Abdool Hassen Jeewooth v The Government of Mauritius

Abdool Hassen Jeewooth

Appellant

v.

The Government of Mauritius

Respondent

Appeal from the Court of Appeal of Mauritius

Composition of the Board:

Lord Goff of Chiveley

Lord Nicholls of Birkenhead

Lord Hoffmann

Lord Hope of Craighead

Lord Cooke of Thorndon

Judgment delivered on the 26th November 1996

by Lord Hoffmann

Cur. adv. vult.

______________________________________________________________

The following judgment was delivered by the Board:

This is an appeal from an order of the court of Appeal (Lallah S.P.J. and Pillay J.) dated 5th May 1994 dismissing an appeal from an order of Forget J. dated 15th January 1993, by which the learned judge struck out the appellant's pleaded defence to a claim for income tax land a counterclaim for repayment of money recovered by the commissioner) on the ground that they disclosed no reasonable grounds of defence or cause of action.

The Government's action to recover the tax was commenced on 16th November 1988. It was based upon two assessments raised by the Commissioner on 28th May 1986 in a total sum of Rs. 6,026,875 in respect of the tax years 1985-86 and 1986-87. The defence admitted that the assessments had been made and served upon him but pleaded in effect that the amounts were excessive. It appears that the appellant had made no returns for the years in question and the assessments had been made upon the commissioner's estimate of his chargeable income.

The judge and the court of Appeal held that section 82 of the Income Tax Act prevented the appellant tram challenging the validity or amount of the assessments. The relevant parts of the section read as follows:-

"Except in proceedings on objection to an assessment under Part IX -

(a) no assessment ... shall be disputed in any court or in any proceedings either on the ground that the person assessed ... is net a taxpayer or on any other ground; and

(b) every assessment ... shall be final and conclusive, and the liability of the persons so assessed ... shall be determined accordingly. "

Part IX of the Act (sections 90-96) is headed "Objections and Appeals". A person who has been assessed to tax may, within 28 days of service upon him of the assessment, make an objection to the commissioner: section 90(1). It is a precondition of a valid objection that the taxpayer should have made a return for the relevant tax year and paid the tax shown by that return to be due: section 90(2). A proper objection must be considered by the commissioner, who may determine to disallow the objection or allow it in whole or in part: section 91. If the taxpayer is dissatisfied with the commissioner's determination, he may appeal under section 93 to the Tax Appeal Tribunal.

In this case, the appellant failed to abject within the 28 days prescribed by section 90(1). on 28th May 1986, when the assessment was served, he was in police custody and did net abject until 22nd August 1986. Section 90(3) gives the Commissioner power to entertain an objection made out of time when it is shown to his satisfaction that "owing to illness or other reasonable cause, a person has been prevented from making an objection within the time specified". The appellant relied upon his confinement as the reason why he had been prevented from making an objection. But the commissioner took the view that he had had access to legal advice and could have made his objection in time. He therefore refused to consider it.

The Income Tax Act used to provide for an appeal to the Tax Appeal Tribunal against the commissioner's refusal to exercise his discretion under section 90(3). But this right was abolished by the Finance Act 1985. The appellant lodged an appeal but in view of the change in the law the Tax Appeal Tribunal declined jurisdiction. This decision was affirmed by the court of Appeal in 1988 and is net challenged before their Lordships.

It follows that the proceedings under Part IX of the Act, insofar as they may be said to have taken place at ail, have run their course. But the effect of section 82 is to make such proceedings subject only to the possibility of judicial review on limited grounds (which their Lordships are not called upon to consider in this case) the only means by which the validity of an assessment or the amount of tax assessed may be challenged by the taxpayer. Their Lordships consider that the language of section 82 is plain and unambiguous. The assessments have become final and conclusive and cannot be disputed on the ground that the tax was not due or on any other ground.

Mr. Glover, who appeared for the appellant and t~ whom their Lordships are indebted for his attractive and economical argument, said that the commissioner had acted oppressively and unfairly in refusing to entertain his client's objection in 1986. He ought therefore to be allowed now to deploy the arguments which he might otherwise have raised by way of objection and, if necessary, by an appeal to the Tax Appeal Tribunal. But section 90(3) conferred an administrative power upon the commissioner. Although the right of appeal to the Tribunal against his decision net to exercise that power had been abolished, the exercise of his discretion would on ordinary principles have been subject to central by judicial review. But any challenge on grounds of, for example, procedural irregularity or irrationality should have been made at the time, by public law proceedings. If they had been successful land their Lordships have no material on which to express any view as to whether they would have been or net), the proceedings under Part IX could have taken their normal course. Mr. Glover frankly acknowledged that, by the time he was called upon to advise in the present action, he took the view that there was no prospect of obtaining leave to review the 1986 decision. But it seems to their Lordships that the consequences of this omission, even on the assumption that the commissioner's decision could have been set aside, are now beyond remedy. Section 82 does net permit a court hearing an ordinary civil action for recovery of tax as a debt to enter into a challenge to the exercise of the Commissioner's discretion under section 90(3), still less to undertake an inquiry into the amount of tax properly due, which under Part IX is within the exclusive jurisdiction of the commissioner and the Tax Appeal Tribunal.

Mr. Glover also raised some procedural points about the motion to strike out the defence. He criticised the judge for having referred to an affidavit sworn on behalf of the Government deposing to the fact that the appellant's appeal to the Tax Appeal Tribunal had been dismissed for want of jurisdiction. He said that on a motion to strike out a defence under Rule 20 of the Rules of the Supreme Court 1903, the court should confine itself to the pleadings and not look at affidavits. But their Lordships think that there are two answers to this point. First, the proceedings before the Tribunal were relevant only as background. The Government's case rested upon the making and service of the assessments, which were admitted. It was for the defence to plead some ground in law which made them unenforceable. Secondly, the court was entitled to rely upon its inherent jurisdiction to strike out a defence as frivolous and vexatious and it is well established that for this purpose affidavit evidence is admissible.

The proceedings before Forget J. took a slightly unusual course. He had before him both the Government's motion to strike out the original defence and a motion by the appellant to amend his pleadings by substituting a new defence and counterclaim. He dealt with the matter in two hearings. At the first he allowed the amendment and at the second he struck out the amended statement of claim. It would have been open to him to deal with both motions together; to strike out the original defence and to refuse leave to amend on the ground that even as amended, the pleading would net disclose a reasonable defence. Before the court of Appeal it was argued that as Forget J. had allowed the amendment, he must be taken to have held that it disclosed an arguable defence. He should net therefore have afterwards struck it out. Mr. Glover did not pursue this point before the Board and their Lordships think that this was a sensible decision. It is clear tram the judgment of Forget J. when giving leave to amend that he was in no way passing upon the merits of the defence. It was a matter of convenience to grant the amendment so that the subsequent hearing of the Government's motion could concentrate upon the appellant's final pleading rather than one which he wanted to abandon. No one could have been in any doubt about the matter and the appellant suffered no prejudice.

Finally, Mr. Glover made some comments of a general nature upon the procedures of the Tax Appeal Tribunal. He questioned the constitutionality of the provision by which it is required to sit in camera and the validity of the way in which it was composed for his client's hearing. But he accepted that these questions could have had no impact upon whether his client now had a defence to the Government's claim. Accordingly, their Lordships will say nothing about them. The appeal must be dismissed with costs.

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Consolidated Investment and Enterprises Limited v The Commissioner of Income Tax

Consolidated Investment and Enterprises Limited

Appellant

v.

The Commissioner of Income Tax

Respondent

Appeal from the Supreme Court of Mauritius

Composition of the Board:

Lord Goff of Chieveley

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Nicholls of Birkenhead

Sir Michael Hardie Boys

Judgment delivered on the 19th February 1996

by Lord Browne-Wilkinson

______________________________________________________________

(1) Administrative law - Taxation - Dividends - Exempt income - Allowable deductions - Allocation of interest charges

(2) Privy Council jurisdiction - New course of argument before the Judicial Committee - Various questions on which parties desire decisions in principle from the Judicial Committee

___________

Legislation referred to in judgment

Income Tax Act 1974, sections 2, 4, 7, 19, 20, 26, 55, 57

The following judgment was delivered by the Board:

This is an appeal by Consolidated Investment and Enterprises Limited ("the taxpayer company") against a decision of the Supreme Court of Mauritius (Glover C.J. and Yeung Sik Yeun J.) dismissing the appeal of the taxpayer company from the dismissal by the Tax Appeal Tribunal of an appeal from a determination of the respondent, the Commissioner of Income Tax ("the Commissioner") claiming additional tax of Rs680,074 in respect of the year 1989/90. The appeal is unusual since the arguments advanced before their Lordships were materially different from those urged before the courts below which, it is now accepted, cannot be sustained for the reasons given by them. Their Lordships were asked by both parties to determine certain new issues in principle. Since the taxpayer company and other companies in Mauritius are affected by the issues now raised, their Lordships agreed to adopt that course.

The taxpayer company is an investment and holding company for a group of 28 subsidiaries. In the relevant year, some subsidiaries paid dividends, others did not. The income of the taxpayer company for the year in question came from three different sources, viz.

(1) dividends paid by subsidiaries, which dividends constituted "exempt income" in the hands of the taxpayer company;

(2) dividends paid by subsidiaries out of the subsidiaries' profits, which profits had been charged to tax in the hands of the paying company ("A dividends");

(3) other income.

In earning such income, the taxpayer company incurred management expenses and interest charges on borrowed capital.

Before turning to the statutory provisions directly in issue, namely section 55(2) of the Income Tax Act 1974, it is convenient to set out how that Act approaches the taxation of a company's profits apart from that section.

Section 4 provides that income tax is assessable and payable on all income "other than exempt income". "Exempt income" is income of a type specified in section 7 of the Act. It is common ground that the taxpayer did receive income of that description. Such exempt income is not central to the main issue which arises on this appeal, and is to be sharply distinguished from the A dividends to which their Lordships will refer later.

Section 4 further provides that income tax shall be calculated on the taxpayer's "chargeable income" which is defined by section 2 in relation to a company taxpayer to mean the amount of income determined in accordance with Part VI of the Act. Section 55(1) (which is in Part VI) provides that "the chargeable income" of the company is the "net income" of the company for the relevant purpose. "Net income" is defined by section 2 to mean the amount remaining after deducting from the gross income "allowable deductions".

"Allowable deductions" are defined as meaning the sums deductible under Part IV of the Act. Under section 19(1) any expenditure exclusively incurred in the production of "gross income" is deductible. But section 20(1)(c) expressly provides that expenditure incurred in the production of "exempt income" is not deductible. As to interest charges, section 26(1) provides, so far as relevant, that expenditure on interest shall not be deductible except "interest... on capital employed... for the production of gross income".

Still ignoring for the time being section 55(2), the impact of these provisions on the income of the taxpayer company in the relevant year would be as follows:-

(1) The dividends which are "exempt income":

Since "exempt income" is not included in "gross income" it is not included in the net income of the company which under section 55(1) is the income chargeable to tax.

(2) The A dividends:

These are the dividends paid to the taxpayer company out of profits of the subsidiaries which have already borne tax. As will be seen sub-section (2) of section 55 is expressly directed to such A dividends. But, apart from the provisions of that sub-section, the A dividends received by the taxpayer company would form part of the taxpayer company's gross income and, subject to any allowable deductions, would form part of the company's net income chargeable to tax.

(3) Other income:

Other income of the company would be chargeable under section 55(1), subject to allowable deductions, as part of the taxpayer company's chargeable income.

As to allowable deductions, no management or interest charges incurred in earning the exempt income would be deductible: section 20(1)(c). The management and interest charges preferable to the A dividends would be deductible in computing the taxpayer's chargeable income.

Therefore, apart from further provision, the taxation of the A dividends in the hands of the recipient of the A dividends (i.e. the taxpayer company) would involve an element of multiple taxation. If the subsidiary pay the dividends out of the subsidiary's taxed profits, the same profits will be taxed twice, once in the hands of the subsidiary paying the dividend and again in the hands of the recipient, the taxpayer company.

There is no doubt that section 55(2) is directed to eliminating this multiple charge to tax. It provides as follows:-

"(2) (a) Where in any income year a resident company pays dividends to another resident company, including a company to which section 57 applies and the dividends are paid out of income of the company which has been charged to tax for any year of assessment beginning with the year of assessment 1984-85, the company receiving the dividends shall not, to the extent that the dividends received by it are not directly or indirectly attributable to the allowable management and interest expenses incurred by it, be chargeable to income tax on such dividends.

(b) Where a resident company, including a company to which section 57 applies, has received dividends which are not chargeable to income tax under paragraph (a) and that company pays dividends to another resident company, the company receiving the dividends shall not, to the extent that the dividends received by it are not directly or indirectly attributable to the allowable management and interest expenses incurred by it, be chargeable to income tax on such dividends.

(c) Where a resident company receives dividends form another resident company and only part of those dividends received is not chargeable to income tax under paragraph (a) or (b), the company receiving the dividends shall be liable to income tax on the excess.

(d) (i) Subject to subparagraph (ii), the amount of dividends chargeable to income tax for the purposes of paragraphs (a) and (b) shall be the lower of the allowable management and interest expenses incurred or a percentage thereof determined as follows -

dividends received (exclusive of the excess under paragraph (c))

100x

net income from all sources before deduction of management and interest expenses

(ii) Where for a trading company, the percentage is subparagraph (i) is 25 per cent or less, the dividends received (exclusive of the excess under paragraph (c)) shall be regarded as not chargeable to income tax.

(e) ..."

Three questions arise on these provisions which their Lordships will deal in turn.

A. How does section 55(2) work ?

It is common ground that the purpose of section 55(2) is to prevent the taxation of the A dividends in the hands of the taxpayer company if, but only if, those dividends have borne tax in the hands of the paying subsidiary i.e. have been paid out of the taxed income of the subsidiary. It achieves this first purpose by the words "where in any income year a resident company pays dividends to another resident company... and the dividends are paid out of income of the company which has been charged to tax... the company receiving the dividends shall not... be chargeable to income tax on such dividends".

If the relief had been granted in full on the whole of the A dividends, the relief would have been too great. The management and interest expenses incurred by the taxpayer company in earning the A dividends would be allowable deductions and be set against the other gross income of the company. The draughtsman could have conteracted this by providing that such expenses referable to the A dividends should not be deductible. But unhappily he sought to meet the point by clawing back the amount of the expenses so allowed as deductions by limiting the amount of the A dividends to which relief was to be afforded. The draughtsman achieved this second, claw back, purpose in paragraphs (a) and (b) of section 55(2) by providing that the relief is to be only "to the extent that the dividends received by it are directly or indirectly attributable to the allowable management and interest expenses incurred by it". That phraseology, although not very happy, is at least comprehensible. As was common ground, the amount of dividends payable out of the taxed profits of the subsidiaries which would otherwise benefit from the relief in section 55(2) is to be limited so as to exclude an amount of dividends equal to the management expenses and charges referable to the A dividends paid out of income. The part of the dividend so excluded from the relief given by section 55(2) will therefore remain within the general charge to tax.

However, paragraph (d) of subsection (2) produces chaos. At first sight, paragraph (d) sets out the formula by reference to which one has to calculate the amount of the A dividends which are not relieved from tax by paragraphs(a) and (b) but remain chargeable to tax under paragraph (c): "the excluded dividends". But as a matter of language it is difficult to give subparagraph (d) such an effect. If paragraph (d) sets out a formula for calculating the "excess" chargeable to tax under (c), how is one to work the formula in paragraph (d) ? The words in brackets in the numerator of the fraction in paragraph (d) "(exclusive of the excess under paragraph (c))", require one to have discovered what is "the excess under paragraph (c)" before one can work out the formula in paragraph (d). Given that difficulty, the first question raised on the appeal in how section 55(2) is to operate in practice.

Mr. Baker, in his admirable submissions for the taxpayer company, accepted that the common sense of the matter suggests that paragraph (d) simply provides a machinery for calculating the excluded dividends i.e. that part of the A dividends which are not to be relieved from tax under paragraphs (a) and (b) so as to reflect the fact that expenses incurred in earning A dividends remain allowable deductions against the gross income of the company. But, he submitted, the words of the statute do not permit that construction. He therefore submitted that paragraph (d) operates as a separate provision, affording an exemption from tax for A dividends additional to that afforded by subparagraphs (a) and (b).

In outline he submitted that the section operates as follows. At stage (1), it is necessary to identify the excluded dividends by construing the words between the commas in paragraph (a) i.e. "the dividends received by it" which are "directly or indirectly attributable to the allowable management and interest expenses". Such identification of the excluded dividends is achieved by identifying the allowable management and interest expenses incurred in the production of the A dividends. The excluded dividends are equal to the amount of those expenses. Such allowable expenses are to be a rateable allocation of the expenses i.e. the proportion of the company's total allowable management and interest expenses corresponding to the ratio between the total A dividends and the gross income of the company. After this has been done, one has determined what is "the excess" for the purposes of paragraph (c) and it is possible to proceed to stage (2) by applying paragraph (d). The latter paragraph must now be understood to operate as a further limit on the amount of dividends chargeable to income tax for the purposes of paragraphs (a) and (b). The further allowable management and interest expenses incurred in the production of A dividends or a percentage of such expenses computed by the formula. Applying the formula one then reduces "the excess under (c)" by a further amount represented by the operation of the formula in (d).

This is a most ingenious construction but one which their Lordships reject. First, it produces a wholly irrational result, affording to the taxpayer double relief from tax on the part of the expenses incurred in the production of the A dividends. On Mr. Baker's argument, the whole of the expenses incurred in the production of the A dividends are not clawed back and brought back into tax. Under his construction the total expenses referable to the production of the A dividends have been excluded from relief at stage 1 and form part of "the excess under paragraph (c)". At stage 2 he then operates the formula under paragraph (d) so as further to reduce the amount of expenses excluded from relief under paragraphs (a) and (b). Thus Mr. Baker's construction fails to achieve what, it is common ground, was intended to be achieved, namely the claw back into tax of the amount of the expenses referable to the production of the A dividends.

Mr. McCall, in his cogent argument for the Commissioner, has demonstrated that the language of section 55(2) does not force their Lordships to accept Mr. Baker's construction. As Mr. McCall points out, in relation to any given A dividend received by the taxpayer company there are two factors which may reduce the amount of the dividend relieved from tax: first, the proportion, if any, of such a dividend which is paid out of capital and has therefore not borne tax in the hands of the paying company; second, the expenses of earning the A dividend. Mr. McCall submits that the reference in paragraph (c) to "the excess" is a reference only to the part of the dividend which is excluded from relief by reason of it having been paid out of capital and therefore not borne tax in the hands of the paying subsidiary. If this is correct, there is no difficulty in operating paragraph (d), since the "excess under paragraph (c)" does not refer to the amount by which the relief is to be reduced so as to claw back the amount allowed for expenditure but refers only to the capital element in any A dividend.

Although Mr. McCall's construction involves some distortion of the language of the section, their Lordships are satisfied that it is correct. Not only does it produce the only common sense result but any other construction is impossible to reconcile with paragraph (d)(ii). Paragraph (d)(ii) applies when the operation of the formula in paragraph (d)(i) produces the result that less than 25% of the allowable expenses are attributable to the A dividends; in that case the A dividends "exclusive of the excess under paragraph (c)" are wholly relieved from tax by section 55(2). This de minimis provision requiring management and interest charges to be lest out of account and the whole dividend (other than the capital element) afforded relief from tax simply cannot operate if the dividend relieved from tax is to exclude the excess identifies by paragraph (c) as including a deduction on account of such charges. This factor demonstrates that the words "the excess under paragraph (c)" refer only to that part of the A dividend which is not relieved from tax because it was not paid out of income.

Section 55(2) therefore operates in a logical and explicable manner which both relieves the A dividends from double taxation (to the extent that it has borne tax in the hands of the paying company and claws back only such part of the management expenses as are referable to the A dividends. The A dividend is relieved from tax subject to two deductions, viz.

(1) that part of the dividend which was not paid out of profits which have borne tax in the hands of the paying company; and

(2) an amount equal to the management expenses and interest charges referable to the A dividend.

The amount at (2) is to be calculated in accordance with paragraph (d)(i) being either the whole of such expenses (e.g. if there is no other income of the recipient company against which the expenses can be set) or, if lower, the proportion of such expenses corresponding to the ratio between the total amount of the A dividends (excluding the capital element) and the total chargeable income of the company before deduction of management and interest expenses.

B. Exempt income.

The operation of section 55(2) requires one to identify what are "the dividends" referred to, what is concluded in the words "net income from all sources" in the denominator of the fraction in paragraph (d) and what are "the allowable management and interest expenses" referred to in paragraphs (a), (b) and (d). The Commissioner contends that exempt income is included in "the dividends" and "net income from all sources" and that allowable management and interest expenses include the expenses incurred in producing "exempt income".

Their Lordships have no hesitation in rejecting the Commissioner's submissions. As has been said "gross income" is defined so as to exclude exempt income; accordingly exempt income can form no part of the "net income" of the taxpayer company for any purpose of the Act. Moreover, management and interest expenses incurred in producing "exempt income" are expressly made non-deductible. Therefore exempt income is excluded from chargeable income of a company brought into tax by section 55(1). Subsection (2) provides a relief from tax in relation to income otherwise chargeable to tax. Therefore, prima facie references to "dividends" and income in subsection (2) will not include exempt income. Although the word "dividends" is not defined so as to exclude dividends which constitute exempt income, the whole structure of the relief afforded by subsection (2) of section 55 shows that exempt income cannot be relevant for any purpose of the subsection.

Say that one half of the dividend constituting exempt income of the recipient taxpayer company was paid out of the capital of the paying subsidiary company. Were it not for section 55(2), the whole of such dividend would not be subject to tax because the whole dividend would be exempt income under section 7. But if the Commissioner's argument is correct and such dividend being exempt income is to be included in the dividends under consideration in section 55(2), the one half of such dividend paid out of capital will be brought into tax: that half paid out of capital would not be relieved under paragraph (a), would form part of the excess under paragraph (c) and as much would be charged to tax by paragraph (c). This is obviously an impossible result. Moreover to the extent that part of the purpose of section 55(2) is to claw back allowable deductions otherwise claimable in respect of the relieved dividends, the section cannot be held to operate sensibly if it claws back the expenses incurred in producing exempt income, since such expenses cannot have been deducted in the first instance. There is nothing to be clawed back.

For these reasons, in their Lordships' view both "exempt income" and the expenses referable to the production of exempt income are to be left wholly out of account in applying section 55(2).

C. Allocation of interest charges.

In order to operate the provisions of section 55(2), it is necessary to allocate the management expenses and interest charges as between exempt income, A dividends and other income of the taxpayer company. The parties are agreed that it is impossible to identify specifically the management expenses attributable to, for example, exempt income. Such expenses are incurred generally for the purposes of running all aspects of the company's business. Therefore it is agreed that the total management expenses have to be allocated between the various types of income pro rata e.g. in the same ratio as the exempt income bears to the total income of the company from all sources.

But there is a dispute as to how the interest charges are to be allocated between the various types of income. The taxpayer company led evidence, which was not challenged, that it could identify certain borrowings as having been incurred for the specific purpose of producing a specific source of income, for example a borrowing to acquire shares in a company the dividends from which constitute "exempt income". The taxpayer company submits that in allocating the interest charges between the various categories of income, the interest payable on any specific borrowing should be allocated to the income earned by the asset acquired or improved by means of such borrowing. The Commissioner, on the other hand, contends that the interest charges should be dealt with in the same way as management expenses, i.e. the total interest charges of the company should be allocated pro rata between the various sources.

The relevant provisions of the Act are section 19(1) and 26(1)(a) which provide as follows:-

"19 (1) Any expenditure... shall be deductible from the gross income of a taxpayer in the income year in which it was incurred to the extent to which it is exclusively incurred in the production of his gross income for that year...

26 (1) Notwithstanding section 19, no deduction shall be allowed of any expenditure incurred on interest in an income year except,... expenditure incurred on interest -

(a) on capital employed in the course of any business or other income earning activity for the production of gross income derived in that income year;"

In order to be an allowable deduction, the interest has to be on capital employed in the course of any business "for the production of gross income". Prima facie in the case of a composite business having a number of activities one would expect the total allowable interest charges from the whole of the company's business to be set against the total income of the whole company business chargeable tax. If this were not done, interest charges incurred in relation to the start up of a new activity not yet showing a profit would be deductible. The interest referable to capital expenditure on a non-income bearing asset could not be shown to be interest incurred "for the production of gross income derived in that income year" in relation to that specific asset. If the taxpayer is right, interest charges referable to shares in non-profitable companies would not be capable of being set against the dividends payable by profitable subsidiaries.

If it is correct, in the ordinary case, to set the total interest charges against the total income of the composite business, it must follow in their Lordships' view that the same principle is applicable when interest charges have to be allocated between different sources of income. It cannot be correct, as their Lordships understand to be the taxpayer's contention, to allow all interest charges attributable to loss making activities to be set against the company's general income but in calculating the interest charges attributable to exempt income or A dividends to allocate the interest charges by reference to the actual interest charges paid in relation to the assets producing the exempt income or the A dividends as the case may be. The same method of treating interest charges must be applicable throughout.

Moreover, in the ordinary case (including the present) the company will have general borrowings on overdraft or loan account to finance the general conduct of the company's business. The interest on such borrowings is incapable of being specifically appropriated to any given source of income. If specific interest is to be allocated to specific income, how is interest on such general borrowing to be allocated ?

Although there may be exceptional cases, in the ordinary case of a company carrying on a composite business, interest charges must be allocated between different sources of income pro rata in the same way as management expenses.

Conclusion.

Counsel formulated for their Lordships a number of questions on which the parties desired decisions in principle. For the purposes of exposition, their Lordships have dealt with these questions in a different order. But to avoid any doubts as to the correct answers their Lordships now set out those questions and answers which they give:

(1) Whether as the taxpayer contends in subsection (2) must be identified on the basis that exempt dividends are excluded or as the Commissioner contends include all dividends ?

Answer: Excluded: see B. above

(2) Whether as the taxpayer contends "net income from all sources" in paragraph (d) must be identified on the basis that exempt income in excluded or as the Commissioner contends that it is included ?

Answer: Extended: see B. above.

(3) Whether as the taxpayer contends paragraph (d) imposes a limit on the amount of A dividends chargeable to tax as computed for the purposes of paragraphs (a) and (b) or as the Commissioner contends paragraph (d) lays down a method of making the computations required for the purposes of paragraphs (a) and (b) ?

Answer: As the Commissioner contends: see A. above.

(4) Whether as the taxpayer contends the words in paragraph (d) "the excess under paragraph (c) denote the amount computed under paragraphs (a) or (b) or as the Commissioner contends the amount of any capital dividends received by the taxpayer company ?

Answer: As the Commissioner contends: see A. above.

(5) Whether as the taxpayer contends references to the allowable management and interest expenses in paragraphs (a) and (b) are references to such expenses after deducting the amount of such expenses attributable to exempt income or without such a deduction as the Commissioner contends ?

Answer: After deduction of expenses attributable to exempt income: see B. above.

(6) If the answer to question (5) is in the former sense, whether as the taxpayer contends the expenses attributable to exempt income may be identified by a rateable apportionment of management expenses and a specific attribution of interest expenses or as the Commissioner contends must be identified by a rateable apportionment of both ?

Answer: As the Commissioner contends: see C. above.

(7) Whether as the taxpayer firstly contends the allowable amount of expenses in paragraph (d) means such expenses attributable to the production of A dividends or as the Commissioner contends has the same meaning as in the answer to question (5) ?

Answer: As the taxpayer contends: see B. above.

(8) If the answer to question (7) is in the former sense, whether as the taxpayer contends the expenses attributable to the A dividends are to be computed on the basis of a rateable apportionment of management expenses and to specific attribution of interest expenses or as the Commissioner contends on a rateable apportionment of both ?

Answer: As the Commissioner contends: see C. above.

Their Lordships will accordingly allow the appeal and remit the matter to the Commissioner for the determination of the tax liability of the appellant in accordance with the views they have expressed. There will be no order as to costs, here or below.

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