WALES Vs. TILLEY

JUDGEMENT

(1.) By an agreement of June 28, 1937, the remuneration which the appellant had been receiving as managing director of his company was increased from Pounds 2,000 to Pounds 6,000 a year, and in the event of his ceasing from any cause whatsoever to be managing director, the company agreed to pay him, as an from the date of cessation, a pension of Pounds 4,000 a year for ten years, reckoned from the same date. There was no agreement between the parties as to the period for which the appellant should serve and his tenure of office could have been, as it sill can be, terminated by either party at any time on whatever may be reasonable notice. The language of the clause relating to the pension is obscure, and questions might have arisen whether the pension was payable after the death of the appellant if he were to die during his service, or after its cessation. By clause 1 of an agreement of April 6, 1938, the appellant released the company from its obligation to pay him the pension. Clauses 2 and 3 were as follows : "2. Mr. Tilley hereby agrees to serve the company as managing director as from the date of these presents at a reduced salary of two thousand Pounds per annum. 3. In consideration of the premises the company will pay to Mr. Tilley the sum of forty thousand Pounds by two equal installments, the first of which shall be paid on April 6, 1939."

(2.) The Special Commissioners discharged an assessment made under Schedule E in respect of the sum of Pounds 40,000 payable under the 1938 agreement, holding that it was a payment in commutation of the companys liability under the 1937 agreement to pay pension and increased salary, and that it was not income in the hands of the appellant. Lawrence, J., reversed this decision, holding that the payment was expressly made in consideration of the appellants agreement to serve at a reduced salary. Part of the Pounds 40,000 he considered to be payable in commutation of the pension, but he held that as the pension would have been assessable under Schedule E, a sum payable in commutation of it would also be assessable under the same schedule. As will be seen, I agree with the conclusion of Lawrence, J., but I respectfully dissent from his view that a sum paid in commutation of a pension is necessarily assessable under Schedule E. The case of short Bros., Ltd. V/s. Inland Revenue Commissioners cited by Lawrence, J., does not, in my opinion, support his proposition. Indeed, the Attorney- General on behalf of the Crown did not attempt to support this part of the reasoning of the learned Judge. He preferred to argue that the pension was deferred remuneration, and that the acceptance during the service of a sum in commutation to it was the acceptance of present, in place of deferred, remuneration. If the agreement of 1938 had dealt with nothing but the appellants salary as managing director, reducing the annual amount and providing of payment of a lump sum in consideration of his acceptance of the reduction, there would, in my opinion, have been no difficulty in the case. If a man agrees to serve in consideration of a lump sum and no periodical salary or a small periodical salary, the lump sum is just as much remuneration and taxable as such as a periodical salary or a large periodical salary would have been (Prendergast V/s. Cameron). Indeed, the only real argument that was presented on behalf of the appellant on this aspect of the case consisted of an endeavour to draw a distinction between a lump sum paid at the beinning of the service and a sum paid, as in the present case, in consideration of an agreement to continue to serve for a reduced salary. There is no substance in this distinction. If a man who is serving at a salary of Pounds 1,000 a year agrees to serve for a reduced salary in consideration of a lump sum, he is merely commuting his salary, and a sum so accepted in commutation of salary can in its nature be nothing but salary. The commutation merely substitutes one form of remuneration for another. It is, in effect, remuneration payable in advance and it is quite fallacious to speak of it as a special payment. Indeed, I am unable to understand how a sum paid as remuneration can ever be capital in the sense that it escapes taxation, since remuneration as such is the subject-matter of tax under Schedule E whatever form it takes. The analogy of cases such as the sale by an annuitant of his annuity for a lump sum is a false one since the quality of remuneration is absent from the payment.

(3.) The real difficulty in the case arises by the introduction into the agreement of the provisions relating to the pension. If the agreement had merely provided for the surrender of the pension in consideration of a present payment, with no reference to or connection with present or future services, I do not think that the sum received would have been taxable under Schedule E since it would not have been remuneration or salary of services. It would have been nothing more nor less than commutation of a pension, and a pension is in itself a distinct taxable subject-matter. It was admitted by the Attorney-General that a sum received in commutation of a pension effected after the termination of the service is not taxable. But he maintained that the case is different where the commutation takes place during the continuance of the service, and that a sum paid then must necessarily be regarded as remuneration for service rendered and to be rendered. I do not think that this view is correct. It would, of course, be possible for an employee to agree to give up his future pension rights in consideration of a present addition to his salary, and in that case the addition would be remuneration and taxable as such, notwithstanding that it originated in a surrender of pension rights. The question whether a sum received in consideration of the surrender of future pension rights is or is not remuneration must, as it appears to me, depend upon the true construction of the agreement by which the transaction is effected. If the sum received is by way of an addition to remuneration, in the form either of an increase in periodical salary or of a lump sum, it is taxable; if it is not so received, but is merely received, but is merely paid by way of commutation of a future pension, without reference to or connection with the service, it would not, I think, be taxable. The game result would, I think, have followed in the present case if the agreement had been framed in two distinct parts : one an agreement to serve at a reduced salary in consideration of sterling Pounds x, the other an agreement to give up the pension rights in consideration of Pounds y. In that case the sum y Pounds could not, as it appears to me, have been described as remuneration for services.