McCabe v South City and County Investment Company Ltd

JurisdictionIreland
CourtSupreme Court
JudgeMr. Justice Francis D Murphy,BARRON J.
Judgment Date01 January 1998
Neutral Citation[1997] IESC 8
Docket Number[S.C. No. 54 of 1995]
Date01 January 1998

[1997] IESC 8

THE SUPREME COURT

Murphy J

Lynch J

Barron J

54–95
McCABE v. SOUTH CITY & COUNTY INVESTMENT COMPANY LTD

Between:

B McCabe
Appellant

AND

South City and County Investment CompanyLimited
Respondent

Citations:

INCOME TAX ACT 1967 S429

CORPORATION TAX ACT 1976

INCOME TAX ACT 1967 S53

INCOME TAX ACT 1842 S102

IRC V RAMSEY 1935 20 TC 79

VESTEY V IRC 1962 2 WLR 221

MCGRATH V MCDERMOTT 1988 IR 258

RAMSEY V IRC 1982 AC 300

FURNISS V DAWSON 1984 AC 474

WATERFORD GLASS (GROUP SERVICES) LTD V REVENUE COMMISSIONERS 1990 1 IR 337

IRISH SHELL V JOHN COSTELLO LTD 1981 ILRM 66

KENT V SUSSEX SAWMILLS LTD 1947 IR 177

KEENAN BROS, IN RE 1985 IR 401

CARROLL GROUP DISTRIBUTORS LTD V G & JF BOURKE LTD 1990 1 IR 481

FOLEY V FLETCHER 1858 3 H & N 769

SECRETARY OF STATE IN COUNCIL OF INDIA V SCOBLE 1903 1 KB 494, 1903 AC 299

PERRIN V DICKSON 14 TC 608

HANBURY, IN RE 1959 38 TC 588

ESSEX CO COUNCIL V ELLAM 1989 STC 317

SOTHERN-SMITH V CLANCY 24 TC 1

IRC V PLUMMER 1979 3 AER 775

Synopsis:

Revenue

Corporation tax; annuity sums; whether periodic payments chargeable to corporation tax; whether annuity income or capital receipt; nature of transaction; interpretation of tax statutes; s.53 Income Tax Act, 1967 Held: Annuity payments chargeable to tax Supreme Court: Murphy J., Lynch J., Barron J. 30/07/1997

McCabe v. South City and County Investment Company Ltd.

[1997] 3 IR 300 - [1998] 1 ILRM 264

1

Mr. Justice Francis D Murphydelivered the 30th day of July 1997[LYNCH CONC]

2

The issue in this case was whether certain periodic payments made by Crosspan Developments Limited (Crosspan) to South City and County Investment Company Limited (South City) pursuant to an agreement in writing dated the 26th May 1983 (the Contract) were, or any part thereof was, subject to Corporation Tax in the hands of the recipient.

3

By the Contract Crosspan agreed to grant to South City what was therein described as "an annuity" on the terms and conditions set out therein. Those terms provided that monies, described as "the Annuity Sum", would be payable to South City on the 27th May 1983 and the anniversary of that date in each of the two following years. The Annuity Sum was defined as meaning in respect of each payment an amount equal to the sum of:-

4

(i) IR£500 plus

5

(ii) 95% of the profits before taxation disclosed in the unaudited management accounts, of Crosspan prepared by Crosspan's accountant for the 11 month period to the 30th April 1983 and for the year ended the 30th April 1984 and 1985.

6

The offer by Crosspan was conditional upon South City paying in consideration therefor the sum of IR£1,290,000 on or before the 27th May 1983.

7

It is common case that the consideration aforesaid was duly paid and that the Annuity Sums were discharged. As the Contract is a short document and its terms are of vital importance to the understanding and resolution of the issues herein I have annexed a copy of it as a schedule to this judgment.

8

The Appeal Commissioners decided that the annuity aforesaid was liable to Corporation Tax. From that decision the Respondent, South City, appealed to the Circuit Court where Circuit Court Judge Martin reheard the appeal pursuant to the provisions of Section 429 of the Income Tax Act, 1967, and set out his conclusion thereon in the following terms:-

"I considered the several authorities referred to by Counsel and the provisions of the Income Tax Act, 1967, and the Corporation Tax Act, 1976, aswell as the statement of agreed facts. I consider there is nothing sacrosanct in the manner in which accountants treat any particular transaction in the accounts. Furthermore, I do not feel bound by the attitude taken by the Revenue in other cases. I am looking only at what happened between the contracting parties in this instance and, in the circumstances, the arguments put forward on behalf of (Southcity) are those which I feel I should accept. I am allowing theappeal."

9

The Inspector having expressed dissatisfaction as required by statute the learned Circuit Court Judge agreed to state a case for the opinion of the High Court raising the following question:-

"The question of law for the opinion of the High Court is whether, on the facts as proved or admitted as aforesaid, I was correct in law in holding that part of the annuity receipt represented a capital receipt and was not chargeable to Corporation Tax."

10

In his judgment dated the 11th day of January 1995 Mr Justice Carney having set out the history of the transaction and the propositions for which the parties contended gave his judgment on the question raised in the following terms:-

"I am satisfied that the learned Circuit Court Judge was correct in law in his determination and that there was evidence before him to support the same."

11

It is from the judgment of Carney J and the order made thereon that the Appellant/Inspector appeals to this Court. The Appellant contends that the learned High Court Judge erred in fact and in law on a variety of grounds of which I quote four as being of particular assistance in defining the matters in issue between the parties, namely:-

12

a "(c) In failing to hold that the monies payable to the Respondent pursuant to the said annuity contract were within the definition of "any interest of money, or any annuity or other annual payment" within the provisions of Section 53 of the Income Tax Act 1967and, therefore, taxable under the provisions of case III.

13

(d) In failing to take into account or, in the alternative, in failing to apply the authorities to which the learned High Court Judge was referred by Counsel on behalf of the Respondent;

14

(e) In failing to take any or, in the alternative, failing to take any proper account of the following important characteristics of the annuity contract, namely:-

15

(I) That the contract does not contain any provision for the calculation of interest;

16

(II) That the contract does not state that the receipt represents the payment of any antecedent debt;

17

(III) That the annuity contract does not refer to the purchase price of any item of property (other than the purchase of a right to receive the annual income);

18

(IV) That there is nothing in the annuity contract which states or implies that any of the sums received were by way of the return ofcapital;

19

(f) Failing in all the circumstances to hold that the true legal nature of the transactions was the expenditure of capital in consideration of the purchase of an annuity comprising pureincome."

20

To a generation familiar with income tax at the rate of 80p in the Pound and inflation at 20% per annum, the purchase or creation of fixed rate annuities would seem an unusual and imprudent investment. It was different in Victorian times. With income tax, when imposed, less than 10% even in times of war and the maintenance of the Gold Standard perceived as a requirement and achievement of civilised society, the position was otherwise. Fixed Rate annuities managed by the National Debt Commissioners were a common method by which the wealthy provided for their dependants. In the economicclimate that existed the need to develop "financialproducts" which might escape the burden of taxation or the ravages of inflation did not exist. It is unlikely that confusion was caused among taxpayers when the Income Tax Act of 1842, Section 102, provided that:-

"Upon all annuities, yearly interest of money, or other annual payments; whether such payments shall be payable within or out of Great Britain, either as a charge on any property of the person paying the same by virtue of any deed or will or otherwise, or as a reservation thereout, or as a personal debt or obligation by virtue of any contract, or whether the same shall be received and payable half-yearly or at any shorter or more distant periods, there shall be charged for every twenty shillings of the annual amount thereof the sum of seven pence without deduction, according to and under and subject to provisions by which the duty in the third case of schedule (D) may be charged."

21

Moreover it was clear in 1842 - and it is clear now - that tax was imposed on the annuity as such and not by reference to the source from which it arose. Changed economic circumstances and the emergence of important principles applicable in the interpretation of the income tax code may have rendered lessobvious the interpretation of Section 53 of the Income Tax Act, 1967, which replaced and reenacted, in virtually identical terms, the material provisions of Section 102 of the 1842 Act. Furthermore both parties were in agreement that the provisions and principles applicable to income taxable under the Income Tax Code were equally applicable under the Corporation Tax Act, 1976, in so far as the same concerned the liability or otherwise of South City to Corporation Tax on the annuity.

22

The Income Tax Acts have not at any time attempted to provide a definition of "an annuity". It would seem clear that the word connotes, first, payments which are expected to continue over a period of more than one year, secondly, a requirement that the payments are not mere gifts but are made and repeated by virtue of a commitment or obligation and, thirdly, are not made in return for goods supplied or services rendered.

23

As the legislation expressly imposes tax on what the section describes as "an annuity" tax is prima facie payable on the monies paid by Crosspan to South City and which the parties themselves chose to describe as "an annuity". Indeed it was at one time thought that the terminology used in the document creating the periodic payment was decisive (see IRC -v- Ramsey [1935] 20 TC79 at 98). That view was rejected in Vestey .v. IRC [1962] 2 WLR 221 in England.

24

In this jurisdiction the principles applicable in the interpretation of taxation statutes have been laid down clearly...

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