Commissioners of Inland Revenue v Payne
| Jurisdiction | England & Wales |
| Judgment Date | 02 December 1940 |
| Date | 02 December 1940 |
| Court | King's Bench Division |
NO. 1169-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
Sur-tax - Deduction - Payments under deed of covenant - Power of revocation - Finance Act, 1938 (1 & 2 Geo. VI, c. 46), Section 38, and Part II of the Third Schedule.
(2) The Respondent in the first case covenanted by a deed of the 29th March, 1938, to pay to Derwent, Ltd. (a company which he controlled by his shareholding), for the remainder of his life or until an effective resolution for winding up the company was passed, such a weekly sum as after deduction of tax would amount to £72, the aggregate of 52 weekly payments up to the 31st March, 1938, to be paid on or before that day. On the 6th October, 1938, it was resolved that the company should be wound up. The Respondent had paid to the company £3,744 net after deduction of tax for the period to the 31st March, 1938. He claimed the corresponding gross sum of £4,992 as a deduction for Sur-tax purposes for 1937-38 on the grounds (1) that the terms of the deed of the 29th March, 1938, did not confer upon him any such power of revocation or determination as is mentioned in Section 38(1)(a) of the Finance Act, 1938, and (2) that the deed was exempted from the operation of Section 38 by virtue of Paragraph 1 (a) of Part II of the Third Schedule to that Act.
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(3) In the second case the Respondent covenanted by a deed dated the 25th October, 1937, to pay to himself and his wife jointly as trustees for their son, during the joint lives of the Respondent and the son, such a monthly sum as after deduction of tax would amount to £88. The first payment, the aggregate of twelve monthly sums, was to be made on the 31st October, 1937, and thereafter the sums were to be paid each month. The Respondent had power, with the consent of one of four named persons, to revoke the trusts in whole or in part. The deed was revoked in part on the 18th October, 1938, the monthly sum payable being reduced to one shilling as from the 1st April, 1938. The next day the Respondent revoked the first deed entirely and entered into a
new irrevocable covenant to pay the trustees as from the 1st April, 1938, such a monthly sum as after deduction of tax would amount to one shilling.
On appeal against an assessment to Sur-tax for 1937-38 the Respondent claimed the deduction of a sum of £1,994 13s. 4d. representing seventeen monthly payments made under the deed with the appropriate additions for Income Tax. He contended that the deed of 25th October, 1937, satisfied the conditions either of Paragraph 1 (a) or of Paragraph 1 (c) of Part II of the Third Schedule, Finance Act, 1938, and that therefore the provisions of Section 38 of that Act did not apply to the sum of £1,994 13s. 4d.
Held, that on the terms of the deed of 29th March, 1938, the first Respondent had power, through his control of the company, "to revoke or otherwise determine the settlement", that in neither case did the deed of covenant satisfy the conditions of Part II of the Third Schedule, Finance Act, 1938, and that the deductions claimed were accordingly inadmissible.
(1) Commissioners of Inland Revenue v. Payne
CASE
Stated under the Finance Act, 1927, Section 42 (7), and the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 27th July, 1939, Mr. Walter Payne (hereinafter called "the Respondent") appealed against an assessment to Sur-tax in the sum of £9,356 for the year ending 5th April, 1938.
2. The question for the opinion of the High Court is whether a sum of £4,992 paid by the Respondent under a deed of covenant dated 29th March, 1938, to a company called Derwent, Ltd. is an admissible deduction in computing his total income for the purposes of Sur-tax for the said year.
3. Derwent, Ltd. was incorporated under the Companies Act, 1929, on 13th March, 1937.
At all material times the issued capital of Derwent, Ltd. was £100 and the Respondent was the beneficial owner of 95 redeemable preference shares of £1 each and Brompton Investment Co., Ltd. was the beneficial owner of 5 fully paid ordinary shares of £1 each. The rights attaching to each of these two classes of shares were originally as set out in article 4 of the articles of association but by a special resolution of Derwent, Ltd. passed on 23rd March, 1938, they were as follows. The preference shares were entitled to a fixed cumulative preferential dividend at the rate of 5 per cent. per annum, the balance of any divisible profit being divided among the holders of the ordinary shares. In the event of a winding up of the company the assets available for distribution among the members were to be applied first in paying to the holders of the preference shares the amounts paid up on such shares and thereafter the balance to be distributed among the holders of the ordinary shares.
The said special resolution further provided however that the company might at its option redeem all or any of the said preference shares at the price of £500 per share upon giving notice to the holders of such shares.
By article 13 of the articles of association it was provided that on a poll every member should have one vote for each share of which he is the holder.
A copy of the memorandum and articles of association of Derwent, Ltd. is attached hereto, marked "A", and forms part of this Case(1).
4. The Respondent and Mrs. L.M. Monckton, a nominee of his, were sole directors of Derwent, Ltd.
5. By a deed of covenant dated 29th March, 1938, between the Respondent of the one part and Derwent, Ltd. of the other part, the Respondent covenanted "to pay weekly to the Company as on "and from the First day of April One thousand nine hundred and "thirty seven and during the remainder of his life or until an "effective resolution shall be passed or order made for the winding "up of the Company (other than for the purposes of reconstruction "or amalgamation) whichever shall be the shorter period such a "sum as after the deduction of Income Tax at the standard rate "for the time being in force shall leave the clear weekly sum of "Seventy two Pounds (hereinafter called "the weekly sum") in "manner following:-
(i) "Each weekly sum shall be paid to the Company on the "Thursday of each week to which such weekly sum "relates.
(ii) "The aggregate of fifty-two of the weekly sums in respect "of the period from the First day of April One thousand "nine hundred and thirty seven to the Thirty first day "of March One thousand nine hundred and thirty eight "shall be paid to the Company on or before the Thirty "first day of March One thousand nine hundred and "thirty eight."
6. On 31st March, 1938, the Respondent paid to Derwent, Ltd. £3,744 being the aggregate of 52 weekly payments of £72 in respect of the period 1st April, 1937, to 31st March, 1938.
The said sum of £3,744 with the appropriate addition for Income Tax amounts to £4,992.
7. On the 29th March, 1938, Derwent, Ltd. purchased for £3,739 from the Respondent his holding of 3000 shares in a company known as Syndicate Varieties, Ltd. and on the 6th April, 1938, received a dividend of £750 on these shares.
8. On 6th October, 1938, the Respondent paid a further sum of £1,944 to Derwent, Ltd. being 27 weekly payments of £72 in respect of the period 1st April to 6th October, 1938, and on the same date Derwent, Ltd. also received the sum of £3,320 as the price of the said 3000 shares in Syndicate Varieties, Ltd. sold back to the Respondent.
9. At a meeting of the directors of Derwent, Ltd. held on 6th October, 1938, it was resolved that 12 preference shares of the company (part of the 95 preference shares in issue) should forthwith be redeemed at the price of £500 per share, and accordingly £6,000 was paid by Derwent, Ltd. to the Respondent on that date in respect of such redemption.
10. At a subsequent extraordinary general meeting of Derwent, Ltd. also held on 6th October, 1938, it was resolved that Derwent, Ltd. should be voluntarily wound up and the Respondent was appointed liquidator.
11. Derwent, Ltd. had no income except the said annuity and dividend and the net result of the transactions hereinbefore mentioned was that the liquidator was left with a sum of £92 9s. 6d. in cash, £83 of which was paid to the Respondent in payment of the capital paid up on his balance of 83 unredeemed preference shares and the balance of £9 9s. 6d. was paid to Brompton Investment Co., Ltd., the holders of the ordinary shares.
12. Copies of the following documents are attached hereto, and form part of this Case(1):-
(a) The minutes of Derwent, Ltd. (marked "B");
(b) Bank pass book of Derwent, Ltd. (marked "C");
(c) Accounts of Derwent, Ltd., 13th March, 1937, to 5th April, 1938 (marked "D").
13. In computing the Respondent's total income for Sur-tax 1937-38 the Respondent's claim to deduct the said sum of £4,992 was refused by the assessing Special Commissioners on the ground that the said sum must be treated as income of the Respondent by virtue of Section 38 (1), Finance Act, 1938.
14. It was contended on behalf of the Respondent that:-
(a) The said deed of covenant dated 29th March, 1938, did not by its terms confer upon the Respondent any such power of revocation or determination as is referred to in Section 38 (1) (a), Finance Act, 1938.
(b) Under the said deed of covenant the Respondent was liable (but only liable) to make annual payments for one of two alternative periods, i.e. for life or until a resolution was passed for Derwent, Ltd. to be wound up.
(c) The passing of the winding up resolution by Derwent, Ltd. merely defined the period during which the Respondent was liable to make the said annual payments and did not amount to a determination of the "settlement"...
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