The Commissioners of Inland Revenue v John Blott
| Jurisdiction | England & Wales |
| Judgment Date | 03 June 1921 |
| Date | 03 June 1921 |
| Court | King's Bench Division |
NO. 436.-IN THE HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).-
COURT OF APPEAL.-
HOUSE OF LORDS.-
Super-tax. - Total Income. - Shareholder in Limited Company is allotted fully paid-up shares in satisfaction of bonus declared by Company. - Finance (1909-10) Act, 1910 (10 Edw. 7. c. 8), Section 66(2).
The Respondent in each of these cases was a shareholder in a Limited Company, which, under the authority of its Articles of Association, had declared a bonus out of its undivided profits and, in satisfaction of such bonus, had allotted to its shareholders as fully paid up certain ordinary shares forming part of the Company's authorised but unissued capital.
The shareholders had no option to receive cash in lieu of shares in satisfaction of the bonus.
Held, (Lords Dunedin and Sumner dissenting), that the shares credited to the Respondent in respect of the bonus, being distributed by the Company as capital, were not income in the hands of the Respondent, which he was required to include in his return of total income from all sources for the purposes of Super-tax assessment.
(I.)
STATED under the Finance (1909-10) Act, 1910, Section 72(6), and the Taxes Management Act, 1880, Section 59, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a Meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 13th May, 1918, at Windsor House, Kingsway, London, W.C. 2, for the purpose of hearing Appeals, Mr. John Blott, of 38, Villiers Avenue, Surbiton (hereinafter called the Respondent), appealed against additional assessments to Super-tax in the sum of £500 for the year ending 5th April, 1916, and £750 for the year ending 5th April, 1917, made upon him under the provisions of the Finance (1909-10) Act, 1910, and subsequent enactments.
2. The Respondent is a shareholder in the Company of Hepburn, Gale and Ross, Limited (hereinafter referred to as the Company), being a company registered and established under the Acts relating to Public Companies. The
Memorandum and Articles of Association of the Company are annexed to this Case, as is also a copy of a Special Resolution duly passed and confirmed at Extraordinary General Meetings of the Company held on 18th February, 1918, and 5th March, 1918.(1)By the Company's Articles it is provided inter alia as follows:-
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Art. 50. The Company may from time to time, whether all the "shares for the time being authorised shall have been issued, or all the "shares for the time being issued shall have been fully called up or not, "by Special Resolution increase its capital by the creation and issue of "new shares, such aggregate increase to be of such amount and to be "divided into shares of such respective amounts as the Company by the "Special Resolution authorising such increase directs, but no shares "shall at any time be issued on terms which shall in any way prejudice "the preference given by these Articles to the original Preference Shares.
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Art. 123. The profits of the Company available for dividend shall "be applied first in payment of a fixed cumulative preferential dividend "at the rate of five per cent. per annum upon the amounts credited as "paid up on the First Preference Shares of the Company; secondly, in "payment of the dividend payable upon any further or other Preference "Shares, created or hereafter to be created by the Company in accordance "with the terms on which the same may be created and issued, and "subject thereto such profits shall be applied in payment of dividends "upon the amounts credited as paid up on the Ordinary Shares of the "Company.
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Art. 127. Any General Meeting declaring a dividend may direct "payment of such dividend wholly or in part by the distribution of specific "assets, and in particular of paid-up shares of the Company or paid-up "shares of any other company, and the Directors shall give effect to "such Resolution, and where any difficulty arises in regard to the distribution, "they may settle the same as they think expedient, and in particular "may issue fractional certificates, and may fix the value for distribution "of such specific assets, or any part thereof, and may determine "that cash payments shall be made to any members upon the footing "of the value so fixed, in order to adjust the rights of all parties, and may "vest any such specific assets in trustees upon such trusts for the persons "entitled to the dividend as may seem expedient to the Directors. Where "requisite, a proper contract shall be filed in accordance with Section 88 "of the Companies (Consolidation) Act, 1908, and the Directors may "appoint any person to sign such contract on behalf of the persons entitled "to the dividend, and such appointment shall be effective.
Art. 128. The Directors may, before recommending any dividend, "set aside out of the profits of the Company such sum as they think proper "as a reserve fund, which shall at the discretion of the Directors be applicable "for meeting contingencies, for the gradual liquidation of any debt "or liability of the Company, or for repairing or maintaining the works "connected with the business of the Company, or shall be as to the whole "or in part applicable for equalising dividends or for distribution by way "of bonus among the Members of the Company for the time being, on "such terms and in such manner as the Company in General Meeting "shall from time to time determine.
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3. The Company's accounts are made up to 31st December every year, and its profits are assessed to Income Tax.
For the year to 31st December, 1914, the Company made a profit of £58,851 10s. 10d., which, together with the sum of £3,051 10s. 5d. carried forward from the previous year, made a total available for distribution of £61,903 1s.3d. dividends on the Preference and Ordinary Shares in the Company amounting to £13,288 8s. 0d. were paid in cash out of this amount, £10,000 was placed to the credit of General Reserve Fund, and upon the recommendation of the Directors a bonus was also declared at the rate of 331/3 per cent. on the Ordinary Shares, which the Directors were authorised to satisfy by the distribution of unissued Second Preference Shares of £1 each, credited as fully paid.
Under the Resolution of the Shareholders dated 8th February, 1915, no provision was made for the payment of the bonus in cash in any case except so far as such distribution would otherwise involve (which it did not in the Respondent's case) the issue of fractional Certificates for an amount less than £1. An Agreement dated 8th February, 1915, between the Company and Mr. Samuel Joseph Bradford, on behalf of the Shareholders, was entered into for the purpose of carrying out the distribution.
Similarly, for the year to 31st December, 1915, the Company made a profit of £249,091 14s. 6d., which, together with the sum of £4,881 6s. 7d. carried forward from the previous year, made a total available for distribution of £253,973 1s. 1d. Out of this amount £75,000 was carried to General Reserve Fund, £25,500 was paid in cash as Dividends on Ordinary and Preference Shares, and Second Preference Shares of £50,000 (face value) were distributed under the terms of a Resolution dated 7th February, 1916, the distribution being carried out under an Agreement dated 10th February, 1916, between the Company and Mr. Charles Walker on behalf of the Shareholders.
Copies of the Directors' reports and accounts for the years 1914 and 1915, of the Resolutions dated 8th February, 1915, and 7th February, 1916, and of the Agreements dated 8th February, 1915, and 10th February, 1916, are annexed and form part of this Case.(1)
4. In the year ended 5th April, 1914, the Respondent received, as his share of the said distribution, shares of the face value of £500, and in the year ended 5th April, 1915, shares of the face value of £750. As these amounts had not been included in the first assessments made upon him to Super-tax for the years ending 5th April, 1916, and 5th April, 1917, the additional assessments which form the subject of this appeal were made in respect thereof.
At the hearing of the Appeal no question was raised as to the amount of the Assessment nor as to the value of the shares distributed, beyond a contention on behalf of the Respondent that the issue of additional shares to him in proportion to his existing holding automatically reduced the value of each individual share held.
5. In these circumstances Counsel on behalf of the Respondent contended-
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(2) That by reference to the decision in the Case of Bouch v.Sproule (1887 12 A.C. 385) the distributions of shares must be treated as distributions of capital and not of income;
(3) That there had not been any actual payment by the Company of any sums receivable by the Appellant which were taxable for Super-tax within the meaning of the Finance (1909-10) Act, 1910, Section 66(2)(d); and
(4) That by reference to previous decisions by the Special Commissioners of Income Tax the assessments should be discharged.
6. On behalf of the Commissioners of Inland Revenue it was contended (inter alia)-
(2) That the rule laid down in Bouch v. Sproule for the guidance of Trustees in distinguishing income belonging to persons with life interests from capital forming part of the corpus of the estate had no application in the present case;
(3) That a distribution of shares was a distribution of money's worth taxable for Super-tax; and
(4) That in the present case the rule of Bouch v.Sproule would not in any event apply, and that previous decisions of the Special Commissioners of Income Tax were therefore inapplicable.
7. We the Commissioners who heard the Appeal gave our determination as follows:-
In our opinion the decision in Bouch v. Sproule where the point at "issue was as to the...
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