Wood Preservation Ltd v Prior (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 13 November 1968 |
| Date | 13 November 1968 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income tax - Loss in trade - Losses forward - Trade assigned by company to subsidiary - Share capital of subsidiary previously sold subject to condition precedent for benefit of purchaser - Condition still outstanding - Whether beneficial ownership of capital retained by vendor - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 342; Finance Act 1954 (2 & 3 Eliz. 2, c. 44), s. 17 and Sch. 3, para. 3.
Until July 1959 S Ltd. was distributing agent in the United Kingdom for D, a German manufacturer of wood preservation products. The agency was then transferred to its 75 per cent. subsidiary, the Appellant Company, by an agreement which D was entitled to determine without notice in certain events. On 25th March 1960 B Ltd. offered to purchase from S Ltd. the whole issued capital of the Appellant provided that within one month of the acceptance of the offer a letter from D was produced confirming that D would not regard the purchase as a reason for so terminating the agency agreement. A further condition was that the Appellant should not (inter alia) declare or pay any bonus or dividend on its shares. The offer was accepted on 31st March 1960. D proved unwilling to give the letter, and on 18th May 1960 B Ltd. informed S Ltd. that they were able to make satisfactory arrangements direct with D and the contract had accordingly become unconditional. Meanwhile, on or about 9th May 1960 S Ltd., which had incurred losses in its trade up to that date, assigned the goodwill of and beneficial interest in its trade to the Appellant Company.
On appeal against assessments to income tax under Case 1 of Schedule D for the years 1960-61 to 1963-64, the Appellant Company claimed under s. 17, Finance Act 1954, to set off losses incurred by S Ltd. For the Company it was contended that at the date of the assignment the offer by B Ltd. was still conditional, so that its share capital was still in the beneficial ownership of S Ltd. For the Crown it was contended that on or about 1st April 1960 S Ltd. had entered into a binding contract to sell the shares of the Appellant beneficially owned by it, and that it had no beneficial interest therein at the date of the assignment. The Special Commissioners upheld the Crown's contention.
Held, that having by its acceptance of the offer precluded itself from otherwise disposing of the Company's shares or receiving a dividend or bonus on them, S Ltd. had ceased to be the beneficial owner thereof within the meaning of s. 17, Finance Act 1954.
Stated under the Income Tax Management Act 1964, section 12(5), and the Income Tax Act 1952, section 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 14th February 1966, and thence adjourned to 15th, 23rd and 24th February 1966, Wood Preservation Ltd. (hereinafter referred to as "the Appellant") appealed against the undermentioned assessments to income tax, namely:
1960-61 Paint dealers £3,806 less £20 capital allowances
1961-62 Paint manufacturers £4,000 less £1,500 capital allowances
1962-63 Paint manufacturers £4,509 less £1,162 capital allowances
1963-64 Paint manufacturers £2,798 less £1,303 capital allowances
1963-64 Balancing charge £933.
The grounds of the appeal were that under the provisions of the Income Tax Act 1952, section 342, and the Finance Act 1954, section 17, certain losses sustained by Silexine Paints Ltd. (hereinafter referred to as "Silexine"), a company which at the relevant times owned not less than three-quarters of the share capital of the Appellant, fell to be deducted from or set off against the amount of the profits or gains so assessed.
2. Evidence was given at the hearing of the appeal by Theodore Edward Le Bouthellier Allbeury (hereinafter referred to as "Mr. Allbeury"), the managing director of Silexine, and Michael Derek Carr, one of the partners of Sturges, Fraser, Cave & Co., auditors to the Appellant; and the following documents, inter alia, were produced and admitted or proved:
(i) An agreement dated 30th June 1959 made between Silexine, of the first part, the directors of Silexine, of the second part, and Denton Edwards Paints Ltd., of the third part.
(ii) An agreement dated 30th June 1959 made between Floor Treatments Ltd., of the one part, and Silexine, of the other part.
(iii) An agreement dated 30th June 1959 made between the Appellant, of the one part, and Mr. Allbeury, of the other part.
(iv) An agreement dated 1st July 1959 made between Desowag-Chemie G.m.b.H., Silexine and the Appellant (hereinafter referred to as "the Desowag agreement") (exhibit "A").
(v) A bundle of correspondence.
(vi) A deed made 9th May 1960 between Silexine and the Appellant (hereinafter referred to as "the assignment").
(vii) A bundle of share transfers.
The provisions of the above documents, so far as relevant to this Case, have been incorporated herein, but the said documents other than document (iv)(1) are not attached and do not form part of this Case for reasons of economy.
3. From the evidence adduced, we found the following facts admitted or proved and relevant to this Case.
(2) In the year 1957 Silexine was carrying on business as a manufacturer and dealer in paint and as a dealer in products for the preservation, cleansing and maintenance of wood and other floorings; inter alia, products known by the names of Xylamon, Bourne Seal, Bourne Gleem and Glint were dealt in. The Appellant handled all the retail sales of Bourne Seal and Bourne Gleem in the United Kingdom pursuant to an agreement entered into in 1956 with the manufacturers thereof, Floor Treatments Ltd., for a period of seven years.
(3) In October 1957 Silexine agreed to sell its factory and office premises for £27,500. In April 1958 Silexine entered into an agreement with Denton Edwards & Co. Ltd. for the manufacture of Silexine's products and for the supply of paints and granted a licence to Denton Edwards & Co. Ltd. to use Silexine's formulae relating to stone paints and to deal in such paints. By June 1958 the sale of Silexine's factory and other assets used in the former conduct of manufacture had been completed. Thenceforward Silexine was engaged in dealing only in paint and associated products and not in manufacturing.
(4) By an agreement dated 30th June 1959, made between Silexine, of the first part, the directors of Silexine, of the second part and Denton Edwards Paints Ltd., of the third part, Silexine agreed to sell to Denton Edwards Paints Ltd., (a) the goodwill of Silexine's business so far as it related to the business of manufacturers and dealers in paint, (b) the exclusive right to use the name "Silexine", the trade mark "Silexine" and certain trade names, and (c) all formulae and processes known to Silexine and relating to the said business, for the sum of £5,000.
(5) By an agreement dated 30th June 1959 made between Floor Treatments Ltd., of the one part, and Silexine, of the other part, it was agreed that the marketing agreement referred to in sub-para. (1) above should be brought to an end. It was agreed that the marketing agreement should cease to have effect from 1st September 1959 and the obligations of the parties were mutually released. As consideration of the release by Silexine of their rights Silexine was to be paid £11,676 18s. 6d. by instalments of £3,300 a year from 1st September 1959 to 14th March 1963.
(6) On 30th June 1959 Mr. Allbeury's service agreement with Silexine was terminated, and on the same day he entered into a new service agreement with the Appellant as managing director for a period of five years at a salary of not less than £750 per annum and commission. Mr. Allbeury agreed that he would not during his term of office without the written consent of the Appellant's board of directors be directly or indirectly interested in any business similar wholly or in part to the business from time to time carried on by the Appellant or calculated to compete therewith.
(7) By the Desowag agreement dated 1st July 1959 and made between Desowag-Chemie G.m.b.H., Silexine and the Appellant, expressed to be entered into for a period of five years, the Appellant was to be substituted for Silexine in respect of an agreement made in 1955, which was based on yearly periods, and all Silexine's rights and duties were expressed to pass to the Appellant. Desowag granted the Appellant the right of exclusive import and distribution of their wood preservation preparations manufactured at that time and distributed under the marks Xylamon, Fluralsil, Pyromors and Xylacolor for the area of the United Kingdom to be sold by the Appellant in their own name and for their own account. It was a term of this agreement (contained in article 6(2), to which reference is made in the letter set out in para. 3(9) below) that the agreement might be dissolved by either contracting party for important reasons without any preliminary notice. It was provided, further, that an important reason should mean any circumstance which made it unreasonable to expect a party to continue the agreement until terminated by notice in the ordinary way. A number of instances of "important reasons" were given in the agreement (the original of which has been in German), which included if the management of the Appellant was not, or ceased to be, conducted by persons ensuring the requirements for the distribution of the products the subject of the agreement. A copy of the said agreement is attached to and forms part of this Case (exhibit A(1) ).
(8) At all material times up to and including 25th March 1960 Silexine owned not less than three-quarters of the share capital of the Appellant.
(9) In accounting periods up to and including 9th May 1960 Silexine incurred...
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