Marshall Richards Machine Company, Ltd v Jewitt (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 11 May 1956 |
| Date | 11 May 1956 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income Tax, Schedule D - Profits of trade - Deduction - Payments to subsidiary company.
In 1949 the Appellant Company formed a subsidiary company in the U.S.A. to act as its agent, and in 1950 entered into an agreement with the subsidiary company in which it undertook to pay that company a minimum annual sum of $25,000 towards its operating expenses. The agreement provided that such payments, together with any agreed increases, were to be treated as being on account of agency commission payable to the subsidiary company by the Appellant Company. In the period to 30th September, 1950, and in each of the years ending 30th September, 1951, and 30th September, 1952, the annual payments to the subsidiary exceeded the commissions earned.
On appeal against assessments to Income Tax under Schedule D for the years 1951-52, 1952-53 and 1953-54, the Appellant Company contended that the payments made to the subsidiary company in excess of the commissions earned were wholly and exclusively laid out for the purposes of its trade and were admissible deductions in computing its profits for Income Tax purposes. The Special Commissioners decided that the sums in question represented amounts paid by way of advance to the subsidiary company to enable that company to meet its obligations and that they were not expended wholly and exclusively for the purposes of the Appellant Company's trade, and held accordingly that the appeal failed. The Company demanded a Case.
Held, that the Special Commissioners' decision was correct.
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 26th November, 1954, Marshall Richards Machine Co., Ltd. (hereinafter called "the Appellant"), appealed against assessments of Income Tax under Schedule D as under:
| 1951-52 | … | … | … | … | £60,000 |
| 1952-53 | … | … | … | … | £24,000 |
| 1953-54 | … | … | … | … | £15,000 |
The grounds of the appeal were that in computing the profits or gains of the Appellant for the purpose of the foregoing assessments no deduction or allowance had been made in respect of certain payments made by the Appellant to Marshall Richards Machine Co., Inc. (hereinafter referred to as "the American company"), as hereinafter appeareth and accordingly the said assessments were excessive.
2. Evidence was given at the hearing of the appeal by:
Samuel Hugh Richards, a technical director of the Appellant (hereinafter called "Mr. Richards"); and
Frank Lawson Moulding, a partner in Joshua Wortley & Sons, chartered accountants and auditors to the Appellant (hereinafter called "the auditors");
and the following documents were produced and admitted or proved:
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(i) a copy of the certificate of incorporation of the American company;
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(ii) a copy of the minutes of the first meeting of the American company held on 23rd November, 1949;
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(iii) a copy of the minutes of the first meeting of the directors of the American company held on 23rd November, 1949;
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(iv) copy of a letter dated 19th January, 1950, from the secretary of the Appellant to the manager of the National Provincial Bank, Sheffield;
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(v) copy of a letter dated 21st July, 1950, from the secretary of the Appellant to the manager of the National Provincial Bank, Sheffield;
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(vi) copy of an agreement dated 19th December, 1950 (hereinafter called "the agency agreement"), between the Appellant and the American company;
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(vii) a summary and photostatic copy of the ledger account of the American company in the books of the Appellant covering the period 30th December, 1949, to 30th September, 1953;
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(viii) copy of an agreement dated 8th September, 1952 (hereinafter called "the sale agreement"), between the Appellant and LeRoy De Voe Seymour (hereinafter called "Mr. Seymour") and a schedule containing a copy of an agreement dated 29th September, 1952 (hereinafter referred to as "the concession agreement"), between the Appellant, the American company and Mr. Seymour;
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(ix) copy of the manufacturing, trading and profit and loss account of the Appellant for the year ended 30th September, 1950, and balance sheet at that date certified by the auditors;
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(x) copy of the manufacturing, trading and profit and loss account of the Appellant for the year to 30th September, 1951, and balance sheet at that date certified by the auditors;
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(xi) copy of the manufacturing, trading and profit and loss account of the Appellant for the year to 30th September, 1952, and balance sheet at that date certified by the auditors;
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(xii) copy of a letter dated 29th December, 1950, from the auditors to W.B. Pickard, the secretary of the Appellant.
Such of the above documents as are not attached to and do not form part of this Case are available for the use of the High Court if required(1).
3. We found the following facts admitted or proved at the hearing of the appeal.
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(2) The Appellant, a company registered in the United Kingdom, was at all material times engaged in the manufacture of machines for
making wire and other machinery ancillary to the wire and tube making industry. The machines varied considerably in size and took between six months and two years to make and some even as long as three years. -
(3) Mr. Richards visited the United States of America in 1945, 1947 and 1949 with a view to introducing the Appellant's machines to the United States of America market. Following Mr. Richards' visit in 1945 the Appellant sold a recently developed machine to John A. Roebling, Sons & Co. (hereinafter called "Roebling & Co.") of New Jersey. The directors of the Appellant decided that it would be advantageous for the Appellant's business to have a representative in the United States of America, but it was found that a representative of the Appellant being an agent of a foreign company would have to clear all his business through the United States Government, a course which did not commend itself to the directors of the Appellant. The directors of the Appellant then decided that Mr. Seymour of Roebling & Co. should be the Appellant's representative in the United States of America and that such representation could best be accomplished through the medium of a subsidiary company incorporated in the United States of America which would employ Mr. Seymour. The cost of such representation was estimated at $25,000 per annum.
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(4) On 23rd November, 1949, the American company was incorporated in the State of New Jersey. The certificate of incorporation was in the following terms:
CERTIFICATE OF INCORPORATION of MARSHALL RICHARDS MACHINE COMPANY, INC.
THIS IS TO CERTIFY THAT WE GEORGE BRYDEN, SAMUEL HUGH RICHARDS, THOMAS B. SOMERVILLE and LEROY D. SEYMOUR do hereby associate ourselves into a corporation, under and by virtue of Title 14 of the Revised Statutes, and do severally agree to take the number of shares of capital stock set opposite our respective names.
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(a) The name of the corporation is MARSHALL RICHARDS MACHINE COMPANY, INC.
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(b) The location of the principal office in this State is room 1106, Trenton Trust Building, 28, West State Street, Trenton, New Jersey.
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(c) The name of the agent therein and in charge thereof, upon whom process against this corporation may be served is H. Collin Minton, Jr.
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(d) The objects for which this corporation is formed are to become the sole and exclusive sales representative throughout the continent of North America of Marshall Richards Machine Company, Ltd., a corporation of Crook, County Durham, England, or any of its associated or subsidiary manufacturing corporations located in the United Kingdom, and as such to promote, organize and handle all sales, and the placing of orders for any and all manufactured machinery, and other goods and products manufactured of every kind and description by the said corporation or corporations in the United Kingdom; and to do all of the necessary and incidental engineering work in connection with the installation of such manufactured goods and products, and to do and perform all of the functions necessary for the proper servicing and maintenance of the same at all times throughout the continent of North America.
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(e) The corporation shall also have power to conduct its business in all its branches, have one or more offices, and unlimitedly to hold, purchase, mortgage and convey real and personal property in any State, Territory or colony of the United States and in any foreign country or place.
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(f) The Directors and stockholders of such corporation shall also be empowered to hold meetings at any of such places of business, or elsewhere, within or without the State of New Jersey.
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(g) The total authorised capital stock of this corporation is ten thousand (10,000) shares of common stock without nominal or par value.
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(h) All or any part of the said shares of Common Stock without nominal or par value, may be issued by the corporation from time to time and for such consideration as may be determined upon and fixed by the Board of Directors, as provided by law.
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(i) The names and post-office address of the incorporators and the number of shares subscribed for by each, the aggregate of which (2,500) shares is the amount of capital stock with which this Company will commence business, are as follows:-
Name
Post-Office Address
Number
Of Shares
George Bryden
Elmwood, Retford, Nottinghamshire, England
833
Samuel Hugh Richards
Woodifield House, Crook, County Durham, England.
833
Thomas B. Somerville
2, Woodlands Drive, Davyhulme, Manchester, Lancashire, England.
833
LeRoy D. Seymour
Effingham Road, Morrisville, Pennsylvania
1
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(j) The period of existence...
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