HOME (INSPECTOR OF TAXES) Versus ASQUITH

1. PENNYCUICK, J.‑ I have before me an appeal and cross appeal against a decision of the General Commissioners for the Division of West Brixton. The appeals relate to certain assessments made upon Mr. Simon Anthony Roland Asquith in respect of royalties derived in a manner which I shall mention from the late Sir James Barrie.

2. It will be convenient, in the first place, to read or summarise the Case Stated, supplementing it by reference to the documents which are referred to in it.

3. [His Lordship then read the relevant parts of the Case Stated and the documents set out above, made the comments and explanations there set out and continued :]

4. As regards the Type A royalties and the Type B royalties, the decision was in favour of the tax‑payer; as regards the Type C royalties, the decision was in favour of the Crown. Each party has appealed. I will endeavour to deal with the three types of royalty in the same order.

5. The Type A royalties, it will be remembered, were royalties under agreements which had been entered into by Sir James Barrie during his own lifetime ; so what passed to Lady Cynthia under the gift in his will in respect of those royalties was the right to receive the royalties from Hodder and Stoughton, and that right was in turn passed by assignment to the present tax‑payer, her son, Mr. Asquith.

6. The issue as regards these royalties turns in great measure upon the effect of the decisions of the House of Lords in the two cases, Stainer's Executors v. Purchase ((1952) 32 T C 367) and Carson v. Cheyney's Executors ((1958) A C 412). In each of those the Crown sought to charge the executors of a deceased professional man with annual sums for royalties falling into his estate after his death under contracts made by him while he was carrying on his profession. The House of Lords rejected the claim on the part of the Crown and held that, in the hands of the professional man himself or his executors, those payments did not represent income under any source of income which could give rise to taxation ; they represented mealy receipts from the profession formerly carried on by him which remand uncollected at the date of his death. It was common ground that for that purpose the position would have been the same if he had retired from his profession and received the payments in question after his retirement.

7. In the present case, the Crown seeks to distinguish those decisions on the ground that they are applicable only to royalties received by the professional man himself or by his personal representatives, who stand in the same position as himself, and that they have no application to persons claiming under, him apart from his personal representatives. It is said that in the hands of persons claiming under him, including legatees under his will, the royalty contract does represent a source of taxable income.

8. In order to reach a conclusion upon this point, it is essential to look with some care at the decisions in the two cases. Stainer's Executors v. Purchase came before the Court of Appeal, where the Crown was successful. Jenkins L. J. gave a dissenting judgment which was unanimously affirmed in the House of Lords, who thus reversed the decision of the Court of Appeal. The members of the House of Lords approved the reasoning of Jenkins L. J. in terms, and it is, therefore, necessary to look at a number of passages in his judgment. I should mention that Stainer's Executors v. Purchase was concerned with the case of an actor.

9. At p. 401, Jenkins L. J. said :

10. "It is I think reasonably plain that periodical payments in respect of a contractual right to a share in the receipts or profits of the distribution of a film acquired otherwise than in the course of a trade, profession or vocation falling within Cases I or II of Schedule D would be taxable under Case III, Rule 1(a), as falling within the words 'Any . . . . . . annual payment . . . . . payable either as a charge on any property of the person paying the same . . . . . or as a personal debt or obligation by virtue of any contract . . . . . . : ‑see Asher v. London Film Productions Ltd. ((1944) 1 K B 133)."

11. I shall come back to that passage on which counsel for the Crown relied in the present case.

12. "This does not however take the case for the Crown the whole of the way. It may well be that if Mr. Howard had not been carrying on the profession of a film actor and producer or any' other relevant profession, but had (for example) acquired by gift or purchase the copyright in certain films and sold those films to a distributor for a lump sum plus a share in the profits to arise from their distribution, the share in the profits as and when it accrued to him or, after his death, to his executors would have been taxable under Case III of Schedule D. I apprehend that in these hypothetical circumstances the share of profits as and when it accrued would have been what Lord Greene M. R. described as 'pure income profit' in Asher v. London Film Productions Ltd., while the lump sum would have been capital. But the actual state of the case here is that under contracts A, B and C Mr. Howard in the course of his profession rendered profes sional services for remuneration consisting of the prescribed lump sums and shares of receipts or profits. This meant that for income‑tax purposes there was no distinction between the lump sums and the shares of receipts or profits. The former were not pure capital, the latter were not pure income ; they were all in one and the same category as professional remuneration liable to be brought into account for the purpose of ascertaining the taxable profit of the profession. This would, I think, be accepted on the part of the Crown as sufficiently accurate statement of the position as it stood so long as the profession was carried on. But it is claimed that on discontinuance of the profession a new liability arose with respect to the shares of receipts or profits remaining to be paid, which thereupon assumed the character of annual payments in the nature of pure income profit taxable in the hands of the executors under Case III of Schedule D. The Solicitor‑General put it that the Crown bad an option to tax either under Case II or under Case III, and it is no doubt true that in general, where income of a given description is such as to fall within the terms of two heads of charge, the Crown has an option to tax under whichever of the relevant heads it may select. But, it seems to me, that is not his case. So long as the profession was carried on these shares of receipts or profits could not be taxed under Case III of Schedule D because they were earnings of a profession and not pure income profit. There was thus no option. It was Case II of the schedule or nothing. After the discontinuance of the profession they could not be taxed under Case if of Schedule D as profits of any subsequent period for the very reason that they were earnings of a profession, which had been discontinued, received after such discontinuance. There was thus again no option. It was Case III or Case VI of Schedule D or nothing. It appears to me that the argument for the Crown involves not merely the exercise of an opinion but the assertion of a new and distinct liability to tax arising upon the discontinuance of the profession with respect to payments on account of the shares of receipts or profits received after such discontinuance. Perhaps the best way of putting the point is to describe the shares of receipts or profits as possessing the dual character of (a) professional earnings and (6) annual payments, the argument being in effect that so long as the profession was carried on their character as earnings precluded their assessment as annual payments under Case III of Schedule D, but that on the discontinuance of the profession. this obstacle was removed and the sums in question became thenceforth simply annual payments to which the previously potential but suspended liability to tax under Case III of Schedule D thereupon attached."

13. Then, on p. 403, Jenkins L. J. cites the decision of Rowlatt, J. in Bennett v. Ogston ((1930)15 T C 374) which he accepts as a correct exposition of the law. That judgment was likewise accepted in the House of Lords as a correct exposition of the law. The passage in question reads:

14. "When a trader or a follower of a profession or vocation dies or goes out of business‑because Mr. Needham is quite right in saying the same observations apply here‑and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income‑tax they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts."

15. Then, at p. 404

16. "I think it is clear that if, in the course of a profession, an income bearing asset is received as remuneration, the income produced by that asset after the discontinuance of the profession may be taxed as such, just as the interest accruing after the death of the money‑lender was taxed in Bennett v. Ogston. But accepting as I do the principles stated in that case, I think it is equally clear that the assessment to tax of the profits of a profession under Case II of Schedule D down to the date of discontinuance is to be taken as covering all remuneration earned in the course of such profession whether received prior to or after such discontinuance and that, the liability to tax being thus exhausted so far as remuneration is concerned, nothing which is in truth remuneration so earned can afterwards be charged to tax merely because the mode of ascertaining and paying it is such that 1t might have been charged to tax under some other Case if it had not been remuneration so earned."

17. He then poses the question:

18. "Applying these principles to the present case, I ask myself whether under each of the contracts A, B and C Mr. Howard is to be regarded as having rendered his professional services for remuneration consisting of a lump sum or lump sums, plus the notional capital equivalent of a now source of income in the shape of the right to receive the shares of receipts or profits, or simply as having rendered those services for remuneration consisting of a lump sum or lump sums plus a further sum consisting of the share of receipts or profits, whatever it might amount to."

19. He answered that question in accordance with the second alternative, and expressed his conclusion on p. 405:

20. "It follows that in the view I take the shares of receipts or profits paid to the executors after the death of Mr. Howard should be regarded simply as remuneration professionally earned by him fn his lifetime, and as such, on the principles stated fib Bennett v. Ogston, not liable to tax in their hands."

21. The case went to the House of Lords, and on p. 410 Lord Simonds said : "My Lords, if this contention"‑that is the Crown's contention‑

22. "Had not found favour with the learned Master of the Rolls and Somervell L. J., I should not have thought it arguable. The principle which is applicable here was stated with His usual clarity by Rowlatt, J. in Bennett V. Ogston."

23. And he then goes on to cite the passage which I have already read. He goes on at p. 410:

24. "I am satisfied that this is a correct statement of the relevant principle of income‑tax law, though I have some doubt‑ it is not necessary to decide it‑whether the learned Judge correctly applied the principle in the case before him. if so there seems to me to be an end of the case. How else coup these sums come to the hands of Mr. Howard or his, executors than as the remuneration for his professional activities, the reward for services rendered by him during his life and unpaid for at his death ?"

25. At p. 412 Lord Asquith delivered a shot speech which I should read almost in full. He said:

26. "My Lords, I entirely agree with the opinions expressed by my noble and learned friends, and would only wish 0 add a few sentences.

27. "It seems quite clear that the payments whose liability to tax is in issue were exclusively the fruit or aftermath of the professional activities of Mr. Leslie Howard during his lifetime. This was as a matter of historical fact their source and their only source. ?he fact that he died before some of this fruit had been garnered or its amount could be ascertained cannot alter that historical fact. He and he alone had done everything necessary to provide the harvest. Secondly, I adhere to the statement of principle‑never apparently challenged in any reported case‑of Rowlatt, J. it, Bennett v. Ogston", and he reads that passage.

28. Then :

29. "Applying this principle to the facts of the present case prima facie the resulting conclusion can only be that the payments in issue escape tax. It is however contended by the Crown that in Bennett v. Ogston the reason why the principle involving exemption did not apply was that whet, the money‑lender died there was outstanding an income, bearing asset (namely that part of the principal which was then unrepaid) which continued to earn income, as it were, in its own right. It was argued for the Crdwn that the same was the case here, the income‑bearing asset consisting of the contracts made by Leslie Howard where under the payments in question were posthumously made.

30. There seems to me however to be a very clear distinction between 'income‑bearing assets' for the purpose of this type of case and the contracts in question. If Mr. Leslie Howard had stipulated for payment in blocks of shares or bonds, or any other Instrument which by their independent vitality generate income; the dividends or interest might well halo been taxable in the hands of his executors. The contracts in the present case enjoy, in my view, no such independent vitality. The consideration for what Mr. Howard was to do-- to act or manage‑was not the grant of a contract of contracts but the payment of money under the terms of those contracts. Mr. Howard acted for money : he did not act for contracts. The contracts were mere incidental machinery regulating the measure of the services to be rendered by him on the one hand, and on the other, that of the payments to be made by his employers : they were not the source but the Instrument, of payment, and his death, in my view, did nothing to divest them of that character. I agree unreservedly with the judgment of Jenkins. L. J., and respectfully concur with the motion of the Lord Chancellor that this appeal should be allowed."

31. The second case is Carson v. Cheyney's Executors ((1958) Ch. 345). In, that case, the professional man concerned, Mr. Cheyney, was an author, and the case was concerned with royalty payments. Crown returned to the attack against his executors. The Crown's claim was based upon the proposition that where a professional man acquires, in return for his professional activities, a contract under which royalties are payable, that contract is a source of income independent of his profession. So long as he is practising his profession, that source of Income remains dormant ; but as soon as he ceases to practise his profess on, then that source of income‑namely, the contract under which the royalties are payable‑become operative, with the consequence that the royalties are chargeable under Case III of Schedule D. That was not. I think, a different contention fundamentally from that advanced in the Stainer case.

32. In the Court of Appeal, Jenkins, L. J gave the judgment of the Court. At [(1958) Ch. 345] 369, he said:

33. "The sums sought to be taxed on the present case (so far as the contracts made In Mr. Cheyney's lifetime are concerned) consisted of royalties based on sales of books written by him in the ordinary course of his profession, and constituted his reward for his professional activities in the shape of the writing of those books. Indeed, in those instances in which the books dealt with by Cheyney's contracts with publishers were yet to be written, one may say that the royalties constituted (in part at all events) remuneration for his professional services in writing the books. In each cast"

34. ‑that is, this case and the Stainer case. "everything required to be done by Mr. Howard or Mr. Cheyney in order to earn the sums in questions had been done during the continuance of the profession. In each case the sums in question were in the nature of periodical payments which did not become payable, and were not quantified or capable of quantification, until after the profes sion had been discontinued."

35. Then, at p. 370, the Lord Justice deals with a contention that the royalties in the present case were income from property, tamely, the copyrights. Ha says : "He"‑that is, Mr. Magnus for the Crown‑

36. "Admits that during the continuance of the profession the royalties received were receipts of the profession to be included in the computation of its profits under Case II of Schedule D and could not be taxed under Case III or Case V1. But he says that on discontinuance the royal ties lost their character as profits or gains of the profession and became simply Income from property, namely, the copyrights, which thenceforth were substituted for the profession as their source, and as such became taxable under Case III or Case VI. We do not feel able to accept this argument consistently with the speeches In" the Stainer's case.

37. He then quotes from the speeches of Lord Simonds and Lord Asquith.

38. Then, at p. 373 he says:

39. "The royalties were not payable by reference to periods of time but by reference to copies sold. They were the measure of the reward to be received by Mr. Cheyney for his professional activity in the production of original and therefore copyright works."

40. That case, too, went to the House of Lords, who in this case affirmed the decision of the Court of Appeal, and again the judgment of Jenkins, L. J. was specifically approved. At Carson v. Cheyney's Executors Lord Simonds quotes from Jenkins L. J. and expresses his concurrence. Then he says:

41. "The principle which emerges is clear. Payments which are in historical fact (I adopt the language of the late Lord Asquith of Bishopstone in the same case) exclusively the fruit or aftermath of professional activities do not change their taxable character when the profession is discontinued. But there was another aspect of Stainer's case, which is relevant to the present case. Perhaps it is no more than a different way of stating the same point. It was urged that the contracts made by Leslie Howard were 'income‑bearing assets' and that the payments made to his executors were the income of such assets. To this the same noble Lord gave" an answer which I venture to quote, so completely does it dispose of a similar argument in the present case," and he once again quotes from Lord Asquith.

42. He continues on p. 424 :

43. "My Lords, I do not see how in face of this decision the [Crown's] argument can succeed without a degree of refinement which is to be avoided in the realm of focal law. In Stainer's case, it could not be denied that the tax‑payer acquired under his contracts certain contractual rights nor that those rights could in a certain context be called property. So it was argued that the payments were the income and the contracts were the 'income‑bearing assets.' I will again content myself with the description given to this argument by Jenkins L. J., and ask how it is to be distinguished from the argument in the present case. When I do so I find myself using again the same language that Lord Asquith used and I used in Stainer's case. What else were these payments than the fruit of Peter Cheyney's professional activities? How is It relevant that in order to reap his harvest he had to enter into contracts under which he acquired rights and incurred obligations, as did the publishers with whom he contracted? And how is it relevant that it was a term of those contracts that there should be vested in the publishers right created by the law to protect him in the exploitation of his work ? It was by entering into such contracts that he was able to carry on his profession gainfully. It was because he did so that he was assessable to tax under Case II of Schedule D. I reject, therefore, the plea that the royalty payments could, whether during the carrying on of the profession or after its discontinuance, be regarded as income from property, "constituting a substantive subject. matter of taxation under Schedule D":

44. I need not, l think, quote from the short speech of Lord Morton, but I should read two or three passages from Lord Reid. At p. 428 he said :

45. "In the ordinary case of professional earnings, which are outstanding when the profession is discontinued, and which cannot be brought into computation for the period before the discontinuance, it has long been recognised that there is no provision in the Income‑tax Acts which subjects them to charge and that they therefore escape from taxation."

46. He then quotes Rowlatt, J. in Bennett v. Ogston. Then, lower down :

47. "The question, then, is whether these royalties had a dual character : whether in addition to being professional earnings they were of such a character that they could be assessed under some other case than Case II."

48. Then, at p. 429 : "It is quite possible for receipts to have such a dual character that the Crown can elect under which Case they shall be assessed." He then gives an instance in relation to insurance companies, and continues

49. "But in the present case it is admitted that that is not so t the nature of these royalties is such that they cannot be assessed under any Case other than Case II so long as the author is following his profession. But it is argued that they can be so assessed after the profession is discontinued. The nature of the royalties does not change on the death of the author : they are still payable under the same contracts, and, as I have said, they are still part of professional remuneration. But the circumstances are different because the profession has been discontinued. No further expenses allowable as deductions can be incurred, and assessment under Case II is no longer possible. Can this change of circumstances bring within the scope of Case III payments which had formerly not been within its scope"?

50. Then he refers to Stainer's case, and comes to a negative conclusion.

51. At p. 431 he draws this distinction:

52. "But I must add that, even so, there is an essential difference between that case and the case of a person who buys a copyright from the author and then proceeds to exploit it by granting licences to publishers. Where the author exploits his own copyright by granting licences to publishers the fees which he receives are admittedly part of his professional earnings and are not taxable as annual payments under Case III, at least during his lifetime. But, where the author sells his copyright, the price which he receives is part of his professional earnings, and the fees which the purchaser gets from granting licences to publishers are from the beginning taxable as annual payments to him irrespective of whether the author is still practising his profession ; they are no part of the author' professional earnings."

53. At p. 433 he says:

54. "In my opinion, the ground of judgment in this House in Stainer's case, was that payments which are the fruit of professional activity are only taxable under Case II and cannot be taxed under Case III, even when it is no longer possible when they fall due to tax them under Case II, and when looked at by themselves and without regard to their source they would fall within Case III. I am not sure that I fully appreciate the reasons for the decision, but I have no doubt that that is what was decided, and I am bound by that decision whether I agree with it or not."

55. At p. 436 Lord Keith gives an analysis of the manner in which an author can exploit his professional work. I do not think I can usefully read that.

56. The effect of those decisions, then, is that where a profes sional man such as an author, daring the carrying on of his profession, enters into a royalty contract, the royalties payable under that contract are, so long as he carries on his profession, part of the receipts of his profession; but when he has ceased to carry on his profession they are wholly outside the scope of taxation in his hands, including the hands of his executors. It is true that a contract under which royalties are payable may, in certain circumstances in the hands of some other person be a source of taxable income, but it is not legitimate. as regards the position of the author himself, to regard him as in receipt of a second source of taxable ; namely, a royalty contract which lies dormant during the carrying on of his profession but becomes operative afterwards.

57. That reasoning is of course, accepted by the Crown in the present case. However, the Crown contends that the position is entirely different when the benefit or a royalty contract made by an author comes into the bands of someone other than the author himself. That could arise by disposition inter vivos ; it could arise under the will of the author. Once the royalty contract comes into the hands of someone else, it is said, then the reasoning in the Stainer and Cheyney's case has no application, one is left with a dimple contract under which annual sums are payable, and in the hands of the owner of that contract the contract is a source of taxable income.

58. I find it impossible to accept that contention consistently with the reasoning in the two cases. The reasoning in the two cases, as I understand it, is that where an author enters into such a contract, that contract represents merely the machinery whereby he collects the return for his professional activities The point is made with particular clarity by Lord Asquith In the Stainer case. It will be remembered that he says at p. 412:

59. "The contracts in the present case enjoy, in my view, no such independent vitality . . . The contracts were mere incidental machinery regulating the measure of the services to be rendered by him on the one hand, and on the other, that of the payments to be made by his employers."

60. It seems to me that if that was the quality of the contracts in the hands of the author himself and of his personal representatives, who are in the same position, there could be no change in the quality of the contracts by reason of the fact that the benefits of the contract passed from the personal representatives to a beneficiary under a will, or at a later stage from the beneficiary to someone in whose favour he disposes of the contracts. If, immediately before the assent in favour of the beneficiary, a royalty contract possessed no independent vitality and was merely incidental machinery for the recovery of the payments due to the author, it seems to me that immediately after the assent the quality of the royalty contract was exactly the same. I do not see how it can be said that by reason of the assent in favour of the beneficiary the royalty contract in some way changed its character. What the beneficiary received upon the assent was a piece of machinery for collecting outstanding payments due to the deceased author. Unless the contract possesses independent vitality as a source of income, it is perfectly clear that payments received under it, representing as they do no more than outstanding receipts of the discontinued profession, do not possess the character o taxable income in the hands or anyone. The position is in fact comparable to the simple position which arises where a professional man who is charged with tax on the basis of receipts dies leaving fees outstanding and owed to him, and where the right to receive those fees passes under his will to a beneficiary. It would be impossible for me. I think, consistently with the reasoning in these two cases, to accept the argument advanced on behalf of the Crown.

61. An aspect of this matter which was much pressed by counsel for the Crown has given me considerable perplexity. That is the position which arises where a professional man, having entered into a royalty contract, and while still carrying on his profession, proceeds to assign the benefit of that royalty contract. In such a case it seems clear, at first sight, to say no more, that the royalties could not be treated as part of the professional income of the person who has made the disposition, because they are no longer his income. On the other hand, it appears that, representing as they do uncollected income owing to the person carrying on the profession, they could equally not be taxed in the hands of the assignee. That is a very strange and anomalous position. On the other hand, a comparable position appears to arise in the simple case where, whilst still carrying on his profession, a person who is charged to tax on the basis of receipts assigns uncollected fees of a non‑recurrent nature due to him. I do not know what the practice 13 in such a case, but the anomaly is not specific to the case of royalties or other income of recurring nature, and I do not think that the existence of this anomaly common to recurrent and non‑recurrent payments is a justification for attributing to the recurrent payments a character which they would not otherwise have possessed.

62. Before leaving this point I must go back to the first passage which I quoted from the judgment of Jenkins L. J. In the Stainer case. That is the paragraph at p. 401, where he says:

63. "It is I think reasonably plain that periodical payments in respect of a contractual right to a share in the receipts or profits of the distribution of a film acquired otherwise than in the course of a trade, profession or vocation falling within Cases I or II of Schedule D would lie taxable under Case III, Rule 1(a), as falling ;within the words 'Any . . . . . annual payment . . . . . . . ' "

64. Counsel for the Crown was at first disposed to say that in that paragraph Jenkins, L. J, was deciding the present case, but I think that when one looks at that paragraph one sees that what the judge is addressing himself to is a contractual right which is acquired upon its creation otherwise than in the course of a profession ; i.e., at the date of the contract the contracting party is not carrying on a profession. That that is so appears clear from citation of Asher v. London Film Productions Ltd. which was a case of that character. I do not think that this paragraph is properly applicable to the case of a contractual right originally acquired in the course of a profession and then assigned to someone who is not carrying on a profession. It is indeed significant that throughout the two cases, In more than one passage, contrast is made between a contractual right acquired in the course of a profession‑i.e., an ordinary royalty contract made by an author and a contractual right not so acquired, but there is no contrast between the position in respect of a royalty contract made by an author in the hands of the author himself, on the one hand, and, on the other hand, in the hands of an assignee.

65. So far, then, as these Type A royalties are concerned, it seems to me that the commissioners arrived at a correct conclu sion ; though I venture to think that the word "franking;" which they used, is not a very happy one. Before leaving this point I ought to mention that under section 32 of the Finance Act, 1960, the law with regard to these post‑cessation payments has been materially altered. The present appeal is concerned with the position as it existed before 1960.

66. I turn now to the Type B royalties under the agreement of August 4, 1944. It will be remembered that under that agreement Lady Cynthia assigned to Samuel French Ltd. The sole and exclusive right of representation by amateur performers therein mentioned, and that assignment was expressed to be "in consideration of the covenants of the licensees hereinafter contained." The first covenant is to "account and pay over to her 661 percent. of all fees which are received by them in respect of performances of the said plays," It will be remem bered that Samuel French Ltd. was already the owner of the rights in question. The effect of this assignment was to make it the owner of the whole of the rights In question That would no doubt be a convenience in dealing with third parties in whose favour it might giant licences, and so forth. But so far as the substance of the matter is concerned, the covenant is to pay over to Lady Cynthia the entire two‑thirds of the fees corresponding to the two thirds share assigned. So one has, on the terms of this agreement, the assignment of a right In consideration of a covenant to pay over fees.

67. The commissioners accepted the evidence of Mr. Parker that ":he profits of Samuel French Ltd. assessed to income‑tax each year substantially exceed the figures of royalties paid to Mr. Asquith." That might appear to be the end of the matter, as the commissioners evidently considered ; that is to say, that this is a straight forward case falling within section 169 of the Income‑tax Act, 1952, which runs, so far as now material, as follows:

68. "(1) Where any yearly interest of money, annuity or other annual payment is payable wholly out of profits or gains brought into charge to tax . . . . no assessment shall be made on the person entitled to the interest, annuity or annual payment . . . . . .

69. The person making the payment has of course the right to deduct and to retain the tax. Counsel for the Crown, however, has advanced an argument based on the form of the company's accounts and the decision of the House of Lords in Chancery Lane Safe Deposit and Offices Co. Ltd. Inland Revenue Commissioners ((1966) A C 85). It does not appear that an argument in that form was presented before the commissioners, but it seemed to me right to allow the argument to proceed.

70. I turn now to the report of the Chancery Lane case. I need not cite that case at any length. The headnote, so far as now in point, runs as follows :

71. "Income‑tax‑Mortgage interest charged to capital‑Whether payable out of profits or gains brought into charge to tax Appeal against first assessment to income‑tax for one year, settled by agreement‑Whether additional assessment competent‑Income‑tax Act, 1952 . . . . . . . . sections 169, 170 and 510.

72. The appellant‑Company borrowed money on mortgage to, finance the rebuilding of its premises and the erection of new buildings. On the advice of its auditors, a proportion of the interest was charged to capital in the company's accounts, The company's income was such that (except in one year) its could have paid the whole of the interest out of profits or gain brought into charge to tax.

73. The company was assessed to income‑tax under section 170 Income‑tax Act, 1952, for "certain years" on the interest so charged to capital. On appeal, the company contended ((1937) A C 77) that the payments fell within section 169, Income‑tax Act, 1952; and they raised a further contention which is not now material.

74. "Held, . . . . . that, since the company's decision to attribute part of the interest to capital had a practical effect on the amount of the, distributable fund represented by the balance of the profit and loss account carried forward from year to year, the company could not make an inconsistent attribution for tax purposes . . . . . ."

75. The Lords were divided in the proportion of three to two. I will quote one passage from the speech of Lord Morris of Berth‑y‑Gest at p. 112 which substantially sets out the view which prevailed :

76. "My Lords, the perplexing words 'payable . . . . out of profits or gains brought into charge to tax' were fully analysed in the Central London Railway Co. v. Inland Revenue Commis sioners (1). The words 'payable out of are words which might often be used to denote an actual payment out of some actual fund. In sections 169 and 170 the words involve a different conception. There is a statutory figure of 'profits or gains brought into charge to tax'. It is an assessment based at any rate so far as trading profits are concerned upon the actual results of the previous year. It is not, therefore, an actual fund. If the word 'fund' is used in reference to it, it must be classed as a notional fund. An annual payment, on the other hand, is not something notional : it is actual and real. But since, as Lord Macmillan has pointed out, you cannot makes an actual payment out of a notional fund the word 'payable' comes to mean notionally payable. It denotes, therefore, a right which the tax‑payer may decide to exercise : he may attribute his payment as being within and under the statutory figure of his profits or gains brought into charge to tax. He can say that in paying tax on his profits or gains brought into charge to tax he has paid tax on the amount of a smaller annual payment which he has to make : he may, therefore, deduct tax in making such annual payment : the recipient must allow that deduction if it is made. It may be, however, that the tax‑payer cannot link his annual payment with 'profits or gains brought into charge to tax'; there may not be any : in that event the annual payment cannot be 'payable out of them there cannot be any attribution to them. In that situation the tax‑payer must deduct tax when making his annual payment. He is, so to speak, collecting the tax for the Revenue, to whom he must pay it. The same result will follow if the tax‑payer firmly decides not to link and in fact does not link his annual payment with profits or gains. This may be so if he decides to make his annual payment out of capital."

77. So, irrespective of the amount of profits or gains which had been brought into charge to tax, the case does not fall under section 169 if and in so far as the tax‑payer makes a certain decision‑i.e., not to link the payment with profits or gains‑and, in particular, if he decides to make his annual payment out of capital.

78. In the present case, what Samuel French Ltd. ought to have done having regard to the terms of the agreement of August 4, 1944, was, I think, this. It ought to have brought into its revenue account as a receipt the whole of the fees received from persons in whose favour it granted licences and so forth. The effect of that would have been to increase the amount of its taxable income. It was not entitled to bring into its revenue account on the other side the two‑thirds of the fees which it was bound under the agreement to pay over to Lady Cynthia, because those represented the price payable by instalments of the capital asset which it had acquired. What it ought to have done was to make the covenanted payments to Lady Cynthia under deduction of tax, and to have retained that tax. That would have been the orthodox way of doing it. What Samuel French Ltd. in fact did was to leave Lady Cynthia's share of the fees received out of its revenue account and pay over to her, without deduction of tax, her two‑thirds of the fees.

79. Now, if Samuel French Ltd. had carried out the operation in the correct way, the result so far as Samuel French Ltd.'s own liability to tax was concerned would have been exactly the same as it was under the way in which it in fact carried out the transaction. On the other hand, the result of the way in which the transaction was carried out was to benefit Lady Cynthia at the expense of the Crown. That was the ultimate result of the way in which it was done.

80. Starting from that point, counsel for the Crown contends that one must impute to Samuel French Ltd. an intention to attribute to capital account and not to revenue account the whole of the two‑thirds paid over to Lady Cynthia. Only if that was done could the right result be reached as between the three parties concerned‑namely, the Crown, Samuel French Ltd. and Lady Cynthia. So, it is contended, Samuel French Ltd. must be regarded as having made a decision to make such an attribution, because that was the right result to reach.

81. I find it quite impossible to impute to Samuel French Ltd. such a decision. The making of a decision is a matter of fact. Of course, a decision may be made by a company either by an express resolution of its directors or the like or it may be made merely by conduct ; for example by casting accounts in a particular form. But it is clear from the speeches in the Chancery Lane case, (43 T C 83) that there must be a positive decision. In the present case it seems to me impossible, on the facts; to impute to Samuel French Ltd. any such decision. The position was that the two‑thirds share assigned under the agreement was an asset of no capital value to Samuel French Ltd., except, I suppose, for convenience when dealing with third parties. The two‑thirds share of income was equally of no value to Samuel French Ltd. It received that two‑thirds share from the third parties and passed it over to Lady Cynthia. That being the position, Samuel French Ltd. merely omitted all the elements of that two‑thirds interest from its accounts. It did not bring in the two‑thirds interest as a capital asset ; it did not bring in the two‑thirds of the fees received from third parties; it did not bring in the payment of the two‑thirds to Lady Cynthia.

82. It seems to me that, given those facts; the natural inference is that the directors of Samuel French Ltd., if they ever addressed their minds to the matter at all, or their accountants, so far as they ever addressed their minds to the matter at all, treated the company Samuel French Ltd. merely as a conduit pipe through which two‑thirds of the fees received from third parties were transmitted to Lady Cynthia. It is impossible, I think, to impute to the company any decision as to the attribution to one account or another of the two‑thirds payable to Lady Cynthia. In the absence of such a decision, one is left, as I said at the beginning, with the simple case of an annual payment made by a taxpaying company which had more than' sufficient taxed income to support it. That being so, under the express' terms of section 169 no assessment can be made on Lady Cynthia. So, as regards the Type B payments, again T think the commissioners came to a correct conclusion.

83. I turn finally to the Type C payments. Those are the payments made by the American company under the agreement of July 19, 1949. It is contended by the Crown that those payments fall under section 170 of the Income‑tax Act, 1952. 1 have already referred to that section in connection with the Type B royalties, but perhaps I should now read the relevant words : ‑

84. "Where . . . any interest of money, annuity or other annual payment charged with tax under Schedule D . . . . . . . is not payable or not wholly payable out of profits or gains brought into charge, the person by or through whom any payment thereof is made shall, on making the payment, deduct out of it a sum representing the amount of the tax thereon at the standard rate in force at the time of the payment."

85. Then, that person is to deliver to the commissioners an account of the payment, and is to be chargeable with tax upon it. It is not in dispute that if the payer in such circumstances omits to make the deduction and pays over the amount of the annual payment in full, it is open to the Crown to make a direct assessment upon the recipient. That is what has been done here, and the general commissioners held that it was rightly done.

86. Once again, I agree with the general commissioners. On this point, counsel for the tax‑payer advanced two arguments. I think he may have advanced certain others, but these, I think, are the only arguments of any substance. The first is based on the fact that, having regard to their dates, the first two or three of the assessments in question must have been additional assessments. That is plainly so. The argument runs thus : that it was only open to the Revenue officials‑I will came to that fn a moment‑to make additional assessments if the inspector of taxes had discovered that far one reason or another the original assessment had been insufficient. The relevant section of the Act of 1952 as it then stood was section 41, which provided :

87. "If the surveyor discovers‑that any . . . profits chargeable to tax have been omitted from the first assessments, . . . . [then] where the tax is chargeable under Schedule D, the additional commissioners shall make an assessment on the person chargeable, in an additional first assessment . . . :

88. So it is said here, as regards the first years, that there must have been a discovery.

89. Then it was said that the burden lay upon the Crown at the hearing before the general commissioners to establish by affirmative evidence that the surveyor had made a discovery, and that, failing such evidence, the Crown's case really never got off the ground. I should mention that the word "discovery" here and in its statutory predecessors has been the subject of a great many judicial decisions, and boars an extremely wide meaning.

90. It seems to me that this contention is wholly misconceived. Where the surveyor discovers or believes himself to have discovered an under‑charge, ha must no doubt satisfy the additional commissioners as to that discovery. Assuming they are satisfied, they make the additional assessment. Then, if the tax‑payer appeals and the matter comes before the adjudica ting commissioners, the burden of proof is, I think, exactly the same as It would be in the case of an original assessment ; that is to say, it lies upon the taxpayer to displace the assessment. There is no foundation at all in the section or in any reported case for the proposition that, in order to start the proceedings before the adjudicating commissioners, the representative of the Crown must discharge before them the burden of showing that there is some prima facie case of discovery.

91. This matter was considered by Goff, J. in Jones v. Mason Investments (Luton) Ltd. (43 T C 570) where he deals fully with the question of discovery. I am in complete agreement with that judgment, and I do not think it necessary to refer to it further. I would only add that upon the facts of this case as they in fact emerged there was ample material upon which the inspector could properly have made his discovery. That is the first point relied upon on this part of the case.

92. The second point relied upon depends upon the decision of Upjohn, J. in Stokes v. Bennett ((1953) 34 T C 337). The headnote in that case runs as follows :‑

93. "The appellant obtained a divorce and an order of the High Court was made that her husband should pay her maintenance at the rate of 22 per month, free of tax. The husband later ceased to be resident in the United Kingdom. He continued to make the monthly payments to his wife but there was no evidence that he purported to deduct tax from them or that he was in receipt of income which had suffered United Kingdom income tax, and he did not deliver to the Inland Revenue Commissioners an account of payments and of tax deducted therefrom pursuant to Rule 21 (2), General Rules, income‑tax Act, 1918.

94. That was the predecessor of section 170.

95. "Assessments were made on the wife under Case III of Schedule D in respect of the amounts received.

96. On appeal to the special commissioners, the appellant con tended that the sums she received were net sums in respect of which she had already suffered tax by deduction under either General Rule 19."

97. Which was the predecessor of section 169.

98. "Or General Rule 21.‑The commissioners dismissed the appeal, holding that the sums received by the appellant were untaxed income in her hands there was no evidence that they were paid under General Rule 19 and, if they were made out of profits or gains not charged to United Kingdom income tax, General Rule 21 was inappropriate to a person not resident in this country.

99. Held, that the appellant should be treated as having received sums from which tax had been deducted and no further assessments In respect of these sums could be raised upon her."

100. It was proved in that case that there were these special circumstances. First, under the Order of the Divorce Division the sum payable at the commencement was defined upon a net basis. Second, the husband had in fact paid that net sum over the years in question. It will be seen from page 341 of the judgment that the case proceeded upon the footing that the husband had regularly made payments of 22 a month pursuant to the Order.

101. Given those very special circumstances, Upjohn, J. said this at p. 343:

102. "The facts of this case are that the husband made, more or less exactly, payments of the net sums prescribed by the Order, and in my judgment the only permissible inference to drawn from that is that he was intending to and did deduct tax from the gross amount which was due from him upon the proper construction of the Order."

103. It seems to me that that decision has no bearing upon the present case. In that case the facts were such that the Judge drew the inference that the sums were paid net after deduction of tax. In the present case, there is no material so far as I can see which would justify such an inference. The sums in question were of varying amount depending upon the receipts of the American company. There was not any term in the agreement with the Amercian company that those sums should be paid net. So all one has is the receipt by the tax‑payer of periodic sums of varying amount from the American company. That being so, I see no reason why it would be right to draw the inference that those sums were payable after deduction of tax.

104. Unless that inference car, be drawn, then it rests upon the tax‑payer to establish affirmatively either that the sums in question were paid out of profits or gains of the American company brought into charge to United Kingdom tax or, alternatively, that the American company did deduct tax from the payments so that the amounts received by the tax‑payer were net payments. The tax‑payer has not attempted to discharge that burden and has adduced no evidence which would justify a conclusion that either of those circumstances was present. That being so, one is left simply with the position that the tax‑payer received a series of payments from the Amercian company, and I can see no reason why one should treat those payments as other than gross payment made without deduction of tax. Upon that footing, the charge under section 170 was competent, and again, as I have said, it seems to me that the general commissioners arrived at the correct conclusion.

105. I propose, therefore, to dismiss both the appeal and the cross‑appeal.

106. Appeals dismissed.

107. No order as to costs,