Jarvis Robinson Transport Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 27 November 1963 |
| Date | 27 November 1963 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Profits Tax - Capitalisation of profits followed by liquidation and reconstruction - Distributions by liquidator - Whether avoidance or reduction of liability to Profits Tax main purpose or main benefit which might be expected to accrue from transactions - Finance Act, 1947 (10 & 11 Geo. VI, c. 35), Sections 35(1) and 36(4); Finance Act, 1951 (14 & 15 Geo. VI, c. 43), Section 32.
Prior to 1957 the Appellant Company, whose business was road haulage, had retained a substantial part of its profits. On 25th November, 1957, the Company passed a resolution that undivided profits of £72,000 be capitalised and applied in paying for 72,000 new £1 shares, increasing the issued capital of £36,000 to £108,000. On 13th March, 1958, the Company went into voluntary liquidation and on 17th March, the liquidator entered into an agreement with a new company incorporated under the same name for the sale to it of the Appellant Company's assets in return for 108,000 £1 shares in the new company. Cash and securities of a total value of £60,407 were omitted from the sale. The new company's shares were allotted to members of the Company and the assets excepted from the sale were distributed among them. By virtue of a subsequent joint election by the liquidator and the new company under Section 36(4), Finance Act, 1947, the allotment of the shares was not treated as a distribution for Profits Tax.
Since the paid-up share capital of the Company, as increased by the capitalisation of the undistributed profits and the allotment of paid-up shares, exceeded the amount of £60,407 available for distribution it followed from the decision of the Court of Appeal on 24th May, 1957, in Commissioners of Inland Revenue v. Pollock & Peel, Ltd., 37 T.C. 240, that the distribution of that sum by the liquidator would not be a gross relevant distribution for the purposes of Section 35(1)(c), Finance Act, 1947.
On 22nd March, 1961, the Commissioners of Inland Revenue made a direction under Section 32, Finance Act, 1951, that the liability of the Appellant Company to Profits Tax for the chargeable accounting period ended 13th March, 1958, should be computed as if its paid-up share capital for the purposes of Section 35(1)(c) was at all relevant times £36,000.
On appeal to the Special Commissioners the Appellant Company contended that the direction should be discharged for the reasons, inter alia, that avoidance or reduction of liability to Profits Tax was not the main purpose or one of the main purposes of the transactions nor could any benefit by way of avoidance or reduction of liability to Profits Tax have been expected to accrue in the three years immediately following the completion of the transactions. For the Crown it was contended that avoidance or reduction of the Company's liability to Profits Tax was one of the main purposes of the transactions and the main benefit which might have been expected to accrue from such transactions, and that the direction should be confirmed. The Special Commissioners held that avoidance or reduction of liability to Profits Tax was not one of the main purposes of the transaction but that it was the main benefit. They upheld the direction and dismissed the appeal.
Held, that the Commissioners' decision was correct.
Stated under the Finance Act, 1951, Section 32(7), the Finance Act, 1937, Fifth Schedule, Part II, Paragraph 4 and the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 30th and 31st October, 1962, Jarvis Robinson Transport, Ltd. (hereinafter called "the Company"), appealed against a direction made on 22nd March, 1961, by the Commissioners of Inland Revenue (hereinafter called "the Commissioners") under the provisions of Section 32 of the Finance Act, 1951, and also against an assessment made upon it to Profits Tax for the chargeable accounting period from 1st January to 13th March, 1958, in the sum of £6,496 2s.9d. The assessment was made upon the basis of the direction, and it was common ground that the greater part of the tax assessed would stand or fall with the direction.
2. The direction is as follows:
We, the undersigned, being two of the Commissioners of Inland Revenue, have had under consideration the following transactions:-
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(2) the Resolutions passed by the Members of Jarvis Robinson Transport Ltd. (No. 165060) in liquidation, hereinafter referred to as "the Company", at an Extraordinary General Meeting of the Company held on 25th November, 1957, whereby it was resolved that:-
(i) the capital of the Company be increased to £108,000 by the issue of 72,000 new Ordinary Shares of £1 each;
(ii) a sum of £72,000 (being part of the undivided profits of the Company standing as to £35,000 to the credit of the General Reserve Fund, as to £22,000 to the credit of the Reserve for Depreciation and Replacements and as to £15,000 to the credit of the Profit and Loss Account) be capitalised and applied in payment in full for 72,000 shares of the Company of £1 each;
(3) the application of the said capitalised fund and the allotment to the shareholders of the said 72,000 shares in the manner directed by the said Resolution and the consequent increase of the nominal amount of the paid-up share capital of the Company from £36,000 to £108,000;
(4) the commencement of the voluntary winding-up of the Company on 13th March, 1958, and the distributions made in due course of liquidation;
(5) an Agreement made on 17th March, 1958, under which the Company sold the goodwill of the business theretofore carried on by it and certain other assets (excepting certain investments and £31,050 in cash).
And being of opinion that avoidance or the reduction of the liability to the Profits Tax was, or as being the main benefit which might have been expected to accrue from the transactions in the three years immediately following the completion thereof, is deemed to have been, the main purpose or one of the main purposes of the transactions, direct, by virtue of the powers conferred upon us by Section 32(1) of the Finance Act, 1951, that the liability to the Profits Tax of the Company for the chargeable accounting period ended 13th March, 1958, shall be computed as if for the purposes of Section 35(1)(c) of the Finance Act, 1947, the total nominal amount of the paid-up share capital of the Company was at all relevant times £36,000 and no more.
(2) Mr. R. A. Clark Smith, one of the directors of the Company, and Mr. Harold Morland, a partner in Balmforth, Morland and Co., chartered accountants, the auditors of the Company, gave evidence at the hearing of the appeal, and the following documents, which are annexed hereto, marked as indicated, and form part of this Case(1), were admitted:
(3) "A" a bundle of correspondence passing between the Company or its auditors and officers of the Board of Inland Revenue.
(4) "B" the accounts of the Company for the year ended 31st December, 1957.
(5) "C" statement of shareholdings in the new company as at June, 1958.
(6) "D" extracts from minutes of the Company.
(7) "E" an agreement dated 25th November, 1957, relating to allotment of shares in the Company consequent upon a capitalisation of profits.
(8) "F" a return of allotments relating to Exhibit "E".
(9) "G" an agreement dated 17th March, 1958, between the Company and the new company.
(10) "H" the final return of the liquidator of the Company, dated 18th April, 1958.
(11) "J" two computations of Profits Tax liability of the Company for the period in question, on the basis contended for by the Crown and the Company respectively.
(12) "K" statement of non-distribution relief obtained by the Company in earlier chargeable accounting periods.
(13) From the above material we found the facts set out in paragraphs 4 to 12 below.
4. The Company was incorporated in 1920 and at all material times carried on the trade of road hauliers. It remained in business throughout the period (1947 to 1953) during which road transport was largely nationalised, owing to the fact that a large proportion of its business was the carriage of meat; owing to subsequent developments in the handling of meat the directors had formed the view before 1958 that if road transport should be nationalised again the Company would be unlikely to escape being taken over.
5. The original issued capital of the Company was £160,000 in £1 shares. In 1929 the issued capital was reduced to £20,000, each £1 share becoming a 2s. 6d.share. In 1950 £16,000 of undivided profits were capitalised and applied in increasing the issued capital to £36,000 by the issue of 16,000 new £1 shares. In 1953 the Company proposed to revalue its fleet (which was independently valued at £83,000, but stood in the Company's balance sheet at £5,000) and apply the reserve so created, together with other reserves, by capitalising £72,000 thereof and applying it in paying up in full a further 576,000 ordinary shares of 2s. 6d. each. The necessary documents were prepared and application was made to the Capital Issues Committee (as was then necessary), but the proposal was not at that time implemented for a number of reasons not material to this appeal. The directors of the Company, however, did not lose sight of the desirability (as
they saw it) of bringing the issued capital more into line with the real value of the Company's assets, and also wished to restore the issued capital to a figure nearer to what it had been before 1929.6. In...
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