Westburn Sugar Refineries Ltd v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 22 March 1960 |
| Date | 22 March 1960 |
| Court | Court of Session (Inner House - First Division) |
COURT OF SESSION (FIRST DIVISION)-
Profits Tax - Capitalisation followed by reduction of capital - Fixed assets written down and later written up - Amount written up applied in paying up bonus shares - Whether a distributable sum applied in reducing capital - Assets distributed in kind - Unquoted shares in investment company holding unquoted shares - Whether sum applied in excess of par value - Finance Act, 1951 (14 & 15 Geo. VI, c. 43), Section 31.
On 3rd April, 1939, the Appellant Company had revalued its buildings, machinery and plant, and on and after that date amounts totalling £117,281 were written off out of retained profits. Following a further revaluation at 30th June, 1948, the values were written up by £161,348. £155,909 of this amount was added to capital reserve in the accounts to 2nd October, 1948, and a further £5,439 in the accounts to 1st October, 1949. Following these transfers the capital reserve amounted to £177,690, the other items included being £13,858 received as compensation for loss of water rights, £2,339 received from the liquidator of the Raw Sugar Association of Greenock and £145 sinking fund provision not required. On 24th August, 1949, the Company applied £152,250 from the capital reserve in paying up newly created bonus shares.
On 26th June, 1951, the Company sold certain investments not essential to its business to L Ltd., an investment company of which it already held all the issued capital, for £60,900, the value in its balance sheet. L Ltd. paid £100 in cash and £60,800 by allotting further shares in itself to the Company. On an independent enquiry, the investments (which were mostly shares in private companies) were valued at £197,768, on the basis of the proportion of the balance sheet values of those companies' net assets which the shares bore to the companies' total share capital. On 12th July, 1950, the Company reduced its capital by £60,900, which was returned to the proprietors in the form of shares of that nominal amount in L Ltd.
The Company was assessed to Profits Tax for the chargeable accounting periods ending on 31st December, 1950, and 29th September, 1951, on the footing that by virtue of Section 31, Finance Act, 1951, the gross relevant distributions included £152,250, being a distributable sum which had been capitalised and thereafter applied in reducing capital. On appeal, the Company contended (inter alia) (a) that the amount of the capital reserve derived from the revaluation of capital assets was not realised and therefore not a "distributable sum" within Section 31; alternatively, (b) that the "sum applied" in reducing capital was £60,900 only. For the Crown it was contended (i) that in view of the Company's financial position neither the law nor the Company's articles prohibited the distribution of the whole sum credited to the capital reserve; (ii) that the sum applied in reducing capital was the value of the shares in L Ltd. at the date of their distribution, which had not been shown to be less than the amount capitalised; alternatively, (iii) that out of the capital reserve of £177,690, the amounts of £117,281, £5,439, £13,858, £2,339 and £145 above-mentioned, totalling £139,062, were distributable, and that the distributable element in the £152,250 capitalised was ascertainable on Profits Tax principles in the proportion of £139,062 to £177,690. The Special Commissioners held that the capital reserve as a whole was distributable, but that in deciding the sum applied in reducing capital the shares in L Ltd. could not be treated as having a certain cash value in excess of par.
Held, that the £152,250 capitalised was not a distributable sum, irrespective of the Company's liquid resources available to meet it.
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Act, 1952, Section 64.
I. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Glasgow on 15th and 16th October, 1958, for the purpose of hearing appeals, Westburn Sugar Refineries, Ltd. (hereinafter called "Westburn"), appealed against assessments to the Profits Tax for the chargeable accounting periods ended 31st December, 1950, and 30th September, 1951, in the respective sums of £7,612 12s. (tax) and £42,222 12s. (tax). These two sums included distribution charges in respect of sums capitalised and assets subsequently distributed by way of reduction of capital by Westburn. The question for our decision was whether distribution charges were properly made in consequence of these events by virtue of Section 31 of the Finance Act, 1951.
II. The said Section 31 provides (so far as relevant) as follows:
(1)…where-(a)…a body corporate…capitalises any distributable sum; and (b)…thereafter…any sum is applied in reducing its capital, there shall be deemed…to be a distribution to the members…of an amount equal to the sum so applied or to the total amount of the distributable sums previously capitalised by it as aforesaid, whichever is the less, taking place when the sum is so applied.
By Sub-section (5) of the said Section "distributable sum" is defined to mean
a sum which could be utilised in making a distribution, within the meaning of subsection (1) of section thirty-six of the Finance Act, 1947.
It was common ground before us that the distributions referred to in the said Sub-section (5) included distributions by way of dividend or capital bonus, and the first question we had to determine was whether Westburn was entitled (as the Crown contended and Westburn denied) to distribute the sum in question. If it was so entitled the further question arose as to what was the "sum applied" in subsequently reducing Westburn's capital.
III. A statement of agreed facts was placed before us, which reads as follows (after the addition of paragraph 5A, which was agreed between the parties during a short adjournment). The documents annexed to such statement are annexed to this Case (1), except document no. 1, which was not referred to before us. The report of Mr. Spens, extracts from which are set out in paragraph 13 of the statement, was not produced to us.
1. The Westburn Sugar Refineries, Ltd., was incorporated in Scotland on 1st February, 1897, and carries on in Greenock the business of sugar refining. New articles of association were adopted by the Company on 30th January, 1935 (document no. 1). Subsequently, on 14th June, 1950, amended articles were adopted by the Company (document no. 2).
-
2. Consequent on the reinstatement of this Company's refinery after extensive war damage suffered in 1941 the Company adopted a valuation of the buildings, plant and machinery as at 30th June, 1948, by Messrs. James Barr & Sons. The amount of Messrs. Barr's valuation was as follows:
£
Buildings
…
177,000
Plant and machinery
280,000
£457,000
-
3. At 30th June, 1948, the buildings, plant and machinery appeared in the Company's books at the following figures:
£
s.
d.
Book value of buildings
49,981
11
6
Book value of plant and machinery
156,981
13
7
Reconstruction costs borne by the Company (including a provision of £20,000 to meet liabilities not yet ascertained)
94,126
18
1
301,090
3
2
New valuation adopted by the Company
457,000
0
0
Surplus arising transferred to capital reserve
£155,909
16
10
3. These valuations were given effect to in the Company's accounts to 2nd October, 1948 (document no. 3), and the sum of £155,909 16s. 10d. added to capital reserve was described as "Surplus on revaluation of fixed assets". Of the above provision of £20,000 the sum of £5,438 15s. 11d. was not required, and this amount was also added to capital reserve in the Company's accounts to 1st October, 1949 (document no. 4).
-
4. Following the above transfers the capital reserve of the Company amounted to £177,690 7s. 1d., made up as follows:
£
s.
d.
(1) Sum received from Greenock Corporation as compensation for loss of water rights
13,858
0
0
(2) Sum received from the liquidator of the Raw Sugar Association of Greenock
2338
13
4
(3) Sinking fund provided to redeem casualties not required
145
1
0
(4) Surplus arising on revaluation of fixed assets
Added in 1948
£155,909
16s.
10d.
Added in 1949
£5,438
15s.
11d.
161,348
12
9
£177,690
7
1
4.
-
4. (5) The following illustrates the relationship between the valuations at 30th June, 1948, and the net cost of the relevant assets to the Company at that date.
Ground and
Plant and
House
Motor
Total
buildings
machinery
property
vehicles
£
£
£
£
£
30/9/38
Net costs to Company
70,223
217,974
1215
565
289,977
3/4/39
1141
3245
-
-
4386
30/9/39
401
855
-
-
1256
30/9/40
130
3270
-
-
3400
30/9/41
-
504
-
-
504
30/9/42
-
171
-
-
171
30/9/43
-215
2099
-
-
1884
30/9/44
-29
4658
-
-
4629
30/9/45
-
-
1700
-200
1500
30/9/46
52
9463
-
-
9515
30/9/47
-
4919
-
-
4919
30/6/48
-
5,383
3,150
-
8,533
£71,703
£252,541
£6,065
£365
£330,674
£
324,244
War damage expenditure borne by Company
…
88,688
Net costs to Company to 30/6/48
…
412,932
Valuation at 30/6/48
457,000
Excess of valuation over net cost to Company
44,068
Add amounts written off in books:
At 3/4/39 Buildings
16,224
"
1141
Plant and machinery
65,425
" " "
3245
3/4/39 to 30/6/48 Buildings
4358
Plant and machinery
26,698
" " " (1946)
190
117,281
Surplus of valuation over book values
£161,349
Carried to capital reserve:
£
At 30/6/48
155,910
At 30/9/49 £20,000
-£14,561
5,439
£161,349
5A. Prior to 3rd April, 1939, buildings, plant and machinery had appeared in the Company's books at a figure representing net...
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