Blackburn (HM Inspector of Taxes) v Close Bros.Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 02 June 1960 |
| Date | 02 June 1960 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION) -
Income Tax, Schedule D and Profits Tax - Company providing services for another - Compensation received for termination of agreement - Whether trading receipt.
The Respondent Company carried on the business of merchant bankers and of a finance and issuing house and derived income in the form of allowances and fees in return for managerial and secretarial services rendered to other companies.
Under an agreement made on 3rd May, 1950, with S the Company was to provide secretarial services for three years at a remuneration of £8,000 per annum. Following a dispute the agreement was terminated as from 17th July, 1950, in consideration of the payment of £15,000 to the Company as compensation.
On appeal against assessments to Income Tax under Schedule D for the year 1951-52 and to Profits Tax for the corresponding chargeable accounting period ended 31st December, 1950, the Company contended that the payment of £15,000 was made as compensation for the loss of an enduring asset of a capital nature and was accordingly a capital receipt. The Crown contended that the sum was a trading receipt of a revenue nature to be included in computing the profits of the Company's business. The General Commissioners held that the sum in question was a capital payment and determined the assessments accordingly.
Held, that the sum of £15,000 was a trading receipt.
(1) Blackburn (H.M. Inspector of Taxes) v. Close Bros., Ltd.
CASE
Stated by the Commissioners for the General Purposes of the Income Tax for the City of London pursuant to the provisions of Section 64 of the Income Tax Act, 1952, for the opinion of the High Court of Justice.
1. At meetings of the said Commissioners held at Gresham College, Basinghall Street in the said City on 3rd and 17th November, 1958, Close Bros., Ltd. (hereinafter referred to as "the Company"), appealed against an assessment to Income Tax made upon it under Schedule D of the Income Tax Acts in respect of the profits of its trade or business for the year ended 5th April, 1952, in the sum of £2,000.
2. The question for the determination of the Commissioners was whether or not, in the circumstances hereinafter described, a sum of £15,000 received by the Company from South-Western Industrial & Water Corporation, Ltd. (hereinafter referred to as "South-Western"), in July, 1950, was a trading receipt which should be included in the computation of its profits for Income Tax purposes.
3. The following facts were admitted or proved in evidence:
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(i) The Company is a private one and was incorporated on 9th February, 1924, to carry on the business of merchant bankers and of a finance and issuing house that was originally established in 1878 by Mr. W. B. Close and his brother under the style of Close Brothers & Co.
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(ii) Largely owing to the trend of current events, the fortunes of the Company between 1925 and 1937 had been ill-fated and at times disastrous. The first phase of its business covered the period to the Hatry crash and world slump in about 1931, and culminated in a scheme of arrangement with its creditors dated 15th September, 1933. The second phase began with the appointment of the present chairman, Mr. A. H. Martens, in 1934, and the incursion by the Company into the gas industry, which took the form of agreements with South-Western Gas Corporation, Ltd. (as South-Western was then named) and United Kingdom Gas Corporation. These agreements provided for the appointment of the Company to perform various services as agents and to act as secretaries and registrars.
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(iii) Thus, by an agreement dated 11th April, 1934, made between the Company and South-Western Gas Corporation, Ltd. (as South-Western was then named), the Company was appointed (a) sole agents for the purchase of the ordinary stocks and shares of additional gas undertakings suitable to be amalgamated with those already acquired by South-Western, and (b) secretaries and registrars. The agreement was for a period of seven years commencing from 14th April, 1934, and the remuneration for these services was fixed by clauses 1 and 4 respectively on a percentage basis. A copy of the said agreement, marked "A", is annexed hereto and forms part of this Case(1).
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(iv) A supplemental agreement to the above was made in 1939 between the Company and South-Western Gas & Water Corporation, Ltd. (as South-Western was then named) providing, inter alia, for an alteration in the method of remunerating the Company for its services with a minimum aggregate remuneration of £1,500 per annum, and the extension of the term of the earlier agreement to 13th April, 1949. A copy of the said supplemental agreement, marked "B", is annexed hereto and forms part of this Case(1).
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(v) The Company's incursion into the gas industry seemed to indicate a more rosy future if the hampering influence of the aforesaid scheme of arrangement could be ended and fresh capital provided. A copy of the audited balance sheet of the Company dated 31st December, 1936, to show its precarious position with an accumulated loss of £125,369, was produced, and a copy thereof, marked "C", is annexed hereto and forms part of this Case(1). Efforts were made to raise fresh capital and these were successful partly through the provision of financial assistance by a company called Lakenham Trust, Ltd., and ultimately through a new company known as Close Brothers (Holding Company), Ltd., incorporated in 1936; and as a result the scheme of agreement was terminated in 1937 and further capital in the Company was subscribed. Copies of the minutes of board meetings of the Company, Lakenham Trust, Ltd., and Close Brothers (Holding Company), Ltd., dealing
with the financial reconstruction of the Company, all dated 27th October, 1937, were handed in and will be available in Court for reference, if required. The following was included in the resolutions by the board of the Company:
To write up the value of goodwill from £30,000 to £86,000, the Directors having taken into consideration in so doing the value of the Service Agreements existing with the United Kingdom Gas Corporation, South-Western Gas and Water Corporation, Shipley Collieries, Limited, White Pass & Yukon Railway Co. Ltd., Noel y Compania, Ltda., etc., producing fees amounting in the aggregate to over £12,000 per annum, together with the value of Agreements under which the Company acted as negotiating agents for the Gas Corporations, and to transfer the amount by which the goodwill is so written up to the credit of Reconstruction Account.
(vi) Effect was given to the above resolution in the Company's balance sheet dated 31st December, 1937, a copy whereof, marked "D", is annexed hereto and forms part of this Case(1).
(vii) The following is a short record of the experiences of the Company in connection with the aforesaid service agreements:-
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(a) The White Pass & Yukon Railway Co., Ltd., was formed and financed by the Company's predecessors, Close Brothers & Co., in 1898, for the purpose of building a railway in Canada, which subsequently became of considerable strategic importance in the Second World War, but was liquidated and the control transferred to a new Canadian corporation in 1954 owing to the impossibility of remitting any funds from the United Kingdom after the Second World War. The Company's current service agreement thereupon ceased as part of the arrangements for sale of the shares;
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(b) Shipley Collieries, Ltd.-although the coal industry was nationalised by the Coal Industry Nationalisation Act, 1946, the service agreement continued to operate until Shipley Collieries, Ltd., was liquidated in July, 1952. The Company received full remuneration up to...
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