Commissioners of Inland Revenue v Universal Grinding Wheel Company Ltd
| Jurisdiction | England & Wales |
| Judge | Viscount Simonds,Lord Porter,Lord Morton of Henryton,Lord Reid,Lord Cohen |
| Judgment Date | 30 March 1955 |
| Judgment citation (vLex) | [1955] UKHL J0330-2 |
| Date | 30 March 1955 |
| Court | House of Lords |
[1955] UKHL J0330-2
House of Lords
Viscount Simonds
Lord Porter
Lord Morton of Henryton
Lord Reid
Lord Cohen
Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against Universal Grinding Wheel Company Limited, that the Committee had heard Counsel, as well on Monday the 14th, as on Tuesday the 15th, days of this instant March, upon the Petition and Appeal of The Commissioners of Inland Revenue, of Somerset House, Strand, London, W.C.2, 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 27th of November 1953, 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 printed Case of Universal Grinding Wheel Company Limited, 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 27th day of November 1953, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
This appeal raises a question of construction of a few words in the Finance Act, 1947, upon which the Appellants invite your Lordships to reject the view entertained by the Commissioners for the Special Purposes of the Income Tax Acts and Mr. Justice Upjohn and by the majority of the Court of Appeal.
The question arises upon an assessment to profits tax on the Respondent Company in respect of the profits of its business for the accounting period of 12 months ending the 30th September, 1948, and, shortly stated, it is whether the payment of a premium by the Company on the redemption of certain £1 Preference Shares of the Company was a "distribution" within the meaning of section 36 of the Act so as to restrict the non-distribution relief allowed in respect of profits tax under section 30 (2).
The shares in question were £1 shares redeemable under the articles of the Company at 27s. per share, that is at a premium of 7s. per share. It is common ground that relief must be given in respect of the £1: the dispute relates solely to the 7s. premium, the Appellants contending that it is, and the Respondent Company that it is not, a "distribution" within the meaning of the section.
To explain the question further I think it necessary to refer only briefly to the Act. Profits tax was first imposed by the Finance Act, 1937, under the name "National Defence Contribution" and that name was changed to "Profits Tax" by the Finance Act, 1946. In 1947 by the Finance Act of that year the scheme of the tax was amended and its rate varied. In particular by section 30 ( 1) and (2) relief described as "non-distribution relief" was provided by way of reduction of the rate of tax upon so much of the taxable profit as is not covered by what is called in the Act "net relevant distributions to proprietors". I need not explain these somewhat turgid expressions except to say that they pave the way to the definition of "distribution" which is contained in section 36 (1) and is in the following terms:
"36.—(1) Subject to the provisions of the next succeeding subsection, wherever—
( a) any amount is distributed directly or indirectly by way of dividend or cash bonus to any person; or
( b) assets are distributed in kind to any person; or
( c) where the trade or business is carried on by a body corporate the directors whereof have a controlling interest therein, an amount is applied, whether by way of remuneration, loans or otherwise, for the benefit of any person,
there shall be deemed for the purposes of the last preceding section to be a distribution to that person of that amount or, as the case may be, of an amount equal to the value of those assets:
Provided that no sum applied in repaying a loan or in reducing the share capital of the person carrying on the trade or business shall be treated as a distribution."
Nothing else is involved in this appeal than to determine in relation to the facts of the case, which I will now state, what is the meaning of those few words "sum applied … in reducing the share capital".
The Company was incorporated on the 8th March, 1935, with a capital of £600,000 divided into 400,000 5% cumulative participating preference shares of £1 each and 400,000 ordinary shares of 10s. each.
Under Article 8 of the Company's Articles of Association provision was made in accordance with the powers granted by section 46 of the Companies Act, 1929, for redemption of the preference shares. I think it necessary only to refer to clause A of the Article which provided ( inter alia) that in any event any amount to be applied in redemption of the shares in excess of their nominal amount should only be provided out of profits which would otherwise have been available for dividend on shares ranking behind the preference shares, and to clause D of the Article which provided that the redemption price of a share should be the nominal amount of the share plus a premium of 7s. per share and a sum equal to all (if any) arrears or deficiency of the fixed cumulative dividend (less tax) and the current fixed cumulative dividend (less tax) calculated down to the date of the repayment of capital. The clause also provided for certain additional payment to be made, which I need not particularise. I have stated this clause at some length because some argument was founded on it, but in this case the only concern is with the 7s. premium which by the terms of the Article was payable only out of profits.
In due course in December, 1947, the Company redeemed the preference shares at the redemption price stipulated by the Articles, viz.: 27s. per share together with a sum equal to certain dividends. It is, I think, irrelevant to he question that a new issue was made in order to provide part of the redemption price and that for that purpose an agreement was made with certain brokers who in effect underwrote the issue. The only material facts were that the shares were redeemed at the stipulated redemption price and that quoad any excess over their nominal amount the payment was made, as it was bound to be, out of profits. In these circumstances an assessment to profits tax was made upon the Company which treated the payment of the 7s. per share premium as having been "distributed" with the result that the Company did not get relief in respect of the sum so paid. The Company appealed to the Special Commissioners who allowed the appeal, holding that the sum paid to the shareholders in respect of premium was a sum applied in reducing the share capital within the meaning of the proviso to section 36 (1) which I have already set out. At the request of the present Appellants the Special Commissioners stated a case for the opinion of the Court and their decision was upheld by Mr. Justice Upjohn. I think it worth while at this stage to pose the question as it appeared to the learned Judge and to state his conclusion, since I find myself in complete agreement with him. "Ought you," he asked, "as the Crown says, to explore the application of 27s. per share into the Company's balance sheet, and find that 20s. goes to reduce the capital and 7s. to reduce the profit and loss account? Or ought you to treat this as one transaction and say, in order to get rid of these shares and thereby reduce the capital by that amount, the Company were compelled by their Articles to apply the 27s. per share?". Having thus posed the question the learned Judge concludes "A company may reduce its capital in many ways, and one way is by redeeming its Preference Shares if so authorised by its Articles. To reduce the capital by that method, the Company was bound by its Articles to apply 27s. for every £1 nominal of capital reduced". He therefore affirmed the decision of the Special Commissioners.
The Court of Appeal, to whom the case was then carried, affirmed the decision of the learned Judge by a majority (Singleton and Birkett L.J.J., dissentiente Hodson, L.J.). Lord Justice Singleton stated the question in a sentence: "What amount did the Company 'apply' to reduce its capital?" Some criticism was levelled at the form of the question, and it is true that substituted "to reduce" for "in "reducing", but it is clear that he was not making any distinction between the two phrases, for his conclusion was that the word "applied" in the proviso has the same meaning as "paid", and he proceeded thus:
"The Company could not redeem the Preference Shares unless they paid 27s. a share to the holders of those shares. In paying that amount they were applying it to redeem the Preference shares and in reducing the share capital of the Company; thus the sum which they paid was applied in reducing the capital of the Company, and does not fall to be treated as a distribution".
My Lords, the case for the Company could not, I think, be put more concisely or cogently. Lord Justice Birkett agreed, emphasising that the operation of reducing the capital and the operation of redeeming the preference shares were really indivisible since by the very act of redeeming the shares the capital was in fact reduced....
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