Van Den Berghs Ltd v Clark (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Date | 1935 |
| Court | King's Bench Division |
NO. 960-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Capital or income - Agreements between competing trading companies for profit-sharing, etc. - Payment received by one company from the other as damages for cancellation of its future rights under the agreements.
In 1908 the Appellant Company, which carried on the business (inter alia) of manufacturing and dealing in margarine and similar products, entered into an agreement with a competing Dutch company by which the two Companies bound themselves for the future to work in friendly alliance and agreed (inter alia) (a) to share the profits of their respective margarine businesses in specified proportions, (b) to bring within the operation of the agreement, if required, any interest in other margarine concerns acquired by companies under their control, (c) not to enter any pooling or price arrangements with third parties inimical to the interests of the two Companies, (d) to set up a joint committee to make arrangements with outside firms as to prices and limitation of areas of supply of margarine and (e) to promote generally the interests of the two Companies in the margarine business. Supplemental agreements made in 1913 and 1920 provided that, with certain modifications, the provisions of the 1908 agreement were to continue in force until 1940.
In the period from 1908 to 1913 payments were made under the agreements by and to the Appellant Company and were treated for Income Tax purposes as trading expenses and receipts, respectively, of the years in which they were made. From 1914 to 1919 the two Companies were unable to compute their profits owing to the difficulties caused by the war. In 1922 the Appellant Company arrived at the sum of £449,042 as being the amount due to it by the Dutch Company under the agreements. This liability was not admitted by the Dutch Company, which claimed that under the agreements there was, on balance, a sum due to it by the Appellant Company. The matter was referred to arbitration which, however, proved so lengthy and costly that, in 1927, the Companies, in contemplation of a merger of interests,
entered into negotiations with a view to a settlement of the dispute. The Dutch Company desired to cancel the agreements, but the Appellant Company, which considered that such a course would be to its disadvantage, refused to consent to cancellation unless the Dutch Company paid to it, at least, £449,042A settlement was finally reached in 1927, whereby, inter alia, (a) all claims and counter-claims under the agreements for the period 1914 to 1927 were withdrawn; and (b), in consideration of the payment by the Dutch Company of £450,000 to the Appellant Company "as damages", the agreements were determined as at 31st December, 1927, and each party released the other party from all claims thereunder. That sum was paid in 1927 and credited in the Appellant Company's accounts for that year.
The Company was assessed to Income Tax under Schedule D, for the year 1928-29, in an amount which included the sum of £450,000. On appeal, the General Commissioners decided that the £450,000 was paid "in respect of the pooling agreements" and must be brought in for the purpose of arriving at the balance of profits and gains of the Appellants for the year to 31st December, 1927.
Held, that the payment of £450,000 was a payment for the cancellation of the Appellant Company's future rights under the agreements, which constituted a capital asset of the Company, and that it was, accordingly, a capital receipt.
Stated by the Commissioners for the General Purposes of the Income Tax for the City of London pursuant to Section 149 of the Income Tax Act, 1918, for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held at Gresham College, Basinghall Street, in the said City on the 14th day of December, 1931, Van den Berghs, Limited, an incorporated Company having its registered office at Unilever House, Blackfriars, E.C.4 (hereinafter called "the Appellants") appealed against an assessment to Income Tax made upon them under the rules applicable to Schedule D of the Income Tax Act, 1918, and subsequent amending Acts for the year ending 5th day of April, 1929, in the sum of £650,000.
2. The question for the determination of the Commissioners was whether or no a sum of £450,000, forming part of the said assessment, was an income or trade receipt of the Appellants for the year ended 31st December, 1927, that being the preceding year by reference to which the Company's profits were computed for the year 1928-1929. No question was raised before us as to the exact amount of the assessment, it being agreed that the above-mentioned assessment should be adjusted in any event.
3. The Appellants were incorporated on the 9th day of March, 1895, as a Company with a capital of £950,000 divided into 90,000 £5 Preference Shares and 100,000 Ordinary Shares of £5 each.
The objects of the Company as contained in its Memorandum of Association comprised (inter alia) the following:-
. . . . . . . . .
(B) To carry on business as manufacturers of margarine, oleo margarine and other substitutes for butter, butter merchants, merchants, dealers, brokers or factors in all kinds of provisions, either wholesale or retail; importers and dealers of oil and other oleaginous or fatty matters, seed crushers and merchants, farmers, dairy produce dealers, and dealers in condensed milk, cow-keepers, grasiers, cattle breeders, shipowners, charterers or brokers, carriers, forwarding agents, warehousemen, wharfingers, lightermen and any other business which the said Messrs. Van den Berghs may have been engaged in or connected with ancillary to their principal business of margarine manufacturers and merchants, or which may be in the opinion of the Company conveniently carried on in conjunction with any of the businesses aforesaid, or calculated directly or indirectly to enhance the value of or render profitable any of the Company's property or rights.
. . . . . . . . .
(D) To enter into partnership or into any arrangement for sharing profits, union of interest, co-operation, joint adventure, reciprocal concession, or otherwise, with any person or company carrying on, or engaged in, or about to carry on, or engage in any business or transaction which this Company is authorised to carry on, or to engage in any business or transaction capable of being conducted so as directly or indirectly to benefit this Company, and to take and otherwise acquire and hold, sell, re-issue, or otherwise deal with shares or stocks in or securities or obligations of and to subsidise or otherwise assist any such company and to guarantee the principal and/or interest of any such securities or obligations and/or the capital and/or dividends of any such shares or stock.
A copy of the Memorandum and Articles of Association of the Company is attached hereto marked "A" and may be referred to as part of this Case(1).
4. At the date of the assessment now under appeal the capital of the Company was £3,575,000 divided into 90,000 Cumulative 6 per cent. Preference Shares of £5 each, 1000,000 Cumulative 6 per cent. B Preference Shares of £1 each, 1000,000 Cumulative 7 per cent. C Preference Shares of £1 each, 3750,000 15 per cent. Preferred Ordinary Shares of 5s. each and 750,000 Ordinary Shares
of 5s. each. The capital was later further increased. The general voting power of the Company was confined to the holders of Ordinary Shares. Of the said Ordinary Shares members of the Van den Bergh family held 260,000 and through a subsidiary company held a further 152,000 so that the control of the voting power of the Company was vested in the Van den Bergh family. The bulk of the remaining capital, viz.:-the Preferred Ordinary and Preference Share capital, was held by the public.5. The Appellants had for many years been in keen business competition with another firm of margarine manufacturers, Anton Jurgens Vereenigde Fabrieken of Holland (hereinafter referred to as the "Dutch Company") and in the year 1908 these two Companies thought it would be to the advantage of their respective trades and of the companies controlled by them to enter into an agreement for profit sharing and other purposes and accordingly made the agreement next hereinafter mentioned. Within the various groups of companies controlled by the Appellants and between the said controlled companies there were other pooling agreements. These agreements however were not of the same type as the agreement next referred to: they related to the regulation of prices.
6. By an agreement dated 13th February, 1908, (which with the agreements referred to in paragraphs 7 and 9 hereof are hereafter referred to as the "pooling agreements") and made between the Dutch Company of the first part the Appellants of the second part and certain Directors and Managers of the third and fourth parts after reciting (inter alia) that the Companies (the Appellants and the Dutch Company) carry on margarine business (which expression includes the business of manufacturing, buying, selling, exporting, importing and dealing in margarine and other butter substitutes) and in addition thereto carry on certain other businesses (therein referred to as the "outside businesses") and that the Companies are desirous of working in friendly alliance on the terms therein set forth, it was agreed (inter alia) as follows:-
(1) "The five year period" means the period comprised in the years one thousand nine hundred and two, one thousand nine hundred and three, one thousand nine hundred and four, one thousand nine hundred and five, one thousand nine hundred and six.
(2) As between the two Companies this agreement is to be treated as having come into operation on the First day of January, 1908, and is to continue in force until it is determined as hereinafter...
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