Commissioners of Inland Revenue v Land Securities Investment Trust Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 29 April 1969 |
| Date | 29 April 1969 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Profits tax - Deduction - Property company - 10-year rentcharges payable as consideration for lessor's interest in properties leased to company - Finance Act 1937 (1 Edw. 8 & 1 Geo. 6, c. 54), s. 20(1) and Sch. 4, para. 4; Finance (No. 2) Act 1940 (3 & 4 Geo. 6. c. 48), s. 14; Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 177.
The Respondent Company carried on business as a property investment company. In January 1960 the Church Commissioners sold to the Company (or a subsidiary grouped with it for profits tax purposes), in consideration of rentcharges reserved for ten years, the Commissioners' freehold or leasehold interest in seven properties which were already let by them to the Company (or its subsidiary) for terms with between 60 and 990 years to run. Three of the properties were burdened with head rents totalling £22,000 per annum; the rentcharges totalled £96,000 per annum; the aggregate rents payable for the properties by the group before the transaction were £62,500 per annum. The rentcharges were paid under deduction of income tax on the footing that s. 177, Income Tax Act 1952, applied.
On appeal against assessments to profits tax for the chargeable accounting periods of twelve months ending 31st March 1960 to 1964, the Company contended (a) that the rentcharges were rentcharges to which s. 177 applied and should be deducted in computing its profits, and (b) that no part of them could be regarded as of a capital nature. For the Crown it was contended (i) that s. 177 did not extend to rentcharges of a capital nature; (ii) that for the purposes of s. 177 the rentcharges should be dissected into capital and income payments by reference to the terms of correspondence between the Company and the Church Commissioners, and that only the part representing an income payment was an admissible deduction for profits tax purposes; alternatively, (iii) if the whole of each rentcharge was within s. 177, nevertheless, by virtue of s. 14, Finance (No. 2) Act 1940, such part as on income tax principles represented a capital payment was not an admissible deduction. The Special Commissioners held (1) that s. 177 applied to the whole of any rent-charge, whether or not it contained a capital element; (2) that the assets acquired by the Company were the reversions to their leases and underleases,
which were doubtfully of any monetary value, and from a commercial point of view the whole of the payments were rents and as such deductibleHeld, that, irrespective of whether s. 177 applied, the rentcharges were the cost of acquiring capital assets, viz., the reversions of the properties, and therefore not admissible deductions on income tax principles.
Stated under the Income Tax Management Act 1964, s. 12(5), and the Income Tax Act 1952, s. 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 20th and 21st July 1965. The Land Securities Investment Trust Ltd. (hereinafter called "the Company") appealed against the following assessments to profits tax:
Chargeable accounting period from |
1st April 1959 to 31st March 1960 |
in a sum of |
£30,000 (tax) |
do. |
1st April 1960 to 31st March 1961 |
do. |
£50,000 (tax) |
do. |
1st April 1961 to 31st March 1962 |
do. |
£45,000 (tax) |
do. |
1st April 1962 to 31st March 1963 |
do. |
£24,000 (tax) |
do. |
1st April 1963 to 31st March 1964 |
do. |
£168,750 (tax) |
2. Shortly stated, the question for our decision was whether the Company was entitled, in computing its profits for the purpose of the assessments under appeal, to deduct amounts paid by it in respect of certain rentcharges.
-
(2) The following documents were admitted or proved:
(a) An agreement dated 5th January 1960 between the Church Commissioners for England (hereinafter called "the Church Commissioners") and the Company and Associated London Properties Ltd. (exhibit A(1) ).
(b) Copies of seven deeds of transfer, all dated 25th March 1960, of the properties referred to in the said agreement. So far as the arguments before us were concerned, no distinction was drawn between these deeds, and one only (that relating to Title no. LN 57344) is annexed (exhibit B(2) ).
(c) The Company's printed reports and accounts for the years ended 31st March 1960, 1961, 1962, 1963 and 1964.
(3) Such of the above documents as are not annexed hereto are held available for inspection by the Court if required.
(4) The following additional documents were tendered in evidence on behalf of the Commissioners of Inland Revenue as being relevant and admissible if we should accept either the second or the fourth of the Crown's contentions of law (set out in para. 9 of this Case), but it was agreed that they would not otherwise be admissible. For the Company the admissibility of these documents was contested in any event. As we did not accept the said contentions of the Commissioners of Inland Revenue it did not become necessary for us to determine their admissibility, nor did we take them into
consideration in arriving at our decision, although by agreement between the parties they had been placed before us and referred to. These documents, which are held available for inspection by the Court if required, are: a bundle of letters passing between Sir Harold Samuel and the Church Commissioners, relating to negotiations prior to making the said agreement, and a bundle of copies of file notes and inter-office memoranda of the Church Commissioners relating to the said negotiations.(5) We found the facts set out in paras. 4 to 7 below.
4. The Company is a very large public company carrying on business as a property investment trust company. Its issued share and debenture capital total some £85 million, and it holds (either itself or through subsidiaries) properties valued at over £100 million. It does not carry on any trade of dealing, and is not assessed to income tax under Case I of Schedule D. Its chairman and managing director at all relevant times was Sir Harold Samuel. One of its wholly-owned subsidiaries is Associated London Properties Ltd. (hereinafter called "Associated"). Associated was a party to the agreement and to one of the deeds of transfer referred to later in this Case, but we were informed that nothing turned upon this because Associated is grouped with the Company for the purpose of assessment to profits tax.
5. The Church Commissioners owned certain freehold and leasehold properties which were let or underlet to the Company (or, in the case of one property, to Associated) on long leases. By agreement dated 5th January 1960 (exhibit A(1) ) the Church Commissioners agreed to sell to the Company their freehold or leasehold interest (or, in the case of the property let to Associated, to sell to Associated) subject to the leases and underleases to the Company in consideration of rentcharges. Particulars of the properties, the leases to the Company or to Associated, and the rentcharges are set out in a schedule to this agreement, but for convenience brief particulars are set out below.
Property |
Particulars of lease or |
Rentcharge |
underlease to the Company |
||
No. 1 Freehold |
993 years from 1953 at £5,000 |
£12,000 |
No. 2 Freehold |
150 years from 1948 at £2,000 |
£4,800 |
No. 3 Freehold |
150 years from 1947 at £2,000 |
£4,800 |
No. 4 Underlease 71 years from 1949 at £7,500 per annum |
whole term less 3 days at £17,500 |
£23,450 |
No. 5 Leasehold 99 years from 1935 at £5,000 per annum |
whole term less 3 days at £7,000 |
£4,700 |
No. 6 Leasehold 99 years from 1934 at £9,500 |
whole term less 3 days at £20,000 |
£24,650 |
No. 7 Freehold |
999 years at £9,000 |
|
(this was the lease to Associated) |
£21,600 |
The agreement provided that the transfers of the properties should be in a form agreed, and the transfers were duly made on 25th March 1960. These provided (exhibit B(1) ) that the rentcharge reserved in each case was a yearly
rentcharge for the period of ten years from 1st April 1959 charged on and issuing out of the property transferred.(a) It will be seen from para. 5 above that the Company and Associated, which had previously owned long leases or underleases for varying terms at rents totalling £62,500 per annum, acquired by the transfers freeholds and leaseholds, subject to head rents totalling £22,000 per annum, burdened with rentcharges totalling £96,000 per annum for ten years.
(b) It was common ground that prior to the transfer the rents paid by the Company or Associated (totalling £62,500 per annum) were deductible in computing profits for profits tax purposes; it was also common ground that after the transfer the head rents (£22,000 per annum) were so deductible. The dispute concerned the rentcharges.
(c) The Company or Associated deducted income tax at the standard rate on paying the rentcharges, on the footing that s. 177 of the Income Tax Act 1952 entitled them so to do, and the Church Commissioners did not challenge their right to do so. Section 177 applies to (inter alia):
any yearly interest, annuity, rent, rentcharge, fee farm rent, rent service, quit rent, feu duty, teind duty, stipend to a licensed curate, or other annual payment reserved or charged upon land,
(d) and provides that any such payment shall be subject to deduction of income tax as if it were a royalty or other sum paid in respect of the user of a patent.
7. It was common ground that in the negotiations leading up to the agreement of 5th January 1960 there was no legally enforceable agreement between the Company or Associated and the Church Commissioners for the purchase of any of the properties for a lump sum.
8. It was contended on behalf of the Company:
(2) that the rentcharges reserved in the transfers were rentcharges to which s. 177 applied, and that (by...
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