Forbes's Trustees v Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 16 January 1958 |
| Docket Number | No. 15. |
| Date | 16 January 1958 |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
RevenueIncome taxIncome assessableCompany directorProfits of officeOption to purchase shares at less than current valueOption exercised in later yearYear in which resulting profit assessable to taxIncome Tax Act, 1918 (8 and 9 Geo. V, cap. 40), First Sched., Sched. E, Rule 1.
The Income Tax Act, 1918, enacts, by Rule 1 of the Rules applicable to Sched. E, that the tax "shall be annually charged in respect of all salaries, fees, wages, perquisites or profits whatsoever."
The managing director of two private companies entered into an agreement with the companies under which he had the option, so long as he remained managing director, of applying for and having allotted to him a certain number of shares in each company on payment in cash of their nominal or par value. This option he subsequently exercised. The true value of the shares exceeded the par value both when the option was granted and when it was exercised. After his death an additional assessment to income tax was made upon him, for the year in which the option was exercised, in a sum representing the difference between the par value of the shares and the price at which they could have been sold at the date of allotment.
Held that, under the agreement, no taxable profit arose out of the option in the year in which it was granted but that such a profit arose in the year in which the option was exercised and the shares were allotted; and that the assessment had been correctly made for the latter year.
Tait v. SmithTAX, (1954) 35 T. C. 79,distinguished.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts the testamentary trustees of the late John Tarbert Wishart Forbes appealed against an additional assessment made upon him under Schedule E of the Income Tax Act, 1918, for the year 1946-1947.
In that year Mr Forbes had exercised an option, conferred on him in an earlier year, to apply for and receive an allotment, on payment of the par value, of certain shares in two private companies of which he was managing director; and the question for the determination of the Commissioners was whether the benefit obtained by him on the allotment of these shares, measured by the difference between their par value and the price at which they could have been sold at the date of allotment, represented profits of his offices of managing director, chargeable to income tax under Schedule E.
The Commissioners decided the question adversely to the appellants, and, at their request, stated a case for the opinion of the Court of Session.
The stated case set forth that the following facts were proved or admitted:"(1) At some date prior to 1934 Mr Forbes was appointed managing director of two companies, Watt Torrance Limited and Watt Torrance Woolwich Limited. (2) By an agreement entered into on 3rd December 1934 Mr Forbes was appointed managing director of both the above-mentioned companies for a term of five years on a salary and commission basis. This agreement was renewed from time to time, and, although there were small gaps between the expiry of periods covered by formal appointments and the beginning of ensuing periods, Mr Forbes held the appointments continuously. (3) When the above-mentioned agreement was entered into, Mr Alexander Watt Torrance (who died in 1940) held a controlling interest in each of the said two companies and controlled the running of their businesses. (4) Mr Torrance was, however, getting old, and the businesses were not successful. He thought that Mr Forbes was the right man to take over the management of the businesses, and in 1936, although he retained his controlling shareholding in the two companies, he dropped out of the management, leaving Mr Forbes in charge. Under Mr Forbes's management the companies eventually prospered. (5) Mr Forbes wanted some security of tenure, and on 18th February 1938 a minute of agreement, supplementary to the said agreement of 3rd December 1934, was entered into between the said two companies and Mr Forbes. By this supplementary minute of agreement it was provided that so long as Mr Forbes remains the managing director of Watt Torrance Limited and Watt Torrance Woolwich Limited, he shall have the right to apply for and to be allotted shares of any denomination in either or both companies up to the number of ten. thousand, on payment in cash of the nominal or par value of the shares applied for. At the date of this supplementary minute of agreement the companies businesses were still not particularly successful, and the shares in both companies were worth their par value. The said agreement of 3rd December 1934, as amended by the above-mentioned supplementary agreement of 18th February 1938, was renewed in 1939. (6) Mr Torrance died in 1940, as already stated. Under the terms of his will his grandson Alistair was entitled, on certain conditions, to have transferred to him his grandfather's shares in both companies at the market price at the date when he attained the age of twenty-five, which he did in 1941. In that year Alistair made efforts to obtain the transfer to himself of his grandfather's shares, but he was unable to pay the then market price. (7) On 18th September 1944 a new minute of agreement was agreed and executed between Watt Torrance Limited of the first part, Watt Torrance Woolwich Limited of the second part, and Mr Forbes of the third part. Clause eleventh of this agreement provided that so long as Mr Forbes remains the managing director of the Company [i.e., Watt Torrance Limited] and of the Woolwich Company, he shall have the right to apply for and to be allotted shares of any denomination up to the number of ten thousand in either or each of the companies, on payment in cash of the nominal or par value of the shares applied for. At the date of this last-mentioned agreement the shares were worth more than their par value. (8) It became apparent in 1946 that Alistair was going to make every effort to get control of both companies. (9) As a result of Alistair's attitude in 1946, Mr Forbes considered that his position with the two companies would be insecure if Alistair obtained control of them, and he decided to exercise his option. In 1946, therefore, Mr Forbes applied for and was allotted, on payment of the par value, 10,000 shares in Watt Torrance Limited and 8000 shares in Watt Torrance Woolwich Limited. After this allotment Alistair took unsuccessful action against the companies and against the trustees of Mr Torrance's will. (10) Both companies are private companies and there is the restriction on the transfer of shares which is normally found in the articles of association of private companies. It was common ground, however, that the shares which Mr Forbes acquired as the result of the exercise of his said option could have been sold by him at the date when they were allotted to him at a price above their par value, although we were not told what this price was. The assessment appealed against was made on the footing that the advantage or benefit obtained on allotment of the said shares, represented by the difference between the par value of these shares and the price at which they could have been sold by Mr Forbes at the date of allotment, was profits of his offices of managing director of both companies."
The contentions of the parties were stated as follows:
"It was contended on behalf of the appellants:(1) (a) That, in the circumstances of this case, what must be considered was Mr Forbes's option, and not the shares he acquired by exercising his option; that any further benefit represented by the appreciation of the shares between the granting of the option and the taking up of the shares was (i) contractual, since it could not have been withheld, and (ii) common to all the other shareholders in the companies. (b) That the option was personal to Mr...
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