Varty v British South Africa Company
| Jurisdiction | England & Wales |
| Judge | The Master Of The Rolls,LORD JUSTICE DANCKWERTS,LORD JUSTICE DIPLOCK,THE MASTER OF THE ROLLS |
| Judgment Date | 17 June 1964 |
| Judgment citation (vLex) | [1964] EWCA Civ J0617-3 |
| Date | 17 June 1964 |
| Court | Court of Appeal |
[1964] EWCA Civ J0617-3
The Master of the Rolls
(Lord Denning)
Lord Justice Danckwerts
Lord Justice Diplock
In The Supreme Court of Judicature
Court of Appeal
Sir John Senter, Q. C. and Mr. J. Raymond Phillips (instructed By the Solicitor of Inland Revenue, Somerset House, Strand, W.C.2) appeared as Counsel on behalf of the Appellant.
Mr. H. H. Monroe, Q. C. and Mr. M. P. Nolan (instructed By Messrs. Coward Chance & Co., St. Swithin's House, Walbrook, E. C.4) appeared as Counsel on behalf of the Respondent.
On Tuesday, 28th April, we first heard argument in this case. We them gave reasons for dismissing the appeal. But on thinking over the case afterwards, we thought that there were points on which we would like to hear further argument. We directed, therefore, "that the order of dismissal should not be drawn up and the case should be set down for further argument. We told counsel of the points we had in mind and on 20th May we had the benefit of their submissions upon them. In these circumstances our previous judgments should be regarded as interlocutory observations only: and we will now give our final judgments.
The facts are set out in the Case Stated, and I need only summarise than here. The British South Africa Company carried on business (amongst other "things) as an investment company. It is a finance house which makes loans, buys and sells shares, and so forth. It is taxed on the basis that as and when investments are realised, any profit or loss on the realisation over or below the cost figure has to be brought into account. This case concerns an investment that it made in conjunction with the Anglo-American Corporation of South Africa. In 1952 the Anglo-American Corporation agreed to finance three gold mining companies in the Orange Free State. One of These companies was the President Steyn Gold Mining Company. The Anglo-American Corporation agreed to provide the President Steyn Company with loan facilities up to £4000,000. In short, the Anglo-American Corporation agreed to lend. President Steyn money as required up to a total of £4,000,000. In return the Anglo-American Corporation were to receive, first, a raising fee that is, a commission, of per cent, on the £4,000,000; secondly, interest at 6 per cent, on the money as and when it was lent; and thirdly, an option, exercisable up to and including the 30th June, 1955) to subscribe at the price of 20s. per share for 2,000,000 shares in the President Steyn Company. If, in pursuance of this option, the Anglo-American Corporation subsoil be for shares, the loan facilities (or, if the money had been lent, the loans themselves), were to be reduced by the amount paid for the shares.
Shortly after those arrangements were made the Anglo-American Corporation granted to the British South Africa Company a 5 per cent, participation in them. In pursuance thereof, early in 1953 the British South Africa Company lent to the President Steyn Company a sum of £200,000, and in return they received, first, a raising fee of percent, on the £200,000; secondly, interest at 6 per cent, on the £200,000, and thirdly an option to subscribe for 100,000 shares in the President Steyn Company at £1 a share. The value of the shares at the time was 19s.6d. a share. So that there was no point in exercising the option at that time. It was worth nothing then. But by November, 1954, the value of the President Steyn shares had gone up to 43s.6d. a share. On the 15th November, 1954, the British South Africa Company exercised the option. They did so through the Anglo-American Corporation. They subscribed for 100,000 shares, which were worth 43s.6d. apiece, and paid £1 each for them out of the loan. So the British South Africa Company got 100,000 shares, and the loan of £200,000 was reduced by £100,000 to £100,000. This meant that by paying, or rather allowing, in account £100,000, the British South Africa Company got shares which were worth at that time £217,000. In other words, they were £117,000 to the good. The question is whether that £117,000 is taxable or not.
The rival views are these. On the one hand the Crown say that the Company was carrying on trade, not only as a dealer in shares, but also as a dealer in options: and that this option (to take up shares in the mining company) was an asset which was part of its stock-in-trade. The Company acquired this option in January, 1963 and realised it in November, 1964. If the Company had sold the option in November, 1954 for £117,000 (as it is conceded it could have done), it is admitted that that sum would have been taxable as part of its trading receipts. The option would have been realised for that sum. Nov what has happened?Instead of selling the option, the Company have exercised it themselves and acquired shares with it. The Crown say that that is the exchange of one asset (the option) for another asset (the shares). that, they say, is a realisation of the asset. It is just the same, they say, as any trader, who has an asset which is part of his stock-in-trade available for disposal, and, when it has gone up in value, instead of selling it, he takes it and exchanges it for another asset. He cannot get out of tax in that way. He must bring the asset which he thus realised into his trading account at its realisable value at the time of exchange. The Crown rely on the decision of the House of Lords in Westminster Bank, v. Osier, 1933 Appeal Cases.
On the other hand the Company say that the option was not part of their stock-in-trade at all. The Company admit that they were dealers in shares, but not that they were dealers in options. They liken this case to a grocer who deals in beans and makes a forward contract which entitles him to delivery of the beans next year at £1 a case. This forward contract is, no doubt, an asset of the grocer which he nay sell. But it is not part of his stock-in-trade. It does not come into his trading account. When he takes delivery of the beans, he brings them into his accounts at their cost of £1 a case, and when he sells them he brings in the price they fetch. The Company also likened this case to a ship owner who carries goods by sea and bays Mai as fuel for his ships. The coal is an asset but it is not part of his stock-in-trade. If he finds that he does not need to use all of the coal, and sells part which he does not need, he has to bring into charge for tax the price realised, but only on sale, not otherwise. The Company relied on Imperial Tobacco Company v. Kelly (1943), 25 Tax Cases.
To which the Crown make this answer: the grocer was not a dealer in forward contracts. Nor was the ship owner a dealer in coal; whereas here the Company were dealers in options. When weighing these rival contentions, I think the issue depends on this. Was this option part of the stock-in-trade of the British South Africa Company? I think it was. The option was a distinct contractual right, available in the hands of the British South Africa Company against the President Steyn Company and transferable by the British South Africa Company to any purchaser. It was an asset just as much as any other asset of the Company. The Commissioners found that it was a "trading asset", and by that phrase I think they meant it was part of the stock-in-trade. I say that for two reasons: first, the phrase "trading asset" is taken from the judgment of Lord Justice Somervell in the Gold Coast Selection Trust case which was adopted by Lord Simon in the House of Lords. It was used in that case in reference to a gold mining concession which was part of the stock-in-trade of the taxpaying company. Secondly, the Commissioners in the present case drew attention to the financial arrangements with the other two mining companies. In one case the Company received "registered option certificates" which were transferable in the market. Those option certificates were undoubtedly part of the stock-in-trade of the Company. This option is indistinguishable in point of law from these options. The Company were dealers in options, and this option was part of their stock-in-trade.
Once it is found that the option was part of the stock-in-trade of the Company, the next question is this: when did the company realise it? It seems to me that when they exercised the option, they disposed of one asset (the option) and acquired a new asset (the shares themselves). The Judge seems to have thought that the asset was one and the same asset before and after the option was exercised. That one asset was, he said, an interest in the shares. I cannot take that view. The option gave the Company no interest in the shares at all. It only gave the Company the light to acquire shares. I think these were two differentassets. One was the option and the other was the shares. When the one was exchanged for the other there was a realisation of the one asset and the acquisition of another. If the Company had realised the option, by selling it for cash, they would certainly have had to bring the proceeds into account for tax. So also when they realise the option by exercising it. They have realised part of their stock-in-trade, not by selling it for cash, but by receiving its equivalent in money's worth. They must account for this equivalent by bringing it into charge far tax. The case is governed in this respect by Westminster Bank, v. Osier in 1933 Appeal Cases.
I ought to say that the Crown put forward an alternative contention. They said that the loan of £100,000 was part of the trading stock of the British South Africa Company, and then, when the option was exercised, this loan was realised and that the £117,000 was a taxable profit on the realisation. Both the Commissioners and the Judge rejected that contention. I would reject it too. In...
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