Bamford (HM Inspector of Taxes) v A.T.A. Advertising Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 27 March 1972 |
| Date | 27 March 1972 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Corporation tax, Schedule D-Trade-Deduction-Expenses-Sums fraudulently misappropriated by director and lost-Tax on director's salary accounted for to Inland Revenue but not deducted from salary-Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 137(a), (e) and (f); Finance Act 1965 (c. 25), s. 53.
The Respondent Company's trade consisted of advertising and publicity work; it had never lent money by way of trade. In 1966 N, a director in whose hands financial matters were left by the other directors, misappropriated £15,000 belonging to the Company by advancing it to another company which he controlled. That sum was written off as a bad debt in the Company's accounts for the year to 30th April 1967. During part of the period in which he was a director N drew his salary without deduction of income tax under Schedule E, although the tax which should have been deducted was paid over to the Inland Revenue; £636 representing the balance of his loan account with the Company was also written off in the 1967 accounts.
On appeal against an assessment to corporation tax for the accounting period ending 30th April 1967 the Company contended (a) that funds misappropriated by a servant of a company were an admissible deduction, and N, as well as being a director of the Company, was its servant and as such in no different position from any clerk or other servant, and (b) that the balance of the loan account represented income tax which had been paid to the Inland Revenue and should have been deducted from N's salary, and therefore represented additional emoluments of N. For the Crown it was contended that the loss of the £15,000 was both incurred outside the trade and also a capital loss, and that the loss of the £636 was a capital loss. The General Commissioners allowed the appeal under both heads.
Held, (1) that the loss of £15,000 was not a loss connected with or arising out of the Company's trade within s. 137(e), Income Tax Act 1952;
(2) that a deduction for the balance of the loan account was not admissible because the payment by an employer of his employees' tax is not a payment wholly and exclusively expended for the purposes of his trade.
Stated under s. 56 of the Taxes Management Act 1970 by the Commissioners for the General Purposes of the Income Tax for the Division of St. George, Hanover Square, for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held on 10th December 1970 A.T.A. Advertising Ltd. (hereinafter called "the Respondent Company") appealed against assessments to corporation tax for the period ending 30th April 1967 in the sum of £15,554(2).
2. At the hearing evidence was given before us by Edward John Fox, chairman of the Respondent Company.
3. The following facts were admitted or proved:
(a) The Respondent Company's trade consists of advertising and publicity work. It has never lent money by way of trade.
(b) In 1965 Major A.E. Newnham and Mr. H.G. Walker, directors of the Respondent Company, negotiated on its behalf facilities with Forward Trust Ltd. whereby the Respondent Company could obtain credit up to a maximum of £30,000 on the basis of a settlement period of three months and also facilities for further advances subsequently, provided that the account with Forward Trust was worked satisfactorily. The first advance was made on 18th May 1965. It was part of the mandate that funds could only be obtained on a Forward Trust Ltd. cheque signed by any two of Mr. Fox, Major Newnham and Mr. Walker.
(c) The moneys were required wholly and exclusively for the Respondent Company's business as an advertising agency, and were essential for the continuance of that business.
(d) Cheques drawn on the Respondent Company's bank account only required the signature of one director.
(e) Major Newnham and Mr. Walker each held 50 per cent. of the ordinary shares in the Respondent Company. Financial matters were left by the other directors in the hands of Major Newnham. They dealt with the day-to-day business of the Respondent Company.
(f) Early in 1966 Mr. Fox and Mr. Walker became aware that Major Newnham was utilising some of the moneys advanced by Forward Trust Ltd. to the Respondent Company by making advances on a temporary basis by the Respondent Company to the St. James Mortgage and Finance Co. Ltd., a company controlled by Major Newnham but in no way connected with the Respondent Company and with which it did not do business. The amount involved was then £10,000, and Mr. Fox and Mr. Walker insisted that Major Newnham should arrange for repayment.
(g) Had Major Newnham sought the approval of his co-directors to draw cheques on the Respondent Company's bank account in favour of the St. James Mortgage and Finance Co. Ltd. he would not have obtained it.
(h) On 15th January 1966 Major Newnham caused to be paid into the bank account of the Respondent Company a cheque for £10,000 drawn on the bank account of the St. James Mortgage and Finance Co. Ltd. The previous day, however, without the knowledge of Mr. Fox and Mr. Walker, a cheque for £10,000 was drawn and signed by Major Newnham on the bank account of the Respondent Company payable to the St. James Mortgage and Finance Co. Ltd. On 16th February 1966 Major Newnham drew and signed on the bank account of the Respondent Company a cheque for £15,000 payable to the St. James Mortgage and Finance Co. Ltd. On the same day he caused a cheque for £10,000 of the St. James Mortgage and Finance Co. Ltd. to be paid into the Respondent Company's account. This payment was to clear the £10,000 outstanding from 14th January. The result of all these transactions was that the sum of £15,000 remained owing to the Respondent Company. The cheques drawn on the Company's bank account by Major Newnham in favour of the St. James Mortgage and Finance Co. Ltd. were without the authority or knowledge of Mr. Fox or Mr. Walker.
(i) It subsequently came to the knowledge of Mr. Fox and Mr. Walker that the moneys paid to the St. James Mortgage and Finance Co. Ltd. were diverted by Major Newnham to Lincoln & Co., a firm of estate agents of which Major Newnham was the principal.
(j) In November 1966 Lincoln & Co. failed with a deficit of £101,532, and Major Newnham was adjudicated bankrupt. In 1968 Major Newnham was tried on thirteen counts, ten involving fraudulent conversion of clients' deposits in Lincoln & Co. and two involving other charges connected with Lincoln & Co. He was also charged with fraudulently applying £15,000, the property of the Respondent Company, for a purpose other than the use of the Company. He was acquitted on the latter charge.
(k) During part of the period when Major Newnham was a director of the Company he drew his salary without deduction of Schedule E tax.
(l) In the Respondent Company's accounts for the year ended 30th April 1967 sums totalling £15,636.60 were written off as bad debts in the profit and loss account made up as follows: (i) the £15,000 mentioned in para. 3(h) above; (ii) £636.60 representing the balance of Major Newnham's loan account with the Company.
4. It was contended on behalf of the Respondent Company as follows:
(2) The sum of £15,000 was misappropriated by Major Newnham for his own purposes and represented moneys wholly and exclusively obtained by the Respondent Company for the purposes of its business as advertising agents.
(3) The authority which Major Newnham had to issue and sign cheques related solely to those drawn for the purposes of the Respondent Company's business, which did not include the lending of money.
(4) Major Newnham, as well as being a director of the Company, was its servant, and as such was in no different position from any clerk or other servant who misappropriated the funds of the Respondent Company. Funds misappropriated by a servant of a company are admissible as deductions from assessable profits.
(5) The sum of £544 comprised in the assessment under appeal represents income tax which should have been deducted from Major Newnham's salary and which sum the Respondent Company was under a liability to pay and which liability it discharged. It therefore represents additional emoluments of Major Newnham.
5. It was contended on behalf of H.M. Inspector of Taxes as follows:
(2) that for the sums in question to be allowable as deductions from the profits of the Company for corporation tax purposes they must not come within the...
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