Commissioners of Inland Revenue v Universal Grinding Wheel Company, Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 30 March 1955 |
| Date | 30 March 1955 |
| Court | High Court |
HIGH COURT OF JUSTICE-
COURT OF APPEAL-
HOUSE OF LORDS-
Profits Tax - Premium paid on redemption of preference shares - Whether to be treated as a distribution - Finance Act, 1947 (10 & 11 Geo. VI, c. 35), Section 36 (1).
In December, 1947, the Respondent Company redeemed its issued £1 redeemable preference shares at their nominal amount plus a premium of 7s. per share. The Company made a fresh issue of preference shares for the purpose of the redemption; the premium was paid out of the Company's profits which would otherwise have been available for dividend.
In the assessment to Profits Tax on the Company for the chargeable accounting period ending 30th September, 1948, the premiums of 7s. per share were treated as part of the gross relevant distributions to proprietors for that period. On appeal the Company contended that it had purchased its preference shares for 27s. per share, that the full redemption price was a sum applied in reducing its share capital and that, in accordance with the proviso to Section 36 (1) of the Finance Act, 1947, no part of it should be treated as a distribution. The Special Commissioners accepted the Company's contentions, and the Crown demanded a Case.
Held, that the Special Commissioners' decision was correct.
Stated under the Finance Act, 1937, Fifth Schedule, Part II, Paragraph 4, and the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 15th January, 1952, Universal Grinding Wheel Co., Ltd., hereinafter called "the Company", appealed against an assessment to Profits Tax made upon the Company for the period of twelve months to 30th September, 1948, showing tax payable £56,250, viz. £112,500 less relief in respect of non-distribution £56,250.
2. Sections 34 to 37 of the Finance Act, 1947, contain "supplementary provisions as to non-distribution relief and distribution charges". Sections 34 and 35 are respectively concerned with the meaning of net and gross "relevant distributions to proprietors". Section 36 deals with the meaning of "distribution", and the proviso to Sub-section (1) thereof, on which the present appeal turns, provides
that no sum applied … in reducing the share capital of the person carrying on the trade or business shall be treated as a distribution.
3. As hereinafter appears, the Company in December, 1947, redeemed certain £1 shares at a redemption price of 27s. per share, together with a sum equal to certain dividends, as to which sum no question arises. It was admitted for the Company that, apart from the aforesaid proviso to Section 36 (1), the said redemption would involve a corresponding relevant distribution for the purposes of Profits Tax, but it was contended that, by reason of the said proviso, no part of the sum representing 27s. per share could be treated as such a distribution. On the other hand, while it was admitted for the Crown that to the extent of £1 per share there was no relevant distribution, it was contended that the balance representing 7s. per share did not fall within the terms of the said proviso and was therefore a relevant distribution within the meaning of Section 36.
4. The Company was incorporated on 8th March, 1935, with a capital of £600,000 divided into 400,000 5 per cent. cumulative participating preference shares of £1 each and 400,000 ordinary shares of 10s. each. A copy of the memorandum and articles of association of the Company is annexed, marked "A", and forms part of this Case(1).
5. Article 7 (B) to (F) of the articles of association sets forth the rights of preference and ordinary shares, (D) being as follows:-
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(D) The Participating Preference Shares shall entitle the holders thereof on liquidation or other return of capital assets to receive in priority to any payment to the Ordinary Shareholders-
(a) A sum equal to all arrears or deficiency of the 5 per cent. cumulative preferential dividend whether earned or declared or not down to the date of repayment of capital.
(b) The amount paid up on the said Preference Shares and out of the surplus assets remaining after repaying the amounts paid up on the Ordinary Shares the said Participating Preference Shares shall entitle the holders to a further payment at the rate of 7s. in respect of each £1 nominal value of the said Participating Preference Shares.
6. Under article 8 provision is made, in accordance with the powers granted by Section 46 of the Companies Act, 1929, for redemption of the said preference shares. 8(A) provides for a sinking fund and 8 (D) fixes the redemption price.
Under 8 (A) sums which the Company sees fit to set aside for redemption
shall only be provided out of profits which would otherwise have been available for dividend on shares in the Company ranking behind the said 5 per cent. Cumulative Participating Preference Shares, or out of the proceeds of a fresh issue of shares, made for the purpose of such redemption and provided further that in any event any amount to be applied in redemption of the said Preference Shares in excess of the nominal amount of such shares shall only be provided out of profits which would otherwise have been available for dividend on shares ranking behind the said Preference Shares.
Under 8 (D) the redemption price of a preference share
shall be the nominal amount of the share plus a premium of seven shillings per share
and a sum equal to certain dividends.
7. The preference shares, as stated in paragraph 3 above, were all redeemed in December, 1947. The redemption price was as required under the terms of article 8 (D) as aforesaid and, the available profits not being sufficient to provide the fund necessary for redemption, the Company had made a fresh issue for the purpose, thereby increasing the Company's capital immediately before the redemption to £1,000,000 as appears below.
8. On 30th September, 1947, the Company entered into an agreement with a firm of stockbrokers, Grieveson, Grant & Co., hereinafter referred to as "the brokers", a copy of which is annexed, marked "B", and forms part of this Case(1) . The said agreement was, by clause 1 thereof, conditional upon resolutions being passed by the Company for the issue of 400,000 new preference shares for the purpose of providing in part the moneys required for redeeming the existing 400,000 preference shares, hereinafter referred to as "the old shares" or "the old preference shares". Such resolutions were duly passed on the same day, 30th September, 1947: they are set out in a notice to shareholders of 5th September, 1947, a copy of which is annexed, marked "C", and forms part of this Case(1).
9. In accordance with clause 2 of the aforesaid agreement the brokers subscribed the whole of the new issue of preference shares at the price of 20s. 6d. per share, on terms that the Company should allot all the said new shares to the brokers or to holders of the old shares electing to convert the same into new shares, as nominees of the brokers.
10. In accordance with clause 3 the brokers received a commission of 41/2d. per share against the issue price, deduction of which made the total net sum paid by the brokers to the Company £402,500.
11. In accordance with clause 4 the Company set aside the said sum of £402,500 to a sinking fund for redemption of the old shares, and also set aside out of its profits standing to general reserve the further sum of £148,384, which made up the full amount required to redeem the whole of the old shares at the price of 27s. per share together with amounts payable thereon in respect of dividend.
12. In accordance with clause 5 the Company on 1st October, 1947, posted to all holders of the old shares (a) a notice of its intention to redeem the same on 27th December, 1947, (b) an invitation to convert into the new shares and (c) forms of acceptance. Copies of these documents are annexed, marked "D", "E" and "F" respectively, and form part of this Case(1).
13. In accordance with clause 6 and with the terms of the invitation to convert (annexe E) the Company, having notified the brokers of the number of holders of the old shares-about 75 per cent. of the whole-who had accepted the offer to convert, allotted to such holders new shares at 20s. 6d. per share and made cash payments to them of 6s. 6d. per share. At the same time the Company paid to the brokers 20s. 6d. in respect of every share so allotted in recoupment of the price paid by the brokers, and allotted to them or their nominees the balance of the new shares as to which the offer of conversion had not been accepted.
14. It was contended on behalf of the Company:-
(2) that the redemption of the 400,000 old preference shares was a reduction of the share capital of the Company;
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(3) that the amount applied in redeeming the old preference shares was 27s. per share;
(4) that the amount so applied in redeeming the old preference shares was "applied…in reducing the share capital of" the Company within the terms of the proviso to Sub-section (1) of Section 36 of the Finance Act, 1947;
(5) that a difference was to be noted between the terms of the said proviso, which made no reference to nominal capital, and those of the concluding part of Sub-section (1) of Section 35 of the same Act, under which in case of liquidation the amount treated as a distribution of the Company's capital was "the total nominal amount of the paid-up share capital" together with the amount of any premiums;
(6) that the provisions of Sub-section (1) (c) of Section 46 of the Companies Act, 1929-which Section gives power to issue redeemable preference shares-use the expression "a sum equal to the amount applied in redeeming the shares", and that Section 71 (1) of the Companies Act, 1947, in amending the said provisions, expressly...
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