Sommerfelds Ltd v Freeman
| Jurisdiction | England & Wales |
| Year | 1967 |
| Date | 1967 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Profits of trade - Compensation for breach of contract to supply stock-in-trade to company A - Company A's business sold to company B - Whether compensation a receipt of company B - Whether a capital or income receipt.
The Ministry of Supply contracted in 1948 to offer for sale to K Ltd. certain surplus war material manufactured by that company; in June 1950, in breach of the contract, it sold some of the material in the open market. Meanwhile in March 1950 K Ltd. had ceased to trade and sold its business as a going concern, with the goodwill and the benefit of all pending contracts, to the Appellant Company, its wholly-owned subsidiary. In 1951 the Appellant Company claimed redress from the Ministry, and, after negotiations turning on the amount of profit estimated to have been lost through the breach of contract, the Ministry in January 1952 paid £50,000 to K Ltd. by a cheque which the latter endorsed over to the Appellant Company. In the books of the two companies the £50,000 was treated as a loan, remaining outstanding, from K Ltd. to the Appellant.
The Appellant Company was assessed to income tax under Schedule D for the year 1953-54 on the footing that the said sum of £50,000 was a trading receipt of the year to 30th April 1952. On appeal, the Company contended (1) that the said sum belonged to K Ltd. and not to the Company; alternatively, (2) that it was not recoverable from K Ltd. by the Company, which was therefore not liable to be taxed on it; alternatively, (3) that it was a capital receipt, as being paid for the loss of (a) the contractual right violated by the breach of contract, or (b) a source from which circulating capital could have been obtained, or (c) an asset on which the profit-making organisation of the business was constructed, or (d) part of the initial assets of the Company's business. The Special Commissioners found that the sum in question belonged to the Appellant Company and was a revenue receipt.
Held, (1) that the £50,000 was part of the assets sold by K Ltd. to the Appellant Company and belonged in equity to the latter; (2) that, having been received by the Appellant Company, that sum was available to it, and the book entries should be disregarded; (3) that the sum represented compensation for loss of profit, and was a revenue receipt.
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 8th, 9th and 10th June 1964 Sommerfelds Ltd. (hereinafter called "the Appellant Company") appealed against the following assessments to income tax under Schedule D:
2. Shortly stated, the question for our decision was whether a sum of £50,000 paid by the Ministry of Supply in January 1952 by a cheque which was issued to K. J. & A. Sommerfeld Ltd., and endorsed over to the Appellant Company, should be included as a revenue receipt in computing the profits arising from the trade carried on by the latter Company for income tax purposes.
3. The following statement of facts was admitted between the parties.
(2) K. J. & A. Sommerfeld Ltd. was incorporated on 29th April 1943. The registered office of the company was then at the Cedars, High Street, Cowley, Middlesex, and in 1946 was moved to Trench Works, Wellington, Shropshire, where it has since remained. The nominal share capital of the company is £7,000, and the issued share capital is £7,000, divided into 2500 "A" ordinary shares of £1 each, 2500 "B" ordinary shares of £1 each and 2000 15 per cent. cumulative preference shares of £1 each. The shareholdings are as set out in para. (6).
(3) The company manufactured Sommerfeld track, which was invented by Mr. K. J. Sommerfeld and used extensively for landing grounds during the second world war. After the war the Ministry of Supply, in accordance with the provisions of a White Paper (Cmd. 6539) ["Government Surplus Stores- Plans for Disposal"], was required to offer for sale to K. J. & A. Sommerfeld Ltd. all unused track declared surplus.
(4) By letter dated 23rd May 1946 the Ministry of Supply offered all available unused track (approximately 26,513 tons) to K. J. & A. Sommerfeld Ltd. for £106,053, on the terms and conditions therein mentioned, which included Form CCC/Sales/1 (edition February 1946) entitled "Standard Conditions of Government Contracts for Sale of Goods". At the same time the Ministry of Supply stated that further declarations of surplus track and accessories were likely in future and the Department would be prepared to offer such further material to K. J. & A. Sommerfeld Ltd. This offer was accepted by K. J. & A. Sommerfeld Ltd. by letter dated 29th May 1946. Copies of these letters and the further correspondence hereinafter referred to are annexed hereto in appendix A(1).
(5) By letter dated 26th July 1946 a contract was made accordingly between K. J. & A. Sommerfeld Ltd. and the Ministry of Supply, and K. J. & A. Sommerfeld Ltd. purchased from the Ministry of Supply the then available surplus track (approximately 20,955 tons) for £83,818 18s. Condition 7 provided that in the event of further declaration of surplus material K. J. & A. Sommerfeld Ltd. would be given an opportunity to purchase on the terms set out in the contract.
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(6) Between 26th July 1946 and 23rd August 1947 there were seven purchases of surplus track and one or two minor adjustments of prices (see summary in appendix B(1) ). On each occasion the original price was adjusted, and at 23rd August 1947 the price stood at £143,249 12s. 11d. for purchases of approximately 35,818 tons. Letters from the Director of Disposals dated 3rd October 1946 and 18th October 1948 are typical of the procedure which was adopted. The payments made by K. J. & A. Sommerfeld Ltd. are set out in appendix C(1).
(7) By letters dated 11th and 14th October 1948 it was agreed between K. J. & A. Sommerfeld Ltd. and the Ministry of Supply that future purchases would be restricted to material arising at two specific depots, Long Marston and Grangemouth. The very substantial stock at these two depots which had previously been declared surplus had at that time been withdrawn by the War Office, and this agreement provided that in the event of this being redeclared surplus by the War Office from time to time then K. J. & A. Sommerfeld Ltd. would have the contractual right to purchase in accordance with the terms and at the prices laid down in the original contract. In a further letter, dated 18th October 1948, the Ministry of Supply made it clear that they could not commit themselves at this stage as to any possible future arisings of Sommerfeld track other than at Long Marston and Grangemouth as referred to in their letter of 11th October 1948.
(8) On 18th March 1950 K. J. & A. Sommerfeld ceased to trade, and by agreement of the same date amalgamated with the Appellant Company. The latter Company was originally incorporated on 14th September 1940 under the name of Mesh Steel Ltd. with its registered office at the Cedars, High Street, Cowley, Middlesex. In April 1946 the registered office of the Company was changed to Trench Works, Wellington, Shropshire. Mesh Steel Ltd. commenced trading as general engineers on 1st May 1948 and changed its name to Sommerfelds Ltd. on 18th March 1950. The said amalgamation was effected by purchasing the whole of the issued share capital in the Appellant Company (see copy of agreement made on 18th March 1950 in appendix D(1) ). By an agreement and an assignment, dated 19th March 1950 respectively, K. J. & A. Sommerfeld Ltd. sold the business as a going concern and assigned the goodwill thereof to the Appellant Company. Copies of this agreement and assignment are annexed hereto in appendices E and F(1). The share capital of the two companies immediately before and after 18th March 1950 was as follows:
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(9)
(10) Letters dated 6th April, 20th April, 25th April and 17th May 1950 passed between the Appellant Company and the Ministry of Supply. The Ministry had never been advised that K. J. & A. Sommerfeld Ltd. had ceased to trade or had amalgamated with and sold the business to the Appellant Company. Neither had any application been made by K. J. & A. Sommerfeld Ltd. to the Ministry under condition 1(3)(a) of the standard conditions of Government contracts for permission to assign the benefit of their contract to the Appellant Company or to any other individual firm or company.
(11) On 27th April 1950 the War Office notified the Ministry of Supply that some 9000 tons of Sommerfeld track at the Grangemouth depot was released as surplus. The Ministry of Supply omitted to offer this in accordance with the terms of the contract, and proceeded to offer it for sale by tender in the open market, and the track was subsequently sold on 28th June 1950 to the Motherwell Machinery Scrap Co. Ltd. in breach of the supply contract with K. J. & A. Sommerfeld Ltd.
(12) On 14th February 1951 the Appellant Company wrote to the Ministry of Supply requesting that this matter should be put right and saying that otherwise they would claim damages.
(13) As appears from letters dated 15th February, 19th February, 19th April, 3rd May, 4th May, 15th May, 22nd May, (with enclosures) and 23rd May 1951 which passed between the Ministry of Supply and the Appellant Company (copies of which are in appendix A), the Ministry did take action to put this matter right as follows: (i) It reacquired from Motherwell Machinery & Scrap Co. Ltd. 2000 tons sold at Grangemouth, and resold this to the Appellant Company on the same terms and conditions as provided by the 1946 contract. (ii) It sold to the Appellant Company 950 tons stored at Paddock Wood (on the same terms), to which it was not entitled under any contract...
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