Williams' Executors v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Year | 1942 |
| Date | 1942 |
| Court | Court of Appeal |
No. 1282-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Sur-tax - Total income - Capital or income.
At a general meeting in 1922 of a private company dealing in bloodstock, it was resolved that all reserve funds (which consisted entirely of undistributed profits of the company) should be the joint property of members of the company pro rata to their shareholdings. In 1927, W became a director of the company, acquiring 750 shares out of the 3000 issued and paying £1,901 10s. for a one-fourth share of the reserve fund. In view of the value of their personal connexions, each director took out an insurance policy against death or disablement by accident; the company paid the premiums and was the beneficiary under the policies. In February, 1938, one of the directors died as the result of an accident and the company received £15,000 from the insurance company.
At the annual general meeting of the company held on 31st May, 1938, it was resolved that this sum of £15,000, and a sum of £5,000 taken from the reserve fund, should be distributed. Of these amounts, W received respectively £2,750 and £1,250, which were included in an assessment to Sur-tax made upon his Executors for the year 1938-39. The Executors appealed against the assessment, contending that both sums were in the nature of capital. The Special Commissioners held (1) that the insurance policies were taken out to provide against damage or loss of a capital nature and the sum received thereunder was a distribution of capital; and (2) that W had acquired by his payment of £1,901 10s. an interest in the reserve fund carrying with it the right to participate in an income distribution, and that the sum received formed part of his income for Sur-tax purposes.
Held, (a) in the King's Bench Division, that the distribution of £5,000 out of the reserve fund was a dividend out of the company's profits and, accordingly, the amount of £1,250 received by W was income in his hands for tax purposes;
(b) in the House of Lords, affirming the decisions of the Courts below, that the sum received by the company under the insurance policy was a revenue receipt, and W's share thereof had been correctly included in the assessment to Sur-tax.
(1) Commissioners of Inland Revenue v. Williams's Executors
CASE
Stated under the Finance Act, 1927, Section 42(7), and Income Tax Act, 1918, Section 149, 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 21st March, 1941, the Executors of D.H. Williams, deceased (hereinafter called "the Respondents"), appealed against an assessment to Sur-tax made upon them for the year 1938-39 in the sum of £9,790.
2. There were two questions for our determination, one of which forms the subject-matter of a separate Case, Williams's Executors v.Commissioners of Inland Revenue, which follows hereon. The question to which alone the present Case relates is whether the proceeds of an insurance policy taken out against the death by accident of a director of a company called British Bloodstock Agency, Ltd. were income or capital in the hands of the said company, and whether, therefore, the aforesaid proceeds when distributed were income or capital in the hands of the recipients, one of whom was Mr. D.H. Williams.
3. British Bloodstock Agency, Ltd. (hereinafter referred to as "the "company") was incorporated as a private limited company on 24th November, 1911. A copy of the memorandum and articles of association is annexed hereto, marked "A", and forms part of this Case(1).
The company's business is the buying and selling of bloodstock and, to a certain extent, the keeping of bloodstock.
4. The nominal and issued capital of the company is £3,000 divided into 3000 shares of £1. Originally there were three shareholders, E.E. Coussell, E. Moorhouse and R. Bunsow, each holding 1000 shares and all three being directors of the company. Mr. Bunsow went out of the company at an early stage, his shares being divided equally between the two remaining directors, who thus held 1500 shares each.
5. By article 14 of the articles of association a quorum of two sufficed for a general meeting. It was not necessary to send a copy of the directors' report and accounts to the shareholders. All business decided to be special was to be dealt with at an extraordinary meeting. The company in general meeting could declare dividends, but not exceeding what was recommended by the directors.
6. At a general meeting held on 21st April, 1922, a resolution was passed in the following terms:-
Resolved that all reserve funds or working capital (all of which is "undistributed profits of the Company) together with undistributed "balance of Revenue Account, whether invested in or outside the business "of the Company, shall be the joint property of the present "members of the Company, pro rata to their share holdings in the "Company, and that in the event of the death or retirement from the "Company of a member, such proportions of the above-mentioned "balance shall be paid to the retiring member, or to the legal personal "representative of the deceased member, by the remaining or surviving "members.
At the date of this resolution the reserve fund stood at about £3,000. Since then it has been steadily increased by transfers from revenue account.
In consequence of this resolution all reserve funds and undistributed profits of the company were regarded as the joint property of the then members of the company, Mr. Coussell and Mr. Moorhouse, and were treated as credited to the two members' capital accounts, as though they were partners.
7. On 31st March, 1925, Mr. Moorhouse retired, and on 1st April, John Crawford became a member and director of the company. Mr. Crawford acquired the 1500 shares which had been held by Mr. Moorhouse at a price of £3 per share. At this time the company's reserve fund stood at about £4,000, and Mr. Crawford paid £2,000 to Mr. Moorhouse in addition to the sum of £4,500 for the shares. He could therefore be regarded as Mr. Moorhouse's assignee in respect of his share of the reserve fund.
8. The reserve fund gradually increased and on 14th April, 1927, it stood at £7,606. On that date D.H. Williams became a member and director of the company. Mr. Williams acquired 750 shares, being one-fourth of the total number of shares, half from Mr. Coussell and half from Mr. Crawford, at a price of £6 per share. At the same time he paid to these two directors a sum of £1,901 10s., being one-fourth of the amount at which the reserve fund stood. All three individuals treated the reserve fund as being capable of assignment.
9. On 1st September, 1928, when the shares were worth about £3 each, Mr. Coussell and Mr. Crawford each transferred 50 shares to a Mr. F.L. Birch and 25 shares to a Miss E. Chambers, these two individuals having been members of the company's staff for some 15 or 16 years.
Thus from this date the shares were held as follows:-
Mr. Coussell |
… |
… |
1050 |
Mr. Crawford |
… |
… |
1050 |
Mr. Williams |
… |
… |
750 |
Mr. Birch |
… |
… |
100 |
Miss Chambers |
… |
… |
50 |
At a later date, in 1934, Mr. Coussell and Mr. Crawford wrote to Mr. Birch and Miss Chambers making it clear that they were not entitled to any share of the reserve fund or bonuses that had accumulated up to 1st September, 1928, when their shares had been transferred to them. They were entitled from that date not only to the shares but to future dividends and bonuses.
10. In 1933 an insurance against accident to Mr. Crawford was, for the first time, taken out for a sum of £15,000 on death, and certain lesser sums in the event of partial or total disablement, etc. The policy contained a number of endorsements, of which the one relevant to the appeal was that the company was to be recognised as the beneficiary in the event of any claim arising out of the policy. A photostatic copy of the policy and endorsements is annexed hereto, marked "B", and forms part of this Case(1) The policy was renewed from year to year, the company paying the premiums
11. On 1st February, 1938, Mr. Crawford died as the result of an accident in South Africa.
In due course the sum of £15,000 was paid to the company by the insurance company, and was distributed by the company, as hereinafter appearing, to Mr. Coussell, the executors of Mr. Crawford, and Mr. Williams.
The appeal before us brought by the Executors of D.H. Williams, deceased, was concerned with the question of liability to Sur-tax in respect of this distribution of policy moneys as affecting Mr. Williams. Mr. Williams died on 8th April, 1939.
12. The company was assessed to National Defence Contribution for the period to 31st March, 1938, and to Income Tax for the year 1938-39 by reference to the receipt of the said sum of £15,000. At first the company disputed liability on the ground that the said sum was a capital receipt but later withdrew its objection and accepted liability.
13. Evidence was given before us by Mr. Coussell who founded the business of the company and has been a director and secretary throughout. Mr. Coussell is the Respondent in a further case, in which precisely the same point is at issue.
Mr. Coussell stated that Mr. Crawford was of special value to the company. Mr. Crawford, whom he had known since 1914, had been the company's agent in Bombay before he joined the company in 1925. He had valuable connections in India where, after the South African war (during which he had been a Captain in the Army Veterinary Corps), he became the leading veterinary surgeon in India, and the judge of the Turf Club, Bombay. He was the pioneer of high breeding in India, and was very prominent there for twenty years, becoming an acquaintance...
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