Lupton v F.A. & A.B. Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Morris of Borth-y-Gest,Lord Guest,Viscount Dilhorne,Lord Donovan,Lord Simon of Glaisdale |
| Judgment Date | 21 October 1971 |
| Judgment citation (vLex) | [1971] UKHL J1021-1 |
| Date | 21 October 1971 |
| Court | House of Lords |
[1971] UKHL J1021-1
Lord Morris of Borth-y-Gest
Lord Guest
Viscount Dilhorne
Lord Donovan
Lord Simon of Glaisdale
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause F. A. & A. B. Limited against Lupton (Her Majesty's Inspector of Taxes), that the Committee had heard Counsel, as well on Monday the 21st, as on Tuesday the 22d, Wednesday the 23d and Thursday the 24th, days of June last, upon the Petition and Appeal of F. A & A. B. Limited, whose registered office is situate at 22 Upper Grosvenor Street, London W.l, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 14th of May 1969, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of Douglas Edward Lupton (Her Majesty's Inspector of Taxes), 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 Her Majesty the Queen assembled. That the said Order of Her Majesty's Court of Appeal of the 14th day of May 1969, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, Dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
This is one more case in which the question which arose for consideration was whether certain transactions should fairly and reasonably be regarded as share-dealing transactions resulting in the acquisition of shares by a company as a dealer in shares so that they become part of its stock-in-trade or whether the transactions could not fairly and reasonably be so regarded.
At all relevant times the Appellant Company was trading as a dealer in stocks and shares. It entered into numerous transactions in stocks and shares. The proceedings which culminate in your Lordships' House related only to five transactions. It does not follow that because a person is carrying on a trade as a dealer in shares every transaction into which he enters will be a dealing in shares in the course of his trade. So the question arose in regard to five particular transactions. The way that the question arose was that there was an assessment to Income Tax made upon the Company for the year 1960-61. The Company appealed and claimed relief from tax under section 341 of the Income Tax Act, 1952, for the years 1959-60, 1960-61 and 1961-62 in respect of losses claimed by the Company to have been sustained by it in those years in its trade as a dealer in stocks and shares.
In the Case Stated the Special Commissioners carefully summarised the five transactions (which were in relation to shares in five separate companies) which were entered into by the Appellant Company. The Commissioners had in mind the decision in J. P. Harrison (Watford) Ltd. v. Griffiths [1963] A.C. 1 and the decision of the Court of Appeal on the 7th July, 1965, in Finsbury Securities Ltd. v. Bishop (which was later reversed in this House). They found that the five transactions, which they described as "dividend stripping transactions", had formed part of the trade of the Company of dealing in shares.
The learned judge (Megarry J.) reversed the decision of the Special Commissioners. Though with some hesitation in regard to one of the live transactions he held in the case of all of them that they were not trading transactions in the course of the Company's trade: rather were they to be regarded as artificial devices remote from trade in order to secure tax advantages.
The Appellants did not appeal against the decision of the learned judge in regard to four of the five transactions. Their appeal in relation to the fifth was dismissed by the Court of Appeal (Lord Denning M.R. and Phillimore L.J.: Sachs L.J. dissenting).
So it becomes necessary carefully to examine this fifth transaction. Ought it, when viewed fairly and rationally, to be classed as a trading transaction coming within the trade of a dealer in shares? Ultimately this becomes a matter of judgment. In such cases as these some help may be derived from considering the decisisons of courts as to how other transactions have been regarded. One transaction with certain features may have been held to have been a transaction properly to be regarded as being within the trade of a dealer in shares. Another transaction with other features may have been held not to have been one which could properly be so regarded. Deriving such help as a consideration of other cases may yield—the question for decision will be whether the particular transaction under review can and should be regarded as a trading transaction within the course of the trade of a dealer in shares.
This enquiry may or may not involve or necessitate a consideration of the profitability of a transaction or of the tax results of a transaction. One trading transaction may result in a profit. Another may result in a loss. If each of these, fairly judged, is undoubtedly a trading transaction its nature is not altered according as to whether from a financial point of view it works out favourably or unfavourably. Nor is such a transaction altered in its nature according as to how the revenue laws determine the tax position which results from the financial position.
The opening words of section 341 of the Income Tax Act, 1952, are as follows:
"Where any person sustains a loss in any trade, profession, employment or vocation."
If an application for an adjustment of liability is made in regard to an alleged loss in a trade the first enquiry will be whether the transaction alleged to have resulted in a loss was ever a transaction in the particular trade at all. Only if it was would it be necessary to consider whether or not a loss had resulted.
If, before changes in the law were made, a dealer unversed in revenue law had bought shares, pregnant with dividend, of a company that had paid tax on its profits, he might have re-sold the shares and made a profit or he might have received a dividend and then sold the shares and made about the same profit. But there could have been different consequences according as to which course he followed. If he had received a dividend and then sold the shares and if (being unversed in revenue law) he had told his advisers that he had made a trading profit he would, greatly to his surprise, have been told that though he had more in his pocket at the end of his transaction than at its start he would for purposes of revenue law have made a loss. He would have been told that because of the dividend payment his shares had declined in value to the extent of that payment with the result that he had made a loss in his trade in the calculation of which he could omit the amount of the dividend payment that he had received and that actually he might be able to make a claim for recovery of tax: so that as an after-effect of his transaction the revenue laws would yield a large benefit to him if he wished to take it and thought it right to take it. He might contemplate that the revenue laws would be changed but he might ask whether if he made another precisely similar transaction but this time with knowledge of the revenue laws the result would be any different. In my view, he would have been told that if he made a similar ordinary trading transaction its nature would not change according as to whether he knew or did not know what under revenue law would be or could be the possible fiscal results for him. Many people order their affairs either with or without expert guidance in such ways as, on a correct application of the law, will prove most to their benefit.
As a result of the above-noted feature of revenue law and of various other features there have emerged in recent periods certain hybrid transactions. These are paraded by their admirers as possessing the guise and the garb of trading transactions. Others think of the analogy of a wolf in sheep's clothing with the Revenue as the prey.
It may be that there are some who have become specialists in the devising of such transactions and who as a result are sought out by and are consulted by vendors of shares who seek to have part of the profit for which such transactions provide. If any of these specialists are to be found amongst those whose ordinary trade is that of dealing in shares it must be said that in the fashioning of these tax-engineering operations they may be stepping aside from the paths of their trade. The question in any particular case may be whether they have so stepped aside.
Some submissions were made by Mr. Monroe in regard to the decision in your Lordships' House in the case of J. P. Harrison (Watford) Ltd. v. Griffiths (supra). In that case a purchase of shares was made by a dealer in shares: after a dividend had been declared the shares were sold. The dealer in the result made a small profit. The seller of the shares had no interest in them once he had been paid. He was thereafter in no way concerned. It did not matter to him what the purchasers did with the shares. In fact the purchasers had knowledge of the revenue laws as they then stood and had had it in mind to invoke the operation of those laws. They proposed to make a claim under section 341 by asserting that as the shares which they had bought became diminished in...
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