Thornhill v. The Commissioner of Income Tax.
Present: Soertsz and Keuneman JJ. "
THORNHILL v. THE COMMISSIONER OF INCOME TAX.
In the Matter of an Appeal under Section 74 ofthe Income Tax Ordinance.
S. C. No. 131.
Income Tax—Profits or income—Proceeds of sale of tea aVid rubber coupons—Income Tax Ordinance, ss. 6 (1) (a) and 6 Q) (h) (Cap. 188).Income tax is payable on proceeds of the sale of coupons issued underthe Tea and Rubber Control Ordinances.
Where an assessment is made under the wrong category the assessoris not precluded from claiming that it comes under any other categoryin 6 (1) of the Income Tax Ordinance.
HIS was a case stated to the Supreme Court by the Board of Reviewunder section 74 of the Income Tax Ordinance.
The question stated to the Supreme Court was whether a sum ofRs. 19,622.19 realized by the sale of rubber and tea coupons constitutesprofit or income within the meaning of section 6 (1) (a) or alternativelyunder section 6 (1) (h) or whether the said sum represents a realization ofcapital and is therefore not liable to tax; and also whether the assessorwas wrong in describing and assessing the amount in question as agricul-tural income, and, if so, whether the assessment is null and void orwhether the irregularity or mistake, if any, is covered by section 68 ofthe Ordinance.
H. V. Perera, K.C. (with him S. Nadesan and C. Renganathan), forassessee, appellant.—The price realized by the sale of the coupons is nottaxable. The coupons themselves are not income but are mere documentsentitling the holder to export a certain amount of rubber and tea. Thecoupon in the hands of an exporter cannot be regarded as income fromany tea or rubber estate belonging, to him. It is a right of export given toa person irrespective of whether he actually produces rubber or not.
■‘Profits” and “income” are defined in section 6 of Income Tax Ordi-nance. Income is not ’the same thing as receipt of money or money’sworth. It must come from some economic source like capital or labour.The relation of income to its source should be similar to that of the fruitto a tree or of the crop to a field—Pool v. the Guardian Investment TrustCo., Ltd. ‘ The meaning of “ source of income ” has been considered in thefollowing cases:—Fitzgerald v. The Commissioners of Inland RevenueCommissioner of Income Tax, Bengal v. Shaw Wallace & Co. In re JyotiPrasad Singh Deo of Kashipur’: Leeming v. Jones:‘; Brown v. NationalProvident InstitutionScoble et al. v. Secretary of State for India'.
Income, to be taxable, should be derived from the use of the economicsource and not from the conversion of it into money—F. H. Page v.W. ButterworthA. G. Shingler v. P. Williams & Sons".
' $ T. C. 167 at 17$.5 IS T. C. 333 at 341).
•- 1 T. C. 2X4 at 2X7.• L. R. (Ifill) A. C. 222.
' A. I. R. (1032) r. <:. 13S.7 4T. C. 47$ at 4$U.
1 .4. I. R. (1921) Paina in:;.e 12 Annotated T. (.'. 341.
■' l'I Ad notated T. C. 6:">.
314SOERTSZ J.—Thornhill v. The Commissioner of Income Tax.
H. H. Basnaydke, C.C., for Commissioner of Income Tax, respondent.—The income which has been taxed falls under either section 6 (1) (a) orsection 6 (1) (h).
Nobody who is not owner or possessor of rubber or tea plantations isentitled to coupons. Coupons are not of the nature of a grant or gift.Income from coupons is a part of the income from the land and isinseparable from possession of the land. According to the schemes of theRubber Control Ordinance, No. 63 of 1938, and the Tea Control Ordinance(Cap. 299) arid the rules passed thereunder, assessment each year is basedon the productive capacity of the estate. See definition of “ proprietor ”in section 71 of the Rubber Control Ordinance; also sections 14, 17, 23,26, 30, 33, 36, 37, &c.
On the question whether a particular receipt is capital or income, themeaning of “ income ” is dealt with in sections 2, 5 and 6 of Income TaxOrdinance. The word “ source ” in Income Tax law does not have a mean-ing different from its ordinary meaning; it is not a legal concept and hasno technical meaning—Baldwin and Gunn on Income Tax Laics of Aus-tralia (1937 ed.), p. 152; Cunningham and Dowland on Land-and IncomeTax Law and Practice, p. 227; Lamb v. The Commissioners of InlandRevenueCommissioner of Taxes v. Booysens Estates, Ltd.2 The meaningof income is discussed by Baldwin and Gunn at p. 3 where referenceis made to Tennant v. Smith”; Attorney-General of British Columbia v.Ostrum *; The Hudson’s Bay Co., Ltd. v. Stevens
H. V■ Perera, K.C., in reply.—A coupon is only a licence to export.That it is transferable is only an accident. Capital asset when convertedinto money does not become income.
Cur. adv. vult.
April 29, 1940. Soertsz J.—
This is a case stated under the provisions of the Income Tax Ordinance,but the questions which arise for consideration are so closely connectedwith the Tea and Rubber Control Ordinances that brief reference to themis necessary. Both these Ordinances restrict owners of tea and rubberlands to a certain exportable maximum of their potential produce, andprovide for the issue of coupons which are exchangeable for licences tocover the export of that maximum, and no more. The owners are not,however, involved in any obligation to produce the maximum allottedto them, or any part of it, in order to obtain these coupons. The coupons,when issued, are transferable and saleable. The resulting position is thatit lies at the option of tea and rubber landowners whether they willharvest their produce and use their coupons to obtain export licences andexport their maximum, and so obtain their income, or whether they willobtain their income by transferring or selling their coupons, or by usingpart of the coupons themselves and selling the remainder. These Ordi-nances leave the owners free to produce more than their allotted maximumbut that excess will be sterile unless these owners are able, by means ofcoupons, to provide themselves with export licences to cover it. Put ina few words, the scheme of the two Ordinances is to establish a co-operative
1 18 T. C. 212 at 217.3 3 T. <?. 158.
*B. A. L. R. 11918) A. D. 576.•• L. R.,11904) A. C. 144.r. r. 4 -t.
SOERTSZ J.—Thornhill v. The Commissioner of Income Tax.
agricultural undertaking, that is to say, a co-operative"business in whichall tea and rubber landowners work together in order to put on theworld’s market the quota, or as near it as possible, of tea and rubberallotted to this Island. But they need not all work in the same way orwith the same intensity. Indeed, some hardly work their lands at all,and yet they contribute to the end in view, for it may be truly said that“ they also serve who only stand and wait ”, inasmuch as they enableothers to produce usefully more than they would otherwise produce, inview of the restriction imposed. Ultimately, these tea and rubberlandowners acting thus together produce the quota, and, in view oftheir active or inactive collaboration, it may, with justification, be saidthat each has disposed his land to produce the individual quotas of teaand rubber that go to make up the Island’s quota.
To come now to the facts of this case. The appellant before us is theowner of tea and rubber estates. In the income tax year with which thisappeal is concerned, he received the tea and rubber coupons to which hewas entitled. He made use of some of these coupons to obtain exportlicences for himself, and sold others in the market to the value ofRs.. 19,022.19. In the return of income which he made to the Com-missioner he showed these proceeds from the sale of coupons in the class“ Income from Agriculture ”, but when the Assessor taxed this amount as“Profits from Agriculture” he was dissatisfied and appealed against theassessment to the Commissioner of Income Tax on the ground that“ proceeds of sale of coupons are not agricultural income as described insection 31 (2), nor any income liable to tax under the Ordinance”. TheCommissioner rejected his appeal and confirmed the assessment. Theappellant then appealed to the Board of Review, and, as is to be gatheredfrom the terms of the decision of that Board, he pressed his appeal beforethem on the grounds: —
t :'i) That the amount in question is not assessable income inasmuch as—he contended—it does not fall within the range of section 6 (1)of the Ordinance;
<b) That the Assessor “ has wrongly indicated that the amount is. assessable as agricultural income
) That “ the proceeds of sale of the coupons constituted capital andwere therefore free from liability to tax ”.
The Board refused io entertain any of these submissions and ruled that” the value realized by the sale of coupons …. comes within therange of section 6 (1) (a). If it does not come in under section 6 (1) (a),it falls within section 6 (1) (h)
Dissatisfied with this decision, the appellant asked the Board to statea case for the opinion of this Court, and the case stated to us is “ whetherthe said sum of Rs. 19,622.19 constitutes. profits or income within thedefinition of ‘profits’ or ‘income’ under section 6 (1)(o), or alter-
natively under section 6 (1) (h) ; or whether the said sum represents arealization of capital and is, therefore, not liable to tax; and also, whetherthe Assessor was wrong in describing and assessing the amount in questionas agricultural income, and, if so, whether the assessment is ….
null and void, or whether the irregularity or mistake, if any, is coveredby section 68 of the Ordinance ”.
SOERTSZ J.—Thornhill v. The Commissioner of Income Tax.
In my opinion, there is no substance in the appellant’s contention thatinasmuch as the Assessor has described this amount as agriculturalprofits he must either stand or fall by that description, and that if, inpoint" of fact, this is not “ agricultural income ”, the assessment is nulland void notwithstanding the fact that the assessment of tax mightproperly have been made under some other category of section 6 (1).This, I think, is a mere battle of words.
The real question involved is whether this amount is assessable to taxunder any of the classifications set forth in section 6 (1) of the Income TaxOrdinance, for, if I may permit myself the observation, to the Income TaxCommissioner it is the thing and not the name that matters. To him thething that is “ income ” is like the fragrant rose : it smells as sweet byany name.
Similarly, I am of opinion that the appellant's contention that theproceeds of the sale of the coupons constituted' a receipt of capital andnot of income is wholly untenable as is sufficiently shown by the observa-tions made on that contention by the Commissioner and by the Board ofReview. I should state here that these submissions were not adopted bythe appellant’s Counsel in the course of his very able argument before us,and I have made this brief allusion to them only because they have beenraised by the case stated to us for decision.
The one question that was ..debated with great vigour before .us was/whether this" amount could be assessed as' “ income” either'tinder section6 (1) (a) or under section 6 (1) (h). Counsel for the Commissioner ofIncome T^x rightly conceded that it did not fall within any-of the otherclasses of “ profits and income ” or “ profits ” or “ income ” enumeratedin section 6(1).
, Now, this word “ income”, although it. is on .everybody’s lips and runslike a tune—sometimes, a bad one—in everybody’s head, is a baffling sortof word when it comes to defining it for the purpose of the Income TaxOrdinance. The Ordinance itself, .after a feeble attempt to define itsynonymously with “ profits”, resorts in section 6 (1) to the less ambitiousmethod of enumeration, and sets forth the sources of profits and incomein contemplation as sources from which assessable income is derivable.We are, therefore, compelled to search for the meaning of this word“income” in the pages of case law.
We are told, for instance, in Tennant v. Smith ' that for income taxpurposes ‘ income ’ “ must be money or something capable of beingturned into money But obviously this statement needs qualification.All money and all things capable of being turned into money are notnecessarily “ income ” for tax purposes, for, as explained in the case ofThe Attorney-General of British Columbia v. Ostrum ", “ the word ‘ income ’is not a term of art, and what forms of receipts are comprehended withinit, and what principles are to be applied to ascertain how much of thesereceipts ought to be treated as income, must be determined in accordancewith the ordinary concepts and usages of mankind, except in so far as theStatute states or indicates an intention that receipts which are not income
1 (7X92) A. C. 110.
– (1904) .4. C. 14:.
SOERTSZ J.—Thornhill v. The Commissioner of Income Tax.
in ordinary parlance are to be treated as income ”, and, I would ventureto add, except in so far as the Statute states that receipts which, inordinary parlance, appear to be income are not to be treated as income.
Again, Sankey J. in the course of his judgment in Pool v. The GuardianInvestment Trust Co., Ltd.1, observed that “ as Mr. Justice Pitney pointsout in giving the judgment of the Supreme Court of the United States of
Americathe fundamental relation of capital to income lias
been much discussed by economists, the former being likened to the treeor the land, the. latter to the fruit or the crop ; the former depicted as areservoir supplied from springs, the latter as the outlet stream to bemeasured by its flow during a period of time”. He cites various defini-tions, one of which was that “ income may be defined as the gain derivedfrom capital, from labour, or from both combined ”, and points out that" the essential matter is that income is not a gain accruing to capital,but again derived from capital ”.
Cunningham and Dowland in their treatise on Land and Income TaxLaw and Practice examine a number of cases in which the meaning of theword “ income ” has been considered, and they sum up the essentials of“ income ” as follows at page 128 : —
“The essential characteristics appear to be the following : —
It must be a gain,
It must actually come in, severed from capital, in cash or its equi-
It must be either the produce of property or/and the reward of
labour or effort.^
It must not be a mere change in the form of, or accretion to, the
value of articles in which it is not the business of the taxpayer
Ce) It must not be a sum returned as a reduction of a private expense. ”
This statement, if I may say so, provides adequate tests by which toascertain whether a particular receipt is “ income ” or not, and all thatnow remains to be done is to examine the amount involved in this case bythese tests, or at least by as many of them as are applicable. To takethem one by one, there can be no question but that: —
This amount represents a gain : in fact, in his return, the appellant
showed it as income ;
It has actually come in, in the sense that it has reached the hands
of the appellant, ultimately in the form of cash, and as cash
severed from capital;
In a sense, it is the produce of property, for it has been produced
from the sale of coupons which were issued to him under these
Ordinances to cover his produce, real or hypothetical.
Counsel for the appellant, however, strongly contended that thesecoupons were not the “ produce ” of the appellant^ property, and that
1 (1921) S Tux Canes 1/S.
SOERTSZ J.—Thornhill v. The Commissioner of Income Tax.
'* produce ” in the context meant natural produce, such as fruit, leaves,latex, &c. This contention raises a question of some difficulty, and thatdifficulty arises from the fact that the quotaisation of tea and rubber hascreated an artificial state of things, which could hardly have been incontemplation when the Income Tax Ordinance was enacted. Inconsequence, the normal modes of assessment and the phraseology ofsome of the provisions of that Ordinance seem somewhat inappropriate ina case like this.
But, as I have indicated in the preliminary observations I made, ifattention is paid to the substance and not only to words and to the mereform of things, it seems to me that under the scheme of, and in theconditions created by, the Tea and the Rubber Control Ordinances, thesecoupons may fairly be described at least as the equivalents of the produceof property. Assuming, however, but not conceding, that this line ofreasoning is fallacious, these coupons fall to be treated as the reward oflabour or effort for in order to obtain these tea and rubber landownershave maintained, or had at some relevant point of time'to maintain, then-lands in a certain condition in conformity with the provisions of theOrdinances and the rules made under them, and this maintenance involvesor involved labour and effort however small or meagre.
Examined in this way, the amount in question appears to me to be" profits and income ” derived from a business, namely, an agriculturalundertaking, and assessable to income tax under section 6 (1) (a) of theIncome Tax Ordinance.
If. however, this view is incorrect and the amount is not assessableunder that sub-section,' I am clearly of opinion that it is not a receiptwhich escapes altogether from the Ordinance. I find it impossible toresist the conclusion that this is a taxable receipt for, as very pertinentlyobserved by the Board, “ if the appellant’s contention is accepted, theowner of a 500-acre estate may get it registered, refrain fromharvesting its produce, receive coupons, derive large sums of moneythereby, and escape taxation altogether in respect of the money hereceives in connection with his owning and maintaining an estate ”. Iagree with the Board that if it is assumed that this amount does not fallwithin the scope of section 6 (1) (a), it is caught up by the “ residuary ”sub-section (1) (h). for this amount is not something casual or somethingin the nature of a windfall. It is something that will recur, or, at least,that can be made to recur as long as the Tea and the Rubber ControlOrdinances continue in operation.
For these reasons, I am of opinion that this amount was rightly assessedto tax and I would confirm the assessment.
The appellant will pay the costs incurred by the Commissioner of IncomeTax in this Court. He will, however, be credited in the course of taxation•of costs with the sum of Rs. 50 paid by him under section 74 (1) of theOrdinance.
Keuneman J.—I agree.
THORNHILL v. THE COMMISSIONER OF INCOME TAX