Westminster Bank, Ltd v Riches

Factual and Procedural Background

In 1936 Defendant and the deceased Mr. X entered into an agreement under which Defendant was to receive one-half of the profits from the purchase and resale of certain shares. Mr. X realised a substantial profit but fraudulently misrepresented its amount and remitted only a portion to Defendant. After Mr. X’s death, Defendant sued Company A (the judicial trustee of the estate) for an account. On 17 May 1943 Judge Oliver awarded Defendant £36,255 and, exercising discretion under section 3 of the Law Reform (Miscellaneous Provisions) Act 1934, added £10,028 as interest (4 % from 14 June 1936 to 14 May 1943). The formal judgment therefore totalled £46,283.

Company A paid the principal but, invoking Schedule D and General Rule 21 of the Income Tax Act 1918, deducted £5,014 (income-tax at 10 s. in the £) from the statutory interest. Defendant threatened execution for the shortfall, prompting Company A to issue the present Chancery action seeking a declaration that the judgment was fully satisfied. Judge Evershed granted the declaration. The Court of Appeal (Judges du Parcq, Morton and Cohen) affirmed, and the House of Lords (Viscount Simon and Lords Wright, Porter, Simonds, Normand) dismissed Defendant’s further appeal on 21 March 1947.

Legal Issues Presented

1. Is a sum added to a judgment under section 3 of the Law Reform (Miscellaneous Provisions) Act 1934 “interest of money” within paragraph 1(b) of Schedule D to the Income Tax Act 1918?
2. If so, was Company A entitled (and bound) under General Rule 21 to deduct income-tax from that interest when satisfying the judgment?

Arguments of the Parties

Company A’s Arguments

• The £10,028 is plainly “interest of money”: the 1934 Act empowers the court to add interest, and the formal judgment describes it as such.
• Schedule D taxes “all interest of money”; Rule 21 therefore required deduction at source because the interest was not payable wholly out of taxed profits.
• The 1934 award does not lose its character because it is also compensatory; whether called damages or interest, it remains income in the hands of the payee.
• Authorities indicating otherwise (e.g., In re National Bank of Wales) are either distinguishable or wrongly decided.

Defendant’s Arguments

• Interest awarded under section 3 is, in substance, damages for wrongful detention, not “interest proper,” and therefore falls outside Schedule D.
• The award lacked the “recurrent or capable-of-recurrence” quality said to characterise taxable interest.
• Once merged in a judgment debt, the sum is no longer “interest” for deduction purposes; Company A should have paid the full £10,028.

Table of Precedents Cited

Court's Reasoning and Analysis

Step 1: Identify statutory purpose. The 1934 Act was enacted to enlarge judicial power to compensate creditors deprived of timely payment. The statute expressly speaks of “interest,” and provisos (a)–(c) confirm the ordinary meaning.

Step 2: Characterise the £10,028. Whether labelled compensatory or damages, the sum is computed exactly as interest on money and is the fruit of the principal debt; therefore it is income, not capital.

Step 3: Address merger argument. Although interest is “included in the sum for which judgment is given,” that inclusion does not transmute its nature vis-à-vis third parties. Rule 21’s mandate to deduct applies when the interest element is paid.

Step 4: Evaluate precedent. Authorities where “interest” was held non-taxable turn on findings that the sums were capital compensation. By contrast, Schulze, Sweet, and Barnato demonstrate that compensatory interest remains taxable. In re National Bank of Wales was expressly disapproved as erroneous.

Step 5: Apply Income Tax Act 1918. Schedule D taxes “all interest of money.” The award fits squarely within this phrase; Rule 21 required Company A to deduct tax because the estate’s profits brought into charge were insufficient to make Rule 19 applicable.

Holding and Implications

HOLDING: The House of Lords affirmed the lower courts; the £10,028 awarded under section 3 of the 1934 Act is “interest of money” for the purposes of Schedule D. Company A lawfully deducted £5,014 income-tax, and the judgment debt is fully satisfied.

Implications: The decision settles for the United Kingdom that interest added to judgments under the 1934 Act is taxable income, irrespective of its compensatory purpose or the debtor’s wrongdoing. Litigants and trustees must therefore deduct tax at source under Rule 21 when satisfying such judgments; no new precedent altering the capital/income distinction was created, but prior uncertainty (notably from In re National Bank of Wales) was resolved.