Hart (Inspector of Taxes) v. Sangster

[1957] 2 All ER 208

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(Judgment by: Lord Goddard CJ, Jenkins and Sellers LJJ)

Hart (Inspector of Taxes) v.
Sangster

Court:

Judge:
Lord Goddard CJ, Jenkins and Sellers LJJ

Subject References:
Income Tax
Income
Acquisition of new "source" of income
Interest on sum paid by taxpayer to credit of deposit account with bank
Deposit account already in existence for several years
Bank
Deposit account
Whether payment in a fresh contract

Legislative References:
Income Tax Act, 1918 (8 & 9 Geo 5 c 40), Sch D Case III, r 2(1), as substituted by Finance Act, 1922 (12 & 13 Geo 5 c 17) - s 17
Finance Act, 1926 (16 & 17 Geo 5 c 22) - s 30
Finance Act, 1951 (14 & 15 Geo 6 c 43) - s 21

Case References:
Foley v Hill - (1848) 2 HL Cas 28; 9 ER 1002; 20 Digest 268, 280.
Joachimson v Swiss Bank Corpn - [1921] 3 KB 110; 90 LJKB 973; 125 LT 338; 21 Digest 639, 2188.

Hearing date:
Judgment date: 19 March 1957

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Judgment by:
Lord Goddard CJ, Jenkins and Sellers LJJ

In March, 1951, a taxpayer paid a cheque for £2,000,000 into his deposit account at a bank which he had used for many years and on 20 June 1951, he was he was credited with interest thereon. He was assessed to tax on the interest under Case III of Sch D on the basis that it arose from a new source of income within s 21(1) of the Finance Act, 1951.

Held - The assessment was properly made, because the taxpayer's deposit on the terms of the subsisting contract between him as customer and the bank constituted a new source of income within the meaning of s 21(1) of the Finance Act, 1951, although the deposit of a further sum (in the present case the £2,000,000) on the terms of a subsisting deposit account was not a new contract.

Decision of Vaisey J ([1956] 3 All ER 52) affirmed on a different ground.

As to assessment on a new source of income, see 17 Halsbury's Laws (2nd Edn) 189, para 388.

As to the effect of receipt of money by a banker on deposit account, see 2 Halsbury's Laws (3rd Edn) 174.

For the Finance Act, 1926, s 30, see 12 Halsbury's Statutes (2nd Edn) 271; for the Finance Act, 1951, s 21, see 30 Halsbury's Statutes (2nd Edn) 162; and for the Income Tax Act, 1918, Sch D Case III, r 2(1), see 12 Halsbury's Statutes (2nd Edn) 168.

For the replacing provisions of the Income Tax Act, 1952, s 131, see 31 Halsbury's Statutes (2nd Edn) 126, 127.

Appeal

The taxpayer appealed to the Special Commissioners against assessments made on him to income tax, Sch D, for the years 1951-52, 1952-53, in the amounts £7,037 and £29,371 respectively. The main ingredient in the amount assessed for each year was interest on the taxpayer's deposit account with a branch of Barclays Bank Ltd, and the question for determination was the correct method of computing the income tax in respect of that interest.

The assessment for 1952-53 was made under the Income Tax Act, 1952, and that for 1951-52 was made under the Income Tax Acts in force before the Act of 1952 came into operation, but, as there was no material difference between the two sets of provisions the appeal was argued, and the Case was stated, by reference to the provisions of the earlier Acts as if they applied to the 1952-53 assessment in the same manner as they applied to the 1951-52 assessment.

For many years before 1951 the taxpayer had a deposit account with the Colmore Row, Birmingham, branch of Barclays Bank. No special agreement was concluded between him and the bank. Interest on deposit accounts was calculated on the principal on a day-to-day basis and was credited on half-yearly rest dates, 20 June and 20 December in each year. When so credited, the interest became principal and began to earn interest. It was not the practice to allow accruing interest to be withdrawn between the half-yearly rest dates unless an account was closed, in which case interest was calculated up to the date of closure and credited as principal. The rate of interest allowed varied from time to time. In 1951 the bank required fourteen days' notice of withdrawals from deposit account, and, if a depositor withdrew without giving this notice, he lost fourteen days' interest on the sum withdrawn.

In the early part of 1951 the taxpayer's deposit account with the bank stood at £20,496. On 17 March 1951, he paid in £2,000,000. On 30 March 1951, he withdrew £250,000 without giving notice, and thus lost fourteen days' interest on this sum. On 20 June 1951, he was credited with the sum of £2,215 3s 1d for interest.

The assessments under appeal were made on the basis that the income in question had to be computed in accordance with the Finance Act, 1951, s 21, which dealt with cases where a person acquired a new source, or an addition to any source, of income chargeable under Case III of Sch D. By s 21(3), the section applied in relation to sources or additions to sources of income acquired before 6 April 1951, only where income first arose therefrom on or after that date. Where a person had acquired a new source or an addition to any source of such income and the income first arose therefrom before that date the case was governed by the Finance Act, 1926, s 30. If the matter under appeal were governed by s 21 of the Act of 1951, then r 2(1)(a) and the proviso to r 2(1) of the Rules applicable to Case III of Sch D to the Income Tax Act, 1918, would apply to interest on the deposit of £2,000,000 made on 17 March 1951, in relation to the years of assessment 1951-52, 1952-53 and 1953-54. If the matter were governed by s 30 of the Act of 1926, then r 2(1)(a) and the proviso to r 2(1) would apply to interest in relation to the years of assessment 1950-51, 1951-52, and 1952-53. If the matter were not within either s 21 of the Act of 1951 or s 30 of the Act of 1926, then r 2(1)(b) of the Rules applicable to Case III of Sch D to the Act of 1918 would apply in relation to all material years of assessment.

The taxpayer contended (a) that, when he paid in the £2,000,000 to the credit of his deposit account, he did not acquire a new source, or an addition to a source of income within s 21 of the Act of 1951 or s 30 of the Act of 1926, and that income tax on the interest on his deposit account should be computed for 1951-52 and 1952-53 on the preceding year basis in accordance with r 2(1)(b) of the Rules applicable to Case III of Sch D; and alternatively (b) that, if he acquired a new source, or an addition to a source, of income when he paid in the £2,000,000, income first arose therefrom prior to 6 April 1951; that, therefore, s 21 of the Act of 1951 was not applicable to the income; and that income tax for the years to which the appeal related should be computed in accordance with s 30 of the Act of 1926.

The Crown contended (a) that the taxpayer acquired a new source, or an addition to a source, of income chargeable under Case III of Sch D on 17 March 1951; (b) that income first arose therefrom on 20 June 1951, when the interest was placed at the credit and disposal of the taxpayer; and (c) that income tax for the years to which the appeal related was properly computed by reference to s 21 of the Act of 1951.

The Special Commissioners held that the only source of the income which was the subject of the appeal was the contractual relationship between the taxpayer and the bank which came into being when the taxpayer first opened his deposit account; that the taxpayer did not acquire a new source, or an addition to a source, of income when he made the deposit on 17 March 1951; and that, therefore, neither s 21 of the Act of 1951 nor s 30 of the Act of 1926 had any application to the income. Accordingly, it was not necessary for the Special Commissioners to make any decision on the taxpayer's alternative contention, but they indicated the opinion which they had formed that, if a new source, or an addition to a source, of income was acquired on 17 March 1951, income first arose therefrom on 20 June 1951. The Special Commissioners, accordingly, adjusted the assessments by reducing the assessment for 1951-52 to £53, and the assessment for 1952-53 to £7,032 those figures having been agreed by the parties as being correct on the basis of the decision of the Special Commissioners. The Crown appealed, by way of Case Stated. On 3 July 1956, Vaisey J ([1956] 3 All ER 52) allowed the appeal, holding that the taxpayer when making a new deposit entered into a new contract with the bank and a new source of income was so created. The taxpayer appealed to the Court of Appeal.

Roy Borneman QC and Sir Reginald Hills for the Crown.

Heyworth Talbot QC and G A Grove for the taxpayer.

19 March 1957. The following judgments were delivered.

LORD GODDARD CJ . This is an appeal from an order of Vaisey J who reversed the decision of the Special Commissioners, who adjusted certain assessments for the years 1951-52 and 1952-53 made on the taxpayer in respect of certain interest which he received on a deposit account which he kept at Barclays Bank Ltd. The taxpayer, who evidently had the handling of very large sums of money, had kept a deposit account at Barclays Bank for some years, and no special arrangement was entered into between him and the bank at the time that he opened his deposit account. The commissioners have found, therefore, that the contract between them was the ordinary contract common between English bankers and their customers in respect of deposit accounts. They have set their reasons out in the Case, and they find that.

"Interest on deposit accounts was calculated on the principal on a day-to-day basis and was credited on half-yearly rest dates, 20 June and 20 December in each year. When it was so credited, the interest became principal and then (and not before) began itself to earn interest. It was not the practice to allow accruing interest to be withdrawn between the half-yearly rest dates, save that if an account was closed at any time, interest was calculated up to the date of closure, credited and withdrawn as principal. The rate of interest allowed varied from time to time."

In 1951 £2,000,000 was paid into the deposit account, which even then had a substantial sum of money in it, and this appeal arises in respect of interest earned by this very large sum. The court has to decide what was the source of the income. The Special Commissioners held that the contract was the source of the income. Vaisey J took a different view, and I think held that the source of income was the deposit of the money coupled with the contract. I cannot agree that where a deposit account is kept between a customer and a banker there is a new contract every time money is paid in. I think that it is one continuing contract, but the contract itself yields no income at all. The deposit of money would yield no income at all unless there was an agreement to pay interest, express or implied. The source of the income seems to me to be the deposit of money on certain terms. Unless the money has been deposited there will be no income because there will be nothing which would produce interest. Just as if there were only a contract to pay interest on money no interest would be payable until money was deposited, so it follows that, if there were a deposit of money without an agreement to pay interest, there would be no interest arising from it. There is no difference between a deposit account and a current account so far as the relationship of banker and customer is concerned. The relationship is perfectly clear. The leading case is Foley v Hill ((1848), 2 HL Cas 28), mentioned in the judgment of Atkin LJ in Joachimson v Swiss Bank Corpn ([1921] 3 KB 110 at p 130). It is that of debtor and creditor; the banker borrows the money from the customer under terms to repay it. As a general rule he does not pay interest on a current account, although bankers do at times agree to allow interest on a current account if a certain credit balance is maintained. We need not consider current accounts in this case at all. We are only concerned with deposit accounts under which money is paid in at fourteen days' notice, ie, the customer cannot withdraw the money without giving fourteen days' notice, though he may be allowed to do so if he gives up interest. Interest at the current rate is allowed by the banker, and the current rate generally is regulated by the bank rate.

The taxpayer had been assessed in respect of this interest, which he had been receiving, under Case III of Sch D, and I think that it is necessary in considering this matter to refer to s 21(1) of the Finance Act, 1951, which provides that:

"If at any time any person acquires-(a) a new source of any profits or income in respect of which he is chargeable either under r. 1 of the Rules applicable to Case III of Sch. D or under Case IV of Sch. D or under Case V of Sch. D; or (b) an addition to any source of any such profits or income, then, for the year of assessment in which income first arises from the source or addition and the two following years of assessment",

tax should be computed as laid down in the section.

It is argued here that the source of income was the contract. I cannot agree with that. I think the source of income here was the deposit of money on the terms of the contract. In my opinion, if an addition is made to the amount which is deposited, the words of s 21 are quite wide enough to catch it. I quite agree that certain difficulties might be imposed on the Inland Revenue if they were to pursue every deposit account and find whether or not there had been an addition to the account during the course of the year. That is a matter for the inspector of taxes or those responsible for the assessment. I do not suppose that it would be worth the trouble in every case for the taxing authorities to inquire into every deposit account and find if the sum deposited had been increased, unless it had been increased by a large amount. Here the increase of £2,000,000 is very great. In my judgment there is no question but that there has been a new source of income in the deposit of money, or at any rate an additional source of income here. For these reasons, which are not quite the same as those given by Vaisey J, I think the appeal should be dismissed.

JENKINS LJ . I agree.

SELLERS LJ . I agree also.

Appeal dismissed. Leave to appeal to the House of Lords refused.

Solicitors: Solicitor of Inland Revenue (for the Crown); Hale, Ringrose & Morrow agents for Glaisyer, Porter & Mason, Birmingham (for the taxpayer).