Commissioners of Inland Revenue v Lithgows, Ltd
| Jurisdiction | Scotland |
| Judgment Date | 02 December 1960 |
| Date | 02 December 1960 |
| Docket Number | No. 47. |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
RevenueIncome taxProfits taxTrusteesCompanyControlMajority of shares in each of two companies owned by separate trustsTwo or more trustees registered as holdersFirst-named on register alone entitled to voteSame person first-named trustee on both registersWhether both companies controlled by same personIncome Tax Act, 1952 (15 and 16 Geo. VI and 1 Eliz. II, cap. 10), secs. 333 (1) and 469.
The Income Tax Act, 1952, provides by sec. 333 (1) that:"Control, in relation to a body corporate, means the power of a person to secure, by means of the holding of shares or the possession of voting power in or in relation to that or any other body corporate, or by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate, that the affairs of the first-mentioned body corporate are conducted in accordance with the wishes of that person " Sec. 469 of the Act enacts:"(1) where any property is sold and (a) the buyer is a body of persons over whom the seller has control or the seller is a body of persons over whom the buyer has control or both the seller and the buyer are bodies of persons and some other person has control over both of them; and (b) the property is sold at a price less than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length, then, in computing the income, profits or losses of the seller for income tax and profits tax purposes, the like consequences shall ensue as would have ensued if the property had been sold for the price which it would have fetched if the transaction had been a transaction between independent persons dealing as aforesaid (3) The preceding provisions of this section shall not apply in relation to any sale unless the Commissioners of Inland Revenue so direct, and where such a direction is given all such adjustments shall be made, whether by additional assessment, repayment of tax or otherwise, as are necessary to give effect to the direction. (5) In this section, body of persons includes a partnership and control has the meaning ascribed to it by subsection (1) of section three hundred and thirty-three of this Act, and, for the purposes of this section, a sale shall be deemed to take place at the time of completion or at the time when possession is given, whichever is the earlier."
The articles of association of a shipbuilding company and of a shipping company each contained the provision that, if two or more persons were jointly entitled to a share, and if two or more such persons were present at a meeting either personally or by proxy, then the person whose name first appeared in the register of shareholders alone was entitled to vote in respect of the jointly owned shareholdings. The majority and controlling shareholdings in both companies were each owned by a trust, the controlling trusts being separate trusts. A. M. was a trustee in both trusts, and his name appeared first in the register of shareholders in the case of each company in respect of the holdings of the controlling trusts. The shipbuilding company sold to the shipping company two ships at prices less than they would have fetched had both companies been dealing with each other at arm's length. The Commissioners of Inland Revenue for the purpose of determining the liability of the shipbuilding company for profits tax and income tax, sought to make an assessment on the company on the difference between the prices for which the ships were sold, and the prices they would have fetched had both companies been dealing with each other at arm's length in pursuance of sec. 469, on the ground that both companies were controlled by A. M.
Held that, as each company was controlled by a separate trust and as in each trust A. M. could vote only in accordance with the wishes of his co-trustees, the companies were not controlled by the same person, and the Commissioners of Inland Revenue were not entitled to make an assessment under sec. 469.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts, Lithgows, Limited, appealed against assessments for income tax amounting to 650,000 and 400,000 in respect of the years 1952 to 1953, and 1953 to 1954 respectively, and for profits tax amounting to 121,200 and 39,550 for the years 1951 and 1952 respectively.
The Commissioners sustained the appeal, and, at the request of the Commissioners of Inland Revenue, stated a case for appeal to the Court of Session.
The case set forth that the following facts were admitted or proved:"On 4th July 1951 and 15th March 1952 (hereinafter referred to as the relevant dates), Lithgows, Limited, sold two ships to Nile Steamship Company Limited. The first ship, sold on 4th July 1951, was the s.s. Coulbeg (later renamed s.s. Jutland) and the second ship, sold on 15th March 1952, was the s.s. Dornoch (later renamed s.s. Dunrobin). Both ships were sold by Lithgows, Limited, to Nile Steamship Company, Limited, at prices less than the prices which they might have been expected to fetch if the parties to these transactions had been independent persons dealing at arm's length. At the relevant dates, the issued ordinary capital of Lithgows, Limited, was 9800 shares of 100 each: 6300 of these shares were held at the relevant dates by the trustees acting under Sir James Lithgow's deed of provision in favour of Margaret Helen Lithgow and others. The trustees then acting under the said deed of provision were Sir Andrew Macharg, Mr A. H. White, Mrs Jean Semple and Sir Ian Bolton. Sir Andrew Macharg was the person first-named on the register of shareholders of Lithgows, Limited, in respect of the said shareholding of 6300 shares. Articles 8, 11, 77, 79, 80, 96 and 97 (i) of the articles of association of Lithgows, Limited, are reproduced in appendix A.1 At the relevant dates the issued ordinary capital
of Nile Steamship Company, Limited, was 5000 shares of 10 each. Of these issued shares 4997 shares were held by trustees acting under Sir James Lithgow's deed of provision in favour of William James Lithgow. At the relevant dates, the trustees acting under the said deed of provision were Sir Andrew Macharg, Mr H. B. Semple and Mr A. H. White. Sir Andrew Macharg was the person first-named in the share register of Nile Steamship Company, Limited, in respect of the 4997 shares held by these trustees. Articles 10, 11, 66, 68, 70, 80, 99 and 102 (4) of the articles of association of Nile Steamship Company, Limited, are reproduced in appendix B."2The contentions of the parties were stated as follows:
"It was contended on behalf of Lithgows, Limited, that in view of the definition of control contained in section 333 (1), the same person was not in control of the two companies, and accordingly that the provisions of section 469 (3) of the Income Tax Act, 1952, could not be applied in relation to the sale of the said two ships of the respondent company.
"It was contended on behalf of the Commissioners of Inland Revenue (1) that control in relation to a body corporate as defined in section 333 (1) of the Income Tax Act, 1952, and the expression controlling interest in a company as used in paragraph 11 of the Fourth Schedule of the Finance Act, 1937, both describe circumstances in which a person or group of persons has the power to exercise the majority of votes at a general meeting of the company; (2) that at the relevant dates Sir Andrew Macharg had the power to exercise the majority of votes in Lithgows, Limited, and the Nile Steamship Company, Limited, and thus had control of both companies within the meaning of the said section 333 (1); (3) that the said direction appealed against should be confirmed in principle; (4) that following the confirmation of the said direction the Special Commissioners should (failing
agreement between the parties) (a) ascertain the prices which the said ships might have been expected to fetch if each company had been an independent party dealing with the other at arm's length, and (b) adjust the amount of the assessments appealed against to take account of the said prices."The Commissioners stated their decision in the following terms:"We the Commissioners who heard the appeal held that the construction of section 333 advanced on behalf of Lithgows, Limited, was the correct one. The wishes of the person which controlled the affairs of the two bodies corporate were not in our opinion the wishes of the same person. The senior trustee, if he were present at a meeting of either company, had to exercise his vote in a fiduciary capacity and in accordance with the wishes of a majority of himself and his co-trustees. Since the two bodies of trustees were by no means identical and the respective trusts were not in favour of the same person, the wishes of the two bodies of trustees were not necessarily the same.
"We were to some extent influenced in coming to this conclusion by the consideration that the contention advanced by the Crown, namely, that the presence of a senior member common to two or more trusts, if the trust's holding in two or more companies was sufficiently large, brought such companies under the same control, would lead to strange and anomalous results. It might be that a professional person such as a solicitor would act as senior trustee in many trusts, with many different co-trustees, the beneficial interest in such trusts being entirely different. He might be registered in the books of many companies as senior trustee, and his name would accordingly be entered first in the companies books. In such a case it would seem to us anomalous and not in accord with the apparent intention of section 469 that such companies should be treated as controlled by the same person, if the trustee shareholdings were more than half the total.
"We accordingly allowed the appeal and left figures to be agreed. Figures...
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