C. A. SPELDEWINDE (Commissioner of Income Tax), Appellant, and EMIL SAVUNDARANA

007-NLR-NLR-V-59-C.-A.-SPELDEWINDE-Commissioner-of-Income-Tax-Appellant-and-EMIL-SAVUNDARANA.pdf

LORD SOJIERVBLL—Speldetvinde v. Sovundaranayagatn
25
[In the Privy Council]
1957 Present:Lord Tucker, Lord Cohen, Lord Somervell of Harrow,
Lord Denning and Mr. L. M. D. de Silva
C. A. SPELDEWINDE (Commissioner of Income Tax),Appellant, and EMTL SAVUNDARANAYAGAM, Respondent
Privy Council Appear Ho. 16 of 1956
S. C. 323—In the Matter of a Case stated for the opinion ofthe Supreme Court under Section 74 of the Income TaxOrdinance
Income tax—Money paid under ti mistake of fact—.Liability to be assessed as profitof a trade—Artificial or fictitious transactions—Income Tax Ordinance(Gap. JSS), ss. 0, 52 (2).
Money paul under a mistake of fact (e. g.( on the nssumptiontliat certain forgeddocumen's of title to goods are genuine) to tlio credit of a person in his tradingaccount is liable to be assessed to income tax as bis profit from a trade, unlessthe assesoee shows that the money lias been or will bo extinguished ordiminished by a claim made by the person who is entitled to receive it. Moneypaid under a mistake of fact cannot bo said to be the “ property ” of,or to “ belong ” to, the payer while it is st ili in the hands of the payeo, althoughthe payeo is liablo to pay the sum to the payer.
It is open to an Assessor to hold, if the facts warrant- it, that a company ora partnership should be considered, for income tax purposes, as artificial orfictitious and falling within the operation of section 52 (2) of the Income TaxOrdinance although, os far os third parties are concerned, there is a legal basisfor such company or partnership.
jA.PPEAL from a judgment of the Supreme Court reported in56 N. L. JR. 457.
John Senler, Q.C., with Reginald Hills and R. K. Handoo, for theAppellant.
R.Heyworth Talbot, Q.G., with S. Nadesan, Q.C., H. H. Munroe andSirimevan Amerasinghe, for the Respondent.
Cur. adv. vult.
June 24, 1957. [.Delivered by Lord Somervell of Harrow]—
This is an appeal from a judgpnent of the Supreme Court of Ceylonon a Case Stated under the Income Tax Ordinance by the Board ofReview. The respondent had applied for the case . in respect of adetermination of the Board dismissing his appeal against an assessmentto. income .tax by the Commissioner. The assessment-was confirmedsubject to a reduction in amount wliich is not in dispute in the appeal.
2xxx. … ;. ; . _ –
2J.N B 69096-1,593 (9/67)
26
LORD SO.MERyEIAs-^-Speldeic-inde v. Savundaranayagam
The decision of the Board of Review is final subject to questions oflaw (section 74). The Supreme Court reduced the assessment thesums which are in issue in this appeal, and the Commissioner of IncomeTax appeals.
The question is whether certain sums received by the respondent areprofits of a trade. Under the Income Tax Ordinance the tax is imposedon profits or income. Those words mean inter alia the profits from anytrade for however short a period carried on or exercised (sectipn 6).Trade includes every trade and manufacture, and every adventure andconcern in the nature of trade (section 2). Section 52 (2) is as follows :
' Where an Assessor is of opinion that any transaction which reducesor would reduce the amount of tax payable by an3' person is artificialor fictitious or that any disposition is not in fact given effect to, hemay disregard any such transaction or disposition and the personsconcerned shall be assessable accordingly.
In October, 1949, the respondent formed a private company called theTransworld Enterprises Ltd. (hereinafter called T. W. E.) with an issuedcapital of Rs. 100 of which he and his wife held 6/10ths. In Alhy, 1950,the respondent formed a company called Eastern Traders Ltd. (herein-after called E. T.) with a capital of Rs. 1,000. T. W. E. controlled 93 percent, of the shares.
The Commissioner said that it was not possible to accept as trueanything the respondent said or even to accept at its face value whatappears in most of the documents produced.
In October, 1950, letters passed between T. W. E. and one Renfro asrepresentative of the Hwa Shill Co., Tientsin. The Chinese companywere to buy 45,000 drums of lubricants as specified in a letter of 23rdOctober at a price c.i.f. §1,230,000. A credit was to be opened inCeylon, India, or Switzerland in favour of an entity described by T. W. E.as “ our subsidiary firm Messrs. Eastern Enterprises Co. ” A letterof 23rd October from the Chinese Company’s representative in Colombo,presumably Mr. Renfro, though his signature was illegible, contained thefollowing paragraph :—
We suggest that you approach in a. very discreet manner oneof the undernoted organizations whom we have reasons to believewill not be averse to helping you obtain supplies for shipment toChina.
Societe Mediterrannienne de Produits Petroliers.
Marseilles Petrole France, Paris.'
Association of Independent Oil Cos., Teheran.. ,. …
Anglo-Iranian Oil Co., London. …..
The Eastern Enterprises Co. (hereinafter called E. E.) was registeredby the respondent as starting business on 27th October the partnersbeing E. T. and T. W. E.''
On 27th October E. T. and T. W. E. as partners in E. E. granted therespondent a Power of Attorney in very wide terms to act in the conductand management of all their affairs in Europe and the U.S.A."
LORD SOMERVELL—Spcfdewuufe v. Savundaratiayagam
27
Arrangements were made by the Chinese Company or their representa-tive for the opening of the credit by the Union Bank of Sw itzerland atZurich.
On the 2Sth November, 1950,' the respondent left for Europe. Heselected the first company on the list, hereinafter called S. 51. P. P.and wrote to them from London on 30th November. Arrangements weremade with a 51. Duval one of the directors of the S. 51. P. P. for thatcompany to supply the lubricants. The credit opened by the UnionBank was in a usual form, the Bank requiring a sight draft on theChinese company, invoices, bills of lading, Lloyds survey certificatesconfirming loading, analysis certificates from an independent laboratoryand insurance policies.
The S. 51. P. P. handed over the required documents to the respondent.The respondent presented these documents to the Bank on the 13thJanuary and the Bank after four da3-s paid SI,230,000 to the respondentas the attorney of E.E. The documents were subsequently found to beforgeries. Paragraphs 11 and 12 of the Case Stated are as follows :—
“ 11. Out of this sum of 1,230,000 dollars the appellant-assessee asthe attorney of the Eastern Enterprises Co. paid Duval 825,552.50 dol-lars. Further the appellant-assessee as attorney of the Eastern Enter-prises Co. drew out the sum of 235,000 dollars in cash at the Bank’scounter and paid it to himself in his personal capacity as commissionearned by him for his part in this transaction. The appellant-assesseealso as attorney transferred a sum of 109,447.50 dollars (equivalentto Rs. S04.7S5) by telegraphic transfer to the credit of the T. W. E.Ltd. at the Bank of Ceylon, Colombo. This was followed up by acable by the appellant-assessee to Cji'il Gardiner as to how the moneysent by telegraphic transfer to T. V. E. Ltd. was to be distributed.
12. At the time the appellant-assessee received payment from theBank of the said amounts totalling 1,230,000 dollars, the appellantbelieved bona fide that the Bank was making payment on genuinedocuments and he was not aware of the fraud which had beenperpetrated by' Duval in connection with the documents presentedto the Bank till about the end of March, 1951, or beginning of April”.
Out of the proceeds in rupees of the SIG9,447.50 remitted to T. W. E., adividend of Rs. 30,000 per share of Rs. 10 was declared. The respondentmd his wife received Bs. ISO,000 on their shareholding. The respondenttlso received Rs. 5,000 described as Directors’ fees. The remainder of theiroceeds was paid away to a company' and individuals. The Board ofdeview has treated these latter payments as disbursements on which theespondent is not liable to tax. The appellant accepts this position andt is unnecessary therefore to set them out.
The assessment as confirmed by the Board was as follows :—
The equivalent of the §235,000 received by the appellant (the
present respondent) at the counter of the Swiss Bank—
Rs. 1,110,204.
The sum paid to the appellant and his ivife as dividend in terms
of the Resolution of T. W. E.—Rs. 180.000.
28LORD SOMERVELL-—Speldemindc v. Savundaranayagam
Directors’ fees—Rs. 5,000.
Other income shown in the appellant’s return—Rs. 28,624.
The respondent does not dispute item (4).-
The respondent was back in Colombo on 22nd January, 1951, carryingwith him approximately $235,000 in TJ. S. A. currency notes. He waspaid the equivalent in Ceylon currency by the Controller of Exchange.He dealt with the money as his personal assets.
The respondent then dissolved the partnership and took steps towind up T. W. E. and E. T.
The “ Saga ” on which according to the documents the lubricantshad been shipped, not having arrived by the beginning of March theChinese company asked the Swedish East Asia Company, the ownersaccording to the documents, for information. That company statedthat they had no such ship.
There were letters from the Chinese company and the Bank to E.E.They both claimed the money. If the Bank were entitled to debit theChinese company the Bank would have suffered no loss. If the Bankwere not entitled to debit the company, the company might have aclaim for breach of the contract of sale but not for the amount of thecredit money.
The respondent as attorney of E. E. denied liability and put theresponsibility on the Bank. Subsequently E.E. informed the Chinesecompany without prejudice to their rights that they would be preparedto compromise at a lower figure after the claim made by the IncomeTax Department was settled.
The respondent conducted this correspondence in the name of E. E.although the partnership had been dissolved.
No sum has been paid to either the Bank or the Chinese Companyand t-he Commissioner and the Board of Review found as a fact thatthe money will not be repaid.
The Board of Review treated the $235,000 as money which therespondent had lawfully earned as commission. This must have beenon the basis that there was a contract of agency' under which commis-sion was earned when the respondent obtained the documents fromthe S.M. P. P. whether those documents were or were not genuine. Ifthis view were right, it would provide an answer to the respondent scontention in law which will be stated in a moment. There is of courseno evidence of any contract of agency except the respondent s statementswhich are of no evidential value.
The respondent was in control of tho whole matter and dealt with themoney as his own. In considering the other items and the applicationof section 52 (2) of the Income Tax Ordinance the Board of Reviewafter considering the facts held " that as far as the outside world isconcerned and as far as third parties are concerned there was a legalbasis for the companies and the partnership but so far as the Income
LORD SOMERVELL—Spetdewinde v. Savundaranayagam
29
Tax Ordinance is concerned they should be considered as fictitiousand artificial to como within the operation of section 52 (2) of theOrdinance
The respondent did not dispute this and so far as the §235,000 isconcerned his argument is easier to apply if he is treated for incometax purposes as if he were a principal receiving in his own right thebalance of the credit moneys!,
The respondent submitted and submits that the payment by theBank having been made under a mistake of fact the money paid tothe respondent still “ belonged ” to the Bank or to the Chinese Company.It could not therefore he submitted bo treated as a credit item in histrading account. In Kelly v. Solari 1 Parke B. said, “ I think wheremoney is paid to another under the influence of a mistake, that is, uponthe supposition that a specific fact is true, which would entitle the otherto the money, but which fact is untrue, and the money would not havebeen paid if it had been known to the payer that the fact was imtrue,an action will lie to recover it back, and it is against conscience to retainit, though a demand may be necessary in those cases in which the partyreceiving may have been ignorant of the mistake. ”-
The Supreme Court accepted the submission and referred to Lord.Sumner’s opinion in R. E. Jones v. Waring c0 Gilloiv Limited2_;Reference was also made to Lord Wright’s statement in Nonvich Union-Fire Insurance Society Limited xk Wm.H. Price Limited3. “The mistake,being of the character that it was, prevented there being that intention,which the common law regards as essential to the making of an agreementor the transfer of money or property. ” The words and phrases reliedon as to “property’’ in money not passing and as to money paid still“ belonging ’’ to the payer may well have come down from the timewhen under the old action of debt the defendant was regarded ashaving in his possession something belonging to the plaintiff which hadto be “ restored ” (Ifoldsworth History of English Law, Vol. II, 366,Vol. Ill, 420). In form it was similar to the action for the recovery ofa chattel. Later the action of indebitatus assumpsit, based on a promiseexpress or implied, was extended to cover cases such as money paidunder a mistake of fact (United Australia Limited v. Barclays BankLimited*). At the present day when it is said that the “property” inmoney has not passed what is meant is that the payee is liable to payto the payer the same amount which ho has received. The phrase hasnot the significance which the Supreme Court gave to it.. ■
The respondent before the Board put the argument in another way.
He submitted that in a purchase and sale transaction no profit arisesuntil the seller becomes entitled to receive the purchase price. In thepresent case therefore there was not even a conditional or prima faciecredit item when the money was paid. If this argument were right, it .would seem to follow that in every case where there is a possibility ofan adverse claim no credit item can be entered until the facts havo been
1 9 M. <0 W. 54.3 11934) A. O. 455 al p. 462.
* [1926] A. C. 670, 696.* [1941] A. C. 1, pp. 26, 27.
2*J. *». B 69009 (9/57)
30
LORD SOMERVELL—Speideicinde v. Savundaranayagam
■ascertained. It would also seem to follow that there is no profit evenif no claim is or ever will be made if on the facts the seller was notentitled to the price.
No authority was cited for this proposition..
Their Lordships are of opinion that the argument, which commendeditsolf to the Supreme Court is the wrong approach to the present claim.
The difference between the amount paid by the Bank and the amountpaid to S.M. P. P. was on the face of it, subject to expenses, the profitof the transaction. It was when received so regarded and if books werekept it would so appear in them. There are of course numerous casesin which after the purchase price has been paid there is a claim by thebuyer. It may be a claim to reject the goods and recover the purchaseprice, it may be a claim for damages, the goods being retained. Theseller may dispute the claim, successfully. The buyer though having aclaim may refrain from pressing it to avoid expense and preserve friend-ly relations. From the aspect of income tax the question is whethermoney has had to be paid out in respect of the transaction. If it hasbeen it will normally come in on the debit side of the tax account-.
If a claim is plainly going to be made, which may equal or exceed theamount of the purchase price the taxpayer will have a strong case fortreating the “ receipt ” as conditional only until the final profit of the•transaction is settled. This would have special force if the trade wasbeing discontinued and no adjustment was later possible.
In their Lordships’ opinion the fact that the " claim ” is under Englishprocedure for money had and received makes no difference. The taxpaj'erhas still to show that the payment he has received as the purchase pricehas been or will be diminished or extinguished. If a claim having beenquantified and admitted the Revenue authorities are satisfied thatit will be paid it could, no doubt, be treated as an ordinary book debt.
In the present case therefore the respondent in order to succeed must•show that the sums on which the assessment is based have been or willbe extinguished or diminished. He does not seek to show that they havebeen extinguished or diminished. On the question as to whether theywill be, it may be sufficient to refer to the finding of fact. It is worthnoting the inconsistency of the respondent’s case. If as he maintainsto the Revenue the money is not his money, why has he not repaid itor any part of it to the Bank or the Chinese company?, or if hewas doubtful as to which was entitled to it, into a joint account ?
The Inspector of Taxes placed great reliance on Southern Baihvay■of Peru Ltd. v. Owenx. That case dealt with-deductions which could ormight be based on accountancy apportionments of future liabilities.It' was said by Lord Radcliffe, Earl Jowitt concurring, that no sumshould be so deductible unless it was an essential charge against thereceipts of the jear. The problem there being considered seems to theirLordships quite different from the problems raised by actual andpotential claims against sellers who have obtained money under acredit and it would be wrong to treat the language there used as applicable.
11950] 2 A. E. n. 72S.
K. D. do SfLVA, J.—Subrainaniatn v. Sudaiaitnany Wadar
31
The respondent relied on jllorley v. Tatlersa.il *. That case dealt withpurchase monies received by auctioneers for vendors which had notbeen claimed by the vendors. It was held that these could not bptreated as trading receipts. The basis of the judgment in that case wasthat these sums were not received as profits or credit items on an accountof a trade.-
The sum in question here was received as the purchase price of goodssold. It was a profit of a trade and the respondent has failed to satisfythe tribunal of fact that there are sums to be placed on the other sideof the account which would extinguish or diminish it.
For the reasons which have have been given their Tordships will humblyadvise Her Jlajesty that the appeal be allowed and the determination ofthe Board of Review confirmed. The respondent must pay the appellant’scosts in the Supreme Court and of this appeal.
Appeal allowed.