Royal Mutual Benefit Building Society v Walker
| Jurisdiction | England & Wales |
| Judgment Date | 02 May 1968 |
| Date | 02 May 1968 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax - Building society - Building society arrangements - Computation of profit chargeable to tax at standard rate - Profit on sale of property - Property originally mortgaged to society - Equity of redemption purchased before decision to sell - Whether realisation of mortgaged property - Whether property an investment - Whether retained as an investment - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2 c. 10), s. 445.
The Appellant Society was incorporated in 1897 under the Building Societies Act 1874. In 1935 control was acquired by a syndicate. In November 1940 the Registrar of Friendly Societies prohibited the invitation of further subscriptions, and in 1941, when the members discovered that large sums were outstanding on doubtful security, a new board was elected, headed by one B.
In 1937 the Society acquired, as security for a loan of £225,000, a charge by way of mortgage on the 99-year lease of a newly erected block of mansion flats, belonging to a company controlled by the syndicate. Following litigation, the Official Receiver, as liquidator of that company, sold the lease to the Society in 1949 for £100, on the Society's undertaking to pay £25,000, plus £18,000 for fixtures, etc., for the benefit of the company's debenture-holders. From 1949 to 1953 B would have been willing to resell the lease if he could have obtained a sufficient price. Meanwhile he was successfully managing the flats on behalf of the Society and gradually came to see them as the means of restoring the Society's financial position. Consequently he resisted pressure from the Registrar of Friendly Societies to sell the flats in compliance with the proviso to s. 13, Building Societies Act 1874, on the ground that a sale was not conveniently practicable within the meaning of that provision. In consequence of s. 60, Building Societies Act 1960, the board of the Society decided in September 1960 that the flats must be sold, and they were in fact sold in August 1961, with the furniture and equipment, for £1,025,000. The Society had persuaded the Official Receiver to defer the formal assignment of the lease until 1959 on the plea of saving stamp duty in the event of resale. The mortgage was not formally discharged until February 1960. The Society's balance sheets up to 1958 included the flats in properties mortgaged to it, and for 1959 in properties, formerly so mortgaged, held pending realisation.
By virtue of arrangements under s. 445, Income Tax Act 1952, the Society was chargeable to income tax at the standard rate for the year 1961-62 on its "whole profit", computed in accordance with the principles of Case I of Schedule D. The arrangements provided that "profits or losses arising on the realisation of properties mortgaged to the Society (provided that the properties have not been retained by the Society as investments) shall be included in the computation but profits or losses arising on the realisation of investments shall be excluded". On appeal against an assessment to income tax for 1961-62 taking account of the profit on the sale of the flats, the Society contended that the original advance of £225,000 was an investment of its funds; alternatively, that after the purchase of the equity of redemption in 1949 the property had been retained as an investment. The Special Commissioners rejected both contentions; they found that the Society had retained the property not as an investment but to realise it at the best price.
In the High Court it was further contended for the Society that the sale was not, within the meaning of the arrangements, the realisation of a property mortgaged to it.
Held, (1) that, since in equity the property ceased to be mortgaged in 1949, and the process of realisation did not begin until 1960, the sale was not the realisation of a property mortgaged to the Society;
(2) that the original advance was not an investment, so that the sale was not "the realisation of an investment";
(3) that the property had since 1949 been "retained as an investment".
Stated under 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 9th, 10th, 11th, 12th and 13th May 1966 Royal Mutual Benefit Building Society (hereinafter called "the Society") appealed against an assessment to income tax made upon it for the year 1961-62 as follows:
In respect of whole profit, in the sum of £75,000
In respect of distributions, in the sum of £40,000
The said assessment was made under s. 445 of the Income Tax Act 1952 pursuant to arrangements (hereinafter called "the Arrangements") entered into thereunder by the Commissioners of Inland Revenue and the Society (exhibit A).
2. The question for our decision concerned the computation of the whole profit of the Society for its basis period (i.e., the year ended 31st December 1961) under the provisions of para. 3 of the Arrangements. Shortly stated, the question was whether a surplus arising on the sale by the Society in August 1961 of its leasehold interest in Nell Gwynn House, Chelsea (hereinafter called "Nell Gwynn House"), should be included in the whole profit.
(2) The following witnesses gave evidence before us: Mr. J. Morland, chartered accountant, who from September 1949 until July 1965 was accountant on the Society's staff; Mr. A. O. Lewis, solicitor, of Messrs. Lewis & Dick, the Society's former legal advisers; Mr. N. S. Butterfield, secretary of the Society; Mr. A. J. Taffs, chartered accountant (a partner in Messrs. Barton, Mayhew & Co.), the Society's auditor.
(3) The documents listed in the schedule hereto(1) were proved or admitted before us; copies of such of the documents as are not annexed hereto as exhibits(1) are available for inspection by the Court if required.
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(4) As a result of the evidence both oral and documentary we find the facts set out in paras. 4 to 23 below.
(2) The Society was established in 1865 as an unincorporated body under the Benefit Building Societies Act 1836, and in 1897 was incorporated under the Building Societies Act 1874.
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(3) Its rules (exhibit B) provide, inter alia:
"2. The object of the Society (which is permanent) shall be to raise, by the subscriptions of the members, a fund for making advances to members out of the funds of the Society, upon security of freehold or lease-hold estate, by way of mortgage."
"14. All moneys not immediately required for the purposes of the Society shall be invested as the Board shall direct, in the name of the Society, in any manner authorised by the Building Societies Acts."
"18. Any sum which is available out of profits after the payment of dividends shall, at the discretion of the Directors, be placed to the credit of the General Reserve Fund."
(4)
(5) The Building Societies Act 1874 provides, by s. 13:
13. Any number of persons may establish a society under this Act, either terminating or permanent, for the purpose of raising by the subscriptions of the members a stock or fund for making advances to members out of the funds of the society upon security of freehold, copyhold, or leasehold estate, by way of mortgage; and any society under this Act shall, so far as is necessary for the said purpose, have power to hold land with the right of foreclosure, and may from time to time raise funds by the issue of shares of one or more denominations, either paid up in full or to be paid by periodical or other subscriptions, and with or without accumulating interest, and may repay such funds when no longer required for the purposes of the society: Provided always, that any land to which any such society may become absolutely entitled by foreclosure, or by surrender, or other extinguishment of the right of redemption, shall as soon afterwards as may be conveniently practicable be sold or converted into money.
(6) (No penalty was provided for the infringement of this proviso, until the passing of s. 60 of the Building Societies Act 1960 which came into force 1st October 1960.)
By s. 25, that Act provides: "25. Any society under this Act may from time to time, as the rules permit, invest any portion of the funds of the society not immediately required for its purposes, upon real or leasehold securities, or in the public funds, or in…"
(7) By s. 37 a society was given power to purchase or lease buildings, or purchase or lease land for erecting buildings, for conducting business.
(8) A society under the said Act had no further or other power to hold freehold or leasehold land.
(2) Up to 1935 the Society carried on its business in a modest way, having about 32 members and up to nine advances outstanding. In April 1935 its share capital was £2,300, and its assets £1,937 secured by nine mortgages, £300 in the Post Office Savings Bank and £146 cash.
(3) In 1935 a syndicate acquired the shares, a new board was appointed and extensive advertising was done. Between 1935 and 1939 nearly £1,100,000 was subscribed, and in August 1939 the Registrar of Friendly Societies (herein-after called "the Registrar"), under s. 11(3) of the Prevention of Fraud (Investments) Act 1939, ordered an examination. In 1940 he prohibited the Society from inviting further subscriptions. This prohibition remained effective until late in 1961.
(4) Early in 1941 it came to the notice of the Society's members that about £800,000 had been lent to one group of interconnected companies controlled by the syndicate and about £500,000 had been lent on mortgage without independent valuations; in consequence, in March 1941 the directors were removed and a new board was appointed, with Mr. Richard Burley as chairman.
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(5) During the years 1936 to 1938, in addition to such loans to companies, the Society continued to make small advances to...
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