Johnson v Jewitt
| Jurisdiction | England & Wales |
| Judgment Date | 10 November 1961 |
| Date | 10 November 1961 |
| Court | Court of Appeal |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income Tax, Schedule D-Valuation of stock.
In 1954, the Appellant, a solicitor, formed with two other persons a partnership to act as company promoters and dealers in securities. There followed a series of transactions affecting some 81 companies, all the shares in which were acquired by the partnership or the partners individually either directly or through the intermediary of another company. Transfers were made between the loan and reserve accounts of the various companies in such a way that never more than £63,000 cash was involved. Dividends were declared by some of the companies and, following the consequent reduction in the value of those companies' assets, the shares were sold at a fair price but at an apparent loss. The transactions were reflected in the final accounts of the partnership which showed net taxed dividends received amounting to £948,920 and a net loss of £2,907,620. The value of the opening stock of shares was included in these accounts at cost, which was then greater than open market value.
The Appellant claimed relief for the year 1956-57 under the provisions of Section 341, Income Tax Act, 1952, in respect of his share of the partnership loss. The General Commissioners rejected his claim on the grounds (i) that the partnership had not carried on a trade in 1956-57; (ii) that if the partnership had been trading the value of the stock should have been taken at the lower of cost or market value; and (iii) that the dividends received were not paid out of profits or gains brought into charge to tax and were not income of the recipients.
The Chancery Division held that, on their findings of fact, the General Commissioners were justified in reaching their decision on grounds (i) and (iii) and that a realistic value ought to have been put on the shares in the profit and loss accounts.
The Court of Appeal affirmed the decision of the Court below as regards the Commissioners' rejection of the claim on the first ground and found it unnecessary to express an opinion on the second and third grounds.
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the General Purposes of the Income Tax for the Division of the City of Newcastle upon Tyne for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held at 34, Grainger Street, in the City and County of Newcastle upon Tyne, on 27th February, 1958, and concluded at their adjourned meeting on 6th March, 1958, Mr. Ronald Langford Johnson (hereinafter called "the Appellant") made application in accordance with the provisions of Section 341 of the Income Tax Act, 1952, in relation to a loss claimed to have been sustained in the year ended 5th April, 1957, in a trade carried on by him.
2. The question in issue before us was whether a loss had been sustained in a trade, profession, employment or vocation carried on by the Appellant, either solely or in partnership, for the year ended 5th April, 1957. We were invited by both parties to consider matters of principle only, leaving arithmetical computations to be subsequently decided.
3. The following facts were admitted or proved in evidence given before us, and were accepted by us.
(i) Notice in writing in accordance with Section 341 (1) of the Income Tax Act, 1952, was given by the Appellant to H.M. Inspector of Taxes, Newcastle upon Tyne 2nd. District, on 6th November, 1957, of his claim for relief under the same Section in reference to his share of the loss sustained by Newcastle Securities Co.
(ii) The Appellant is a solicitor, and partner in the firm of Bramwell, Clayton & Clayton of Newcastle upon Tyne who, in the year 1953, had been instructed in the winding-up of a shipping company which had suffered considerable trading losses. The Appellant ultimately negotiated the sale of the shares of this shipping company to a prosperous concern which was able to obtain Income Tax relief as a result of this transaction.
(iii) On 10th August, 1954, the Appellant, together with Arthur Stott and Leslie Mann, entered into a deed of partnership, to terminate on 31st December, 1957, for the purpose of carrying on the business of company promoters and dealers in securities under the title of Newcastle Securities Co.
(iv) Arrangements were made with the before-mentioned firm of solicitors, Bramwell, Clayton & Clayton, for Newcastle Securities Co. to use part of the former's office accommodation and for the use of their staff as required. A sum of £3 per week was paid for these facilities.
(v) On 11th August, 1954, Newcastle Securities Co. purchased 1000 shares in Powell Duffryn, Ltd., which shares were later sold in the same accounting period of the partnership. This purchase established the starting date of the business.
(vi) On 14th August, 1954, instructions were given to company registration agents for the formation of a company to be called Ash Securities, Ltd., which company was duly registered in February, 1955. The three partners in Newcastle Securities Co. subscribed the capital and became the sole directors thereof, the main object being to deal in securities.
(vii) On 28th August, 1954, company registration agents in London were instructed in the proposed formation of another four companies. Provisional consent of the Registrar of Companies for the use of certain names was obtained. In May, 1956, the London agents were instructed to discontinue the formation of these companies.
(viii) In February, 1955, having regard to the Prevention of Fraud (Investments) Act, 1939, Newcastle Securities Co. applied for membership of the Association of Stock and Share Dealers, an association recognised by the Board of Trade as an association of dealers in securities for the purpose of the said Act. The firm was admitted to membership and has since paid an annual subscription of 50 guineas. Ash Securities, Ltd., did not apply for membership of the association as it was proposed that it should conduct that side of its business through the agency of Newcastle Securities Co.
(ix) Between February and March, 1955, Newcastle Securities Co. negotiated for the purchase of the whole of the share capital of a shipping company. There was a difference of £10,000 between the price offered and the price which was acceptable; the negotiations did not reach finality, nor were the shares purchased.
(x) On 22nd March, 1955, Ash Securities, Ltd., purchased 1000 shares in The Distillers Co., Ltd. These shares were never, in fact, taken up and were sold almost immediately thereafter, but in the second accounting period of the company. The first accounts of Ash Securities, Ltd., were made up to 5th April, 1955, and showed neither profit nor loss. The accounts showed the purchase of shares at a cost of £1,278 and stock in hand at cost amounting to £1,278 (the before-mentioned shares in The Distillers Co., Ltd.). These accounts were agreed by H.M. Inspector of Taxes.
(xi) In April, 1955, Ash Securities, Ltd., made arrangements with Bramwell, Clayton & Clayton, solicitors, of Newcastle upon Tyne, for the use of part of their office accommodation and of their office staff as required. A sum of £3 per week was paid for these facilities. This payment was in addition to the before-mentioned sum of £3 per week paid to the said firm of solicitors for the like facilities by Newcastle Securities Co.
(xii) In June, 1955, with a view to ultimately carrying out transactions known as "dividend-stripping", Newcastle Securities Co. and Ash Securities, Ltd., through the agency of Bramwell, Clayton & Clayton, commenced advertising in "The Times" newspaper for companies with substantial taxed reserves. An example of the advertisement is as follow:
Somewhat more than break-up value offered for company with fully liquid assets (£20,000 minimum) and relatively small issued capital. Prompt and confidential investigation offer and settlement. Write Box…The Times, E.C.4.
(xiii) Between June and October, 1955, 37 persons replied to these advertisements.
(xiv) The first accounts of Newcastle Securities Co. were made up to 9th August, 1955. The accounts showed the purchase of shares at a cost of £1,969 and sales of £1,730 (Powell Duffryn, Ltd.). The accounts showed stock in hand at cost amounting to £184 and being the shares in Ash Securities, Ltd. The accounts showed a loss of £245 and the same were agreed by H.M. Inspector of Taxes. Each of the three partners in Newcastle Securities Co. made claims in respect of agreed losses under Section 142 of the Income Tax Act, 1952, and these claims were allowed.
(xv) By 26th October, 1955, negotiations in about ten of the 37 cases referred to in sub-paragraph (xiii) and involving shares worth millions of pounds had reached the stage of personal meetings, which had taken place mostly in London; and, in fact, in one instance completion of the purchase had been arranged for 31st October, 1955.
(xvi) On 26th October, 1955, the Chancellor of the Exchequer made his Budget statement in relation to the Finance (No. 2) Act, 1955, and as result, on the passing of the said Act, Bramwell, Clayton & Clayton, on the instructions of both Newcastle Securities Co. and Ash Securities, Ltd., postponed, without calling off, all negotiations which had taken place with those responding to the before-mentioned advertisements in "The Times" newspaper.
(xvii) The last-mentioned negotiations were not called off as the Appellant considered that, notwithstanding the provisions of the said Act, there might still be a market for such companies
(xviii) In December, 1955, Messrs. Stott, Mann and the Appellant, the partners in Newcastle Securities Co., acquired the whole of the share capital of 20 recently-registered investment companies each of which had an issued share capital of £100 and capital reserves of £50,000, i.e., assets consisting, at the time of acquisition, of...
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