Dividend-stripping receipts excluded from trading profits as already taxed dividends could not be taxed again indirectly.

Dividends received in a dividend-stripping arrangement were held not to form trading receipts for Schedule D Case I computations where the dividends had already borne tax. They were to be left out of the trading profit and loss account because they had been exhausted as a source of income and could not be taxed again indirectly as trading profits. The proposed equitable adjustment to counter any double taxation was rejected for lack of statutory basis. On that footing, the company's income was treated as mainly investment income, it qualified as an investment company, and the surtax direction was valid.

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Issues: Whether dividends received in a dividend-stripping operation by a dealer in shares were trading receipts to be brought into the computation of trading profits under Schedule D, or were excluded from that computation and therefore constituted investment income so that the company was an investment company within section 257(2) of the Income Tax Act, 1952.

Analysis: The company bought the whole share capital of companies with accumulated profits, caused dividends to be paid out, and then sought loss relief on the fall in share value while excluding the dividends from its trading account. The House held that dividends which had already borne tax were not to be brought again into the Schedule D Case I computation of trading profits. The proper method of assessment was to leave such taxed dividends out of the profit and loss account, because they were exhausted as a source of income and could not be taxed again indirectly as part of trading profits. The suggestion that an equitable adjustment should then be made to offset double taxation was rejected as having no statutory basis.

Conclusion: The dividends were not trading receipts for Case I computation purposes, the company's income consisted mainly of investment income, it was an investment company within section 257(2), and the surtax direction was valid.

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