and plant and which were
given as deductions from profits and gains brought into charge
for tax. Under the Act of 1918 no provision was made for recoup-
ment to the Revenue if it should ultimately be found, on sale of
an asset or otherwise, that an excessive allowance had been made,
whereas under the present Act provision is made for such a case,
in the shape of a balancing charge, and also, where it is found
that too small an allowance has been given to the trader in past
years, for giving him further relief in the shape of a balancing
allowance. Section 292 of the Act is the section that provides the
measure for computing the amount of the balancing allowance
or the amount on which a balancing charge falls to be made. This
section has been previously considered in this House and else-
where, and I find it unnecessary to examine its provisions in
further detail. It is agreed that the sum subject to the balancing
charge, namely, £18,675, has been correctly computed. I would
refer, however, to what have been called the relevant charging
provisions of the Act, though they might more appropriately be
called the relieving and charging provisions. Section 301 (1)
says: '' Any allowance or charge made to or on any person under
'' the preceding provisions of this Chapter shall . . . be made to
"or on that person in charging the profits or gains of his trade.''
Section 3238 (1) provides: '' Any claim by a person for an allow-
"ance falling to be made to him under any of the provisions of
' this Part of this Act in charging the profits or gains of his trade
"shall be included in the annual statement required to be
"delivered under this Act of the profits or gains thereof, and the
'' allowance shall be made as a deduction in charging those profits
'or gains.'' Subsection (2) provides for carrying forward the
allowance or part thereof to succeeding years where the profits
or gains of a year are insufficient to permit full effect being given
to the deduction. Subsection (4) reads: '' Any charge falling to
'be made under any of the provisions of this Part of this Act on
'a person for any year of assessment in charging the profits or
'' gains of his trade shall be made by means of an assessment on

A.C. AND PRIVY COUNCIL.

"the profits or gains of that trade for that year of assessment in
'" addition to any other assessment falling to be made thereon for
"that year.''

I pause at this point to ask, what is there that fixes the rate
at which the balancing charge falls to be made on the profits
or gains of the trade? There is nothing in the Act that fixes the
rate expressly. It is, however, common ground that the rate is
the standard rate of income tax for the basis period. I see no
way of bringing in that rate except through section 1 of the Act,
which applies the rate of income tax fixed by any Act for any
year to all property, profits or gains of that year comprised in
the Schedules to the Act of 1952. It is hardly necessary to refer
to repeated observations in this House and elsewhere that income
tax is a tax on income. And if a balancing charge is to be
regarded as a tax on income, it is a short step to take to regard
the amount on which it is levied as income arising, in the present
case, from a transaction in the course of trade. If it is not income
within one or other of the Schedules of the Act, I can see no
authority for levying any rate of income tax on the amount com-
puted as subject to a balancing charge. It is said that a change
has taken place in the outlook of income tax legislation, and that
all receipts which are subject to tax are not necessarily income
receipts. It is true that a somewhat exceptional course seems to
have taken place under section 318 of the Act in the case of the
sale of patent rights for a capital sum. But a particular excep-
tion in the case of so special a matter as the sale of patent rights
does not, in my opinion, detract from the general principle to
which I have referred.

The scheme generally of the relevant statutory provisions
seems to me to be to allow to be charged against the revenue side
of a trading account depreciation in respect of wear and tear of
capital assets, and on the sale or otherwise of these assets either
to restore to revenue what has been found to have been unneces-
sarily charged for depreciation or to allow a further charge against
revenue if it is found that insufficient depreciation has been
allowed. I should not have thought that this would be contrary
to sound commercial and accountancy principles, but whatever
may be commercial or accountancy practice, I think the object
of the Act was to secure that the subject-matter of the balancing
charge should be treated as an income profit subject to. tax and
not as a capital profit free from tax. If this be so, then the sum
of £18,675 should properly be regarded as a receipt credited to
revenue, though arising out of a capital transaction, and as it

515

H. L. (E,)
1958

INLAND
REVENUE
ComMMIS-
SIONERS
v.
Woop
BRovTHERS
(BrrxKEN-
HEAD) Lp.

Lord Keith
of Avonholm.

516

H, L.. (EB)
1958

INLAND
REVENUE
COMMIS-
SIONERS
Ds
Woop
BROTHERS
(BirKEN-
HEAD) Lp.

Lord Keith

of Avonholm.

HOUSE OF LORDS [1959 |

would go to increase the profits and gains of the trade and arise
out of the trade, it should form part of the income of the company
for the purposes of section 245.

The weight of the argument for saying that this sum is not
such income seems to rest on the language of section 323 (4),
which levies the balancing charge by an assessment on profits and
gains additional to any other assessment on the profits and gains.
Any other assessment would include income tax under Schedule
D. Therefore, so the argument would seem to run, this sum
cannot be income from any source recognised as giving rise to a
liability to income tax under the Act. This I find difficult. The
more natural meaning, in my opinion, is that this is a supple-
mentary assessment of the same nature and origin as the tax
levied under Schedule D, and imposed because the subject-matter
of the charge is regarded as an addition to the profits or gains of
the trade. Thus we find a reason, difficult otherwise to explain,
for fixing the rate of charge at the appropriate income tax rate for
the basis period. Moreover, the balancing charge cannot be
considered without reference to its correlative, the balancing
allowance. The balancing allowance has the effect of reducing the
amount of profits and gains brought into charge for tax. Is it to
be said that the income of a company for the purposes of
section 245 are the profits and gains before deduction of the
balancing allowance? I think not. But the balancing allowance
proceeds from the same kind of transaction as may give rise to a
balancing charge. The considerations, in my opinion, are the
same in each case. The balancing allowance results in a reduced
assessment. In the case of a balancing charge an extra assess-
ment is made and the result is the same as if a single assessment
was made on the sum of the profits and gains plus the amount
brought in as subject to a balancing charge. What has been
allowed unnecessarily as a deduction from profits and gains for
the purposes of tax is to be subject to the same kind of tax when
brought back into account. In my opinion, the sum here in
question is just an additional profit or gain of the company
subject to tax under Schedule D of the Act.

I derive little assistance from various other sections of the Act
which were referred to in the course of the hearing, and find in
them nothing to militate against the view I have expressed.
Some reliance was placed by the respondent on section 337 of
the Act inasmuch as it expressly provides that certain proceeds
from the sale of an asset representing scientific research expendi-
ture of a capital nature shall be treated as a trading receipt of the

A.C. AND PRIVY COUNCIL.

trade. This argument I find somewhat double-edged. In any
event, the section finds place in a separate Part of the Act, Part
XI, devoted to '' Relief for Expenditure on Scientific Research,"'
and I should hesitate to draw any inference from Part XI in
considering the effect of Part X of the Act. Of greater signifi-
cance, in my opinion, is the reference in section 270 (6) (c) to
"income which is the subject of a balancing charge under this
'"" Chapter,'' which appears in the same Part of the Act as that
covering allowances in respect of machinery and plant. Section
270 appears in Chapter I of Part X of the Act but Chapters I, II
and ITI of Part X are all modelled on the same pattern and bring
in balancing allowances and balancing charges which, in principle,
differ in no material respect in any one of these chapters. The
separation into chapters is due to the different nature of the assets
dealt with and leads to the same results in each case.

Lastly, it may be noted that where an individual trader has
been assessed to tax at the standard rate for any year of assess-
ment, the assessment will be final and conclusive, under section
524 (4) of the Act, in estimating his total income. This would
seem to be conclusive as to his surtax liability. It would be at
least strange that where an individual's surtax liability emerged
through his interest as a shareholder in a trading company under
the surtax provisions of Part IX of the Act a different result should
be reached.

On all considerations I am of opinion that the determination
of the commissioners is wrong, and that the appeal should be
allowed.

Lorp SoMERVELL oF Harrow. My Lords, I agree with the
opinions of my noble and learned friends, Lord Morton of Henry-
ton and Lord Reid. I would dismiss the appeal.

Appeal dismissed.