Argosam Finance Company Ltd v Oxby
| Jurisdiction | England & Wales |
| Judge | The Master Of The Rolls |
| Judgment Date | 23 June 1964 |
| Judgment citation (vLex) | [1964] EWCA Civ J0623-1 |
| Court | Court of Appeal |
In the Matter of The Income Tax Act 1952
[1964] EWCA Civ J0623-1
The Master of the Rolls
Lord Justice Harman and
Lord Justice Diplock
In The Supreme Court of Judicature
Court of Appeal
From Mr. Justice Plowman
Mr R. A. Maccrindle, Q. C. and Mr R. Buchanan-Dunlop (instructed by Messrs Bird & Bird) appeared as Counsel for the Appellants.
Mr W. A. Bagnall, Q. C., Mr E. Blanshard Stamp and Mr J. Raymond Phillips (instructed by the Solicitor of Inland Revenue) appeared as Counsel for the Respondents.
We are familiar in those Courts with the device of "dividend stripping". We saw a good Illustration Griffiths v. Harrison. 1962, 2 W. L. R. 909. This particular case affords a further illustration.
Some company or other - I do not know its name – had made a profit and had paid tax on it. In consequence it had moneys in its coffers available for distribution as dividend taxed at source. It was "pregnant with dividend". The argesam Finance Co. Ltd. then came along. It was a dealer in stocks and shares. It bought the whole of the shares in that other company for £1,770,500 and got control of it. By virtue of its control it distributed to itself a dividend taxed at source amounting to £226,778 net. Having distributed that dividend to itself, the value of the shares, of course, fell. The value of the shares, after payment of the dividend, was £1,578,000.
If you look at that transaction as an ordinary Individual, you would think that the company had made money out of it thus:
| Money expended | Proceeds received | ? |
| Cost of shares £1,770,590 | Dividend | £226,778 |
| ? | Value of sharee Alter dividend | £1,578,000 |
| ? | ? | £1,804,778 |
| proceede Expenditure | £1,804,778 | ? |
| ? | 1,770,500 | ? |
| Profit | £34,278 | ? |
But if you exclude the dividend from the computation you find that the company sustained a lose
Cost of shares £1,770,500
Value of shares 1.578.000
£192.500
That lose is obviously a notional loss, not a real loss; but It affords the basis of a big claim against the Revenue. It doesit in this way. The company says that its income (in the shape of dividend) had already suffered tax which was deducted at source. It ought to be relieved from that tax because under Section 341 it can set off its loss of £192,£00 against that other income. It can therefore reclaim from the Revenue the tax on £192,500.
We have been told in this case of the way in which "dividend stripping" became possible. It arose out of the way in which a dealer in stocks and shares used to account for dividends Which had suffered tax at source. In calculating the profits of a dealer in stocks and shares, such dividends were always omitted, because they had already suffered tax at source, and it was not thought right that they should be included in the profits of the recipient: for that would mean they would be taxed twice over. But before 1937, in calculating losses, such dividends were included in the accounts as being part of the trading receipts. In 1937 the legislature enacted for the purposes of relief that losses should be calculated in the same way as profits (now Section 341(3).) So thenceforward dividends taxed at source were omitted altogether from the accounts of a dealer in stocks and shares. This enabled the dealers to show a notional Ices and make it the basis of a claim for repayment of tax as in the present case. The dealer claimed repayment of tax, be it noted, which he himself had never paid. It was, while it lasted, a magnificent way for dealers in stocks sad shares to extort money from the Revenue. Fortunately it has now been stopped by the legislature. But not retrospectively. Hence this case.
In 1961, however, the courts made some observations which suggested that this method of dealing with the accounts was erroneous. In the Cenlon case, 1961 Ch. 634, Lord Justice Donovan in the Court of Appeal indicated that dividends Taxed at source ought to be brought into account. They should be brought in at the gross figure both in calculating profitsand losses. It Is obvious that this would mean that the gross dividend might be taxed twice, once in the hands of the paying company, and again in the hands of the receiving company: Lord Justice Donovan said that on this account there should be "an adjustment of the tax bill…such an adjustment must obviously he made to do justice". When the case reached the House of Lords, 1962 A. C. 782, Lord Simonds said (at p. 793) Mat the practice always had been to bring in these items of dividend (taxed at source) into the computation of profits under Case I of Schedule and then make an allowance or adjustment for the tax which had been paid. I added my agreement with Lord Justice Donovan. These observations were followed in a later case called F. S. Securities Ltd.. by Mr Justice Ungoed-Thomas at first instance on 7th December, 1962, in 1963, 1 W. L. R., 183 and by the Court of Appeal on 18th July, 1963, in 1963, W. L. R. 1223 at p. 1233. But F. S. Securities Ltd. has recently reached the House of Lords. The decision was given as recently as 4th June, 1964. It is now clear that the observations of Lord Simonds and of Lord Justice Donovan and myself were erroneous. Dividends taxed at source should not be included in calculating either profits or losses.
Now the originating summons in this case was taken out in October, 1963, in the interval after the decision of F. S. Securities Limited. in the Court of Appeal - which was on 18th July, 1963 - and before the decision in the Rouse of Lords given on 4th June, 1964.
The object of the summons is clear. Argoeam Limited. wanted to know how to make up their accounts. They wanted to know how to bring in these items of dividends taxed at, source. If they could be excluded altogether (as in Griffiths v. Harrison and the other dividend-stripping cases) then the company could show a notional loss of £192,500 and make a big claim for repayment of tax under Section 341. But if they had to be brought into the accounts (according to theobservations in Oenlon'a case) then the company could make a claim in equity for repayment of tax on the ground that the dividends had been taxed twice over. It is quite clear now, since the decision of the House of Lords in F. S. Securities Limited.-Mat the proper method is to exclude these items altogether. But in the interval Argosam Limited. wished to know the answer. Hence this summons which was in these terms: "(a) Whether on the true construction of Section 341 of the Income Tax Act, 1952, for the purpose of ascertaining thereunder whether the plaintiff company being a person at all material times carrying on the trade of a dealer in stocks and shares has sustained...
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