C. A. 1897 July 22. [IN THE COURT OF APPEAL.] THE LEEDS PERMANENT BENEFIT BUILDING Revenue-Income Tax-Benefit Building Society-Money Lent to Borrowing A benefit building society lent money to borrowing members at a fixed rate of interest, and took from them a security on their property. The repayment of the loans was by weekly payments of a fixed sum, in respect of principal and interest, the proportion of interest to principal in each payment decreasing as time went on, and the principal remaining due decreased. No deduction was allowed to be made by the borrower in respect of income tax. The society were assessed to income tax under Sched. D. on the interest they received, as being interest of money within s. 2 of the Income Tax Act, 1853. On a case stated: Held, that the expression "interest of money " in s. 2 of the Income Tax Act, 1853, is not restricted to annual interest, and that the interest received by the society was not in respect of a loan on land, but of a contract relating to interest of money lent, and was therefore assessable in their hands to the income tax. APPEAL from the judgment of a Divisional Court on a case stated by Commissioners of Income Tax. The appellants are a building society duly established and maintained under the Building Societies Acts. The objects of the society as set forth in the rules are, “to raise by the subscriptions of the members a stock or fund out of which to make advances to members upon security of freehold, copyhold, or leasehold estates by way of mortgage." Advances are made to members and to members alone. The society transacts no business other than the receipt of money from some persons, and the lending out of it to others, and it does nothing else except such acts and things as are necessary and incidental to such business. The constitution and course of business of the society are as follows: The members of the society are those persons who hold one or more shares, or one or more fifth parts of a share, in the society, the shares being divided into two classes: (1.) Investors' shares, which are again divided into subscription shares and paid-up shares; (2.) Borrowers' shares. The members are divided into classes according to the shares they hold, namely, investors and borrowers. In addition to the members of the society there is another class of persons with whom the society has dealings, namely, depositors. Investors are the members who invest capital in the society, which is used in making loans to borrowers. Such investments can either be made by paying in to the society a lump sum, in which case the investor is called a "paid-up investor," or by paying in weekly instalments, in which case the investor is called a "subscription investor." Paid-up investors pay in to the society either one or more sums of 100l., in which case they are said to take one or more paid-up investor's shares in the society, or one or more sums of 201., in which case they are said to take one or more fifth parts of a paid-up investor's share in the society. In either case the money remains in the hands of the society, and accumulates at compound interest at the rates shewn in the rules until withdrawn, or until the share matures to its full value as fixed by the rules. Subscribing investors pay in to the society either one or more sums of 2s. 6d. per week, in which case they are said to take one or more investor's subscription shares, or one or more sums of 6d. per week, in which case they are said to take one or more fifth parts of an investor's subscription share. In either case the money remains in the hands of the society, and to it is added by way of accumulation compound interest at a rate shewn in the rules until withdrawal, or until the share matures to its full value as fixed by the rules. In the case of investors of each class the interest is compounded monthly. In neither case can the investors withdraw the interest on their shares alone, but they have the privilege, subject to certain limitations, of withdrawing at any time the amount due to them in respect of each share or fifth part of a share, as indicated by the table under which the investment was made. When the shares, whether paid up or subscription, have matured to their full value, the investor must withdraw his money, although C. A. 1897 LEEDS BENEFIT BUILDING SOCIETY V. MALLAN DAINE. C. A. 1897 LEEDS BENEFIT BUILDING SOCIETY V. MALLAN DAINE. he may and often does reinvest it in the society. The money withdrawn in either case consists partly of capital and partly of interest. The borrowers are members to whom money is advanced by the society upon the security of their properties. A person who desires to become a borrowing member of the society sends in an application, giving particulars of the amount required and of the property proposed as security. If the loan is approved, the money is advanced as soon as a mortgage to the society is executed. The applicant for the loan must then determine upon which of the terms offered by the society he will take his loan. In all cases the advance is made in respect of one or more shares or fifth parts of shares which the borrower takes in the society. Not more than the sum named in the table under which the advance is made can be advanced in respect of one share. Upon each share, whether large or small, he pays 2s. 6d. per week. If the share be a large one, the repayment is spread over a great number of years, and, consequently, the whole amount of interest due in respect of the advance is large. Hence, of the first instalment of 2s. 6d. per week a relatively large part would be appropriated to interest, and a relatively small part to the repayment of the principal. If, on the other hand, the borrower elect to split up his loan into several smaller shares, then he would pay 2s. 6d. per week on each of those shares, and since they would be repayable in a relatively short time, the amount of the 2s. 6d. appropriated to interest would be smaller, and the amount appropriated to the repayment of principal would be larger. If the borrower take one or more fifth parts of a share instead of a whole share, the weekly payment is only 6d. per week for each fifth part; but in all other respects the same rules apply to a fifth of a share as apply to a full share. As the months proceeded in each case, of course the proportion of the monthly sum paid appropriated to the payment of interest would decrease, and that appropriated to the repayment of the principal would increase, for the simple reason that with each month's payment the interest-bearing capital decreases, although the monthly payment remains the same. A member who has borrowed money on any one set of terms may elect to repay his debt upon any other of the sets of terms offered by the society. For instance, if he has borrowed 100l. to be repaid by 291 monthly instalments of 10s. each, he may, after repaying 201. in seventy-nine months, split up his remaining debt into two shares of 401. each, paying 17. a month for ninety-one months. The proportion, therefore, of interest to principal constantly varies considerably, even in the case of loans which at their creation were identical in terms. The depositors are persons who lend money to the society on deposit, and are entitled to receive in consideration thereof interest at rates from time to time varied at the discretion of the directors. Depositors differ from investors in several particulars. They are not members, but creditors of the society. Any sum of money is received by the society on deposit, and it can be withdrawn by the depositor at any time after certain notice, either with or without the interest accrued due, and, if without, the depositor leaves his interest in the hands of the society to be capitalised. All money received on deposit is employed in making advances to the borrowing members of the society. In order to obtain necessary funds for its staff, officers, &c., the society charges a slightly higher rate of interest to borrowers than it grants to investors or depositors. The difference is as little as by calculation it is estimated will afford the necessary amount for carrying on the business of the society; but from time to time à surplus accumulates out of the fund so brought into existence beyond what is necessary for carrying on the business of the society, and this surplus is from time to time divided among the members of the society. The society having been assessed by the Commissioners for General Purposes under Sched. D of the Income Tax Acts in respect of interest received from its borrowing members, appealed to the Commissioners for Special Purposes, contending that the society did not make any profits or gains within the meaning of the Income Tax Acts, and that it was therefore not liable to be assessed under Sched. D; and further, that the whole of the sums received by the society from the borrowing VOL. II. 1897. 2 F 2 C. A. 1897 LEEDS BENEFIT BUILDING SOCIETY v. MALLAN DAINE. C. A. 1897 LEEDS BENEFIT BUILDING SOCIETY v. MALLAN DAINE. members had already paid tax, because money is only advanced by the society for the purpose of being laid out by the borrowers in the purchase of property, and the repayment by instalments of the principal sum lent, together with interest thereon, is secured by a mortgage on the property so purchased. In other words, that these instalments are payments charged upon land, and since the full annual value of that land is chargeable with tax under Sched. A, without deduction in respect of the society's charge thereon, that the society's charge had in fact paid tax as part of the annual value of the land and could not be taxed again. The society, moreover, contended that to distinguish interest from capital in sums paid by borrowers would involve an actuarial calculation in each individual case. It was admitted, however, that the instalments paid by borrowers included interest, and that such interest was not annual interest within the meaning of the Income Tax Acts, and that the society refused to allow deduction of income tax by these borrowers in respect of such interest, on the grounds that the interest could not be distinguished, and because such interest was not yearly interest. The Commissioners for Special Purposes found as facts that part of the instalments paid by the borrowers to the society, consisted of interest paid to and received by the society which was the subject-matter of the assessment under appeal, and that it was possible for the society, even though it might involve some abstruse calculations, to distinguish a payment by a borrower of interest from a repayment of capital by instalments in all sums received by the society from these borrowers. They therefore confirmed the assessment subject to this case. The Divisional Court (Wills and Grantham JJ.) gave judgment for the Crown. The society appealed. Dicey, Q.C., and Lord Robert Cecil, for the society. The Crown does not claim on profits, but claims to tax interest received by the society from borrowers. This amounts to double taxation, since the society's funds consist of money lent out on land, which is taxed under Sched. A, and of which they |