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REPORTS-1924, SCOTS LAW TIMES.
houses is restricted and offers no prospect of
18T DIV. income. Perhaps I should explain that I have used the expression Inland public burdens -as the Revenue v. parties themselves did-to include feu-duties. Fothring- The difference between the Revenue and the ham. respondents does not actually come into view November 17, in determining which of the two rules is applicable to the present case. For they are agreed that it is the second of the two which applies. But this is only because it happens that the extent of Lady Douglas Stewart's interest in the Murthly property-viz. £4000 a year is less than the whole income of the property, whether that income be reckoned gross or net. The difference shews itself, however, the moment the second of the two rules comes to be applied. | 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 life interest, precisely because no net income was set free by the death of the deceased. And in that case there would be nothing to value under subsection (7) of section 7. A precisely similar course of reasoning leads to the conclusion that, when a benefit does arise or accrue, it arises or accrues only to the extent to which the net income of the property is set free by the death of the deceased. In that case there does arise or accrue a benefit to be valued according to one or other of the rules in subsection (7) of section 7. The only question in the case may thus be said to answer itself; income means beneficial income, that is to say net income, after public burdens and the cost of ordinary and necessary repairs have been met.
The question thus raised is one of pure statutory construction: and for its solution it is reasonable to use the statute as its own interpreter, selecting that one of the three possible meanings attributed to the word income which accords best with the statutory scheme of which subsection (7) of section 7 forms part, and which makes the statute consistent with itself. The hypothetical conceptions introduced into the Finance Act, 1894, may make this the ordinary-method of statutory construction less easy than in other taxing Acts which adhere more closely to actualities. But if the main conception hypothetical though it be which runs through subsection (1) (b) of section 2 and subsection (7) of section 7 is once clearly grasped, the answer to the question does not seem to me to present much difficulty. Subsection (7) of section 7 is a valuation clause, not a charging clause. The subject of valuation is the benefit (referred to in subsection (1) (b) of section 2) arising or accruing from the cesser of an interest-the existence and extent of which benefit determines (according to the last-mentioned enactment) what proportion of the property, in which the interest was, shall be deemed to have passed on the death of the deceased and so to attract duty. Now, a benefit implies advantage or profit of some kind. Suppose a house or tenement of houses to be situate in a locality where the demand for
If this is sound, the valuation rules become intelligible notwithstanding their highly artificial character. If the life interest extended to (or absorbed) the whole net income of the property, the value of the benefit is to be reckoned as the market value of the property. If the life interest absorbed only part of the net income, the value of the benefit is to be reckoned as the market value of an addition (or increment) to the property corresponding to the proportion of the net income which the life interest absorbed. The operative part of the second of these rules might, I think, have been expressed thus-the value of the benefit is to be reckoned as a proportion of the market value of the property equal to the proportion
REPORTS—1924, SCOTS LAW TIMES.
of the net income absorbed by the life interest.
per cent. of the rental purely sporting subjects 1st Div.
The circumstances of the Murthly property
Lord Skerrington.-The only question which we have to decide is whether in carrying out the calculation prescribed by section 7 (7) of the Finance Act, 1894, an allowance for repairs ought to be deducted from the gross income of a landed estate as was contended for by the Inland Revenue. The defender, following the example of the defenders in the case of Lord Advocate v. Henderson's Trs. (7 F. 963), conceded in his third plea in law that feu-duties and public burdens ought to be so deducted, and this plea has been sustained by the Lord Ordinary. The sole question argued before the Lord Ordinary was whether repairs could be assimilated to feu-duties and public burdens. He decided this question in the negative and in favour of the defender. While I do not agree with all his reasoning, I think that he 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 average figure sufficient to meet ordinary and necessary upkeep. In the present case that has been done, and the figure agreed on is 10
was, of course, still open to them, but only for
The broader argument, which the Lord
REPORTS-1924, SCOTS LAW TIMES.
1ST 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) (b) 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 as 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 to the market price will give the statutory value of the benefit accruing to the landowner from the cesser of a life annuity of fixed amount but not exhausting the full rental of the property. The general meaning of the subsection is clear enough. The fraction for which we are searching must depend upon the proportion which the income to which the annuitant's interest extended bears to the whole income of the property. In the present case I did not understand it to be disputed that the annuitant's interest in the income extended
I shall now consider the case as it was argued to, and disposed of by, the Lord Ordinary. The question is whether, assuming that feuduties and public burdens ought to be deducted from the gross rental for the purposes of section 7 (7) of the Finance Act, 1894, an average annual sum in respect of repairs ought also to be deducted?
Feu-duties and public burdens are often referred to as burdens upon the rental of an estate, but this is not a strictly accurate expression as appears from the case of Prudential Assurance Co. v. Cheyne (1884, 11 R. 871)
REPORTS-1924, SCOTS LAW TIMES.
average of years in the manner proposed by
Upon both the broader and also upon the
Lord Cullen.-The annuity enjoyed by the deceased Lady Douglas Stewart was £4000 per annum. The annual rental or income of the entailed estates, whether taken gross or net, was of much larger amount. The case is, therefore, one which clearly falls under section 7, subsection (7) (b), of the Act of 1894. The provision applicable to it runs thus: The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall . . . . if the interest extended to less than the whole income of the property, be the principal value of an addition to the property equal to the income to which the interest extended."
(relating to a feu-duty) and the case of Argyll of the view that no such deduction was intended 1st 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 of the ownership of heritable property, without any option or discretion on his part in regard to the time or the amount of the payment. If that is the principle which justifies the deduction of feu-duties and public burdens from the gross rental of a landed estate it seems to me to have no application to the deduction now claimed by the Inland Revenue. Apart from exceptional cases such as that of a proper liferenter, who in this connection may be regarded as an owner, a landowner is under no legal obligation to keep his estate in proper repair. Nor is it always necessary that he should do so from the point of view of prudent estate management, as he may have it in view to replace an old building by one which is more suitable or to alter the manner in which his property has hitherto been utilised. These may be represented as exceptional cases, but the fact remains that the amount expended by a landowner upon repairs and the time 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 an addition to the of the amount actually expended by the property " signify a capital addition. An exdefender 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 ( 2 I.R. 272), an 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 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 fluctuating and varying amount of such ex- the estimation of the value of the benefit accrupenditure affords a strong argument in favouring or arising. I prefer, however, the other
REPORTS-1924, SCOTS LAW TIMES.
beneficial to the owner would be not merely doubled but more than doubled. No doubt from a capital point of view the annuity has, quoad the annuitant, the element of inferior value-that it is temporary. But according to the Act its cesser is to be treated as amounting to a permanent accrual of benefit to the person who benefits by the cesser.
Accordingly, as it is the value of the benefit accruing or arising that is to be valued, I am unable to adopt the defender's contention that it is the gross income of the entailed estates which is to be taken for comparison, modo calculandi, with the annual £4000 of the annuity.
1ST DIV. reading, owing to the difficulty I feel in taking 66 the words an addition to the property Revenue v. otherwise than as meaning a capital addition. Fothring- So taking them, one is bidden by the statute, ham. modo calculandi, to figure the cesser of the November 17, annuity as making a capital addition to the property, i.e. the entailed estates, yielding an income equal to the annuity; that is to say, an income of £4000 per annum. And then one is bidden to find the capital value of such a hypothetical addition to the estates. The hypothetical addition must, I take it, be regarded as homogeneous in income-producing capacity with the property to which it is, hypothetically, added. And the calculation of its principal value may be conveniently thrown into this form: There remains, however, for consideration the If the property, with an income x, has a principal alternative contention for the defender, adopted value of so much, what is the principal value of by the Lord Ordinary, which is to the effect that, a homogeneous addition with an income of y? if the calculation is to proceed on the net income 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 that £1038 represents the average annual expenditure on repairs, de facto, over a series of years. This is not quite the same thing as saying that £1038 is to be taken as the average annual amount of necessary repairs; but I understood counsel to be agreed at the bar that it might be so taken in the event of the calculation of principal value falling to proceed, quoad repairs, on the footing contended for by the Crown. I am of opinion, for the reasons above indicated, that it should so proceed, and that the claim made by the Crown is entitled to prevail.
The statute contains no definition of the word "income." But it is clear, to my mind, that in making valuations for the purposes of duty under the Act the word cannot be taken as meaning gross income irrespective of charges necessarily to be defrayed therefrom before any benefit accrues or arises to the recipient. What has to be valued is the benefit accruing or arising. Now let it be supposed that the property charged with this annuity of £4000 yielded a gross income of £8000. The annuitant would have taken a clear £4000 per annum. The defender would have taken the other £4000 but would have had to defray therefrom certain necessary annual charges. Clearly, in point of annual benefit the annuitant would have been in the better case. And, on the cesser of the annuity, the annual income from the property
Lord Sands.-The estate of Murthly, to which the respondent succeeded as heir of entail, was burdened with an annuity of £4000 per annum in favour of Lady Stewart, the widow of his