Johns (HM Inspector of Taxes) v Wirsal Securities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 26 November 1965 |
| Date | 26 November 1965 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax - Loss in trade - Financial concern - Dividend-stripping - Whether shares trading stock - Whether dividend deemed to be received under deduction of tax - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 184 to 186 and 341.
On 5th April 1961 the Respondent Company received from N Ltd., a dealing company, £279,422 in respect of interim dividends declared as £456,200 subject to deduction of income tax. The adjusted net profit before taxation of N Ltd. in its first year of trading, ended 7th April 1960, was £59: in the year to 7th April 1961 its net profit before taxation was £280,140, derived from the sale of freehold and leasehold properties, largely to the Respondent Company, and at the latter date its net assets were £733 without provision for income tax for 1962-63 based on the profit of that accounting year.
The Respondent Company was formed in January 1959, primarily to carry on the business of stock and share dealers. In the first year for which its accounts were made up, ending 7th April 1960, it bought seven parcels of quoted securities on the stock exchange at the aggregate cost of £8,025 and sold them for £7,974, besides entering into artificial transactions with associated companies. On 4th April 1960 the Company agreed to purchase the issued share capital of N Ltd. for £316,000 and paid £100 on account. The price was based on the opinion of the vendors (some but not all of whom indirectly owned the share capital of the Respondent Company) as to the true value of the assets owned by N Ltd. In the year to 7th April 1961 the Company purchased seven parcels of quoted securities for £945 and sold them for £908; it purchased freehold and leasehold properties from N Ltd. for £356,072, and it wrote down its holding in N Ltd. to £1. Consequently the profit and loss account showed an aggregate dealing loss of £316,036. The Company claimed repayment under s. 341. Income Tax Act 1952. of £121,184, being tax expressed to have been deducted from the dividends from N Ltd. above mentioned, in respect of an adjusted loss of £312,734 sustained in the year 1960-61.
On appeal, the Special Commissioners found that the objects of the transactions were that the profits from the development and disposal of freehold and leasehold properties should be channelled into N Ltd. and the shares in N Ltd. should be acquired by the Respondent Company for the purposes of dividend-stripping, and that the other transactions were designed to show that a trade was being carried on. The Crown having contended that the Company's transactions in 1960-61 were not genuine trading transactions or, alternatively, that its shares in N Ltd. were not trading stock, the Commissioners found that the shares were held throughout as trading stock and the writing down was justified. On the question what tax had been paid by the Company, the Company contended that it had received dividends of £279,422 without deduction of tax, which under s. 185. Income Tax Act 1952, were deemed to represent income of £456,200 less £176,778
tax. For the Crown it was contended that the declaration by N Ltd. of dividends exceeding its profits for the two years ended 7th April 1961 was ultra vires and the Company was not therefore to be deemed to have paid any tax. The Commissioners held that N Ltd. was entitled to deduct tax from a maximum dividend of £280,199, being the total profits up to 7th April 1961 which had been or might be charged to income tax, that the tax paid by the Company was accordingly £108,577, and that the excess of the net dividends received over the net sum corresponding to £280,199 gross must be brought into the Company's trading account. Both parties demanded a CaseIn the High Court it was contended alternatively for the Crown that, where a dividend exhausted the distributable profit, s. 184, Income Tax Act 1952, authorised no deduction from any larger gross amount and s. 186 did not apply, so that the gross amount of the dividends paid by N Ltd. was equal to the net amount.
Held, (1) that, in view of the decision in J.P. Harrison (Watford) Ltd. v. Griffiths 40 T.C. 281; [1963] A.C. 1 and the decision of the Court of Appeal in Finsbury Securities Ltd. v. Bishop (page 591 ante) [1965] 1 W.L.R. 1206 the only reasonable conclusion was that the Company's operations in respect of the shares in N Ltd. were trading operations; (2) that, the intention of the board of N Ltd. having been to distribute substantially the whole distributable profit without deduction of tax, s. 184 did not authorise the deduction of tax from a larger amount and s. 186 did not apply, with the result that the Company had no taxed income to support its repayment claim; (3) that, under the decision in Cenlon Finance Co. Ltd. v. Elwood40 T.C. 176; [1962] A.C. 782 the Company must bring the dividends into its trading account.
Stated under the Income Tax Act 1952, s. 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 16th and 17th May and 23rd and 24th July 1962, Wirsal Securities Ltd. (hereinafter called "Wirsal") applied under s. 341 of the Income Tax Act 1952 for an adjustment of its liability by reference to a loss alleged to have been sustained in the trade carried on by it in the income tax year 1960-61 ended 5th April 1961.
2. The questions for our determination were:
(a) whether Wirsal was carrying on a trade of dealing in securities in the year ended 5th April 1961;
(b) if so, whether and to what extent Wirsal sustained a loss in that trade in the said year;
(c) the aggregate amount of Wirsal's income for the year ended 5th April 1961 by reference to which, together with the loss, if any, sustained in its trade. Wirsal was entitled to an adjustment of its liability under s. 341.
3. The following witnesses gave evidence before us: Sidney Z. Manches, a solicitor and a director of Wirsal; K.H. Hillebrandt, a taxation consultant and former Inspector of Taxes; D.S. Allison, an estate agent and a director of Nadvet Securities Ltd.; E. Lawson, a chartered accountant and chief advisory accountant to the Board of Inland Revenue.
4. The following documents were proved or admitted before us:
1. Computation of relief claimed by Wirsal under the provisions of s. 341, Income Tax Act 1952.
2. Memorandum and articles of association of Wirsal.
3. Report and accounts of Wirsal for the year ended 7th April 1960.
4. Report and accounts of Wirsal for the year ended 7th April 1961.
5. Notices of assessment to income tax for the years 1959-60, 1960-61 and 1961-62 issued to Wirsal.
6. Correspondence between H.M. Inspector of Taxes, Welbeck District, and the accountants to Wirsal.
7. Cash book of Wirsal.
8. Ledger of Wirsal.
9. Schedule of dealings of Wirsal in stocks, shares and properties.
10a. Agreement of 4th April 1960 between Dr. C. Seager and others and Wirsal.
10b. Agreement of 4th April 1960 between L.L. Aelion and Wirsal.
10c. Agreement of 4th April 1960 between M.L. Hydleman and Wirsal.
11a, 11b and 11c. Agreements of 4th April 1961 between Nadvet Securities Ltd. and Wirsal.
12. Details of property dealings by Nadvet Securities Ltd.
13. Report and accounts of Beckford Roadworks Ltd. for the year ended 31st March 1960.
14. Agreement of 4th April 1960 between Fresale Securities Ltd. and Central Properties (Streatham) Ltd.
15. Report and accounts of Fresale Securities Ltd. for the period 23rd March to 10th April 1960.
16. Report and accounts of Acdent Ltd. for the period 2nd December 1959 to 10th April 1960.
17. Report and accounts of Abotin Ltd. for the period 5th October 1959 to 10th April 1960.
18. Report and accounts of Central Properties (Streatham) Ltd. for the period 7th January 1959 to 5th April 1960.
19. Report and accounts of Nadvet Securities Ltd. for the year ended 7th April 1960.
20. Report and accounts of Nadvet Securities Ltd. for the year ended 7th April 1961.
21. Letter of 17th July 1961 to H.M. Inspector of Taxes, Welbeck District, from the accountants to Nadvet Securities Ltd.
21a. Letter of 12th July 1961 to the accountants to Nadvet Securities Ltd. from H.M. Inspector of Taxes, Welbeck District.
22. Summary by the Crown of Wirsal's alleged trading transactions.
23. Six dividend warrants dated 5th April 1961 from Nadvet Securities Ltd.
24. Memorandum and articles of association of Nadvet Securities Ltd.
25. Notices of assessment to income tax for the years 1959-60, 1960-61 and 1961-62 issued to Nadvet Securities Ltd.
26. Schedule of dealings in properties by Nadvet Securities Ltd.
27. Memorandum and articles of association of Abotin Ltd.
28. Memorandum and articles of association of Acdent Ltd.
29. Memorandum and articles of association of Acquint Ltd.
30. Memorandum and articles of association of Central Properties (Streatham) Ltd.
31. Statement by the Crown of the financial result of Wirsal's holding and not dealing in shares of Nadvet Securities Ltd.
32. Statement by the Crown relating to the computation of the income tax liability of Nadvet Securities Ltd. if the company ceased to trade between 6th April 1962 and 5th April 1963.
33. Letter of 6th September 1962 from the Solicitor of Inland Revenue to the solicitors to Wirsal.
34. Letter of 18th January 1963 from the Solicitor of Inland Revenue to the solicitors to Wirsal.
35. Minutes of the meetings of the directors of Nadvet Securities held at 2.00 p.m. and 2.15 p.m. respectively on 5th April 1961.
36. Revised computation of relief claimed by Wirsal under the provisions of s. 341, Income Tax Act 1952.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
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Ian Douglas Thomson (HM Inspector of Taxes) (Respondent) Gurneville Securities Ltd (Appellants)
... ... In the Court below Mr. Justice Goff decided (following the decision of Mr Justice Pennycuick in Johns v. Wirsal Securities, Ltd. (43 Tax Cases 629) that no part of that dividend could oe excluded from B.I.'s accounts as a net dividend paid after ... ...