Craddock (HM Inspector of Taxes) v Zevo Finance Company, Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Viscount Simon,Lord Simonds,Lord Porter,Lord Wright,Lord Thankerton |
| Judgment Date | 22 March 1946 |
| Date | 22 March 1946 |
| Court | House of Lords |
[1946] UKHL J0322-2
House of Lords
Viscount Simon
Lord Thankerton
Lord Wright
Lord Porter
Lord Simonds
After hearing Counsel, as well on Tuesday the 22d, as on Wednesday the 23d, and Thursday the 24th, days of January last, upon the Petition and Appeal of George James Craddock (His Majesty's Inspector of Taxes) of Somerset House, Strand, London, W.C.2, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal, of the 2d of May 1944, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of Zevo Finance Company Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 2d day of May 1044, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House; And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
This is the Crown's appeal from a decision of the Court of Appeal (Lord Greene M.R. and Mackinnon L.J., Luxmoore L.J. dissenting) affirming the judgment of Macnaghten J. upon a Case Stated by the Commissioners for the General Purposes of the Income Tax for the City of London. The Commissioners had allowed the Respondent's appeal from an assessment made upon it under Schedule D for the year ended the 5th of April, 1934, in the estimated sum of £10,000. It seems regrettable that the Revenue authorities, who have been Appellants at every stage since the Commissioners' decision in March, 1942, should not have been able to get a final decision more promptly.
The question is as to the correct figure to debit as the cost of certain investments acquired by the Respondent, when computing for income tax purposes the profits of the Respondent's trade of dealing in investments for the first period of its trading life, viz. from 15th June, 1932, to 31st March, 1933. The Respondent has always contended for a figure of cost of £1,029,958 15s. 4d., and has throughout been upheld in this view. The Appellant contends for a figure of £363,173 2s. 11d.—in the Court of Appeal the alternative of £409,928 15s. 4d. was conceded.
The facts of the case appear from the Case Stated and the documents annexed to it. They cannot be summarized better than in the judgment of the Master of the Rolls, from which I take the following account.
"The Zevo Syndicate Limited (which I will call 'the Syndicate') went into voluntary liquidation with a view to a reconstruction on the 21st December, 1931. Its issued capital at that date was £1,600,000, divided into £60,000 in 25 per cent. Preference shares, £40,000 in Ordinary shares and £1,500,000 in Deferred shares, all fully-paid. Of this capital the Preference shares and the Deferred shares were held in equal proportions by Sir Alfred Beit, Mrs. Bull, and Miss Lilian Muriel Beit, while the Ordinary shares were held by the Executors of the late Sir Otto Beit. There were outstanding at the date of the liquidation second debentures amounting to £400,000.
The business of the Syndicate was that of dealing in investments; and it was assessed to income tax on that basis. Its assets consisted of a large number of investments of various kinds, a considerable proportion being of a more or less speculative character. All these investments were carried in the books of the Syndicate at cost. Both before and after the death of Sir Otto Beit in the year 1930, serious depreciation had taken place in the value of the investments held by the Syndicate. For the years 1930-31 and 1931-32 the losses of the Syndicate attributable, as I understand it, to the depreciation were computed for income tax purposes at £1,117,777; and it obtained relief under section 34 of the Income Tax Act, 1918, to the extent of tax on £386,645. The balance, namely, £731,132, was carried forward and, if the Syndicate had not gone into liquidation, would have been set off for tax purposes against its future profits for the next six years. There is no finding as to what part of this loss was attributable to the investments purchased by the Respondents on the reconstruction.
The reconstruction contemplated by the winding-up resolution was effected in the following manner. Two new Companies were formed, Zevo Trust, Limited (which I will call 'The Trust Company'), and the Respondents, Zevo Finance Company, Limited. The aggregate capital of the two Companies was, for practical purposes, the same as that of the Syndicate (namely, £1,600,000 for the new Companies as against £1,600,030 for the Syndicate). In the case of each of the new Companies the capital was divided into Preference, Ordinary and Deferred shares, and amounted in the case of the Trust Company to £980,000 and in the case of the Respondents to £620,030. The capital of the Trust Company was divided into £60,000 in 25 per cent. Preference shares, £20,000 in Ordinary shares and £900,000 in Deferred shares; while that of the Respondents was divided into £30 in 25 per cent. Preference shares, £20,000 in Ordinary shares, and £600,000 in Deferred shares. The Preference and Deferred shares in each of the new Companies were allotted equally between Sir Alfred Beit, Mrs. Bull and Miss Beit; while the Ordinary shares of both Companies were allotted to the executors of Sir Otto Beit. The result was that Sir Alfred Beit, Mrs. Bull and Miss Beit each received £20,000 in Preference shares in the Trust Company and £10 in Preference shares in the Respondents in place of their holdings of £20,000 each in Preference shares in the Syndicate; and £300,000 in Deferred shares in the Trust Company and £200,000 in Deferred shares in the Respondents in place of their holdings of £500,000 each in Deferred shares in the Syndicate. Similarly, the Executors received £20,000 in Ordinary shares of the Trust Company and £20,000 in Ordinary shares of the Respondents in place of their holding of £40,000 in Ordinary shares of the Syndicate. As the Liquidator said in his evidence before the Commissioners, the share-holdings in the Respondents (and the observation was obviously true as to both the new companies) were arranged so as to keep the interests of Sir Otto Beit's family in the assets of the Syndicate unaltered by the reconstruction. It does not appear to me that the finding has anything to do with the method of fixing the purchase price; it is only concerned with the distribution among the shareholders.
The Trust Company, which is to operate as an investment holding Company, took over the sounder investments of the Syndicate and assumed all the liabilities of the Syndicate other than those in respect of the £400,000 second Debentures of the Syndicate and the interest thereon as from the 1st January, 1932. The Respondents took over the more speculative investments, which stood in the books of the Syndicate at their cost value of £1,029,958 15s. 4d. The relevant agreement in the case of the Respondents (with which alone we are directly concerned) provided (by clause 1) that the Syndicate should 'sell' and the Respondents should 'purchase' these investments; (by clause 2) that as part of the 'consideration for the said sale' the Respondents should undertake to discharge the liability of the Syndicate on the £400,000 Debentures and interest from the 1st January, 1932; (by clause 3) that 'as the residue of the consideration' the allotments of fully-paid shares in the Respondents to the shareholders of the Syndicate should be made as above stated; (by clause 4) that dissentient shareholders should have the rights reserved to them by section 234 of the Companies Act, 1929, and that the Respondents should be entitled to rescind the agreement if the Liquidator had to purchase the interests of members of the Syndicate amounting to £1,000 or upwards.
The liability in respect of interest on the Debentures was adjusted at the figure of £9,928 15s. 4d.; and the first balance sheet of the Respondents as at the 15th June, 1932, accordingly stood as follows: Share capital, £620,030; Debentures, £400,000; Liquidator of Zevo Finance Syndicate, Limited, £9,928 15s. 4d.; making a total of £1,029,958 15s. 4d.; and on the other side Investments, £1,029,958 15s. 4d."
The Master of the Rolls points out that there was nothing unusual about this scheme of reconstruction. It was the obvious way of bringing about the desired result of segregating the sounder investments from those that were more speculative, and placing the former in the hands of a holding Company and the latter in the hands of a trading Company which could buy and sell when favourable opportunities offered. There is no question of any impropriety from any point of view, nor is it suggested that the scheme was in any way colourable or a device to circumvent the Revenue, or anybody else.
The figure of cost adopted for the purpose of the reconstruction being £1,029,958 15s. 4d., arrived at by adding the liability under the second debentures to the cost price of the acquired shares when they were sold to Zevo Syndicate, Limited, in 1927 (which was their then market price), the question is whether this is the opening figure, representing the cost of the Respondent's stock in trade,...
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