B.W. Nobes & Company Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 15 December 1965 |
| Date | 15 December 1965 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income tax-Annual payment-Payment charged against capital in payer's accounts-Profits exceeding annual payment but less than aggregate of annual payment and dividend paid-Whether annual payment made wholly out of taxed profits-Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 170.
The Appellant Company carried on business as shipbrokers. In May 1957 it formed a subsidiary, A Ltd., with an authorised capital of 100 £1 shares, two of which were allotted to the Company. In July 1957 the other 98 shares were allotted to it in consideration of a covenant to make to A Ltd. for nine years annual payments from which income tax was deductible. In the same month the Company sold the whole share capital of A Ltd. to C Ltd. for £45,000, of which £100 was payable on completion and the remainder by instalments over nine years. Each year from 1958 to 1960 before making the covenanted payment to A Ltd. the Company arranged with C Ltd. to receive a cheque for the same amount under the sale agreement, and a ledger account opened by the Company showed each payment to A Ltd. as balanced by a receipt from C Ltd. The balances on profit and loss account for the three years to 31st March 1960 were not affected by the payments to A Ltd. According to its accounts for each of those years, the Company had taxed profits sufficient to cover the annual payments to A Ltd., but not to cover both those payments and the dividends from which it deducted tax. A document submitted by the Company purported to show an accumulated balance of taxed profits at 31st March 1957 of £74,188, but the accounts showed the balance at that date as £4,449.
The Company was assessed to income tax under s. 170, Income Tax Act 1952, for the years 1957-58 to 1959-60 on the footing that the payments to A Ltd. were not wholly made out of profits brought into charge to tax. On appeal, it was contended for the Company that there were in each of the relevant years sufficient taxed profits to cover the payments to A Ltd. and that those payments must therefore be deemed to have been made wholly out of taxed profits. For the Crown it was contended that the Company had not discharged the onus which lay on it to show that the payments were made out of taxed profits, and that the evidence showed that they were in fact made out of capital receipts. The Special Commissioners found that there was no evidence that the Company had had recourse to an accumulated fund of taxed profits, and having regard to the dividends paid under deduction of tax and to the ledger account concluded that the annual payments were made entirely out of capital.
Held, that the Commissioners' decision was correct.
Stated under the Income Tax Act 1952, ss. 170(4) and 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 19th and 20th March 1962 and 17th January 1963, B.W. Nobes & Co. Ltd. (hereinafter called "the Company") appealed against assessments to income tax made under s. 170 of the Income Tax Act 1952 for the years 1957-58, 1958-59 and 1959-60 in the sums of £43,870 (tax £18,644 15s.), £47,126 (tax £20,028 11s.) and £43,329 (tax £16,789 19s. 9d.) respectively.
2. The question for our determination was whether certain annual payments by the Company had not been made or had not wholly been made out of profits or gains brought into charge, within the meaning of s. 170 aforesaid.
3. (a) On behalf of the Company Mr. James William Clement gave evidence before us. He is a Fellow of the Institute of Chartered Accountants, and a partner in the firm of Blackburns, Robson, Coates & Co. This firm audited the Company's accounts at all material times, and Mr. Clement was the partner responsible for the audit.
(b) On behalf of the Crown Mr. Gareth Barlow Baron gave evidence before us. He is a Fellow of the Institute of Chartered Accountants, and chief accountant to the Board of Inland Revenue.
4. The Company at all material times carried on the business of ship-brokers, and has made up its accounts to 31st March each year.
5. In August 1955 all the shares in the Company were sold to a company called Avenue Finance Co. Ltd. On 25th March 1957 the Company paid a dividend of £155,000 net, leaving on its profit and loss account to 31st March 1957 a balance to be carried forward of £4,449.
On 31st March 1957 Avenue Finance Co. Ltd. sold all its shares in the Company to the Company's present parent company, Fashion & General Investment Ltd., for about £17,000.
6. On 16th May 1957 the Company caused Aconite Investments Ltd. ("Aconite") to be incorporated, with an authorised share capital of £100 consisting of 100 shares of £1 each, of which two shares were allotted to the Company for cash.
7. On 12th July 1957 the Company entered into a deed of covenant with Aconite. This deed provided that:
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(i) in each of the years ended 5th April 1958 to 1966, inclusive, the Company should pay to Aconite the greater of the two following sums, namely:
(a) a sum equal to the net annual income (as defined) in the year ending on 30th March which falls within the fiscal year arising on certain shipping contracts, provided nevertheless that the said sum should not in any event exceed the income from all sources of the Company assessable to or charged with income tax in the fiscal year, reduced by all annual payments as defined in s. 169 of the Income Tax Act 1952 except the said sum payable under the deed,
(b) one hundred pounds;
(ii) income tax at the standard rate should be deducted from these payments, which would become due and payable on 30th March in each year;
(iii) in consideration of the giving of the covenant to make the payments Aconite should forthwith issue and allot to the Company (or as it might direct) 98 shares of £1 each credited as fully paid up.
It is common ground that these payments are annual payments from which tax was properly deducted, and it is in relation to them that the question arises whether they were paid out of the Company's profits or gains brought into charge, or partly so paid.
The shares in Aconite were a fixed capital asset of the Company which were acquired by means of the covenant to make the annual payments.
A copy of this deed of covenant is annexed hereto, marked "A", and forms part of this Case(1)
8. On 18th July 1957 the Company entered into an agreement with Consolidated Investment Funds Ltd. ("C.I.F.") whereby it agreed to sell all its 100£1 shares in Aconite to C.I.F. The primary price payable by C.I.F. was £45,000, of which £100 was payable on completion (18th July 1957); but the primary price was subject to a possible increase. The agreement provided that sums equal to Aconite's net profits (as defined) for the financial period ended 31st March 1958 and each of the years ended 31st March 1959 to 1966, inclusive, were to be paid on account of the primary price; but that if the aggregate of such sums and of the £100 payable on completion exceeded £45,000, the primary price was to be increased by the excess. The agreement also provided that the payments by C.I.F. were to be paid to and received by the Company as capital sums on account of the purchase price of the Aconite shares.
A copy of this agreement is annexed hereto, marked "B", and forms part of this Case(1).
9. The Company opened a ledger account in its books, headed "Shares in Aconite Investments Ltd.", in respect of the acquisition and sale of the said shares.
A copy of this account for the period from July 1957 to July 1961 is annexed hereto, marked "C", and forms part of this Case(1).
On the left-hand side there are debited the net annual payments made by the Company to Aconite, and the capital payments made by C.I.F. to the Company are credited on the right-hand side.
In the period covered by the account it balances year by year. The explanation of, for example, the early figure on each side of £225 4s. 6d. is that the Company paid on 25th March 1958 £25,000 on account of its annual payment to Aconite. Subsequent calculation showed that this sum was £225 4s.6d. too little. £225 4s. 6d. was paid to Aconite, and a corresponding sum paid by C.I.F. to the Company. The final calculation shown in the account of the annual payments from the Company to Aconite was accurate, but the payment of the corresponding sums from C.I.F. to the Company was merely provisional. These latter payments were made on account of the sums due from C.I.F. to the Company under the agreement of 18th July 1957, but the final calculation of those sums would not (as appears from the documents) necessarily or normally correspond with the calculation of the annual payments due from the Company to Aconite. Thus the balance of the account did not truly reflect the effect of the agreement, but simply meant that the Company did not, in the period
covered by the account, take credit for any actual surplus arising on the transaction.Each year from 1958 to 1960, before making the payment to Aconite under the deed of covenant (exhibit A), the Company arranged with C.I.F. to receive a cheque for the same amount from C.I.F. under the agreement dated 18th July 1957 (exhibit B).
10. (a) The two transactions of (1) the subscription by the Company for the Aconite shares by means of the covenant to make the annual payments and (2) their sale to C.I.F. in consideration of a series of capital payments were related transactions in the sense that they were both decided upon by the Company at the same time. They were put through the one ledger account because, in Mr. Clement's opinion, this was a natural and convenient way of dealing with them. Since the ledger account balanced year by year, the transactions of subscription for and sale of the Aconite shares were...
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Green v Commissioners of Inland Revenue
...Marcus Jones placed great reliance upon the decision of the House of Lords inB. W. Nobes & Co. Ltd. v. Commissioners of Inland Revenue(1) 43 T.C. 133. I have been unable to understand in what way that case assists this argument, and for that reason I merely mention it without going into it.......