Gardner, Mountain & D'Ambrumenil Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
Date1946
CourtHouse of Lords

HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-

COURT OF APPEAL-

HOUSE OF LORDS-

(1) COMMISSIONERS OF INLAND REVENUE
and
GARDNER MOUNTAIN & D'AMBRUMENIL, LTD.

Profits Tax - Underwriting agents - Commissions receivable under agreements with Lloyd's underwriters - Date at which commissions to be credited in computing profits.

The Company, whose business included that of underwriting agents, entered into agreements with certain underwriters at Lloyd's, under which it was entitled to receive, as remuneration for its services in conducting the agency, commissions on the net profits of each year's underwriting. The agreements provided, inter alia, that accounts should be kept for the period ending 31st December in each year, and that "each such account shall be made up and balanced at the end of the "second clear year from the expiration of the period or year to which "it relates and the amount then remaining to the credit of the account "shall be taken to represent the amount of the net profit of the period "or year to which it relates and the commission payable to the Company "shall be calculated and paid thereon".

The Company's accounts were made up for years to 31st March, and in the accounts for the year to 31st March, 1939, which formed the basis of the first assessment to Profits Tax (then known as National Defence Contribution) for that chargeable accounting period, there were credited the commissions on underwriters' profits from policies underwritten in the calendar year 1936. The commissions on underwriters' profits from policies underwritten in the calendar year 1938, when ascertained, were greater than those for the calendar year 1936, and an additional assessment was made in respect of the excess. On appeal against this additional assessment, the Company contended that the contracts into which it entered were executory contracts, under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account; that the profit in the form of commission was not ascertainable or earned, and did not arise, until that time, and that the additional assessment should accordingly be discharged.

The Special Commissioners allowed the Company's appeal, and discharged the additional assessment.

Held, that, on the true construction of the agreements, the commissions in question were earned by the Company in the year in which the policies were underwritten, and must be brought into account accordingly.

CASE

Stated under the Finance Act, 1937, Section 24(2) and Part II of the Fifth Schedule and the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 8th September, 1942, Messrs. Gardner Mountain & D'Ambrumenil, Ltd. (hereinafter called "the Company") appealed against an additional assessment to the National Defence Contribution in the sum of £18,678 made upon it for the chargeable accounting period from 1st April, 1938, to 31st March, 1939, in respect of the profits of its business.

The Company's business consists of two parts, that of insurance brokers and that of underwriting agents. The only question before us was as to the correct method of computing the profits from the underwriting agency.

2. In the circumstances and for the reasons hereinafter appearing, the Company brought into its account for the year ending 31st March, 1939, the commissions on underwriters' profits from policies underwritten in the calendar year 1936. The commissions were brought into charge on this basis in a first assessment to the National Defence Contribution for the aforesaid chargeable accounting period to 31st March, 1939. The commissions on underwriters' profits from policies underwritten in the calendar year 1938, when ascertained, proved to exceed those for the calendar year 1936, brought into account as aforesaid for the year ending 31st March, 1939, by a sum of £18,678, and, as stated above, an additional assessment was made in this sum.

The question at issue before us was whether the commissions proper to be brought into assessment for the chargeable accounting period to 31st March, 1939, were, as the Company contended, those relating to policies underwritten in the calendar year 1936, or, as the Crown contended, those relating to policies underwritten in the calendar year 1938.

3. The Company, which was incorporated in 1902, acted for certain underwriters at Lloyd's, who formed themselves into syndicates, the members of the syndicates being known as "Names". The Names were insurers of various types of risk, including marine risks (ships and cargoes), fire risks on traders' stocks and accident risks. The functions of the Company were to obtain Names and, on behalf of the group of Names for which it acted, to accept risks, issue policies, collect relative premiums, settle claims and adjust returns of premiums when due.

4. The universal practice of Lloyd's is for underwriting accounts to be drawn up by reference to the calendar year but for the accounts to be kept open for a certain time (usually three years) to allow for various adjustments in the manner hereinafter stated in paragraph 12. The accounts of the Company are made up to 31st March in each year.

5. The Company worked for three syndicates - F. G. Hall syndicate, G. Simmons syndicate and Carisbrooke syndicate, with each of the Names in which it entered into an agreement. A skeleton agreement form applicable to the Names in the F. G. Hall and G. Simmons syndicate is annexed hereto, marked "A1", and forms part of this Case(1).

Under clause 1 of the agreement the Company is authorised to act as the underwriter's agent and to carry on the ordinary business of underwriter at Lloyd's in his name and on his account.

Clause 8 provides that: "The Underwriter shall pay to the Company "as remuneration for its services in conducting the agency a "fixed salary at the rate of pounds per annum and "pounds expenses…and a commission of per cent. on the "net profits on each year's underwriting…The said fixed salary "and expenses shall be paid quarterly and shall be treated as an outgoing "of the Underwriting."

Clause 9 provides that: "The said fixed salary and expenses shall "cease at the termination of the agency but after such termination "(whether by death of the Underwriter or otherwise) the Company "shall be entitled to wind up the underwriting and the accounts in "connection therewith and shall be paid for its services in connection "therewith a remuneration of not less than One hundred guineas".

Clause 10 provides that: "An account shall be kept for the period "ending the Thirty-first day of December", next after the agency commences, "and for each subsequent year of the agency…and each "such account shall be made up and balanced at the end of the "second clear year from the expiration of the period or year to which "it relates and the amount then remaining to the credit of the account "shall be taken to represent the amount of the net profit of the "period or year to which it relates and the commission payable to the "Company shall be calculated and paid thereon Provided Always "that for the purpose of ascertaining the commission payable to the "Company the account for each period or year shall be treated as "a separate account and the profits of any one period or year shall "not be affected by the result of the underwriting done in any "other period or year."

Clause 12 provides that: "In the event of any transaction relating "to the underwriting carried on in any period or year being left "outstanding when the account for such period or year is made up "and balanced any payments or receipts which may afterwards result "from such transactions shall be carried to the debit or credit as "the case may be of the account for the next year as if the transactions "giving rise thereto had occurred in that year Provided Always "that in the event of the termination of this Agreement the account "may at the discretion of the Company remain open until all risks "have run off and the business shall have been completely wound up."

Clause 14 provides that: "Either of the parties may terminate the "agency on the Thirty-first day of December", in a particular year, "or on the Thirty-first day of December of any succeeding year by "giving to the other party six months' previous notice in writing of "his or its intention to do so."

6. A skeleton agreement form applicable to the Names in the Carisbrooke syndicate is annexed hereto, marked "A2" and forms part of this Case(1). The substantial difference between this agreement

and the agreement exhibit "A1" is that the Company receives no salary but only a commission on the net profits resulting from each year's underwriting.

7. A copy of the Company's profit and loss accounts for the years ended 31st March, 1939, 31st March, 1940, and 31st March, 1941, is annexed hereto, marked "B", and forms part of this Case(1). For the year ended 31st March, 1939, the commission for the Company's underwriting agencies is shewn as £1,728, this figure relating to underwriting transactions initiated in the calendar year 1936. The commission figure relating to such transactions initiated in the calendar year 1938 is £21,995, which is shown among the items for the year ended 31st March, 1941. In each year the fixed salaries are credited in the year to which they relate.

8. A copy is also annexed hereto, marked "C", and forming part of this Case(1), of a statement showing the composition of the commission figures for the same years appearing in the profit and loss accounts, divided between the various syndicates for which the Company worked.

In addition to the three syndicates referred to in paragraph 5 hereof, there are items against the Names of Stafford Knight and others, and Kirk & Randall. In the...

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