Lowry (Inspector of Taxes) v Consolidated African Selection Trust Ltd

JurisdictionUK Non-devolved
JudgeLord Chancellor,Viscount Maugham,Lord Russell of Killowen,Lord Wright,Lord Romer
Judgment Date08 May 1940
Judgment citation (vLex)[1940] UKHL J0508-1
CourtHouse of Lords

[1940] UKHL J0508-1

House of Lords

Lord Chancellor

Viscount Maugham

Lord Russell of Killowen

Lord Wright

Lord Romer

Lowry (Inspector of Taxes)
Consolidated African Selection Trust Limited

After hearing Counsel, as well on Tuesday the 20th, as on Wednesday the 21st, Thursday the 22d, Monday the 26th and Tuesday the 27th, days of February last, upon the Petition and Appeal of Hugh George Lowry, formerly one of His Majesty's Inspectors of Taxes (now retired), late of Royal London House, Finsbury Square, London, E.C.2, and now residing at Woodridings, Hemyock, Bovey Tracey, Devonshire, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal, of the 1st of February 1939, except so far as the said Order relates to Costs, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Order, except so far as aforesaid, might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of Consolidated African Selection Trust, Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 1st day of February 1939, except so far as aforesaid, be, and the same is hereby, Reversed, and that the Judgment of the Honourable Mr. Justice Macnaghten, of the 10th day of November 1938, be, and the same is hereby, Restored, except as to Costs: And it is further Ordered, That the Respondents do repay or cause to be repaid to the said Appellant the amount of the tax, together with the interest thereon, paid to the said Respondents, pursuant to the said Order of His Majesty's Court of Appeal, of the 1st day of February 1939: And it is further Ordered, That, pursuant to the terms on which leave to appeal to this House was granted by the said Order of His Majesty's Court of Appeal, of the 1st day of February 1939, the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal to this House, the amount thereof to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the King's Bench Division of the High Court of Justice, to do therein as shall be just and consistent with this Judgment.

Lord Chancellor

My Lords,


This appeal from a judgment of the Court of Appeal, which was delivered by Sir Wilfrid Greene M.R. allowing an appeal from Macnaghten J., raises a difficult question concerning the computation of the profits of a trade carried on by a limited Company. The Respondent Company, which carried on the business of searching for and winning diamonds, was incorporated on the 11th October, 1924, under the Companies Acts, 1908 to 1917, with a nominal capital of one million shares of 5s. each. By a special resolution passed at an Extraordinary General Meeting of the Company on the 6th December, 1933, the capital of the Company was increased by the creation of a number of preference shares and also of 400,000 new ordinary shares of 5s. each, out of which 10,000 shares were to be reserved for issue to employees of the Company at such time or times and upon such terms and conditions as the Directors should determine. Six months later the Directors passed a resolution authorising the Chairman and Vice-Chairman of the Company to allot and issue on such terms and conditions as they should determine up to a total of 6,000 ordinary shares to employees under the special resolution of the 6th December, 1933. Accordingly a letter was written on the 15th June, 1934, to certain members of the staff of the Company in the following terms:—

"The Directors desire to show their appreciation of special services you have rendered to the Company by giving you an opportunity to acquire a share interest in the Company on favourable terms. If you will kindly fill up and return to the Secretary the enclosed form of application for—shares together with a remittance for £— being payment in full at par namely 5s. per share, you will in due course receive an allotment."


In response to this invitation applications were made for the whole of the 6,000 shares so offered and payment was made in full. On the 2nd July, 1934, allotments were made and certificates issued to the applicants. On that day the market price of the ordinary shares was 2 3/16 to 2 1/4, making a middle market price of £2 3s. 9d. It was, therefore, calculated that if the new shares had been issued in the open market, a premium at the rate of £1 18s. 9d. would have been received amounting to a total of £11,625, this amount representing the difference between the middle price of the shares in the open market and the sum paid on allotment. The Respondents claim to deduct this sum in computing their profits for Income Tax purposes.


One other fact appearing from the Special Case must be stated. The employees of the Company resident in England who received these shares were assessed to Income Tax under Schedule E on the premium value of the shares on the footing that they were paid this amount as remuneration for their services. The assessment was justified as the Master of the Rolls pointed out in his judgment by the law as declared in the case of ( Weight v. Salmon 19 Tax Cases, 174). It was there decided in your Lordships' House that the profit which the taxpayer in that case was in a position to make by going on the market and selling shares allotted to him on payment of less than the market price, was an immediate profit in the nature of money's worth received by him. The employees of the Respondent Company have in the same way been treated as receiving money's worth, to the extent of the premium value of the shares, and have been assessed accordingly. Whether the Directors intended that this should be the result of their offer of shares to their employees on the terms contained in the letter of the 15th June, 1934, may be open to some doubt. It is at least as likely, if attention is paid to the terms of the letter, that the Directors really intended to give their employees a chance of acquiring a share interest in the Company at a favourable price so that they might have what is sometimes called a "stake" in the Company with the success of which their own interests were so closely connected. If the wish of the Company had been that their employees should be remunerated by receiving shares which could be turned into cash, the simple course of making a direct payment of an equivalent amount of cash would have produced precisely the same result. The payments could no doubt have been made out of the ordinary resources of this prosperous Company. If some special provision of funds to meet the payments were required, shares to the necessary amount could have been issued on the open market at the full price obtainable. This course would have allowed the Company without question to treat the payments as trading expenses, and to deduct them from its gross receipts in making up its trading account. The Company chose to take another course which did not involve any expenditure of its money, or realisation of any of its assets. It was perfectly entitled to take that course, even though the result might have been to divert into the pockets of its employees the equivalent of the cash profit, which it might otherwise have obtained. In fact, the Company did not obtain the cash profit. It is none the less said on its behalf that it is entitled to make up its trading account as if it had expended a sum of money equivalent to the premium value of the shares in the remuneration of its employees.


I find no guidance from the fact that the employees have had to pay Income Tax on the premium value of their shares. The assessment on the employees was on the ground that holding an office or employment of profit they received a profit therefrom: the right to include a deduction of the amount in question in the trading account of the Company for the purposes of Schedule D must be justified by a finding that the Company incurred a trading expense. The question, therefore, which has to be decided is whether, by reason of the fact that the Company did not make use of the opportunity of issuing shares at a premium, the Company can be said to have incurred a trading expense to the amount of the premium.


Now, my Lords, it is to be observed that the learned Counsel for the Respondents was insistent at the outset of his argument in disclaiming any intention to base his case upon the contention that the profit on the shares was foregone and could therefore be deducted as an expense. The foundation for such an argument is to be found, if at all, in some observations by Lord Sumner in his speech in the case of ( Usher's Wiltshire Brewery Ltd. v. Bruce 1915 A.C., at p. 469). Those observations, which were cited at length by the Master of the Rolls, were as follows:

"A trader who utilises for the purposes of his trade something belonging to him be it chattel or real property which he could otherwise let for money seems to me to put himself to an expense for the purposes of his trade. Equally he does so if he hires or rents for that purpose property belonging to another. The amount of his expense is prima facie what he could have got for it by letting it in the one case and what he pays for it when hiring it in the other. Where he gets something back for it while employing it in his trade by receiving rent or hire for it in connection with that trade, the true amount of his expense can only be arrived at by giving credit for...

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    ...into the capital protection regime. 15 It is clear from the judgment of Lord Wright in Lowry v. Consolidated African Selection Trust [1940] A.C. 648 that directors are normally under an obligation to obtain a premium if they can; they can, of course, issue shares at par but their duty to t......
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