Jones v Shell Petroleum Company Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE RUSSELL |
| Judgment Date | 28 November 1969 |
| Judgment citation (vLex) | [1969] EWCA Civ J1128-3 |
| Date | 28 November 1969 |
| Court | Court of Appeal (Civil Division) |
[1969] EWCA Civ J1128-3
In The Supreme Court of Judicature
Court of Appeal
Civil Division
on Appeal from Order of Cross, J.
Lord Justice Russell
Lord Justice Salmon and
Lord Justice Megaw (not present)
Mr H. H. MONROE, Q. C, Mr MICHAEL NOLAN, Q. C. and Mr S. J. L. OLIVER (instructed by Messrs Allen & Overy appeared on behalf of the Appellants, The Shell Petroleum Co. Ltd.
Mr H. H. MONROE, Q. C., Mr MICHAEL NOLAN, Q. C. and Mr S. J. L. OLIVER (instructed by Messrs Linklaters & Paines) appeared on behalf of the Appellants, The British Petroleum Co. Ltd.
Mr v. A. BAGNALL, Q. C. and Mr P. W. MEDD (instructed by The Solicitor of Inland Revenue,) appeared on behalf of the Respondents.
This is the Judgment of the Court.
Before the Finance Act, 1915, a United Kingdom company such as Shell, whose business was that of making investments, was at a disadvantage compared with, for example, a trading concern, in that while on the one hand it bore full income tax on its income, it could claim no relief in respect of expenses necessary to be incurred in order to earn that income: it was taxed on its gross income and not on what could fairly be regarded as its net profits of any year.
An amelioration of that situation was introduced in 1915 is respect of what were described as its management expenses, in a form relevantly re-enacted in Section 4-25, subsection (1), of the Income Tax Act, 1952, which is in the following terms: "Subject to the provisions of this section, and to the other provisions of this Part of this Act, where -(b) any company whose business consists mainly in the making of investments and the principal part of whose income is derived there from, claims and proves to the satisfaction of the Special Commissioners that, for any year of assessment, it has been charged to tax by deduction or otherwise, and has not been charged in respect of its profits in accordance with the provisions of this Act applicable to Case I of Schedule D, it shall be entitled to repayment of so much of the tax paid by it as is equal to the amount of the tax on any sums disbursed as expenses of management (including commissions) for that year".
For many years, until the introduction of double taxation relief in respect of foreign taxation, the provision gave rise to no problems of the nature debated before us. The tax paid or suffered by the company was at the current or standard rate, and on any construction of the words "the tax on any sums disbursed" that tax was at the same rate.
The income of Shell is of three kinds. (A) Dividends received from United Kingdom companies the profits of which are not subject to foreign tax. (B) Dividends received from United Kingdom companies the profits of which, owing to trading activities abroad, are subject to foreign tax and which companies have themselves claimed double taxation relief against United Kingdom income tax in connection with that foreign tax. (C) Dividends received from foreign companies which dividends are themselves subjected to foreign tax which is consequently withheld by the paying foreign company.
In category (A) the tax paid by Shell under deduction is, of course, at the standard rate. In category (B) the situation is the same. In category (C) upon Shell claiming double taxation relief, the United Kingdom tax paid or suffered is less in amount than would result from a calculation at the standard rate. Though the amount of tax paid in respect of category (B) is calculated at the standard rate, Section 350 of the Income Tax Act, 1952 (in broad terms) restricts claims to repayment of the tax paid by deduction by a ceiling, being a lower nett United Kingdom rate, a rate intended to reflect the fact that in obtaining double taxation relief the distributing company has paid United Kingdom tax at a rate lower than the standard rate.
In connection with category (A), whatever construction is put upon "the tax on" in Section 425 subsection (1), no problem arises: "tax paid" and "the tax on" must be both at standard rate, and the situation is as in 1915. It is when we get to categories (B) and (C) that there is difficulty. Indealing with those categories we will forget category (A) and assume in each case for convenience that the income of Shell is exclusively category (B) or exclusively category (C). In so doing we remark that the amount of the management expenses is such that it is necessary to consider both those categories, the Crown accepting that upon its construction of Section 425 Shell is entitled to attribute its expenditure first to the gross income that has the highest reclaimable United Kingdom tax content giving the highest figure or rate for "the tax on" and "tax paid".
But "before coming to these two categories it is necessary to consider the rival contentions as to the construction of "the tax on" in Section 425. Shell contend that it means and always means income tax at the standard rate regardless of the rate at which any part of the gross income has suffered tax - regardless of the "tax paid" if it "be at a rate lower than the standard rate. (It is in fact only in category (C) that it might be said that tax paid was other than at the standard rate). The Crown contends that "the tax on" is related to the tax paid on the gross income to which any particular part of the disbursements is to be attributed, so that the rate at which "the tax on" is to be calculated is the same as that tax paid. The fact that when this section was introduced in 1915 the two rates were necessarily the same and necessarily the current - later called the standard - rate does not seem to us to assist in the solution of this problem.
In construing the phrase it seems to us important to start with the consideration that the introduction of the provision was clearly aimed at making the situation which should obtain in a company whose business was investment at least approach the situation that obtained in a trading concern, namely that expenses should be deducted from gross profit before a taxable net profit should be disclosed. If that were the principle to be expected from this new scheme to remove a relative disadvantage from a company such as Shell it would involve a reflection of a system by which expenses should be deducted from gross profit in order to ascertain the proper liability to tax. The effect of such deduction would be that which is in fact contended for by the Crown in this case: £100 of expense would be matched with £100 of gross profit, relieving from tax first at the highest level of such tax and next at the next highest level of such tax.
We would approach the construction of Section 425 with this in mind, and we ask ourselves whether the language of Section 425 is such that it arrives at a different result. It was urged upon us that "the tax" could only be the one tax known, namely income tax at the standard rate. We do not agree. It could mean that. But it could mean the tax last referred to in the section - namely "that tax" or "the tax paid by it" which was that from which the amount of "the tax on" is to be deducted. The section does not refer to "the amount of tax" it speaks of the amount of "the tax". Nor does it say "as is equal to tax on the amount of any sums disbursed". There is strictly of course no tax on sums disbursed. The section must refer to the tax on such gross income as is properly to be considered as having been expended as sums in disbursement on the expenses. (Of course expenses may not have been in fact paid out of income at all, but it is assumed by the section to be so since it speaks of the tax on, meaning, of course, income tax). Again this seems to us to relate to expenditure by the company out of income on which it has paid the tax paid by it. For Shell it was argued that if this was intended the phrase used would have been that the company was...
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