Thomson (HM Inspector of Taxes) v Gurneville Securities Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 21 October 1971 |
| Date | 21 October 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Loss in trade - Dealer in securities - Dividend-stripping - Shares acquired as part of tax avoidance scheme - Whether stock-in-trade - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s.341.
At the beginning of 1954 the C group included 102 property companies owning properties of market value much exceeding the book values, and an investment-holding company called B.I. Ltd. The Respondent Company and the companies called B.P. Ltd. and C Ltd. hereinafter mentioned were formed in pursuance of a scheme devised by one S, a director of S Ltd. and other companies in the S group, with the object that (a) B.P. Ltd., a property-dealing company, should dispose by way of trade of the properties of the 102 property companies, (b) B.P. Ltd. should cease to trade just before 5th April 1958, so that the bulk of its large profits in its accounting year to 7th May 1956 would not be taken into account for the purposes of assessment to income tax, (c) virtually all the profits earned by B.P. Ltd. should be paid as dividends to B.I. Ltd., which would in turn pass them on as dividends to the Respondent Company, (d) the Respondent Company, as a share-dealing company, should incur a loss through writing down the value of its shareholding in B.I. Ltd. owing to the payment of the dividends, (e) the Company should claim repayment of income tax in respect of the loss by reference to its income from dividends, (f) the transaction should show a commercial profit apart from any fiscal advantage.
B.P. Ltd. was incorporated in April 1954 as a wholly-owned subsidiary of B.I. Ltd., with the object of dealing in property. It commenced trading on 7th May 1954 and purchased the properties of the 102 companies above mentioned at book values. In the year to 7th May 1956 it made profits of £1,171,847, largely through selling the properties to C Ltd., which was formed on 28th February 1956 as a member of the C group. B.P. Ltd. ceased trading on 3rd April 1958. The purchase by C Ltd. was financed by advances secured on money paid by the Respondent Company as mentioned below.
The Respondent Company was incorporated in March 1954 as a wholly-owned subsidiary of S Ltd., with the object of dealing in shares, and commenced trading on 1st December 1955. In the period 1st December 1955 to 31st March 1957 it bought eight parcels of investments quoted on the London stock exchange at a total cost of £3,193, and sold four of them for a net profit of £27, as well as purchasing the share capital of B.I. Ltd. as mentioned below. In the year to
5th April 1958 it made purchases of £115,851 and sales of £66,061. By an agreement dated 23rd December 1955, providing inter alia for continued representation of the vendors on the board of B.I. Ltd., the Company agreed to buy the whole issued share capital of B.I. Ltd. (the parent of B.P. Ltd.) for £16,803 plus a supplement equal to 95 per cent. of the excess net asset value (i.e. excess of market over book value) computed as at 7th May 1956, the next accounting date of B.I. Ltd. Completion of the sale took place on 30th December 1955. An agreement dated 4th May 1956 provided that the supplement should be quantified at £1,769,000. This sum was paid to a stakeholder, with the condition that £1,611,434 should be used to support an overdraft of that amount for C Ltd. to enable it to make the purchase from B.P. Ltd. above mentioned, which was carried out on the same day, 4th May 1956On 4th April 1957 and 1st April 1958 respectively the Company received net payments from B.I. Ltd. of £682,761 in respect of a gross dividend of £1,187,412 and £289,851 in respect of an alleged gross dividend of £504,090 (which, however, was derived from a net dividend from B.P. Ltd. in excess of that company's aggregate net profits after deducting net dividends already paid). On each occasion the value of its holding in B.I. Ltd. was written down by the amount of the net payment. On 12th March 1962 the Company sold its holding in B.I. Ltd. and realised £519,450 after charging expenses. Its net cash surplus on the transactions in the shares in B.I. Ltd., apart from any tax repayment in respect of losses, was £90,996.
On appeal against the rejection of the Company's claims to relief under s.341, Income Tax Act 1952, in respect of trading losses in the years 1956-57 and 1957-58, it was contended for the Crown, inter alia, that the shares in B.I. Ltd. were not purchased as stock-in-trade; alternatively, that the tax which B.P. Ltd. was entitled to deduct from dividends could not exceed tax on gross dividends equal to its total net profits before tax. The Special Commissioners found, bearing in mind the opinions delivered in J.P. Harrison (Watford) Ltd. v. Griffiths 40 T.C. 281; [1963] A.C. 1, that the transaction in the shares of B.I. Ltd. formed part of the Company's trade; but they held that B.P. Ltd. was not entitled to deduct tax from dividends in excess of its t otal net profits before payment of tax.
Held, in the Chancery Division, that the whole of the so-called net dividend received in 1957-58 must be brought into account as a trading receipt.
Johns v. Wirsal Securities Ltd. TAXWLR43 T.C. 629; [1966] 1 W.L.R. 462 followed
Held, in the House of Lords, that the transactions relating to the acquisition and sale of the shares of B.I. Ltd. were not trading transactions in the course of the trade of a dealer in shares.
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 7th, 8th, 9th, and 10th December 1964 and 20th May 1965, Gurneville Securities Ltd. (hereinafter called "G.S.") applied under s. 341 of the Income Tax Act 1952 for an adjustment of its liability by reference to losses alleged to have been sustained in the trade carried on by it in each of the income tax years 1956-57 and 1957-58, ended 5th April 1957 and 5th April 1958 respectively.
2. Shortly stated, the questions for our decision were:
(a) for each of the years to which the application related, whether the transactions entered into by G.S. in relation to the shares of Bishopsgate Investment Co. Ltd. (hereinafter called "B.I.") formed part of the trade of share dealing admittedly carried on at all material times by the former company;
(b) for the year 1957-58, (i) whether Bishopsgate Properties Ltd. (hereinafter called "B.P.") was entitled under s. 184 of the Income Tax Act 1952 to deduct income tax of £221,000 from the dividend of £520 per share which it paid on its 1000 issued shares on 1st April 1958; and (ii) what was the proper treatment of the dividend payment received by G.S. from B.I. on 1st April 1958 in computing the loss sustained by G.S. in the year 1957-58.
3. The following witnesses gave evidence before us: David George Innes A.C.A; Ronald Harry Clements F.C.A., a partner in the firm of Clifford Bliss & Co., auditors to G.S; Robert Cyprian Hope, solicitor, a partner in the firm of Brian Sandelson & Co.; Maurice Stapleton Barker F.C.A., a partner in Barton, Mayhew & Co., auditors to B.I. and B.P.; Johann Ferdinand Beer, solicitor to G.S. from January 1956; Brian Henry Sandelson, solicitor, a director of G.S; Edward Lawson F.C.A., Principal Advisory Accountant to the Board of Inland Revenue.
4. The following documents, all of which are attached to and form part of this Case(1), were proved or admitted before us:
(2) Memorandum and articles of association of G.S.
(3) The following accounts relating to G.S.: balance sheet at 31st March 1957; profit and loss account for the period from 1st December 1955 to 31st March 1957, and schedule of stocks and shares at 31st March 1957; profit and loss account for the five days ended 5th April 1957, with balance sheet as at that date; and profit and loss accounts for each of the five years ended 5th April 1962, together with relevant balance sheets.
(4) A bundle of correspondence.
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(5) Schedule of securities purchased and sold by G.S. from 1st December 1955.
(4A) Schedule of some of the aforesaid purchases and sales showing dates of purchase and sale.
(6) Schedule of deeds and documents relating to the purchase of the issued shares of B.I. and subsequent matters relating thereto.
(7) Letter of 6th September 1961 from Barton Mayhew & Co. to the secretary of G.S. advising on the basis of valuation of the shares in B.I. in the books of G.S.
(8) Schedule of the income tax computations of G.S.
(9) Dividend vouchers in respect of dividends paid by B.P. on 3rd April 1957 and 1st April 1958.
(10) Dividend vouchers in respect of dividends paid by B.I. on 4th April 1957 and 1st April 1958.
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(a) Agreement dated 23rd December 1955 for the purchase of all the
issued shares in B.I. by Willrose Financial Investments Ltd. (hereinafter called "Willrose"). (b) Agreement dated 3rd May 1956 whereby the vendors under the agreement of 23rd December 1955 assigned their existing rights and interest thereunder to Granleigh Financial Holdings Ltd. (hereinafter called "Granleigh").
(c) Agreement dated 4th May 1956 supplemental to the agreements dated 23rd December 1955 and 3rd May 1956.
(d) Agreement dated 4th May 1956 relating to the sale of certain properties by B.P. to Carward Properties Ltd. (hereinafter called "Carward").
(e) Agreement dated 29th May 1975 supplemental to the first-mentioned agreement dated 4th May 1956 and to the agreements of 23rd December 1955 and 3rd May 1956.
(f) Letter of 27th June 1957 from Granleigh to Willrose and Stormgard Ltd. (hereinafter called "Stormgard") proposing a variation to the first-mentioned agreement of 4th May 1956.
(g) Letter of the same date...
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