against the profits of the company but be borne by the shareholders through deduction from their dividends.

Rule 21 of the General Rules under the Income Tax Act, 1918 (re-enacting a provision originally contained in section 24 sub-section (3) of the Customs and Inland Revenue Act, 1888), provides that upon payment of any interest of money, annuity, or other annual payment, charged with income tax under Schedule D, or of any royalty or other sum paid in respect of the user of a patent, not payable or not wholly payable out of profits or gains brought into charge for the tax, the person by or through whom any such payment is made shall deduct thereout a sum representing the amount of the tax thereon at the rate of tax in force at the time of the payment. Such person is further required to render an account to the Inland Revenue Commissioners of the amount so deducted or of the amount deducted out of so much of the interest, annuity, annual payment, royalty, or other sum respectively, as is not paid out of profits or gains brought into charge, as the case may be, and to pay the amount over to the Crown.

Where interest is payable by a company carrying on a public service undertaking the working out of this provision is usually a simple matter, for all the company's profits, before charging the interest, are taxed, and the interest is payable out of those profits. In the case of a local authority however the matter is sometimes a good deal more complicated. It has been held that tax deducted by an authority from interest paid to holders of its stock may be retained by the authority to the extent to which the interest is paid out of rents and profits received by them in respect of lands assessed to tax under Schedule A, and also to the extent to which it is paid out of interest on loans by the authority to other bodies, which interest is taxed under Schedule D; but that it may not be retained by the authority to the extent that it is merely equivalent to an amount of tax paid by the authority under Schedule A on property occupied by the authority itself.

In the case of Sugden v. Corporation of Leeds and Another, 1914 A.C. 483, the circumstances were as follows: The

Leeds Corporation, under a series of Acts of Parliament, owned various undertakings and borrowed large sums of money for the purposes of these undertakings. Interest on loans raised for the purposes of an undertaking owned by the Corporation as a municipal corporation was paid out of the revenue of the particular undertaking and the borough fund, which was dependent on the borough rate; and interest on loans raised for the purposes of an undertaking owned by the Corporation as an urban sanitary authority was payable out of the revenue of the particular undertaking and the consolidated fund, which was dependent on a separate rate. The Leeds Corporation (General Powers) Act, 1901, section 37, provided that all loans raised by the Corporation for the purposes of its undertakings and properties should be charged indifferently upon such undertakings and properties, and that all such loans, whether raised before or after the passing of the Act, together with the interest thereon, should rank pari passu; and that the provisions of the earlier Acts authorising the raising of money by the Corporation and the granting of securities therefor should be read as though the charge authorised by this section had been the charge authorised by those provisions. For the year ending April 5th, 1903, the Corporation was duly assessed to income tax upon the rents and profits, amounting to £270,000, of its various hereditaments and undertakings. The interest payable on the loans relating to these undertakings amounted to £285,000 (being £15,000 in excess of the rents and profits), and income tax was deducted by the Corporation from its payments of interest. The profits of the borough fund undertakings and the borough fund exceeded the amount of interest on the loans relating thereto by £78,000, but the profits of the consolidated fund undertakings and the consolidated fund were less than the interest on the loans relating thereto by £93,000. In accounting to the Crown the Corporation claimed that by virtue of the Act of 1901 the entirety of the profits from its various undertakings and hereditaments was chargeable generally with the payment of interest on the whole of its loans and that it was

UNIV. OF CALIFORNIA

RATING AND INCOME TAX

ΙΟΙ

therefore entitled to retain the whole amount deducted for income tax except in respect of the £15,000, the excess of interest over profits. It was held by the House of Lords, on appeal, that the Act of 1901 did not authorise the Corporation to apply the surplus on the borough fund undertakings in paying interest on the consolidated fund undertakings, and that the Corporation was therefore assessable to income tax in respect of the further sum of £78,000 in addition to the £15,000, i.e. in respect of the £93,000. Lord Haldane, sitting as Lord Chancellor in this case, said at the beginning of his judgment:

Broadly stated the principle of the Income Tax Acts is to charge all income with tax, but in the hands of the same person only once. Income is brought into such charge at its source, and the burden is then distributed among the recipients, who bear their shares of it proportionately. When the tax is payable on income which consists of the profits of property or undertakings, and out of these profits annual payments have in substance and properly been made, the person entitled to such profits, whatever in point of mere form may have been the way in which he has kept his accounts, is still charged with tax on the whole of the profits. But the Acts give him the right to deduct the tax due from the recipient in respect of the annual payments, and, as he has himself already paid tax on the whole profits, to retain for himself the amount so deducted. If, on the other hand, the annual payments were not really and properly made out of the profits, he is treated as having received these profits undiminished, and, though still bound to deduct the tax from what he has to pay to the creditor, he must account to the Crown for what has been so deducted. If the annual payments would properly have been payable out of profits but the person bound to make them has chosen to defray them out of some other source of income, this does not affect his right to retain the amount of tax he has deducted. On the other hand it is not enough to entitle him to retain it that he has a merely contingent or ineffective right to pay out of the profits."

The annual value on which, under the Income Tax Act, 1918, Schedule A, Division No. III, Rule 3, the income tax is chargeable in the case of ironworks, gasworks, salt springs or works, alum mines or works, waterworks, streams of water, canals, inland navigations, docks, drains or levels,

rights of markets and fairs, tolls, railways and other ways, bridges, ferries and other concerns of the like nature having profits from or arising out of any lands, tenements, hereditaments, or heritages is the profits of the preceding year, and Rule 9 of the same schedule directs that properties of this kind shall be assessed and charged according to the rules applicable to Schedule D so far as the same are consistent with the rules in Division No. III of Schedule A.

CHAPTER VII.

BY-LAWS AND REGULATIONS.

Scope and Purposes of By-law-making Powers.— It is a common thing for Parliament to relieve itself of the burden of making legislative provision for the regulation of many matters of comparatively minor importance in connection with the carrying on of public service undertakings, by entrusting to the undertakers the power of making by-laws with regard to these matters, subject to safeguards afforded by the observance of a prescribed procedure.

In an often-quoted judgment delivered by Lord Russell of Killowen, C.J., in the case of Kruse v. Johnson (1898), 2 Q.B., 91, a by-law is described as being an ordinance affecting the public, or some portion of the public, imposed by some authority clothed with statutory powers, ordering something to be done or not to be done, accompanied by some sanction or penalty for its non-observance, and involving the consequence that, if validly made, it has the force of law within the sphere of its legitimate operation.

Strict Compliance with Powers. The qualification that a by-law must be validly made in order to have the force of law is important. The Courts are astute to see that a statutory power of making by-laws is exercised strictly in accordance with the provisions of the statute by which it is conferred, and it is important to study not merely the scope of the purposes to which the statute permits the by-laws to be directed, but also the procedure with which the statute ordains compliance. The Courts do not judicially notice by-laws, as they do statutes, but require proof that by-laws alleged to be in force have been duly made and that all necessary sanctions have been