Nobes (B. W.) & Company Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE HARMAN,LORD JUSTICE DANCKWERTS |
| Judgment Date | 26 November 1964 |
| Neutral Citation | [1964] EWCA Civ J1126-3 |
| Judgment citation (vLex) | [1964] EWCA Civ J1126-4 |
| Docket Number | T.54 |
| Court | Court of Appeal |
| Date | 26 November 1964 |
[1964] EWCA Civ J1126-3
In The Supreme Court of Judicature
Court of Appeal
(Revenuepaper)
Lord Justice Harman
Lord Justice Dawckwerts
Lord Justice Salmon
SIR ANDREW CLARK. Q. C., MR. MICHAEL NOLAN and MR. J. HOLROYD PEARCE (instructed by Messrs. Ashurst Mjorris Crisp & Co., 17, Throgmorton avenue, E. C.2.) appeared as Counsel for the Appellants.
MR. H. H. M. ONROE. Q. C., MR. J. P. WARNER. MR. J. RAYMOND PHILLIPS and Mi. ANDREW MORRITT (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, W. C.2.) appeared as Counsel for the Respondents.
I am authorised, by Lord Justice Salmon to say that he concurs with the judgment I am about to deliver.
This appeal is concerned with those annual payments which are dealt with by Sections 169 and 170 of the Income Tax Act 1952 re-enacting the old general rules 19 and 21. Section 169 provides that where any annual payment is payable wholly out of profits or gains brought into charge to tax the payer is to he charged with the tax and may on making the payment, deduct and retain a sum representing the amount of the tax at the standard rate for the year in which the amount payable became due. The payee is bound to suffer this and the payer is discharged of the sua represented by the deduction as if he had actually made it.
Under Section 170 where any such annual payment is not payable out of profits or gains brought into charge the payer must, on making the payment, deduct the amount of the tax and account for it to the Grown. The question here is whether the Respondent company, whom I shall call "the Company", having made deductions on making certain annual payments, is entitled to retain them under Section 169 on the footing that the payments have been made out of monies brought into charge or must, as the Crown claims, account for them under Section 170. The Special Commissioners held the Company accountable. The Judge reversed that decision: the Crown appeals.
Most of the transactions with which this case is concerned have for me an air of total unreality. The several companies which come and go seem mere lay figures, dummies set up as payers or receivers of large sums of money for no apparent commercial purpose, though I can only suppose for some end concerned with taxation, No explanations were offered to the Special Commissioners, nor to us, of the object or effect of these transactions, which I confess to finding incomprehensible. I will state the facts so far as I can follow them. The Company was incorporated in the year 1951 and carries on a fairly extensive business as shipbrokers. It had an issued share capital of rather over £17,000 and made considerable profits year by year out of which small dividends were paid in 1955, 1954 and 1955. All the shares in the Company were in August, 1955, sold to a company called Avenue Finance Co., Ltd., but at what price is not stated. In 1957 the Company in the hands of its new owner, paid a dividend of £269,565 gross or £155,000 net. There remained to the credit of the profit and loss account a balance of £4,449. The Company, as its balance sheet shows, had some modest further assets and immediately after the payment of the dividend Avenue Finance Co., Ltd. sold the whole of its shares in the Company to Fashion & General Investment Ltd. for about £17,000. Shortly afterwards, in the hands of its new masters, the Company promoted a company called Aconite Investments Ltd. with an authorised share capital of £100 and two £1 shares issued to the Company for cash. Whether Aconite had any business or any assets is not apparent.
Two months later, on the 12th July, 1957, the Company entered into a deed by which it covenanted to purchase the 98 shares in its own wholly owned subsidiary Aconite at a price to be measured by the annual income arising year by year over the years 1958 to 1966 inclusive on certain of the Company's ship broking contracts set out in a schedule to the deed, which provided that the covenanted sums should rank as annual income payments from which income tax should be deducted, A week later the Company in order, presumably, to finance its payments to Aconite under the deed of covenant, sold all its Aconite shares to a company called Consolidated Investment 'Funds Ltd. for a sum of £45,000. This sum was to be paid by instalments equal to Aconite's net profits for the financial years 1958 to 1966 inclusive but if the profits in question exceeded £45,000 the price was to be increased by that excess. In other words all Aconite's
[1964] EWCA Civ J1126-4
In The Supreme Court of Judicature
Court of Appeal
(Revenue Paper)
Lord Justice Harman
Lord Justice Danckwerts
Lord Justice Salmon
Judgment - Corrigenda
Page 3, 3rd paragraph, 1st line: amend "£28,000" to read "£27,097".
Page 3, 3rd paragraph, 2nd line: amend "£27,500" to read "£26,539".
Page 3, 3rd paragraph, 7th line: amend "3rd May" to read "22nd May".
The Association of Official Shorthand Writers,
1 December, 1964
net profits for the years in question wears to be absorbed in paying: for its shares. The agreement also provided that the payments by C. I. F. were to be paid to and reoeived by the Company as capital sums on acoount of the purchase price of the Aconite shares. There does not seem to have been any point in these two agreements, which were apparently designed to produce a balance and were in fact omitted from the balance sheets of the Company except for a note which stated that no material surplus or deficiency was expected from the transactions.
It will be remembered that the payments to Aconite under the deed of covenant were expressed to be income payments, whereas the payments by Consolidated Investment Funds Ltd. for the Aconite shares were expressed to be instalments of a capital sum. Apart from the notes on the balance sheets which I have already mentioned, the only evidence about these two transactions is to be found in the ledger on one page headed "Shares in Aconite Investments Limited." There the two transactions are shown as balancing transactions and this is consistent with the notes in the balance sheets. On one side of the page are shown the covenanted payments by the Company to Aconite. and against them are set the instalment payments to the Company by Consolidated Investment Funds Ltd. That is to say that the books indicated that the two transactions were related and the Company's income obligations are shown as satisfied by the application of the capital sums received. If this be the true view then the annual payments were made out of capital sums not brought into charge to tax end this is the case for the Crown.
The net payments to Aconite were: 1958, £25,225; 1959, £28,000; 1960, £27,500. These payments were made under deduction of tax, the sums deducted being: 1956, £18,654. 15s. Od.; 1959, £20,028 lls. Od.; 1960, £16,789 19s. Od. These latter sums the Company claims to keep in its pocket while the Revenue claims that they are, as the books show them to be, sums deducted out of receipts not brought into charge to tax and must be accounted for accordingly. On the 3rd may, 1958 the directors submitted their report and accounts for the year ending 31st March, 1958. From these it appears that the net profit for the year was £26,725. Adding to this the balance already mentioned to the credit of the profit and loss account carried forward from the previous year – £4,449 – and a sum of £4,600, being his remuneration waived by the managing director, there is a total for the year of £35,774. Out of this dividends amounting to £34,349 were recommended and paid, leaving a balance to carry forward of £1,425. From the like sources for 1959 it appears that net profits amounted to £26,727, net dividends to £24,500, balance carried forward, £2,227. For 1960 the figures were, profits £30,984, dividends, £24,500, bela 7 poundnce carried forward, 6,484.
It is obvious that both sets of payments could not be made out of the current profits. It is well settled that where a company or an individual is in receipt in any year of sufficient assessable profits these may be treated as available in ordinary circumstances to pay annual sums and this entitles the company to deduct tax on making the payments, and that this is so oven though as a matter of bookkeeping the company is shown as making the payments out of capital. The...
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