Commissioners of Inland Revenue v Reid's Trustees
| Jurisdiction | England & Wales |
| Judgment Date | 20 January 1949 |
| Date | 20 January 1949 |
| Court | House of Lords |
NO. 1415 - COURT OF SESSION (FIRST DIVISION)-
HOUSE OF LORDS -
Income Tax, Schedule D, Case V - Capital or income - Dividend on shares of foreign company paid out of capital profits.
The Respondent Trustees held shares in a South African trading company. The company sold certain warehouses and office premises, which it occupied for the purposes of its trade, at a profit out of which it declared and paid a dividend of 20 per cent. "payable from capital profits". The dividend was received by the Trustees without deduction of Income Tax, and the dividend on shares held for liferenters of the trust was credited by the Trustees to the revenue accounts of the liferenters.
On an appeal to the Special Commissioners against an assessment to Income Tax under Case V of Schedule D in respect of the dividend, the Trustees contended that the dividend, having been paid out of profits of a capital nature, was not assessable to Income Tax. The Special Commissioners upheld the Trustees' contention, and discharged the assessment.
Held, that the dividend received by the Trustees was income arising from foreign possessions assessable to tax under Case V of Schedule D.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Edinburgh on 28th March, 1946, for the purpose of hearing appeals, the Trustees of Joseph Reid, deceased (hereinafter called "the Trustees" or "the Respondents") appealed against an assessment to Income Tax made upon them for the year 1943-44 in the sum of £6,866 under Schedule D of the Income Tax Act, 1918, the said sum being described as income from possessions out of the United Kingdom.
1. The following facts were admitted or proved:-
(2) The Trustees were appointed and act under trust disposition and settlement of the deceased Joseph Reid, iron merchant, Glasgow, who died on 7th October, 1909.
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(3) The sum of £6,866 in respect of which the aforesaid assessment was raised, was received by the Trustees on 14th December, 1943, from Reid Bros. (South Africa), Ltd. (hereinafter called "the company"), a company incorporated and registered in South Africa, in which the Trustees hold 3433 shares of £10 each (fully paid). The remittance was
received without deduction of Income Tax by the hands of James M. Reid, 90 Mitchell Street, Glasgow, as paying agent in the United Kingdom for the company. (4) The said sum of £6,866 is part of a distribution made by the directors of the company among the shareholders at the rate of £2 per share out of profits realised from the sale of capital assets, to wit, four properties in Johannesburg which belonged to the company and were occupied by it as warehouse and office premises as after-mentioned.
(5) The company was incorporated and registered in the Union of South Africa in 1918 for the purpose of acquiring and carrying on the business of Reid Bros. (Johannesburg), Ltd., a company incorporated under the Companies Acts and registered in the United Kingdom, whose registered office was situated in Glasgow. The earlier company had been formed in the year 1896 for the purpose of acquiring and carrying on the business of Reid Bros., importers of mining materials and machinery, Johannesburg.
(6) The business which has been carried on by these successive concerns is chiefly that of mine furnishers, dealing principally in the supply of equipment and appliances for mining operations. Dealing also takes place in other iron and steel goods. A print of the memorandum and articles of association of the company is annexed, and forms part of this Case(1). The authorised capital is £100,000 divided into 10,000 ordinary shares of £10 each, of which 7802 ordinary shares have been issued, and are fully paid. The company is not authorised under its memorandum of association to trade in the buying and selling of property in land.
(7) The properties taken over when the company was formed in 1918 at a price of £33,761 4s. 4d. consisted of the following stands (the word "stand" meaning a plot or parcel of land for building and being commonly used to include the buildings as well as the site), viz:-six stands in Johannesburg Township, two in the City and Suburban Township, one in Marshalls Township, five in Denver Township and three in Geduld Township.
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(8) From time to time stands were sold and new stands were acquired-as set out below-in order to meet the requirements of the company's business:-
1928.
The two City and Suburban stands were sold for £3,500.
1929.
The Marshalls stand was sold for £23,000.
1935.
The five Denver stands were sold for £2,250.
1939.
Three stands were purchased for £5,685 in Village Deep
Township.
1941.
One further adjoining stand in Village Deep Township was
purchased for £3,352.
(9) In March, 1943, four of the six original Johannesburg stands were sold for £30,025, and produced the profits distributed in 1943 in connection with which the question at issue in this appeal arises (see paragraphs (2) and (3) above).
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(10) The circumstances in which the sale took place are as follows. The two Johannesburg stands which were retained had from 1918 onwards been occupied by the company as its offices and stores. The four which were sold were occupied as warehouse and office premises. In 1928 and 1929 the Johannesburg buildings were adapted and enlarged to take over
storage and office facilities previously existing at the City and Suburban stands and the Marshall stands. By 1939 the said buildings had become out of date and unsuitable for the company's business, and it was foreseen that removal to other premises would become necessary. These considerations led to the aforementioned purchases of Village Deep stands in 1939 and 1941. Subsequently, however, an opportunity occurred of acquiring a site in Selby Township situated nearer the business area, but also in the direction of the mines. As this ground was considered much more suitable for the company's purpose, it was decided to buy the Selby ground and dispose of the Village Deep stands. It was intended to erect suitable office and store premises on the Selby ground when war-time restrictions should be relaxed. With this intention in view the aforementioned sale of four Johannesburg stands took place in March, 1943, on conditions which entitle the company to continue in occupation until permission is granted by the authorities for erection of the new business premises on the Selby ground. The purchase of the Selby ground was delayed by war conditions but was completed in May, 1944. (11) The two remaining Johannesburg stands, in which the present office premises are situated, are also for sale by the company, subject to similar terms of continued occupation. Of the four Village Deep stands, two have been sold for £5,000 and it is intended to dispose of the remaining two as opportunity occurs.
(12) Apart from the Selby ground and from the Johannesburg and Village Deep stands which still remain to be sold, the company now owns only the three Geduld stands mentioned in paragraph (6). These stands were acquired, and have continued to be unbuilt on, mining activities not having developed in the locality.
(13) When the City and Suburban, Marshalls and Denver properties were sold as aforesaid in 1928, 1929 and 1935 respectively, the whole of the sale prices were credited to the company's property account. When the two Village Deep stands and four Johannesburg stands were sold in 1943, estimated amounts of profit on the sales, viz., £2,500 and £17,451 19s. 10d. respectively, were transferred to profit and loss acount, from which the latter sum was transferred to a property suspense account. In the opinion of the directors the value of the properties still held is in excess of the balance shown in the property account.
(14) The sum of £17,451 19s. 10d. transferred to property suspense account represented the profit made on the sale of the four Johannesburg stands. From that sum the dividend now in question amounting to £15,604, representing a 20 per cent. dividend, was declared by the board of the company on 23rd October, 1943, leaving a balance of £1,847 19s. 10d. in the suspense account. The company has not been assessed to Income Tax in respect of the said profit. The minute of the directors states that "it was resolved that a dividend of 20 per cent. be declared payable from "capital profits realised on the sale of properties during the past financial "year." At the same meeting of the board a dividend of 15 per cent. from trading profits was recommended. The minute of the directors states that "it was further resolved that the Board recommend that a dividend "of 15 per cent. payable from the Company's trading profits for the year "ended 30th June 1943 be declared." This dividend was declared accordingly at the annual general meeting of shareholders on 14th December, 1943. This dividend, so far as paid to shareholders in the United Kingdom, was paid under deduction of United Kingdom Income Tax, which was accounted for by the paying agent, the said James M. Reid.
(15) The report of the directors to be submitted at the annual general meeting of shareholders on 14th December, 1943, contained the following statement:-
Properties. During the year four of the Johannesburg stands were "sold for a total of £30,750. After deducting agent's commission amounting "to £725 incurred on the sale of three of these stands, the net result "was a capital profit of £17,451 19s. 10d.In the accounts this surplus "has been transferred to a Property Suspense Account and out of this "profit your Directors have, since the close of the financial year, declared "a capital distribution of 20 per cent. payable to shareholders registered "on the 23rd October 1943. The properties which were sold will continue "to be occupied by the Company in terms of the conditions of sale. "Negotiations are proceeding for the purchase...
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