The judgment established the classification of income under different cases of Schedule D and the applicability of tax deduction rules, providing clarity on the tax treatment of contractual payments.

JUDGMENT

LORD GREENE, M.R. - This appeal arises out of a friendly controversy between the respondents, London Film Productions, Ltd., and the appellant, Mr. Asher, with whom they have certain contractual relations. Under the relevant contact sums have fallen to be paid to Mr. Asher and will in future fall to be paid by the respondents. The controversy is whether the respondents, in making those payments, are entitled to deduct tax under rule 21 of the General Rules applicable to all Schedules of the income tax Act, 1918. Mr. Asher contends that, if these receipts be of an income nature, he is only liable to direct assessment. If that contention were correct there would be no legal right in the respondents to deduct the tax.

The way in which the question as staged is by an action brought by Mr. Asher to recover from the respondents the amount of the deduction. I have often thought that the cases of this kind it is extremely inconvenient that the Crown (which is vitally interested) cannot, under the existing procedure, be made a party or otherwise appear. The result is that the Crown is technically not bound by any decision which may be pronounced in its absence. It may well be that the practice of the Inland Revenue is to accept the decision in cases of this kind, which is merely a decision as between two subjects. Cases might very well arise, however, where the Crown was unwilling to accept that decision and might itself embark upon litigation, possibly with new facts. The result would be highly inconvenient and I venture to suggest that the Inland Revenue authorities might usefully consider whether it might not be worth while approaching the rule committee with a view to obtaining enactment of a rule under which they could receive notice of litigation of this kind and should be given a right to attend and put forward any argument or facts they thought right. The corollary would be that they would be bound by the decision, and the whole matter would be cleared up between everybody concerned. However, under the present practice, all we can do is to decide the matter as an issue between two subjects on the evidence that is put before us.

Mr. Asher on July 14, 1938, entered in to a contract with the respondents whereby they agreed to employ and engage him "as a production executive, to render his exclusive services to the company for and during the period of this agreement in and about its business of producing motion pictures" as there described. He was entitled to a number of benefits under the contract, including, in particular, under clause 15, remuneration consisting of certain percentages in respect of motion picture which the respondents produced. The contract was to last for two years from May 23, 1938. On June 7, 1939, the parties entered into a contract which I will call the cancellation contract. It recites the original contract, which it describes as a service agreement, and it recites that Mr. Asher had been engaged under that service agreement upon the making and production of two motion pictures entitled "Q. Planes" and "The Spy in Black". Those two motion pictures are referred to later as "the said motion pictures." It recites the mutual agreement that the service agreement should be determined and the parties released from their liabilities thereunder. Clause 1 provides that the service agreement shall, in all respects, be cancelled as from February 28, 1939. Under clause 2 Mr. Asher released the company from any obligation or liability to pay him any of the amounts or percentages of whatever character mentioned in clause 15 of the service agreement or to pay to him any salary, remuneration or other allowance in respect of any period subsequent to February 28, 1939, and from all other obligations on the part of the company. I only pick out the more important words in these various paragraphs. Then he acknowledges in clause 3 that he has received all his salary and remuneration down to February 28, 1939. Clause 5, wh