Ditchfield v Sharp
| Jurisdiction | England & Wales |
| Judgment Date | 23 June 1983 |
| Date | 23 June 1983 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. C.N. Beattie Q.C. (instructed by Messrs. Stephen Harwood) for the taxpayers.
Mr. J.C. Holroyd Pearce Q.C. and Viscount Dilhorne (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Waller, Fox, May L. JJ.
Income tax - Whether gain of an income nature - Whether excess received on discharge of promissory note a "discount" chargeable under Case III of Sch. D - Whether a discounting transaction - Income and Corporation Taxes Act 1970 section 108 subsec-or-para (1) section 109Income and Corporation Taxes Act 1970, sec. 108(1)(b), 109.
This was an appeal by the taxpayers from a decision of Walton J., 82 BTC 39, who determined that a payment received by the taxpayers upon the maturity of a promissory note was taxable as a "discount" under the provisions of Income and Corporation Taxes Act 1970 section 108sec. 108 of the Income and Corporation Taxes Act 1970.
The Orwell Share Settlement was made in 1934. By 1939 it held a number of shares in a Canadian company, Lewis Berger & Sons Ltd. That company subsequently merged with another and became Berger Jenson & Nicholson Ltd. (Bergers).
In 1969 an American company sold to Bergers all the share capital of the British Paint Group of companies in consideration of ordinary stock units and loan stock of Bergers, together with a promissory note dated 23 May 1969. This, made by Bergers, promised to pay a subsidiary of the seller the sum of £2,399,000 (free of interest) on 1 February 1973.
Early in 1970 a further company made a successful takeover bid for the ordinary shares of Bergers. The trustees expected, from the sale of their shares, to have cash available for investment and wished to invest in purchasing jointly with others the aforementioned promissory note given by Bergers. As a condition of purchase they required the company holding the note to sell it to the UK bankers, Rothschilds, who would guarantee payment of 75 per cent of the note on maturity. The trustees subsequently purchased the promissory note from Rothschilds. That purchase was completed on 26 February 1970 and Bergers discharged the note on 1 February 1973 with the result that the trustees received £460,065 in excess of the consideration they had given to Rothschilds.
Two questions fell to be determined. First, whether the sum of £460,065 was a profit arising from a discount received on a discounting transaction; secondly, if it was such a profit, was it an "annual profit or gain" within Income and Corporation Taxes Act 1970 section 108sec. 108, the charging section of the 1970 Act.
The taxpayer argued first that the transaction to be concentrated upon was the original issue of the note. It was contended that this was not a discounting transaction at all but simply part of the consideration upon a purchase and sale of property. Secondly, reliance was placed upon the fact that this was not a short term note; the note was originally issued in 1969 for a maturity date in 1973. Even after the purchase of the note by the trustees the maturity date was some three years ahead. Alternatively, it was submitted that if there was an income element in the amount which the trustees received it was in the nature of interest not discount.
The Crown argued that the excess was a discount forming an annual profit of the year in which it was received and was chargeable underIncome and Corporation Taxes Act 1970 schedule DCase III of Sch. D. The Crown's contention was that the original issue of the promissory note was a discounting transaction and that the profit was accordingly a chargeable discount.
Held, appeal dismissed.
1. In the circumstances and on the limited findings of facts, the Commissioner's conclusion that the profit was of a capital nature was unfounded. It was plainly a discount, no interest was payable as such and there was nothing to indicate that the receipt was other than of an income nature.
2. The only proper conclusion from the facts was that the excess received by the trustees was of an income nature. Following Lomax v. Peter Dixon & Son Ltd., the onus was on the trustees to show that the assessment was wrong. But they had called no evidence to demonstrate the basis on which the discounting transaction had been entered into.
3. In the Lomax case it was said that where no interest was payable the transaction would normally be a discount chargeable to income tax. There was no reason to doubt the correctness of that opinion. One assumed that the holder of the discount had to be getting a return for his money. It was up to him to demonstrate the capital quality of the discount if he asserted its existence.
The taxpayers appealed against the decision of Walton J. who had allowed the Crown's appeal from the Special Commissioners.
By notice of appeal dated 6 January 1982 and supplementary notice of appeal dated 19 January 1982, the taxpayers appealed on the grounds thatWalton J. was wrong in law in holding that the taxpayers received a discount and in holding that annual profit or gains thereby arose to the taxpayers.
By notice dated 20 January 1982, the Crown gave notice of its intention to contend that the order made by Walton J., that the case should be remitted to the Special Commissioners to restore the assessment under Sch. D, Case III, should be upheld. The contention was made on the grounds that the profit received by the taxpayers on the discharge of the relevant promissory note was a discount within the meaning of Income and Corporation Taxes Act 1970 section 109 subsec-or-para (2)sec. 109(2) of the Income and Corporation Taxes Act 1970 by reason either of the nature of the transaction under which the note was issued on 23 May 1969 (as Walton J. found) or of that under which it was acquired by the taxpayers on 26 February 1970.
Fox L.J.: This is an appeal from a decision of WaltonJ., who determined that a payment received by the taxpayers upon the maturity of a promissory note was taxable as a "discount" under the provisions of Income and Corporation Taxes Act 1970 section 108sec. 108 of the Income and Corporation Taxes Act1970.
The taxpayers are the trustees of a settlement made in the year 1934 by Mr. W.S. Cottingham whereby certain shares in a Canadian company called Orwell Investments, together with shares in Lewis Berger and Sons Ltd. and certain other property, were settled upon trusts which are not material to this case.
In 1939 Orwell Investments Ltd. went into liquidation and the trustees of the settlement, as shareholders...
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