F S Securities Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Viscount Radcliffe,Lord Hodson,Lord Guest,Lord Upjohn |
| Judgment Date | 04 June 1964 |
| Judgment citation (vLex) | [1964] UKHL J0604-1 |
| Date | 04 June 1964 |
| Court | House of Lords |
[1964] UKHL J0604-1
House of Lords
Lord Reid
Viscount Radcliffe
Lord Hodson
Lord Guest
Lord Upjohn
Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against F.S. Securities Ltd (formerly Federated Securities Ltd.), that the Committee had heard Counsel as well on Tuesday the 14th, as on Wednesday the 15th and Thursday the 16th, days of April last, upon the Petition and Appeal of the Commissioners of Inland Revenue, 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 Her Majesty's Court of Appeal of the 18th of July 1963, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of F.S. Securities Ltd., (formerly Federated Securities Ltd.), 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 Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 18th day of July 1963, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Determination of the Special Commissioners of the 23d day of January 1960, be, and the same is hereby. Restored: And it is further Ordered, That the Question of Law in the Case Stated be, and the same is hereby, answered in the Affirmative: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellants the Costs incurred by them in the Courts below, and also the Costs incurred by them in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the Chancery Division of the High Court of Justice with a Direction to make such Order as may be necessary as to the repayment of the Costs already paid by the Appellants to the Respondents under the Order of the Honourable Mr. Justice Ungoed-Thomas of the 7th day of December 1962, as will enable such Costs to be reclaimed by the Appellants, and to do therein as shall be just and consistent with this Judgment.
My Lords,
The Respondent company was incorporated in August, 1954, with a capital of 100 £1 shares. At the relevant period 83 of these shares were held by two persons as trustees. The main object of the company was to carry on the business of stock and share dealers. Its most important venture was to purchase in December, 1954, and March, 1955, the entire share capital of three companies for sums amounting in all to £1,317,565. It financed these purchases by borrowing from its bankers 93 per cent. of the value of these shares. These three companies held large amounts of accumulated profits which had borne tax, and soon after purchasing them the Respondent caused them to declare dividends amounting to £927,408 net after deduction of tax or £1,686,198 gross.
The Respondent then prepared a profit and loss account for income tax purposes for the period from 1st September, 1954, to 31st March, 1955. This showed a loss of £895,487. This loss was arrived at by putting on the one side of the account the purchase price of the securities and on the other side the value of these securities after the dividends had been paid, leaving out of the account the dividends which were paid to the Respondent. The Respondent then submitted a claim under section 341 of the Income Tax Act, 1952, for "repayment" of tax, and repayments were made in due course amounting in all to £404,020. It is found as a fact in the Case Stated that the object of the Respondent in purchasing these shares was to carry out an operation colloquially known as "dividend stripping". All this was done in accordance with the practice which prevailed before Parliament took action to stop this kind of operation.
The present case has arisen out of a direction given by the Special Commissioners in 1960 on the footing that the Respondent company was an investment company within the meaning of section 257 (2) of the 1952 Act. This direction was to the effect that the income of the Respondent company should be deemed to be the income of its members. The Respondent appealed on the ground that it was not an investment company. The Special Commissioners held that it was, and stated a case. The Respondent succeeded before Ungoed-Thomas J. and the Court of Appeal, and the Crown now appeal to this House.
Section 257 (2) provides that, "'investment company' means a company the income whereof consists mainly of investment income, and 'investment income' means, in relation to a company, income which, if the company were an individual, would not be earned income". "Earned income" is defined by section 525, and the relevant part of the definition is, "( c) any income which is charged under Schedule B or Schedule D and is immediately derived by the individual from the carrying on or exercise by him of his trade, profession or vocation …".
It is now common ground between the parties that this case depends on how these large dividends ought to have been treated in making up the Respondent's profit and loss account under Schedule D, Case I. The Crown says that the method which was in fact followed was correct and that the dividends were properly left out of that account. If that is right, then it is not now disputed that these dividends were investment income, that the Respondent was an investment company, and that the Special Commissioners' direction was properly given. But the Respondent now says that these dividends ought not to have been excluded from the profit and loss account and that therefore a properly framed account would have shown no loss. Counsel for the Respondent agrees that if his contention is right the Respondent ought not to have been repaid anything under section 341 but the Respondent has not offered to repay the sum of £404,020.
So the question now in issue is the question how a dealer in stocks and shares ought to treat dividends accruing to him from shares which he has bought in the course of his trade. It was decided in Cenlon Finance Co. Ltd. v. Ellwood (H.M. Inspector of Taxes) 40 T.C. 176 that a capital dividend which is not paid under deduction of income tax must enter his profit and loss account and the Respondent maintains that the same rule must apply to dividends paid under deduction of tax.
The question how dividends paid under deduction of tax fall to be treated for income tax purposes has a long history. I dealt with that matter in my speech in the Cenlon case but anything said in that case about dividends paid under deduction of tax was obiter because the question before this House related solely to dividends which had not borne tax, and I certainly did not have in mind any case like the present. So I have carefully reconsidered what I said in that case, but on reflection I see no reason to alter it. I said at page 205:
"I find it necessary to start from the ordinary case of a dividend paid out of profits under deduction of tax. Why is the shareholder not taxed on what he receives? It is part of his income, or, if he is a trader, it is a trading receipt. But it seems always to have been recognised that an individual does not pay Income Tax on it (I do not refer to Surtax), and a trader does not include it as a trading receipt in determining his taxable profits".
But the view of Lord Simonds and, to some extent, that of Lord Denning were different. In the ordinary case it would make no practical difference which view is right, but in this case if Lord Simonds' view were right it would support the Respondent's argument. He said at page 203:
"I would affirm what was said by Donovan, L.J. (than whom no one has a wider knowledge of revenue law), about the treatment by a trading company of dividends from which tax has been deducted at the source. There is no doubt that the practice is, and, so far as I know, always has been, to include such dividends in the computation of profits taxable under Case I of Schedule D and to make an allowance or adjustment for the tax that has been paid".
I do not think that Donovan L.J. went quite so far as that, because he does not state what the practice was; he only said at page 198:
"These also, in my view, would fall to be included in a computation of profits taxable under Case I of Schedule D with an adjustment of the tax bill which allows for that suffered at source."
It is now agreed by Counsel for both parties that there never was such a practice as that to which Lord Simonds refers. At one time there was a somewhat similar practice with regard to claims based on losses, but as regards the ordinary profit and loss account to show the profits or gains chargeable under Schedule D, Case I it was always the practice before the Cenlon case for a trader to leave out of the account those trading receipts which consisted of dividends received by him after deduction of tax. The Respondent now says that the practice has always been wrong. In my opinion, it was right.
Neither view can be derived directly from any provisions of the Income Tax Act. If the words of the Act were applied literally the result would be double taxation of the same income, but it has been said again and again that the Act cannot be so read as to authorise that. If the Respondent's view is right, it is necessary to bring in some form of equitable adjustment after the...
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