C. H. W. (Huddersfield) Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Jenkins,Lord Hodson,Lord Guest,Lord Pearce |
| Judgment Date | 20 June 1963 |
| Judgment citation (vLex) | [1963] UKHL J0620-1 |
| Date | 20 June 1963 |
| Court | House of Lords |
[1963] UKHL J0620-1
House of Lords
Lord Reid
Lord Jenkins
Lord Hodson
Lord Guest
Lord Pearce
Upon Report from the Appellate Committee, to whom was referred the Cause C.H.W. (Huddersfield) Limited against Commissioners of Inland Revenue, that the Committee had heard Counsel, as well on Tuesday the 21st, as on Wednesday the 22d and Thursday the 23d, days of May last, upon the Petition and Appeal of C.H.W. (Huddersfield) Limited, whose registered office is situate at Hanover House, 73-78 High Holborn, W.C. 1, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 22d of June 1962, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 22d day of June, 1962, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Question of Law set forth in the Case stated be answered in the Negative: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellants the Costs incurred by them in the Courts below, and also the Costs incurred by them in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the Commissioners for the Special Purposes of the Income Tax Acts, to do therein as shall be just and consistent with this Judgment.
My Lords,
This case arises out of surtax directions made upon the appellant company and consequent apportionment of its income for the accounting period 1st April, 1956, to 31st January, 1957, under sections 245 and 248 of the Income Tax Act, 1952. Until 29th January the whole share capital was held by four persons, two Garsides and two Spencers. They then sold their shares for £279,500, nine-tenths being acquired by Anglo-French Trust and one-tenth by Standard Industrial Trust. When the company's accounts for the period in question were made up they showed a net profit of £32,103. On 14th February, 1957, these accounts were adopted by the company in General Meeting and it was resolved to confirm payment of a small preference dividend which the former shareholders had received and to pay no further dividend for the period.
Then on 7th July the Assessing Special Commissioners made a direction and apportionment of the gross income for the period of £55,819. They apportioned £54,282 of this to the Garsides and Spencers in respect that they had owned the ordinary shares for 303 days of the period, and £537 to Anglo-French and Standard in respect that they had owned the shares for the remaining three days of the period. The Appellants maintain that the Commissioners had no right to make this direction and apportionment. The relevant sections of the Act are as follows:—
"245. With a view to preventing the avoidance of the payment of surtax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted that where it appears to the Special Commissioners that any company to which this section applies has not, within a reasonable time after the end of any year or other period for which accounts have been made up, distributed to its members, in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of surtax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that, for purposes of assessment to surtax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members, and the amount thereof shall be apportioned among the members."
"248.—(1) Where a direction has been given under section two hundred and forty-five of this Act with respect to a company, the apportionment of the actual income from all sources of the company shall be made by the Special Commissioners in accordance with the respective interests of the members."
"256.—(1) Section two hundred and forty-five of this Act shall apply to any company which is under the control of not more than five persons and which is not a subsidiary company or a company in which the public are substantially interested.
(2) For the purposes of this section, a company shall be deemed to be under the control of not more than five persons …
( c) if—
(i) on the assumption that the company is a company to which the said section two hundred and forty-five applies …
…
more than half the income of the company (including any income which has been apportioned to it, or could on either of those assumptions be apportioned to it, for the purposes of this Chapter) could be apportioned for those purposes among not more than five persons.
In ascertaining under paragraph ( c) of this subsection whether or not income could be apportioned among not more than five persons, account shall, in cases where an original apportionment and any sub-apportionment are involved, be taken only of persons to whom income could be finally apportioned as the result of the whole process of original apportionment and sub-apportionment.
…
(4) For the purposes of this section, a company shall be deemed to be a subsidiary company if by reason of the beneficial ownership of shares therein the control of the company is in the hands of a company not being a company to which section two hundred and forty-five of this Act applies, or of two or more companies none of which is a company to which the said section two hundred and forty-five applies:
Provided that, notwithstanding anything in this subsection, a company which is deemed for the purposes of this section to be under the control of not more than five persons shall not be deemed to be a subsidiary company unless it can be deemed to be under the control of not more than five persons only by including among the persons mentioned in paragraph ( a), paragraph ( b) or paragraph ( c) of subsection (2) of this section a company to which the said section two hundred and forty-five does not apply and which is not the nominee of any other person."
It was agreed that we must look at the end of the accounting period to see whether section 245 applied to the appellant company. So it is unnecessary to decide whether that is the universal or general rule, and we can accept this agreement for the purposes of this case. At that date the appellant company was under the control of Anglo-French. Section 256 (1) would exclude the Appellant if it was a subsidiary company, but the question is whether the proviso to section 256 (4) required the Appellant to be deemed not to be a subsidiary company. If the proviso applies to this case, then section 245 applied. So the question is, what does the proviso mean? Its language is very obscure, and again I think that we can proceed on the agreement of the parties. They both say that you must begin by assuming that section 245 does apply. And then on that assumption you must see whether it would be competent for the Commissioners to apportion more than half the income to persons other than the controlling company, Anglo-French.
That takes us straight to section 248 (1). That section requires the actual income of the company to be apportioned "in accordance with the respective interest of the members". So there are two questions—who are "members" and what is meant by their "respective interests". The Appellant agrees that the Garsides and Spencers were "members" although they had ceased to have any interest in the company before the crucial date, the end of the accounting period. They admit that that is the result of the decision of this House in Fendoch Investment Trust Company v. Commissioners of Inland Revenue, 27 T.C. 53. And I think that must be so. In the present case the Garsides and Spencers had received £1,000 in preference dividend out of the profits of the period, and it would be strange if that sum could not be apportioned to them because the new shareholders never had any kind of interest in it.
But the question what is meant by "respective interests" is much more difficult. It cannot mean vested interest in the income because these sections are dealing with income which the company has withheld from distribution. Such income is simply part of the assets of the company until the company has decided what to do with it, and no shareholder has any right to any particular part of the company's assets. At one time it was thought that this meant the interests which members would get if the income were distributed in the ordinary way as dividend. But F.P.H. Finance Trust, Limited v. Commissioners of Inland Revenue [1946] A.C.3 [1946] A.C.3 8, shows that "interest" must be given a much wider meaning than that. This company had an odd structure. The preference shareholders had control and got all surplus assets in a liquidation, while the ordinary shareholders were entitled to all dividends (except a small preference dividend). But the rights of the ordinary shareholders were worth little because the preference shareholders could refuse to...
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