Associated Portland Cement Manufacturers Ltd v Kerr
| Jurisdiction | England & Wales |
| Judgment Date | 26 November 1945 |
| Date | 26 November 1945 |
| Court | Court of Appeal |
No. 1338-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
Income Tax, Schedule D, and National Defence Contribution - Profits of trade - Deduction - Payments by company to retiring directors in consideration for world-wide covenants by them not to compete with the company after their retirement - Whether income or capital expenditure.
The Appellant Company sought a deduction from its profits for the purposes of Income Tax and National Defence Contribution in respect of sums of £20,000 and £10,000 paid to two retiring directors, S and C, in the following circumstances. S was a managing director of the Company under a service agreement which was due to terminate on 31st December, 1939. Some months before that date he intimated his wish to retire from the service of the Company at the end of 1939. C, who was a director of the Company, gave notice some time before January, 1939, of his desire to resign his position with the Company on 30th September, 1939, there being no written service agreement in his case. Both S and C had been with the Company since its formation in 1900 and had exceptional knowledge of the cement industry and important business contacts, and they would have been free on retirement to engage in competitive activities to the detriment of the Company. In July, 1939, the Company, accordingly, entered into agreements with them by which the Company agreed to pay £20,000 to S on 30th December, 1939, and £10,000 to C on 30th September, 1939, in consideration of them entering into covenants that they would not, after the respective dates of their retirement, without the consent of the Company, carry on or be concerned in the manufacture or the selling of cement in any part of the world.
On appeal to the Special Commissioners against assessments to Income Tax under Schedule D, Case I, and National Defence Contribution, the Company contended that the payments in question were made solely in order to protect and preserve the goodwill of the Company unimpaired and were admissible deductions in computing its profits for taxation purposes. The Crown contended that the payments were of a capital nature, being payments made once and for all for the sole purpose of bringing into existence an asset or advantage for the enduring benefit of the Company's trade. The Special Commissioners held that the expenditure, although incurred for purposes of the Company's trade, was of a capital nature and was not an admissible
deduction for the purposes of Income Tax and National Defence ContributionHeld, that the Special Commissioners' decision correct.
(1) Associated Portland Cement Manufacturers, Ltd. v. Kerr (H.M. Inspector of Taxes)
CASE
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 7th January, 1944, Associated Portland Cement Manufacturers, Ltd. (hereinafter called "the Company") appealed against an assessment to Income Tax made upon the Company for the year 1940-41 under Case I of Schedule D of the Income Tax Acts. The said assessment was an additional assessment and was in the sum of £31,179.
2. The sole question for our determination was whether the Company, in the computation of its profits for the purpose of assessment to Income Tax, was entitled to a deduction in respect of payments made by it, as hereinafter appearing, of £20,000 to a Mr. Stevens and of £10,000 to a Mr. Charleton, in consideration for covenants by these gentlemen respectively binding them not to enter into competition with the Company.
3. The Company was incorporated on 10th July, 1900, with an original authorised capital of £5,000,000 which in 1938 was increased to £7,000,000, the issued capital being £6,500,000 in preference and ordinary stock.
The Company holds a controlling interest in British Portland Cement Manufacturers, Ltd., hereinafter referred to as "the British company", which was incorporated in 1911. The British company has an authorised capital of £4,000,000, the issued capital being £3,680,000. The two companies, with a group of subsidiary companies, hereinafter referred to as "ancillary "companies", are the largest manufacturers of cement in Great Britain.
4. In 1900, when the Company was formed, Mr. Stevens was appointed secretary. He had been associated with the cement industry all his life and had previously been interested in the Imperial Cement Company, an independent company which existed before the Company's formation. In 1906 he was appointed one of the managing directors of the Company, and continued to be a managing director until his retirement on 31st December, 1939.
Mr. Stevens had particular charge of the administrative and financial side of the Company's business, and was in constant consultation with the chairman of the Company on all aspects of the Company's policy.
5. On 18th July, 1934, Mr. Stevens entered into a service agreement with the Company, hereinafter referred to as "the 1934 service agreement", extending his service as one of the managing directors of the Company for a further period of 5 years as from 1st January, 1935, i.e., up to 31st December, 1939. A copy of the 1934 service agreement is annexed hereto, marked "A", and forms part of this Case(1).
Under clause 1 of the 1934 service agreement Mr. Stevens was to devote "the whole of his time attention and abilities to the business of the Company" and the business of the British company and of any ancillary companies.
Under clause 2 his remuneration as managing director was to be "a fixed "salary at the rate of £4,000 per annum", inclusive of all fees receivable by him as an ordinary director and all fees, etc., from any of the ancillary companies, but exclusive of any remuneration receivable by him as a trustee of the Company's first mortgage debenture stock or as a director or managing director of the British company. He was also to receive additional remuneration as provided in clause 4.
Under clause 3 he was, if and so long as the Company should so desire, to "serve as Director and/or Managing Director and/or Member of Council "of any of the Ancillary Companies", but was not, unless the Company should so decide, to receive any remuneration therefrom.
Under clause 4, as managing director of the Company he was to "receive "by way of additional remuneration a sum equal to two-fifteenths of five per "centum calculated on the surplus net profits of the Company", as defined in clause 5.
Clause 6 makes provision regarding shares to be held by him as managing director.
Clauses 7 and 8 are in the following terms:-
7. The Managing Director shall not save as herein provided during "his employment by the Company without the written consent of the "Company either alone or jointly with any other person or persons or "as Director or Manager agent or servant of any company firm or person "in the United Kingdom and the Irish Free State carry on the business "of manufacture or sale of cement or be interested in any such business "by investment or loan or otherwise.
8. As the office which the Managing Director is to fill involves or may "involve knowledge by him of much confidential information the "Managing Director expressly agrees in extension of and not in substitution "for any obligation cast upon him by law or equity under the terms of his "engagement that he will not either during his employment or at any time "thereafter communicate to others or disclose any information that has "been acquired or may be acquired by him as to any of the business matters "of the Company particularly as to any of its processes of manufacture not "in general use by other cement manufacturers except so far as such "disclosure to other officials of the Company shall be necessary for the "proper performance of his duties and that he will reveal and disclose "all such information from time to time to the Managing Directors' "Committee of the Company or its Executive as and when required and "particularly will not without the written permission of the Managing "Directors' Committee of the Company or its Executive and then only "so far as such permission shall expressly extend under any circumstances "impart or divulge to anyone any information plan or drawing relating "to such plant machines processes or methods and further will not allow "any unauthorised person to enter upon visit or inspect any of the "departments under his charge but will use his best endeavours to exclude "all such persons.
Clause 9 makes provision regarding the communication to the Company of any inventions or improvements affecting the Company's business.
At the conclusion of the 1934 service agreement Mr. Stevens would have been free, had no steps been taken to prevent him, to turn his abilities to account in the way of lending his name to any enterprise which might compete with or otherwise act to the disadvantage of the Appellant Company.
6. The total remuneration of Mr. Stevens for each of the two years 1938 and 1939 was of the order of £13,000.
7. Some months before the date of expiry of the 1934 service agreement Mr. Stevens intimated privately and personally to Sir Malcolm Stewart, the chairman of the Appellant Company, that he wished to resign his post as managing director and retire from the board of the Company. Sir Malcolm reported to the board at a meeting held on 13th July, 1939, that the 1934 service agreement with Mr. Stevens as a managing director expired on 31st December, 1939, and explained it was Mr. Stevens' wish it should not be renewed and further that he should retire from the board at the end of the year. A copy of the minute of the...
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