Potel v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 03 December 1970 |
| Date | 03 December 1970 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Surtax - Total income - Income attributable to a period exceeding a year assessed to surtax in one year - Ordinary dividend - Exclusion of relief for 1965-66 - Interim dividend for 15-month period declared in 1964-65 and paid in 1965-66 - Whether income of 1964-65 or 1965-66 -Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 184, 238 and 524(3)(a); Finance Act 1966 (c. 18), s. 24.
The Appellants were the holders of ordinary shares and "A" convertible shares in S Ltd. The "A" shares ranked initially as deferred shares, but if dividends were paid for any period at the same rate on the ordinary shares and the "A" shares the "A" shares were to be converted into ordinary shares. In March 1965 the board of S Ltd. were minded to acquire the share capital of another company which made up its accounts annually to 31st March and to adopt the same accounting date for S Ltd. On 31st March 1965 the board passed a number of resolutions, including one to send a circular letter to the shareholders on 3rd April and one declaring "an interim dividend of 10 per cent. less Income Tax, as stated in the circular letter" on the ordinary shares and a like dividend on the "A" shares. The circular letter stated (inter alia) that "The Directors intend to prepare accounts of the Company for a fifteen month period to 31st March 1965…your Directors are pleased to declare an interim dividend of 10 per cent. less tax payable on 29th May 1965…It is also your Directors' intention that all the "A" Convertible Shares should now be converted and they therefore declare an interim dividend of 10 per cent. on these shares…" The dividends were paid on 29th May 1965.
The Appellants were assessed to surtax for the year 1965-66 on the footing that the interim dividends for the said period of 15 months formed part of their total income for that year, so that by virtue of s. 24, Finance Act 1966, relief under s. 238, Income Tax Act 1952, was not allowable. On appeal, the Appellants contended that the words "payable on 29th May 1965" should not be written into the resolution declaring the dividends, and that they became due when declared on 31st March 1965, so as to form part of their total income for 1964-65. For the Crown it was contended that the dividends were not a debt due before 29th May 1965. The Special Commissioners dismissed the appeals.
Held, that the dividends formed part of the Appellants' total income for 1965-66, because
(1) the resolution declaring them should be read as providing that they were payable on 29th May 1965, and
(2) in any event a resolution to pay an interim dividend did not create a debt before the dividend was paid.
(1) Potel v. Commissioners of Inland Revenue
CASE
Stated under the Taxes Management Act 1970, s. 56, 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 15th and 16th October 1969, Sion Potel (hereinafter called "the Appellant") appealed against an assessment to surtax for the year 1965-66 in the amount of £7,200.
2. Shortly stated, the question for our decision was whether interim dividends declared and paid in circumstances hereinafter described should form part of the Appellant's total income for surtax purposes (a) for the year 1964-65, so as to qualify for relief under s. 238 of the Income Tax Act 1952 (as contended on behalf of the Appellant) or (b) for the year 1965-66, in which case no relief would be available under the said s. 238 (as contended on behalf of the Commissioners of Inland Revenue).
3. The following documents were proved or admitted before us:
(2) Copy memorandum and articles of association of Star (Greater London) Holdings Ltd. (hereinafter called "the company").
(3) Copy minutes of meeting of directors of the company (31st March 1965).
(4) Copy circular letter dated 3rd April 1965 to shareholders of the company.
(5) Extract from Appellant's statement of income for year ending 5th April 1966.
(6) Copy letter dated 30th September 1969 from Solicitor of Inland Revenue to Appellant's solicitors.
Copies of the above are not annexed hereto as exhibits but are available for inspection by the Court if required.
4. The following facts were admitted between the parties:
(2) The Appellant was at all material times the holder of certain ordinary and "A" convertible shares of the company.
(3) The company was incorporated on 26th October 1959 as a private company limited by shares, having as its main object the purchase of land for investment.
(4) The following articles of the company's articles of association were material for the purposes of this Case:
5 (B) (ii) Upon the declaration and payment of dividends for any year or other period on the Convertible Shares at a rate equal to that declared and paid for the same year or other period on all the Ordinary Shares for the time being issued the Convertible Shares shall thereupon be converted into Ordinary Shares and shall thereupon rank pari passu in all respects with the existing Ordinary Shares.
125. The Directors may from time to time pay to the Members, or any class of Members, such Interim Dividends as appear to the Directors to be justified by the profits of the Company.
(5)
(6) The minutes of a meeting of the directors of the company held on 31st March 1965 read as follows:
1. It Was Resolved that the Company should forthwith enter into an agreement with Laurie Peter Marsh, J.L.C. Investments Limited, Limited, George William Edward Fortune and Eric Alfred Wakefield for the acquisition by the Company of the whole of the issued share capital of John Laurie & Co. Limited on the terms of the Agreement which had been approved by the Company's Solicitors and is now produced and approved and that the Common Seal of the Company be affixed thereto.
2. It Was Resolved that a circular letter to shareholders of the Company in the form produced to and carefully considered by the Board be approved and despatched to shareholders on the 3rd April 1965.
3. It Was Resolved that the Company's Brokers, Messrs. Gow & Parsons be and they are hereby instructed to apply to The Stock Exchange London for permission to deal in and for quotation of the further 850,000 Ordinary Shares of 4s. each in the capital of the Company to be issued as the consideration for the acquisition of John Laurie & Co. Limited and that the Secretary be and he is hereby authorised to sign the appropriate Stock Exchange forms C.A. and G.U.
4. It Was Resolved that an Extraordinary General Meeting of the Company be convened for the purpose of passing the Resolutions set out in the form of Notice which was then produced by the Secretary and approved and that such Notice be despatched to all the shareholders on the 3rd April 1965.
5. It Was Resolved that an interim dividend of 10 per cent. less Income Tax, as stated in the circular letter referred to in Item 2 above, be and is hereby declared on the Ordinary Shares and it was also Resolved that a like dividend be and is hereby declared on all the "A" Convertible Shares, excluding the latest issue of 25,000 on the 5th March 1965.
(7) The circular letter dated 3rd April 1965 referred to in the said resolution 2 contained the following paragraphs material to this Case:
The Directors intend to prepare accounts of the Company and its subsidiaries for a fifteen month period to 31st March 1965, as this is a more convenient accounting date and also coincides with the date already adopted by the Laurie Group. Subsequent accounts will be prepared to 31st March of each year.
It is anticipated that the rental income for the fifteen months ended 31st March 1965 will exceed £200,000 (year ended 31st December 1963 £106,283). The net profit for that period before taxation which includes approximately £9,600 gross dividends received on a recent investment in The Cranston London Hotels Company Limited is estimated to be £60,000 (year ended 31st December 1963 £30,730). On the basis of these figures your Directors are pleased to declare an interim dividend of 10 per cent. less tax payable on 29th May 1965, and will recommend a final dividend of 3 per cent. payable on or about 31st October 1965 (year ended 31st December 1963 9 per...
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