Pott's Executors v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judge | Lord Simonds,Lord Normand,Lord Oaksey,Lord Morton of Henryton,Lord MacDermott |
| Judgment Date | 14 December 1950 |
| Judgment citation (vLex) | [1950] UKHL J1214-1 |
| Date | 14 December 1950 |
| Court | House of Lords |
[1950] UKHL J1214-1
House of Lords
Lord Simonds
Lord Normand
Lord Oaksey
Lord Morton of Henryton
Lord MacDermott
Upon Report from the Appellate Committee, to whom was referred the Cause Executors of G. W. Potts against Commissioners of Inland Revenue, that the Committee had heard Counsel as well on Monday the 20th, as on Tuesday the 21st, days of November last, upon the Petition and Appeal of Group Captain David Fowler McIntyre, of The Cushats, by Ayr, Scotland, Thomas Stuart Overy and Charles Anthony Fisher, both of 3 Finch Lane, in the City of London, the Executors of George William Potts deceased, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal of the 26th of July 1949, might be reviewed before His Majesty the King, in His 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 His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of the Commissioners of Inland Revenue, 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 His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 26th day of July 1949, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Judgment of the Honourable Mr. Justice Singleton of the 26th day of July 1948, thereby Reversed, be, and the same is hereby, Restored: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellants the Costs incurred by them in the Court of Appeal, and also the Costs incurred by them in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the King's Bench Division of the High Court of Justice, to do therein as shall be just and consistent with this Judgment.
My Lords,
This appeal raises a question upon section 40 of the Finance Act, 1938, a section which has not previously been considered in this House. Before I refer to its provisions, I will state the relevant facts.
The late G. W. Potts was until April, 1939, the owner of substantially the whole of the share capital of G. W. Potts Ltd. which consisted of 50,000 shares of £1 each. He was also governing director of the company receiving each year £5,000 as remuneration and £1,500 for expenses. He had for many years before 1939 a current account with the company in which he was credited with his remuneration and expenses and debited with payments made by the company at his request, sometimes to third parties and sometimes to himself.
In the year 1936 he formed the Carron Trust Ltd., a trust company with a capital of £100 divided into 100 shares of £1 each. He held all these shares by himself or his nominees but was not a director of the company. On the 31st March, 1939, he, as settlor, executed a settlement of which Carron Trust Ltd. was trustee and paid to that company as trustee the sum of £150,000 upon trust to be invested at the trustee's sole discretion and to be held (subject to certain powers therein mentioned) upon trust for accumulation for the benefit of four named infant grandchildren of the settlor in the manner therein mentioned. On the 25th April, 1939, the trustee company as trustee of the settlement bought from the settlor or his nominees 49,999 fully paid shares of £1 each in G. W. Potts Ltd. at £3 each. It has been throughout admitted that this company was a "body corporate connected with the settlement" within the meaning of section 40 (3) of the Finance Act, 1938.
I have said that the settlor had a current account with the company. It appears that at the end of the year 1935 after being debited with various sums, including subscriptions to charities, payments of tax and weekly cash drawings, he was in credit in the sum of £2,612 4s. 7d. which was carried forward to the year 1936. At the end of 1936 he was similarly in credit in the sum of £1,377; at the end of 1937 the account was exactly square; at the end of 1938 he had a credit of £1,316, but at the end of 1939, largely owing to the payment by the company on his behalf of a large sum for surtax, he was in debit in the sum of £8,850. At the end of 1940 the account was again square, but during that year the company had paid very large sums on his behalf, including £28,000 for surtax, and he was largely in debit until on the 23rd December, 1940, he paid the sum of £32,570 to the company. On the same day he resigned his directorship of the company. He was at all material times a rich man and had ample liquid resources to pay all that he owed to the company. It has not been suggested that the transactions between himself and the company were in any way colourable or a device for the evasion of tax. The only other fact that I need mention is that the company, whose primary business was that of meat salesmen. had power under clause 3 (I) of its Memorandum of Association to make advances as well to any director as to customers and others with or without security and upon such terms as the company might approve and generally to act as bankers for customers and others, and under clause 3 (L) to invest and deal with the moneys of the company not immediately required in or upon such securities and in such manner as might from time to time be determined in the absolute discretion of the directors. I mention these powers because upon them and particularly the first of them the Respondents relied.
It was under these circumstances that, the settlor having then died, additional assessments to surtax were made upon his executors in the sum of £50,107 for the year ending the 5th April, 1940, and in the sum of £19,924 for that ending the 5th April, 1941. These figures were subsequently adjusted and became respectively £55,383 and £5,426 and, after a further adjustment, £50,583 and £5,470. The assessments were made upon the footing that these sums represented capital sums paid directly or indirectly to the settlor by the trustee of the settlement. It is time then to turn to the section which is said to have such a result. No question arises in regard to the quantum of the assessment, the only matter in dispute being whether the sums, with which the settlor was credited in the current account already mentioned, were capital sums upon which the section operated. It will be necessary therefore to refer to a few provisions only of the section.
Section 40 of the Finance Act, 1938, so far as relevant provides as follows:
"(1) Any capital sum paid directly or indirectly in any relevant year of assessment by the trustees of a settlement to which this section applies to the settlor shall—
(a) to the extent to which the amount of that sum falls within the amount of income available up to the end of that year, be treated for all the purposes of the Income Tax Acts as the income of the settlor for that year;
* * * * *
(3) for the purpose of this section, any capital sum paid to the settlor in any year of assessment by any body corporate connected with the settlement in that year shall be treated as having been paid by the trustees of the settlement in that year.
* * * * *
(5) … in this section—
(a) the expression 'capital sum' means
(i) any sum paid by way of loan or repayment of a loan; and
(ii) any other sum paid otherwise than as income, being a sum which is not paid for full consideration in money or money's worth; …"
It is, as I have already said, admitted that the company is a "body corporate connected with the settlement" and it follows that the validity of the assessments to which I have referred depends upon the nature of the relevant transactions between the settlor and the company.
There was in the first place some argument whether the words "directly or indirectly" which occur in subsection (1) are to be read into subsection (3). In my opinion they clearly are, for the purpose and effect of that subsection are merely to substitute payment by a body corporate connected with the settlement for payment by the trustees of the settlement. In other respects the measure of liability is intended to be the same.
The question then is whether the sums with which the settlor was debited in current account with the company were capital sums paid directly or indirectly by the company to him. This they would be if they were sums paid to him by way of loan or repayment of a loan, or were sums paid to him otherwise than as income which were not paid for full consideration in money or money's worth. These are true alternatives and I will consider the latter first. I cannot doubt, and the matter was not seriously contested by the Respondents, that the sums in question having been paid at the request of the settlor and upon his promise express or implied to repay, there was full consideration given by the settlor for the payment. Some suggestion was made that, inasmuch as there was no provision for payment of interest, there was not full consideration. But that was an arrangement which was no doubt convenient to both parties. Though latterly the company was largely in credit, in the earlier years it had been the other way about and no interest was charged against the company. In my opinion this contention fails and I turn to the question whether these sums were paid by way of loan directly or indirectly by the company to the settlor. The Special Commissioners held that the sums in question were "sums paid by way of loan". They thought that if the company was...
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