Commissioners of Inland Revenue v Carron Company
| Jurisdiction | UK Non-devolved |
| Date | 1966 |
| Court | House of Lords |
COURT OF SESSION (FIRST DIVISION)-
HOUSE OF LORDS-
Income tax, Schedule D - Deduction - Expenses - Company incorporated by charter in 1773 - Cost of obtaining supplementary charter - Cost of settling action by dissenting shareholder.
The Respondent Company, which carried on the business of ironfounders, was incorporated by charter in 1773. The Company's constitution remained virtually unaltered until revised in 1963, as hereinafter mentioned. By the late 1950s many of its features had become archaic and unsuited to modern conditions, and the Company's commercial performance was suffering a progressive decline. The most significant disadvantages were the restriction of the Company's borrowing powers to £25,000, restrictions on the issue and transfer of shares and the restriction of voting rights to certain members holding at least ten £250 shares. The restrictions relating to shares and voting rights prevented the manager of the Company's day-to-day commercial business from being given the status of a managing director, and so made it difficult to obtain a suitable person for the post. It was accordingly decided to petition for a supplementary charter under which, inter alia, (a) responsibility for management could be vested in a board of directors, so that management could proceed on lines similar to that of a company incorporated under the Companies Acts, (b) the limitation of the Company's borrowing powers to £25,000, the restrictions on the issue and transfer of shares and the restriction of voting rights would all be removed, and (c) the members' liability would be limited. A number of the points covered by the proposed charter had little to do with the Company's trade.
The Company petitioned for the supplementary charter in December 1959, but proceedings were suspended pending the outcome of an action by a shareholder claiming that the procedure adopted in deciding to petition was invalid. After winning the action before the Lord Ordinary and in the First Division of the Court of Session, the Company was advised that its prospects of success in the House of Lords were dubious, and the shareholder threatened to raise a further action on new grounds which would once more indefinitely postpone consideration of the petition. Consequently the Company settled the action on the terms that it should pay the pursuer's costs in the action and buy out part of her holding and the whole holding of another shareholder, her nephew, who had for many years been at variance with the Company, and, on the other hand, that she and her nephew should desist from further obstruction and he should never again acquire shares in the Company.
A supplementary charter was granted in January 1963 substantially in the form proposed; the Company's affairs were then reorganised and its commercial performance improved.
On appeal against an assessment to income tax under Case I of Schedule D for the year 1964-65 the Company claimed to deduct the costs of obtaining the charter (£3,107) and defending the action (£2,641) and the amounts paid to the two dissenting shareholders in respect of their shares (£83,800) and expenses in the action (£1,666). For the Crown it was contended that the sums in question were not incurred wholly and exclusively for the purposes of the trade; alternatively, that they were incurred on capital account. The Special Commissioners found that the significant objects of the new charter were the removal of the restrictions on borrowing and the issue and transfer of shares and qualification for voting, which were obstacles to the proper management and conduct of the business, and that the object of the other expenses was the removal of the obstruction to the charter; they held that the Company was entitled to the deductions claimed.
In the Courts it was conceded by the Crown that, if the cost of obtaining the charter was deductible, so were the other sums in question.
Held, (1) that, the objects of the new charter being to remove obstacles to profitable trading, anything in it beyond that could be disregarded;
(2) that, since the engagement of a competent manager and the removal of restrictions on borrowing facilitated the day-to-day trading operations of the Company, the expenditure was on income account.
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Act 1952, s. 64.
(2) At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Edinburgh on 29th and 30th September 1965 for the purpose of hearing appeals, Carron Company, a company incorporated by Royal Charter (hereinafter called "Carron"), appealed against an assessment to income tax, Schedule D, Case I, for the year 1964-65 in the sum of £400,000 (subject to capital allowances of an amount as to which there was no dispute). Before the hearing the said figure of £400,000 had been adjusted to £219,846, subject to the questions for our decision.
(3) Shortly stated, the questions for our decision were whether, in computing the profits of its trade for the purpose of the assessment under appeal, Carron was entitled to deduct the following expenses incurred by it: (1) legal expenses of £3,107 incurred in connection with obtaining the grant of a supplementary charter; (2) legal expenses of £2,641 incurred in connection with an action brought against Carron by Mrs. Dorothy Brown; (3) the following sums paid pursuant to an agreement for the settlement of the said action: to Mrs. Dorothy Brown, a sum of £41,900, and a further sum of £1,666 being her expenses in connection with the said action; to Mr. W.G. Stevenson, a sum of £41,900.
(4) The following witnesses gave evidence before us: Mr. William Leslie W.S., a partner in Messrs. Brodie, Cuthbertson & Watson, solicitors, who acted throughout for Carron; Mr. H. Wilson-Bennetts, managing director of Carron since 1963; Mr. C.S.R. Stroyan W.S., a director of Carron.
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(5) The following documents were proved or admitted before us:
1. Print of an agreed translation from the Latin of Carron's royal charter of 1773, together with original and additional articles of co-partnery, deed of renewal of 1859, and by-laws (exhibit A).
2. Print of Carron's supplementary royal charter of 1963 (exhibit B).
3. Print of Carron's 1963 bye-laws (with amendments to date).
4. Copy of explanatory letter issued by the secretary of Carron on 5th February 1963 (exhibit C).
5. Extract registered minute of agreement between Carron, Mrs. Dorothy Brown and Mr. W.G. Stevenson, dated 5th and 6th March 1962, and registered in the Books of Council and Session on 18th April 1962 (exhibit D).
6. Statement showing sums claimed as admissible deductions (exhibit E).
7. Statement showing numbers of shares in Carron held by voting partners and others in 1962 (exhibit F).
8. Comparative statement of Carron's trading profits and losses from 1954 to 1965 (exhibit G).
9. Appendix in causa Mrs. Dorothy Brown v. Carron Company (exhibit H). Copies of such of the above as are not annexed hereto as exhibits(1) are available for inspection by the Court if required.
II. As a result of the evidence, both oral and documentary, adduced before us, we find the facts set out in this paragraph and in paras. III, IV, V and VI below:
(2) Carron was incorporated by royal charter in 1773 to carry on the business of ironfounders which had previously been carried on by certain partners under articles of co-partnery entered into in 1759. It has carried on the said business continuously ever since.
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(3) The facts relevant to Carron's appeal were complicated, and for convenience we have stated them under four main headings, i.e., para. III, comparison of Carron's constitution prior to and subsequent to 1963; para. IV, Mr. W.G. Stevenson's participation in the affairs of Carron; para. V, Mrs. Dorothy Brown's participation in the affairs of Carron; para. VI, effects of settlement with Mrs. Dorothy Brown.
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(2) Until 15th January 1963 Carron's constitution consisted of: (a) original articles of co-partnery entered into in 1759; (b) additional articles of co-partnery entered into in 1771; (c) royal charter of 1773; (d) bye-laws passed by Carron since 1773 in exercise of the powers in that regard conferred upon the Company by the royal charter of 1773. Exhibit A contains copies of the said documents.
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(3) The significant features of the above constitution in so far as affecting the matters in issue were as follows.
(a) Capital. By the charter of 1773 the capital of Carron was restricted to £150,000, divided into 600 shares of £250 each, with no provision for subdivision, increase or reduction.
(b) Purchase of shares. By the additional articles of co-partnery power was given to Carron to purchase or acquire by forfeiture its own shares, and as at the date of the grant of the supplementary charter in 1963 Carron since its incorporation had so acquired 153 of its shares.
(c) Annual Courts. The charter of 1773 made it obligatory to hold two half-yearly General Courts, and declared that a quorum for these meetings should be those proprietors present in person or by proxy holding £10,000 of the capital stock of the Company.
(d) By the additional articles of 1771 the right to vote in the affairs of Carron was, with certain exceptions which are not relevant to the matters in issue, limited to those partners who were (a)possessed of ten or more shares of Carron's stock and (b)being so possessed had been admitted by ballot by the other partners entitled to vote. Those partners who possessed this voting qualification were known as "voting partners", and the voting partners as a body made up the governing body, known as the General Court. There were also certain provisions whereby the widow of a deceased voting partner having the liferent of her husband's shares and the daughters the fee of such shares could grant a proxy...
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