Commissioners of Inland Revenue v Patrick Thomson, Ltd ((in Liquidation))
| Jurisdiction | Scotland |
| Judgment Date | 07 December 1956 |
| Date | 07 December 1956 |
| Court | Court of Session (Inner House - First Division) |
COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Deduction - Expenses - Payments in respect of termination of services of managing directors - Income Tax Act, 1952 (15 & 16 Geo. VI & 1 Eliz. II, c. 10), Section 137(a).
The Respondent Companies were subsidiaries of S.D.C. Ltd., control of which was acquired by H. of F. Ltd. Changes of organisation which were made in accordance with the policy of the latter company involved the termination of the contracts of service of the managing directors of the Respondent Companies and also the eventual liquidation of those Companies. Certain sums were paid by the Companies to the managing directors in connection with the cancellation of their contracts, the payments being expressed in the first two cases to be in satisfaction of rights to future remuneration, and in the third to be in lieu of notice.
On appeal to the Special Commissioners against assessments to Income Tax under Schedule D in respect of their profits the Companies contended that the payments were made to relieve them from onerous contracts and were allowable deductions. The Crown contended that the payments were not expenses of the Companies' businesses but were incidental to the schemes by which those businesses were acquired by H. of F. Ltd. and were made primarily for the latter Company's benefit. The Commissioners decided that the deductions claimed were allowable.
Held, that the decisions of the Special Commissioners were correct.
Commissioners of Inland Revenue v. Patrick Thomson, Ltd. (in liquidation)
CASE
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Act, 1952, Section 64.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Glasgow on 30th September, 1955, for the purpose of hearing appeals, Patrick Thomson, Ltd. (in liquidation) (hereinafter called "the Respondent Company"), appealed against an assessment to Income Tax under Schedule D of the Income Tax Act, 1952, made upon it for the year 1952-53 in the sum of £130,000 in respect of its profits as drapers.
The question for our determination was whether a sum of £3,000 paid by the Respondent Company to D. G. Gardiner in the circumstances hereinafter mentioned was allowable as a deduction in computing the Respondent Company's profits chargeable to Income Tax.
I. The following facts were admitted or proved:
(2) In the summer of the year 1952 Mr. Hugh Fraser, chairman and managing director of House of Fraser, Ltd. (hereinafter called "House of Fraser"), a drapery company trading under various trading names and a holding company for certain subsidiary drapery companies, formed the intention of gaining control on behalf of House of Fraser of Scottish Drapery Corporation, Ltd. (hereinafter called "Scottish Drapery"), by buying up a large block of shares held therein by an English company called Debenhams, Ltd. (hereinafter called "Debenhams"). The negotiations between Mr. Hugh Fraser and the chairman of Debenhams resulted in terms being agreed in July, 1952, and on 22nd July, 1952, an offer was made by Debenhams to the chairman and directors of House of Fraser to sell 407,160 ordinary £1 shares in Scottish Drapery. In the said offer it was intimated that a Mr. R.P. Gaze undertook to sell a thousand ordinary shares, the price in both cases being £3 a share. The sale was to be carried through not later than 1st September, 1952, and was on the condition that an offer should be made by House of Fraser of £3 a share to the owners of the remainder of the ordinary shares in Scottish Drapery. The aforesaid offer was accepted on behalf of House of Fraser by Mr. Hugh Fraser as chairman on the same date. A copy of the said offer and acceptance is annexed hereto, marked "A", and forms part of this Case(1).
(3) On or about the same date House of Fraser wrote to the directors of Scottish Drapery offering to purchase the whole of the issued preference and ordinary shares in Scottish Drapery. A copy of this offer, marked "B", is annexed hereto and forms part of this Case(1). In the offer last mentioned the seventh clause was as follows:
It is understood that there are no agreements between the Company or its Subsidiary Companies and any of their employees which require more than one month's notice on either side for their termination except those specified in Appendix II annexed hereto.
(4) At that stage Mr. Hugh Fraser had no knowledge of what agreements (if any) existed between Scottish Drapery or its subsidiaries and employees of the said companies, and appendix II was, therefore, left blank.
(5) As is shown in appendix I to the offer last mentioned, exhibit B, Scottish Drapery at the material time owned the whole of the issued ordinary share capital of the Respondent Company; there were no preference shares.
(6) On 30th July, 1952, the chairman and directors of Scottish Drapery accepted, subject to certain qualifications, House of Fraser's offer (exhibit B) to buy the whole of the issued preference and ordinary shares of Scottish Drapery. A copy of the said acceptance, marked "C", is
annexed hereto and forms part of this Case(1). Clause 7 of the acceptance last mentioned stipulated that the purchasers would honour and carry into effect all agreements within the Scottish Drapery group with managing directors, managers, buyers or other senior executives, which at that date were in force or had been substantially agreed. There was annexed to the said acceptance a schedule headed schedule II setting forth a list of directors and employees of Scottish Drapery and its subsidiary companies whose services could not be terminated on one month's notice.(7) In the said schedule II appears, inter alios, the name of D.G. Gardiner, managing director of the Respondent Company, and his contract of service is described as "Agreement to be signed expiring 31.1.1956".
(8) In schedule I annexed to the said acceptance (exhibit C) appears a form of a circular letter which the acceptance stipulated should be addressed by the chairman of directors of Scottish Drapery to the members of that company recommending them to accept the offer of House of Fraser for their shares at the price of £3 per ordinary £1 share and 26s. 9d. per £1 preference share. The attention of members was drawn inter alia to the fact that no provision was made in the offer by House of Fraser for payment of compensation to the directors of Scottish Drapery or its subsidiary companies in the event of loss of office. Mr. Hugh Fraser, acting on behalf of House of Fraser, had, in fact, never any intention of paying compensation for loss of office to the directors of Scottish Drapery or of its subsidiary companies, and at the time the offer was made, he did not know of any of the agreements referred to in schedule II annexed to the said acceptance.
(9) On 31st July, 1952, Mr. Hugh Fraser, on behalf of House of Fraser, agreed to and accepted the whole terms and conditions of the letter of qualified acceptance hereinbefore mentioned (exhibit C) and thereafter all appropriate steps were taken to complete the contracts between House of Fraser, Debenhams and Scottish Drapery. A copy of Mr. Hugh Fraser's said letter of 31st July, 1952, marked "D", is annexed hereto and forms part of this Case(1). By the end of September, 1952, most of the formal matters necessary to complete the contracts had been taken. Scottish Drapery had by then become entirely within the control of House of Fraser and the directors of House of Fraser, except Mr. J.D. Cochrane, became the new directors of Scottish Drapery and of its subsidiary companies, including the Respondent Company.
(10) After the takeover, a reorganisation was carried out in order to apply the same principles to each of the subsidiaries of Scottish Drapery, including the Respondent Company, as were already in force in the case of other branches and subsidiary companies of House of Fraser. All the forty-seven branches or subsidiary companies of House of Fraser were run as separate units, but the policy of each such unit was dictated by the board of directors of House of Fraser. This policy involved the eventual liquidation of any company of which House of Fraser obtained control and, for example, out of forty businesses acquired by House of Fraser since 1940, only seven or eight companies remain at the present time unliquidated. It was, therefore, at all material times, the intention, after House of Fraser obtained control of the Respondent Company through its acquisition of shares in Scottish Drapery, to liquidate it. Accordingly, Mr. Hugh Fraser became chairman and managing director of the Respondent Company in September, 1952, the
other directors being as above mentioned, and on 30th January, 1953, the Respondent Company went into voluntary liquidation and Mr. R.G. Keenan, hereinafter mentioned, was appointed liquidator. The liquidation of the Respondent Company was carried out in accordance with the general policy of House of Fraser and was designed to simplify internal accounting.(11) The directors of House of Fraser at the material time were (i) Mr. Hugh Fraser, who was chairman, (ii) Mr. R.G. Keenan, who was also secretary, and with Mr. Fraser was especially concerned with matters of finance, (iii) Mr. E. Gamble, (iv) Mr. A. Spence, and (v) the said Mr. J.D. Cochrane. Mr. Gamble and Mr. Spence in the broad sense ran all the concerns owned by House of Fraser and were responsible for their general trading policy, but not for their financial policy. Under Messrs. Gamble and Spence were four area managers each responsible for an area in Scotland, and each store had a manager who was under the supervision of the appropriate area manager. The...
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