Lothbury Investment Corporation Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 04 July 1979 |
| Date | 04 July 1979 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Surtax - Non-trading close company - Apportionment of income on "winding-up interest" basis - Special Commissioners' power of review - Legislative history as aid to construction - Income and Corporation Taxes Act 1970, s 296(5), (10) - Case Stated in principle.
L Ltd. was for surtax purposes a non-trading close company and, as such, liable to the apportionment of the whole of its income up to the amount of the required standard: s 298, Income and Corporation Taxes Act 1970. The issued capital consisted of (i) ordinary shares held by two brothers, I and M, and (ii) preference shares held by their respective settlement trustees and others. A substantial sum (£230,000) was also due to "loan creditors", namely I and his sister. I waived interest due from L Ltd. on his loan. This enabled L Ltd. to waive dividends on its holding of shares in IM Ltd. a public company in which it had a substantial interest. The Board apportioned income up to the amount of the required standard (s 298(2)) on a "winding-up interest" basis (s 296(5)), rather than on an "interest in income" basis.
The Special Commissioners decided that the Board had properly exercised their powers under s 296(5), but that they had no power to substitute their own for the Board's discretion which had also been properly exercised. At L Ltd.'s request they stated a Case on the construction question and adjourned the issue of the value of the shares.
The Chancery Division, dismissing the Company's appeal, held that on the true construction of s 296(10), a construction which was strengthened by reference to the legislative history, the Special Commissioners had a right and a duty to form their own view of the whole matter and substitute it, if necessary, for that of the Board, paying regard to the Board's decision, authority and experience but not hesitating to set aside the Board's decision if persuaded, on any ground, that it was wrong; but that, having regard to the unfettered powers of the Board under s 296(5), it could not be said they had exceeded the limits of their discretion.
Penang and General Investment Trust Ltd. v. Commissioners of Inland Revenue 25 TC 219; [1943] AC 486 considered and applied.
Per Curiam: the promise of some extra statutory remission of tax which the Special Commissioners took into account (Stated Case, para 8) was not a matter which should influence the Court's decision.
Stated under s 56, Taxes Management Act 1970, 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 21 and 22 March and 5 April 1977 the Lothbury
Investment Corporation Ltd. ("Lothbury") appealed against apportionments for surtax purposes of its income made under s 78, Finance Act 1965, and s 259, Income Tax Act 1952, for the accounting period ended 31 March 1970 and under ss 296 and 298, Income and Corporation Taxes Act 1970, for the accounting period ended 31 March 1971 among participators (as defined in Sch 18, Finance Act 1965, and s 303, Income and Corporation Taxes Act 1970). Particulars of the apportionments are as follows:-Period ended |
Period ended |
|
31 March 1970 |
31 March 1971 |
|
£ |
£ |
|
Preference shareholders |
26,361 |
40,093 |
Mr. Isidore Ostrer ("Isidore") |
16,681 |
23,304 |
Mr. Maurice Ostrer ("Maurice") |
6484 |
8504 |
Mrs. S. Castlemount ("Mrs. Castlemount") |
1022 |
1555 |
Balance |
1 |
1 |
50,549 |
73,457. |
2. In making the apportionments the Commissioners of Inland Revenue ("the Board") proceeded under s 78(5), Finance Act 1965 and s 259(1), Income Tax Act 1952 for the period ended 31 March 1970 and under s 296(5), Income and Corporation Taxes Act 1970 for the period ended 31 March 1971, thus attributing to each participator in Lothbury an interest corresponding to his interest in the assets of Lothbury available for distribution among them in the event of a winding-up. The main question for our decision was whether we had jurisdiction to review the Board's choice of this method of apportionment instead of the more usual method of apportionment by reference to the participators' interests in income. The statutory provisions applicable to Lothbury's accounting period ended 31 March 1970 were re-enacted, on consolidation, in the Income and Corporation Taxes Act 1970, and the case was argued before us by reference to the period ended 31 March 1971, to which the Income and Corporation Taxes Act 1970 applied, on the understanding that a decision in principle for that period would apply also to the period ended 31 March 1970. References hereinafter to sections of an Act are, unless otherwise stated, to sections of the Income and Corporation Taxes Act 1970.
3. The following documents were proved or admitted before us:-
(i) Lothbury's memorandum and articles, as amended by various resolutions.
(ii) Accounts of Lothbury for accounting periods ended 31 March 1970 and 31 March 1971 (exhibit 1).
(iii) Letter from Surtax Office dated 1 August 1974 and statement showing proposed apportionment (exhibit 2).
(iv) Two notices of apportionment dated 26 September 1974.
(v) Settlements dated 30 November 1960 made by Isidore and Maurice.
(vi) Letter from Deloitte & Co. (Lothbury's auditors) dated 8 March 1972.
(vii) Bundle of minutes relating to Lothbury.
Copies of such of the above as are not annexed hereto as exhibits(1) are available for inspection by the Court if required.
4. The following facts were admitted between the parties:
(2) Lothbury was incorporated on 25 August 1919. At all material times it was, for the purposes of ss 296 and 298 (and for the purposes of statutory provisions thereby reproduced on consolidation) a close company which was not a trading company.
-
(3) Throughout both relevant accounting periods the issued share capital of Lothbury fell into two classes, held as follows:-
Ordinary shares (of £1 each)
Isidore
111,613
Maurice
73,387
Total
185,000
6 per cent. preference shares (of £1 each)
Trustees of a family settlement dated 30 November 1960 made by Isidore
400,000
Trustees of a family settlement dated 30 November 1960 made by Maurice
266,667
Sundry individuals
106,500
Total
773,167.
(4) Also throughout the two relevant accounting periods Lothbury owed the following debts to "loan creditors" as defined in s 303(7) (and in the provisions thereby re-enacted on consolidation): to Isidore, £200,000, to Mrs. Castlemount, £30,000. Mrs. Castlemount was the sister of Isidore and Maurice. She died on 9 September 1971 and left the whole of her estate to Maurice.
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(5) The ordinary shares had been in issue for many years. The preference shares were issued for full consideration in 1960 in two ways, as follows:- (a) 94,630 in exchange for 473,150 shares in Illingworth Morris & Co. Ltd. ("IMCL") acquired from Isidore and Maurice. £94,630 was the market value at the time the IMCL shares were acquired. (b) 678,537 in consideration of £678,537 in cash, made up as follows:
£
Isidore's settlement
400,000
Maurice's settlement
266,667
Maurice and Isidore
11,870.
(6) The £678,537 was then applied by Lothbury in purchasing from Isidore and Maurice a holding of IMCL shares at the current market value. Isidore and Maurice immediately disposed of the 106,500 preference shares subscribed for by them as mentioned in (a)and (b) above, and they did not thereafter own any preference shares in Lothbury.
(7) In 1960 when the preference shares were issued 6 per cent. was a normal rate for preference dividends. The preference dividends were paid in full for both the relevant accounting periods. No dividend was paid on the ordinary shares for the accounting period ended 31 March 1970 but a dividend of £16,650 gross was paid for the period ended 31 March 1971.
(8) The loan of £200,000 to Lothbury from Isidore was made on 1 October 1966 to enable Lothbury to reduce a bank overdraft incurred mainly in 1964 to provide funds for Lothbury to take up a rights issue made by IMCL. Interest was paid on the loan at 61/2 per cent. per annum for the three months to December 1966 but throughout the two accounting periods concerned in the appeal no interest was paid. The revenue accounts for both years contain a deduction for "Loan Interest (less £13,000 waived…)". In their letter of 8 March 1972 Lothbury's auditors stated that Isidore waived the whole of the interest on the loan. The £13,000 referred to is the interest which would have been payable if Isidore had charged interest at 61/2 per cent. for the year. The loan was repaid on 12 June 1973. The arrangements concerning the loan were, however, always a matter of informal agreement. There was no written contract.
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(9) The loan of £30,000 to Lothbury from Mrs. Castlemount was made on 20 December 1967. Interest was paid at the rate of 7 per cent. per annum until 30 June 1970 and thereafter at the rate of 101/2 per cent. per annum until 30 June 1972. The loan was repaid to Mrs. Castlemount's estate as follows:
£
3 November 1972
8000
22 December 1972
10,000
31 December 1973
10,000
26 November 1974
2000.
(10) The arrangements concerning the loan were a matter of informal agreement and there was no written loan contract.
(11) Lothbury has at all material times been an investment company. Throughout the two relevant accounting periods its main investments were its holdings of IMCL shares, particulars of which are given in the notes to the accounts (exhibit 1). In those accounting periods it waived certain of the dividends which it might otherwise have received on its IMCL shares. Details of the waivers also appear in the notes to the accounts.
(12) The waiving or non-charging by Isidore of interest on his loan to Lothbury and the waiving by Lothbury of dividends on its IMCL holding were related in the...
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