4 REPORTS-1924, SOOTS LAW TIMES. Inland 1083. 1st Div. income. Perhaps I should explain that I have houses is restricted and offers no prospect of used the expression" public burdens ”—as the improvement. Suppose further that the house “. Revende v. parties themselves did—to include feu-duties. or tenement is the subject of what is known in Fotbring- The difference between the Revenue and the the law of Scotland as a proper” liferent ham. respondents does not actually come into view the simplest example of a life interest. Finally, November 17, in determining which of the two rules is applic- suppose that at the date of the death of the able to the present case. For they are agreed liferenter the gross income from the property that it is the second of the two which applies. can be shewn—alike in the light of past experiBut this is only because it happens that the ence, and on any reasonable conjecture of the extent of Lady Douglas Stewart's interest in future-to be such as barely to meet the public the Murthly property – viz. £4000 a year-burdens and the cost of ordinary and necessary is less than the whole income of the property, repairs. What benefit could be imagined to whether that income be reckoned gross or net. arise or accrue in these circumstances by the The difference shews itself, however, the moment cesser of the life interest ? It would be no the second of the two rules comes to be applied. benefit to a fiar or other person entitled to the The parties were, I think, agreed in reading reversionary interest to step into the shoes of the expression equal to (used in that rule) as the liferenter as the person liable in payment of meaning equivalent or corresponding to.” the public burdens ; and equally it would be Such at any rate, in my opinion, is its meaning ; no benefit to become entitled to ingather a for the “ principal value of an addition to the gross income whereof the balance (after the property cannot be equated with ' the public burdens had been met) must be spent income of the property to which the interest in ordinary and necessary repairs, as the extended ” except by using the capital equiva- indispensable condition of preserving the prolent of the proportion of the income thus perty itself from perishing of neglect and defined. Now, it makes a material difference becoming a total loss. It seems clear that, to the process of capitalisation whether the in the case figured, the fiar or other reversioner income to be capitalised is gross or net, and would be no whit better off after the death of (if net) what are the deductions to be made the liferenter than before it; in short, no before striking it. benefit would arise or accrue by the cesser of The question thus raised is one of pure the life interest, precisely because no net income statutory construction : and for its solution it was set free by the death of the deceased. And is reasonable to use the statute as its own in that case there would be nothing to value interpreter, selecting that one of the three under subsection (7) of section 7. A precisely possible meanings attributed to the word similar course of reasoning leads to the conincome which accords best with the statutory clusion that, when a benefit does arise or accrue, scheme of which subsection (7) of section 7 it arises or accrues only to the extent to which forms part, and which makes the statute the net income of the property is set free by the consistent with itself. The hypothetical con- death of the deceased. In that case there does ceptions introduced into the Finance Act, arise or accrue a benefit to be valued according 1894, may make this—the ordinary—method to one or other of the rules in subsection (7) of of statutory construction less easy than section 7. The only question in the case may in other taxing Acts which adhere more thus be said to answer itself; income means closely to actualities. But if the main beneficial income, that is to say net income, conception — hypothetical though it be after public burdens and the cost of ordinary which runs through subsection (1) (b) of and necessary repairs have been met. section 2 and subsection (7) of section 7 is If this is sound, the valuation rules become once clearly grasped, the answer to the question intelligible notwithstanding their highly artidoes not seem to me to present much difficulty. ficial character. If the life interest extended to Subsection (7) of section 7 is a valuation (or absorbed) the whole net income of the clause, not a charging clause. The subject of property, the value of the benefit is to be valuation is the benefit (referred to in subsection reckoned as the market value of the property. (1) (b) of section 2) arising or accruing from the If the life interest absorbed only part of the cesser of an interest—the existence and extent net income, the value of the benefit is to be of which benefit determines (according to the reckoned as the market value of an addition last-mentioned enactment) what proportion of (or increment) to the property corresponding the property, in which the interest was, shall to the proportion of the net income which the be deemed to have passed on the death of the life interest absorbed. The operative part of deceased and so to attract duty. Now, a the second of these rules might, I think, have benefit implies advantage or profit of some kind. been expressed thus—the value of the benefit Suppose a house or tenement of houses to be is to be reckoned as a proportion of the market situate in a locality where the demand for value of the property equal to the proportion a REPORTS-1924, SCOTS LAW TIMES. 5 1928, of the net income absorbed by the life interest. per cent. of the rental-purely sporting subjects 1st Div. The draftsman has (not unnaturally, as it excluded. Ordinary and necessary repairs are Inland appears to me) conceived the release of the optional only in the sense that if an owner Revenue v. property from the burden of the life interest as chooses to allow his property to become a Fothringan addition (or increment) to the property ruin or a desert under the operation of the laws ham. itself, capable of estimation by reference to of nature, there is nothing in the law of Scotland November 17, market value. But the Revenue maintain to prevent him. But ordinary and necessary that it is necessary for the proper interpretation repairs are the price which must be paid for of the section to figure this addition in the shape preserving a property in existence. They are of a separate and independent estate—in incommoda which are essential, according to the character such as to present a microcosm of the nature of most (though not of all) kinds of Murthly property, and in size such as to bear real property, to prevent the loss of them, and & sufficient income to produce the £4000 a to enable them to bring any commoda whatever year to which the deceased annuitant was to their owner. The gain sought by saving on entitled. The argument, of course, was that ordinary and necessary repairs is only another this income must be net and not gross, because aspect of the loss consequent upon the inevitthe annuity of £4000 was payable net. I am able deterioration of the property, and could not at all sure that the idea of an addition to not, as I understand the Act of 1894, be the property was intended by the draftsman brought within the category of a benefit. to take this somewhat fanciful shape. For the The circumstances of the Murthly property cesser of a life interest does involve an addition and the method adopted for its valuation or increment to the property in the hands of the create no difficulty in arriving at the correct fiar or other reversioner; and there is nothing number of years' purchase to be applied to the impossible or out of the way in figuring the net income of the property, or to that propormarket value of that addition or increment as tion of it to which the annuity extended, viz. e, value which corresponds in amount with the £4000. I think, therefore, the contention of proportion of the net income set free. I do the Revenue should prevail. not say that the view so strongly insisted in by the Revenue is wrong; indeed, I think it Lord Skerrington.—The only question which results in the same conclusion at which I we have to decide is whether in carrying out have arrived by a different road. But, for the calculation prescribed by section 7 (7) of reasons which I need not elaborate, I distrust the Finance Act, 1894, an allowance for repairs the reliability of the microcosmic conception ought to be deducted from the gross income involved in it; and I confess that the addition of a landed estate as was contended for by the of another to the already sufficiently numerous Inland Revenue. The defender, following the fictions which obscure the construction of the example of the defenders in the case of Lord Act of 1894 brings more confusion than enlight-Advocate v. Henderson's Trs. (7 F. 963), conenment to my mind. I prefer, therefore, to rest ceded in his third plea in law that feu-duties my judgment on what humbly seem to me to and public burdens ought to be so deducted, be broader and simpler grounds. It will be and this plea has been sustained by the Lord observed that according to those grounds the Ordinary. The sole question argued before same meaning is given to the word income the Lord Ordinary was whether repairs could wherever it occurs in subsection (7) of section 7, be assimilated to feu-duties and public burdens. and that that meaning makes the valuation He decided this question in the negative and section a consistent and harmonious adjunct to in favour of the defender. While I do not subsection (1) (b) of section 2, the relative agree with all his reasoning, I think that he charging section. came to a correct conclusion upon the only The Lord Ordinary has drawn a distinction question which he was asked to consider. between public burdens and repairs, and holds When the case came to the Inner House the that income means net income after meeting the defender's counsel argued, with no great former only. It is right, however, to explain confidence as it seemed to me, that the judgthat counsel for the respondent did not present ment reclaimed against might be supported any argument in the Outer House in support of upon a broader ground which if sound would the view that income, should be construed as lead to the conclusion that feu-duties, public meaning gross income. The Lord Ordinary burdens, and repairs ought not to be deducted says that repairs are variable and optional. from gross rental for the purposes of section They are not, however, difficult of ascertain- 7 (7) of the Finance Act, 1894. This argument ment for valuation purposes at an annual was, of course, still open to them, but only for average figure sufficient to meet ordinary and the purpose of supporting and not of altering necessary upkeep. In the present case that the Lord Ordinary's interlocutor. has been done, and the figure agreed on is 10 The broader argument, which the Lord 6 REPORTS-1924, SCOTS LAW TIMES. Inland CG 1923. lør Div. Ordinary was not asked to consider, is as to the annual sum of £4000 neither more nor follows. The purpose of section 7 (7) of the less. Counsel for the Inland Revenue, howRevenue v. Finance Act, 1894, is to provide a formula ever, pointed out quite justly that the annuity Fothring- for valuing the benefit accruing or arising was a free one, and that it was not clogged ham. from the cesser of an interest in property with any corresponding legal liability for November 17, which must by section 2 (1) (6) be deemed to feu-duties or public burdens or with any have passed on the death of a person who died responsibility for the upkeep of the estate. after 1st August 1894. In the present case In short, upon the death of the annuitant the we have to value the benefit accruing to a landowner became richer by £4000 a year landowner from the cesser by the death of without suffering any addition to his liabilities the annuitant of a free life annuity of £4000 and responsibilities a landowner. This charged upon the rents of his estate by a consideration is so obvious that it cannot former heir of entail under the powers of the have escaped the attention of the Legislature. Aberdeen Act. The annuity as granted was One way of meeting the difficulty would have for more than £4000, but it was restricted been to enact, as has been done in other departafter the death of the granter to a sum ments of the legislation, that certain enumerated which the parties agreed to be one-third of the deductions should be made from the gross free rental of the estate. Accordingly, the rental, and that the amount of each deduction annuitant's interest in the rental of the estate should be calculated in the way directed by extended to the sum of £4000 per annum. the statute. This course was not adopted, The formula for valuing the benefit sustained but another, and as it seems to me a simpler by the landowner in a case like the present and more convenient, device was resorted to is exceedingly artificial. It requires us to by means of a third legal fiction. Having resort to no less than three legal fictions, of ascertained that the annuitant's interest in which two are highly advantageous to the the income extended to £4000 a year, we are Inland Revenue, whereas the third, being of directed to regard this sum not as a free lifeadvantage to the taxpayer, is, as it appears to rent annuity but as the income of a property me, tacitly repudiated by the Inland Revenue. similar in all respects to the property over The first fiction is that the benefit accruing which it was secured. It so happens that the to a landowner through the death of a life property in the present case consists of land annuitant is the same whatever may be the in the county of Perth. Accordingly, an age of the annuitant. The second fiction is annual sum which as enjoyed by the annuitant that the benefit to a landowner can be measured was terminable on her death but which on by the market price of the property, and that the other hand was exempt from the burdens it is equal either to the whole market price or affecting land-ownership must now be regarded to an aliquot part of the market price accord- as something very different, viz. as the pering as the annuitant's interest extended to manent income of a landed property forming the whole income or only to a part of the an “addition " to the estate of Murthly, and “ income. The market price of a property therefore as clogged with liabilities and responmay be exceptionally great owing to the sibilities similar pro rata to those applicable supposed existence of undeveloped minerals, to the income derived from Murthly. One of and it is not easy to understand why in such a the objects of this legal fiction was, in my case the cesser of a life annuity of fixed amount opinion, to avoid difficulties of the kind now should be supposed to confer an exceptionally raised by the Inland Revenue. If this view great benefit upon the landowner who already be sound, the lapsed annuity of £4000 ought to possessed during the annuitant’s life full power have been compared with the gross rental of to develop his estate as he might choose. the estate of Murthly without any deduction The third fiction has to do with the mode of therefrom. ascertaining the fraction which when applied I shall now consider the case as it was argued to the market price will give the statutory to, and disposed of by, the Lord Ordinary. value of the benefit accruing to the landowner The question is whether, assuming that feufrom the cesser of a life annuity of fixed amount duties and public burdens ought to be deducted but not exhausting the full rental of the pro- from the gross rental for the purposes of perty. The general meaning of the subsection section 7 (7) of the Finance Act, 1894, an is clear enough. The fraction for which we average annual sum in respect of repairs are searching must depend upon the proportion ought also to be deducted ? which the income to which the annuitant's Feu-duties and public burdens are often interest extended bears to the whole income referred to as burdens upon the rental of an of the property. In the present case I did estate, but this is not a strictly accurate exnot understand it to be disputed that the pression as appears from the case of Prudential annuitant's interest in the income extended Assurance Co. v. Cheyne (1884, 11 R. 871) a REPORTS-1924, SOOTS LAW TIMES. 7 1033. was a (relating to a feu-duty) and the case of Argyll of the view that no such deduction was intended lor Div. County Council v. Walker (1909 S.C. 107) to be authorised. The force of this argument Inland . (which had to do with a local rate). It is is not weakened by pointing out that the Revenue v. difficult, however, to suppose that the con- position is different in appearance at least) Fothringstruction and effect of the subsection depend if the crucial fact is disguised in the manner ham. upon technicalities such as those which the proposed by the pursuer. His counsel en- November 17, Court had to consider in these two cases. If countered a similar difficulty when he was the practice of deducting feu-duties and public asked whether his argument would not justify burdens from the gross rental of heritable a deduction in respect of renewals, insurance, property is assumed to be in conformity with and management-objects which in the ordinary the true intent and meaning of the subsection, case are just as necessary as are repairs if the the only reason which occurs to me is the broad rental is to be maintained and the landowner consideration that feu-duties and public burdens is to receive the benefit of it. Expenditure of are annually recurring debts which a person this kind can be and often is estimated on an is under a legal obligation to pay in respect average of years in the manner proposed by of the ownership of heritable property, without the pursuer. No satisfactory answer any option or discretion on his part in regard given to this question. to the time or the amount of the payment. Upon both the broader and also upon the If that is the principle which justifies the narrower ground I think that the interlocutor deduction of feu-duties and public burdens reclaimed against should be affirmed. from the gross rental of a landed estate it seems to me to have no application to the deduction Lord Cullen.--The annuity enjoyed by the now claimed by the Inland Revenue. Apart deceased Lady Douglas Stewart was £4000 per from exceptional cases such as that of a proper annum. The annual rental or income of the liferenter, who in this connection may be entailed estates, whether taken gross or net, regarded as an owner, a landowner is under no was of much larger amount. The case is, therelegal obligation to keep his estate in proper fore, one which clearly falls under section 7, repair. Nor is it always necessary that he subsection (7) (6), of the Act of 1894. The should do so from the point of view of prudent provision applicable to it runs thus : The estate management, as he may have it in view value of the benefit accruing or arising from the to replace an old building by one which is more cesser of an interest ceasing on the death of the suitable or to alter the manner in which his deceased shall . if the interest extended to property has hitherto been utilised. These less than the whole income of the property, be may be represented as exceptional cases, but the principal value of an addition to the prothe fact remains that the amount expended perty equal to the income to which the interest by a landowner upon repairs and the time extended." when such repairs are executed depend in This provision, in so far as it speaks of “an great measure upon his own discretion when addition to the property equal to the income to applied to circumstances which may vary which the interest extended” is not happily greatly from year to year. The pursuer seeks worded. According to the ordinary use of to meet this difficulty by taking an average language, the words “ an addition to the of the amount actually expended by the property" signify a capital addition. defender upon repairs during some particular pansion or enlargement of the rental or income period which I assume to have been immedi- derived from a property would not be spoken of ately prior to the death of the annuitant. as an addition to the property. From this Estimates of this kind are useful for various point of view, the words "equal to the income purposes, but they seem to me to be quite out are elliptical, and the required paraphrase of place in the case of a taxing statute which would be, as suggested in the case of Attorneymakes the income of a particular year a factor General v. Power ([1906] 2 I.R. 272), from which the amount of a tax is to be cal. addition to the property yielding an income culated. Assuming it to be established aliunde equal to the income to which the interest that repairs constitute a proper statutory extended." Another view advanced in argudeduction, I see no warrant for striking an ment was that the words an addition to the average though it might have been fair both property " are are employed in an unusual sense so to the Inland Revenue and to the taxpayer as to mean an enlargement of the income that this course should have been expressly derived from the property by the person to authorised. Where, however, the question is whom the benefit accrues or arises through whether the statute does or does not sanction the cesser. I do not clearly see that this reading a deduction in respect of repairs, the essentially would in the end lead to a different result in Auctuating and varying amount of such ex- the estimation of the value of the benefit accrupenditure affords a strong argument in favour ing or arising. I prefer, however, the other 66 an 8 REPORTS-1924, SCOTS LAW TIMES. 1923. 1st Div. reading, owing to the difficulty I feel in taking beneficial to the owner would be not merely the words an addition to the property Inland doubled but more than doubled. No doubt Revenue v. otherwise than as meaning a capital addition. from a capital point of view the annuity has, Fothring- So taking them, one is bidden by the statute, quoad the annuitant, the element of inferior ham. modo calculandi, to figure the cesser of the value—that it is temporary. But according to November 17, annuity as making a capital addition to the the Act its cesser is to be treated as amounting property, i.e. the entailed estates, yielding an to a permanent accrual of benefit to the person As I followed the argument, the parties were of the estates, such net income should be reached not in dispute about the suitability of this by deducting from gross income only feu-duties formula. The controversy came to turn on and annual public burdens and not deducting the word “income” used in it. And the reason anything for repairs. On this alternative view, for this is that in the case of the property the the defender admits the deduction of feu-duties gross income is subject to certain necessary and public burdens because the payment of deductions before one reaches the net income them is necessary and the amount taken out of which is of benefit to the defender, while in the gross income to meet them is not of benefit case of the hypothetical addition the income to the defender. But he differentiates repairs thereof—i.e. the annual amount of the annuity as being, in the words of the Lord Ordinary, -is a clear income subject to no such deduc- " optional and variable.” They are certainly tions, and therefore, all of benefit to the recipient. variable. But in the case of landed estates This difference leads the defender to contend such as we are dealing with, as in the case of that the word “income” in the statutory other kinds of heritable property, there is a provision in question means gross income. burden of repair which is necessary and not This contention, if sound, would lead to a result optional if the property is to maintain its more favourable to him than that contended income-producing capacity. The calculation for before the Lord Ordinary and in his plead- of principal value here proceeds on the basis ings, where his calculation of principal value of an income which it is assumed will be mainproceeds on a comparison of the annual amount tained, and, in order so to maintain it, expendiof the annuity, not with the gross income of ture on repairs is unavoidable. The fixing of the property but with a net income thereof a standard of necessary repair is a familiar arrived at after deducting feu-duties and enough topic with men of skill and experience. annual public burdens. Here the parties are on record agreed in saying The statute contains no definition of the word that £1038 represents the average annual income.” But it is clear, to my mind, that expenditure on repairs, de facto, over a series of in making valuations for the purposes of duty years. This is not quite the same thing as under the Act the word cannot be taken as saying that £1038 is to be taken as the average meaning gross income irrespective of charges annual amount of necessary repairs; but I necessarily to be defrayed therefrom before understood counsel to be agreed at the bar any benefit accrues or arises to the recipient. that it might be so taken in the event of the What has to be valued is the benefit accruing or calculation of principal value falling to proceed, arising. Now let it be supposed that the quoad repairs, on the footing contended for by property charged with this annuity of £4000 the Crown. I am of opinion, for the reasons yielded a gross income of £8000. The annuitant above indicated, that it should so proceed, and would have taken a clear £4000 per annum. that the claim made by the Crown is entitled The defender would have taken the other £4000 to prevail. but would have had to defray therefrom certain necessary annual charges. Clearly, in point of Lord Sands.-The estate of Murthly, to which annual benefit the annuitant would have been the respondent succeeded as heir of entail, was in the better case. And, on the cesser of the burdened with an annuity of £4000 per annum annuity, the annual income from the property in favour of Lady Stewart, the widow of his |
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