Moore (HM Inspector of Taxes) v R.J. Mackenzie & Sons Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 20 December 1971 |
| Date | 20 December 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Profits tax - Discontinuance - Valuation of trading stock - Assets sold at undervalue to trader in United Kingdom - Whether belonging to trade at discontinuance - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c.10), s. 143(1) (a).
The Respondent Company carried on the business of builders and estate developers until it ceased to trade as hereinafter mentioned. In May 1958, when its trading stock consisted of two blocks of flats, with an aggregate book value of £27,686, it agreed to sell those properties to Ltd. for £95,000, subject to contract. However, no contract to that effect was entered into. Instead, at the suggestion of one S, on 26th September 1958 the shareholders in the Company sold all their shares to S Ltd. for £87,250, and new directors were appointed, who on the same day resolved that all the Company's trading activities should be discontinued forthwith and immediately afterwards agreed to sell the properties to S Ltd. at book value. Still on the same day S Ltd. agreed to sell the properties to I Ltd. for £95,000. The sale by the Company to S Ltd. was completed by a transfer dated 30th September 1958, but the Company neither conducted trading operations nor kept any staff after 26th September. S Ltd. was carrying on a trade in the United Kingdom, and the cost of the properties could be deducted in computing the profits of that trade for tax purposes.
On appeal against assessments to income tax under Schedule D for the year 1958-59 and profits tax for the chargeable accounting period ending 25th September 1958, the Company contended that it had ceased trading simultaneously with the sale of the properties on 26th September 1958, and that under s. 143(1)(a), Income Tax Act 1952, the value of the trading stock to be brought into the final trading account was the sale price, viz., £27,686. For the Crown it was contended that s.143 did not apply because (inter alia) the properties were sold during the continuance of the Company's trade, and that on disposal they should be brought into account at market value in accordance with the principle of Sharkey v. Wernher 36 T.C. 275; [1956] A.C. 58. The Special Commissioners upheld the Company's contentions.
In the High Court it was further contended for the Crown that s. 143 did not apply to trading stock sold simultaneously with the discontinuance of the trade; alternatively, that the sale to S Ltd. carried out the resolution to discontinue trading and therefore the properties did not belong to the trade at its discontinuance.
Held, that on the contentions of the parties the Commissioners' decision was correct.
(1) Moore (H.M. Inspector of Taxes) v. R.J. Mackenzie & Sons Ltd.
CASE
Stated under the Income Tax Management Act 1964, s. 12(5), and the Income Tax Act 1952, s. 64, 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 16th and 17th June 1969 R.J. Mackenzie & Sons Ltd. (hereinafter called "the Company") appealed against an assessment to income tax for the year 1958-59 in the amount of £70,000. At the same time an appeal was heard relating to a profits tax assessment on the Company. A separate Case has been demanded and stated upon the profits tax assessment.
2. Shortly stated, the question for our decision was whether in computing its profits for the year 1958-59 the Company should bring into account the price at which the Company sold the said properties, namely £27,686 8s. 7d., or the market value of the said properties at the date of the sale, namely £95,000.
3. The following witnesses gave evidence before us: (a)Brian Henry Sandelson ("Mr. Sandelson"), solicitor, a partner in the firm of Brian Sandelson & Co.; (b) Patrick Hugh Coghlan Hamilton, chartered accountant, a partner in the firm of Barton Mayhew & Co.
4. The following documents were proved or admitted before us:
(2) Memorandum and articles of association of the Company.
(3) Accounts of the Company for the period from 26th September 1958 to 31st March 1960.
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(4) Minutes of the following meetings:
(a) Extraordinary general meeting of the Company held on 25th September 1958.
(b) Directors' meeting of the Company held on 25th September 1958.
(c) Directors' meeting of the Company held on 26th September 1958.
(d) Annual general meeting of the Company held on 26th September 1958.
(e) Reconvened adjourned directors' meeting of the Company held on 26th September 1958.
(f) Second directors' meeting of the Company held on 26th September 1958.
(5) Agreement between the Company and Salvil Securities Ltd. dated 26th September 1958.
(6) Share sale agreement dated 26th September 1958.
(7) Memorandum and articles of association of Salvil Securities Ltd.
(8) Minutes of the following meetings:
(a) Directors' meeting of Salvil Securities Ltd. held on 26th September 1958 (3.25 p.m.).
(b) Directors' meeting of Salvil Securities Ltd. held on 26th September 1958 (4.00 p.m.).
(c) Directors' meeting of Salvil Securities Ltd. held on 26th September 1958 (4.10 p.m.).
(d) Directors' meeting of Salvil Securities Ltd. held on 26th September 1958 (4.25 p.m.).
(9) Copy letters dated 20th January 1961 from Messrs. Barton Mayhew & Co. to H.M. Inspector of Taxes, Pimlico District, and 11th June 1969 from Messrs. Beer & Co. to the Solicitor of Inland Revenue.
(10) Accounts of Salvil Securities Ltd. to 30th April 1959.
(11) Agreement between Salvil Securities Ltd. and The Iron Trades Employers Insurance Association Ltd. dated 27th September 1958.
The above are not annexed hereto as exhibits, but are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(2) The Company was incorporated in 1926 as a private company limited by shares, all of which were immediately prior to the events hereinafter described held by its two directors, Robert Charles Mackenzie and William Matthews Mackenzie (hereinafter called "the Mackenzies").
(3) The business of the Company was at all material times that of builders and estate developers.
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(4) On 26th September 1958 the following events took place:
(a) At 3.15 p.m. at an adjourned meeting of directors of the Company Mr. Sandelson was appointed a director of the Company and the Mackenzies resigned their directorships. Mr. Sandelson was a director of Salvil Securities Ltd. (hereinafter called "Salvil").
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(b) At 3.25 p.m. at a meeting of directors of Salvil the following resolution was passed:
Purchase of Company:
The purchase of the share capital in R.J. Mackenzie & Sons Limited was considered and Mr. Reginald A. Hare was authorised to sign the Contract for the purchase thereof from Mr. R.C. Mackenzie and Mr. W.M. Mackenzie in the terms of the form of contract produced.
(c) The contract produced and then signed was an agreement of that date, whereby the Mackenzies agreed to sell all their shares in the Company to Salvil for the sum of £87,250. The agreement was completed that same day by payment of the purchase price and delivery of transfers.
(d) At 4 p.m. at a further meeting of the directors of Salvil the transfers referred to in (b) above were produced and it was agreed to affix Salvil's seal thereto.
(e) At 4.10 p.m. at a further meeting of the directors of the Company, the following resolutions (inter alia) were passed:
Pursuant to Article 89 of Table A to Companies Act 1908 Mr. Brian Sandelson appointed Mr. R.A. Hare to be a Director of the Company and the latter thereupon attended the Meeting in that capacity.
It was resolved that all trading activities whatsoever of the Company be discontinued forthwith.
(f)
The sale of the Company's properties in Tabor Court and Scotsdale Close, Cheam, was considered and Mr. Hare was authorised to sign contract for sale to Salvil Securities Limited in the terms of the form of contract produced.
(g) (The contract produced and then signed was an agreement of that date, whereby the Company agreed to sell to Salvil the said properties in Tabor Court and Scotsdale Close (hereinafter called "the properties") for their book value of £27,686 8s. 7d., which sum was paid by Salvil to the Company that same day.)
The following Transfers of Preferred Shares in The Company were produced. The Transfers were approved for registration and the Secretary was instructed to issue new Certificates to the Transferees.
(h) (The transfers produced were those referred to in (b) and (c) above.)
(5) The only trading operation conducted by the Company on 26th September 1958 was the said sale of the properties. After that date it neither conducted trading operations of any kind nor kept any staff.
(6) The said agreement for sale of the properties (which consisted of registered land) was completed by transfer dated 30th September 1958.
(7) In or about May 1958 the Company had agreed to sell the properties, subject to contract, to the Iron Trades Employers' Insurance Association Ltd. (hereinafter called "the Association") for £95,000. No contract was ever entered into between the Company and the Association. A contract was prepared for the sale of the properties by Salvil to the Association for £95,000 (completion of the sale to be on 1st October 1958). One part of this contract was signed on behalf of the Association on 24th September 1958 and was delivered (together with a cheque for £9,500) to Salvil's solicitors on the morning of 26th September 1958. The other part of the contract was signed on behalf of Salvil at or shortly after 4.25 p.m. on 26th September, and the contract was dated 27th September 1958.
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