Courtaulds Investments Ltd v Fleming (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 31 July 1969 |
| Date | 31 July 1969 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Foreign possessions - Shares in Italian company - Distribution from share premium reserve - Whether capital or income - Income Tax Act 1952 (15 -amp; 16 Geo. 6 -amp; 1 Eliz. 2, c.10), s.123, Schedule D, Case V.
The Appellant Company, which carried on the business of an investment trust, held (inter alia) 4595,121 shares of 1200 lire in a company incorporated under Italian law and carrying on business in Italy. On 29th April 1963 it received from that company £342,866 in respect of a distribution of 130 lire per share out of share premium reserve. The Company was assessed to income tax under Case V of Schedule D for the year 1963-64 in respect of that sum as being income from a foreign possession.
At the material times Italian law required companies to allocate at least 5 per cent. of their net annual profits to a legal reserve until that reserve reached 20 per cent. of the company's capital, and to make it up again to that figure should it fall below it; the legal reserve was for the protection of creditors and was not distributable except in a winding up. Sums received for the issue of shares at a price in excess of their nominal value could not be distributed while the legal reserve was below 20 per cent. of the company's capital. Such sums were normally carried to a share premium reserve; provided that the legal reserve was made up to the prescribed limit, the share premium reserve might be distributed by resolution at a general meeting. A withdrawal from share premium reserve constituted in Italian law a return of capital and was not subject to the Italian withholding tax on dividends. A share in an Italian company entitled the holder to an undivided interest in the capital, reserves and assets; if the share premium reserve were distributed the holder of a share would be entitled to the same rights as before the distribution, though the value of the share would be diminished.
On appeal, the Company contended that the said sum of £342,866 represented a return of capital. For the Crown it was contended that the Company's share-holding remained intact and unaffected, except as to value, and that the said sum was income. The Special Commissioners found that the Italian company's share premium reserve was equivalent to a share premium reserve under the Companies Act 1948, but they held that the Company's property rights in the Italian company remained unchanged after the receipt of the sum in question and that that sum was accordingly income.
Held, that on the Commissioners finding the share premium reserve of an Italian company must be regarded as standing under Italian law in the same position as the legal reserve, so that the foreign possession constituted by each of the Company's shares in the Italian company represented 1200 lire paid-up capital together with the accretion thereto of a proportion of the legal and share premium reserves, and was not left intact by a distribution out of the share premium reserve.
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 17th, 18th and 19th July 1967, Courtaulds Investments Ltd. (hereinafter referred to as the "Appellant") appealed against an assessment to income tax made upon it under the provisions of Case V of Schedule D, Income Tax Act 1952, for the year of assessment 1963-64 in respect of Italian dividends in the sum of £500,000. The grounds of the appeal were:
(a) that, sums received by the Appellant from Società Nazionale Industria Applicazioni Viscosa (hereinafter referred to as "S.N.I.A. Viscosa"), a company incorporated in Italy, during the year of assessment in question not being dividends nor receipt of a revenue nature, the assessment was not competent in law; and
(b) in any event the amount of the assessment, being an estimated sum, fell to be adjusted in accordance with the facts.
2. Evidence was given at the hearing of the appeal by Arthur William Gadsdon (hereinafter referred to as "Mr. Gadsdon"), a chartered accountant and the principal of the taxation department of Courtaulds Ltd. (hereinafter referred to as "Courtaulds"), and Avvocato Dottore Pasquale Chiomenti (hereinafter referred to as "Avv. Chiomenti"), the principal of Studi Legali Chioment, Piazza Monte Savello 30, Rome, Italy; and the following documents were admitted or proved:
(i) a statement in writing of agreed facts;
(ii) a summary of the revenue accounts and balance sheet of the Appellant incorporated in the report and accounts of Courtaulds for the year to 31st March 1964;
(iii) the memorandum and articles of association of the Appellant;
(iv) the report and accounts for the year 1962 of S.N.I.A. Viscosa;
(v) the agenda for a meeting of shareholders of S.N.I.A. Viscosa held 18th April 1963, and an English translation thereof;
(vi) a balance sheet comparison of S.N.I.A. Viscosa for the years 1962 and 1963.
The provisions of the above documents, so far as relevant to this Case, have been incorporated herein, but copies of the said documents are not attached to and do not form part of this Case for reasons of economy.
3. We found the following facts admitted or proved on the evidence adduced at the hearing of the appeal.
(2) The Appellant was incorporated on 27th February 1962 to undertake and carry on inter alia, the business of an investment trust. It was a wholly-owned subsidiary of Courtaulds, which transferred to it trade and other investments, including a substantial holding in S.N.I.A. Viscosa.
(3) S.N.I.A. Viscosa was a joint stock company constituted in Turin on 18th July 1917 by instrument of the notary Teppati, no. 20363 of the Index approved by the Royal Tribunal of Turin by decree of 24th July, deposited and transcribed at the registry of the said Tribunal on 25th July, published in the "Official Bulletin of Companies by Shares" on 13th September 1917.
(4) At all material times S.N.I.A. Viscosa had its registered office in Milan.
(5) At all material times the statute of incorporation of S.N.I.A. Viscosa contained, inter alia, the following articles (as translated into English):
Article 4. The registered capital of the Company consists ofLire 56,043,750,000 divided into 46,703,125 shares ofLire 1200 each, whereof 590,624 are preferential as to the vote and entitle to ten votes each share, 35,437,501 are ordinary shares entitling to one vote each, and 10,675,000 are privileged shares entitling to one vote each and only so in resolutions provided by clause 2365 of the Civil Code [which deals with the formal requirements on going into liquidation]. Shares which are preference shares as regards the voting rights are represented by certificates which are entirely registered and cannot be transformed into bearer certificates. If a shareholder intends to assign his preference shares or any part thereof he shall first give notice thereof in writing to the board of directors. The latter shall be entitled to the right, which it may also exercise through the chairman's office and within one month from the communication mentioned above, of proposing one or more other acquirers, who are hereby granted the preferential right if the terms are equal.
Article 5. Unless the law prescribes otherwise, ordinary shares and privileged shares fully paid up may be made out to bearer or registered at the shareholder's discretion; ordinary and privileged shares made out to bearer may be transformed into registered shares or vice versa, at the expense of the applicants. The shares shall be indivisible; the case of co-ownership is regulated by law. The holding of shares implies automatically full and absolute adherence to the articles of association of the Company and to the resolutions of the meetings as well as the election of domicile at the registered office as regards the relations between the shareholders and the Company.
Article 7. The meeting may resolve on the reduction of the share capital, subject to the provisions of Articles 2327 and 2412 of the Civil Code, either by way of allocation to individual shareholders, or groups of shareholders, of any specific assets of the Company or of shares or interests in other businesses in which the Company participates, or otherwise. [Articles 2327 and 2412 of the Italian Civil Code deal with minimum capital requirements and reduction of capital respectively.]
Article 8. The Company has for its principal object the industry and trade of synthetic textile fibres and any allied or derivative products. The object of the Company shall be considered to include-in so far as they may contribute to its purpose-the exercise of industries and trades of any description, the acquisition, sale, chartering and operation of ships, marine insurance, participation in other firms or companies, also, by means of subventions or associations, the formation of companies and the liquidation of the same, the acquisition and resale of movable and immovable property and of share securities, any financial and credit transactions, including the right of granting mortgages or charges on the property of the Company, and finally, any act connected with the object of the Company in any such form or manner as the board of directors may think fit: the whole both in Italy and abroad.
"Article 24. The net profits resulting from the balance sheet shall, after setting aside at least 5 per cent. for the legal reserve until the latter has attained one-fifth of the share capital, and 2.50 per cent. of the remainder in favour of the board of directors, which shall be distributed among its members as laid down in Article 20, paragraph 1, of these Articles of Association" [which deals...
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First Nationwide v HM Revenue and Customs
... ... paragraph 1(1) Schedule 23A, Income and Corporation Taxes Act 1988 (" ICTA "). First Nationwide then sold the 50,050 ... or income finds expression, yet again, in Courtaulds Investments Ltd. v Fleming [1969] 1 WLR 1683 , (1969) 46 ... ...