TaxTMI 
TaxTMI 
1963 (7) TMI 78
X X X X Extracts X X X X
X X X X Extracts X X X X
....ectors of the respondent were Leonard Lever, Leslie Levy and one Yablon, and the respondent carried on the business of a finance company. The memorandum of association of the respondent contained, inter alia, the following objects for which the respondent was established: "To carry on the business or businesses of stock and share dealers, and to purchase, subscribe for, acquire, hold and deal in shares, stocks, debentures, bonds, securities and obligations generally of any government, company, corporation or body; and to promote, finance, advance money on hire-purchase or otherwise assist any company or companies, whether corporate or unincorporate, or persons as may be thought fit; and to act as agents for the issue and placing of, and to underwrite shares, debentures and other securities or obligations." The trading and profits and loss account of the respondent for the period September 1, 1954, to March 31, 1955, contained, inter alia, the following entries: To Purchases of Securities Quoted 166,208 5 0 Unquoted 1,317,565 1 7 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the tax deducted or deemed to have been deducted from the dividends declared and paid to the respondent. Those operations were duly carried out by the respondent for each of the three companies mentioned above, and the dividends paid to the respondent on March 28, 1955, were as follows: B.&Co. Wool Merchants (Bradford) Ltd. GBP 33,523 (net); Cranwell (Holdings) Ltd. GBP 494,629; N.E.T. Holdings Ltd. GBP 399,256, making a total of GBP 927,408 (net), GBP 1,686,198 (gross). The shares of the three "stripped" companies were retained by the respondent for any ultimate purpose that the directors could put them to, their market value at March 31, 1955, being estimated as follows: B.&Co. Wool Merchants (Bradford) Ltd. GBP 146,769; Cranwell (Holdings) Ltd. GBP 252,345; N.E.T. Holdings Ltd. GBP 25,000, making a total of GBP 424,114. In due course the respondent made a claim for repayment of tax under the provisions of section 341 of the Income Tax Act, 1952, which was admitted in the sum of GBP 404,020, of which GBP 250,000 was repaid on December 14, 1955, and GBP 154,020 on February 28, 1958. On January 22, 1960, the special commissioners issued a direction to the respondent in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... result of these operations was that the company's accounts made up to March 31, 1955, showed a gross trading loss on the one hand amounting to ú895,487 and dividends received from quoted securities GBP 3,043 and unquoted securities GBP 1,686,198-a total of GBP 1,689,241 on the other. The company made a claim under section 341 of the Income Tax Act, 1952, which was duly admitted, for repayment in respect of the tax deducted from these dividends in relation to the trading loss. It is said that, although it was quite proper to compute the trading loss of the company for the purposes of Schedule D without including the dividends received by the company, such dividends were nevertheless trading receipts of the company's trade inasmuch as they satisfied the definition of earned income provided in section 525(1)(c), i.e., they were 'income which is charged under Schedule B or Schedule D and is immediately derived...from the carrying on or exercise of (the company's) trade.' If this were correct the company would not fall within the definition of investment company in section 257(2)...We do not think that this argument is well founded. On the authorities cited t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment which Donovan L.J. has prepared and is about to deliver, in which he has set out the facts and referred to the authorities relied on in the respective arguments. I agree with his judgment and the conclusion that the appeal should be dismissed. I would only add this briefly. F.S. Securities Ltd., in so far as they trade at all, and it must be accepted that they did, traded in stocks and shares and the three securities in question which they held were the main part of their stock-in-trade (Griffiths v. J.P. Harrison (Watford) Ltd.##. The company claimed to have made a loss and were regarded by the Inland Revenue so to have done and were paid over GBP 400,000 as a repayment of tax on that basis, but as their trade brought in earnings of over GBP 1,600,000 gross dividends received, the company in fact made a fabulous profit on GBP100 subscribed capital. If the facts are to be accepted as establishing a "trading" or any loss, a more fictitious or home-made loss it would be hard to devise in business affairs. As the shares of the three companies which F. S. Securities Ltd. acquired and with which they traded were their stock-in-trade producing trade earnings, the same shares w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reof consists mainly of investment income, and 'investment income' means, in relation to a company, income which, if the company were an individual, would not be earned income:... The special commissioners in the present case were dealing with the income of the company for the period September 1, 1954, to March 31, 1955. They took the view that the income of the company consisted during this period mainly of investment income as defined by section 257(2); and they accordingly made a direction upon the company which, if valid, has the effect, when coupled with an apportionment of that income among the company's members, that a large sum of surtax becomes payable to the Crown. The company appealed to the special commissioners against this direction, arguing that it was a trading company and not an investment company. This argument failed before the special commissioners but succeeded before Ungoed-Thomas J. The court is here concerned with a dividend stripping operation. The company was incorporated on August 19, 1954, with a capital of GBP100 and 83 per cent. of the capital was held by two persons jointly. The memorandum of association proclaimed that one of the ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....GBP 1,331,428. The company still had the shares of the three subsidiary companies valued at GBP 424,114, and this gives a total of assets of GBP 1,755,542. Deducting the sum of GBP 1,317,565 required to buy the shares in the three subsidiary companies in the first place, the profit was GBP 437,977, all made by a company with a subscribed capital of only GBP 100. This is subject, of course, to the interest paid to the bank for borrowed money which was, however, a comparatively small sum. The question now arises: was this company, for the period in question-that is, September 1, 1954, to March 31, 1955 (its first accounting period)-an investment company under section 257(2)GBP This depends on whether its income during this period was mainly "investment income" and this depends in turn on whether its income was mainly income which, had the company been an individual, would not have been earned income. Earned income is defined by section 525 of the Income Tax Act of 1952, and the part of that definition here relevant is that contained in section 525(1)(c), namely: "any income which is charged under Schedule B or Schedule D and is immediately derived by the individual from the carryi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rcising the privilege of changing its mind, eventually contended that the dividend must therefore be brought into the computation of the company's trading profits, although originally the Inland Revenue had acquiesced in the company's contrary view. During the argument of the case in this court** it was said for the company that dividends taxed at source were not brought into the computation of profit made by a dealer in stocks and shares, so why should a dividend not so taxed be brought in? Deduction or non-deduction of tax was, it was argued, an immaterial consideration. The answer given was that dividends taxed at source ought to be brought into such a computation. Strictly speaking, of course, this was obiter, but it would have been unsatisfactory not to deal with the point thus raised. In the House of Lords(8) Viscount Simonds and Lord Denning expressed the same view: and accordingly even if, on reflection, I thought I had been mistaken in what I myself said in this court, I would certainly defer to their view. But I see no reason to depart from what I said. Viscount Simonds did say***, however, that it had always been the practice of the revenue to include taxed di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....128, 129, 130, 136, 137 and so on. This, of course, is not surprising. One pays tax on trading profits, not on trading receipts and one would expect the charge to be a charge on "profits or gains." Furthermore, on occasions when Parliament has intended to refer to the receipts of a trade as distinct from the profits of the trade, it has said so in quite clear terms. Thus, section 342(4) of the Act refers to "any...dividends on investments...which would fall to be taken into account as trading receipts in computing the profits or gains of the trade for the purpose of assessment under that case" this is, Case 1; and section 4 of the Finance (No. 2) Act, 1955, the provision which ended the attraction of dividend-stripping, enacts, in sub-section*, so far as is here material, "the net amount of the dividend received on the shares...shall...be brought into account in computing the profits or gains or losses of the trade..." So far, therefore, there seems to be no support for the view that trading receipts as such are "charged under... Schedule D." Mr. Talbot, however, contends that if it were not so, then the decision in the House of Lords in Hughes v. Bank of New Zealand* would have ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....servations of a general character made by Lord Dunedin in Whitney v. Inland Revenue Commissioners*, a case deciding that non-residents were liable to super-tax on income arising here. Lord Dunedin said: "My Lords, I shall now permit myself a general observation. Once that it is fixed that there is liability, it is antecedently highly improbable that the statute should not go on to make that liability effective. A statute is designed to be workable, and the interpretation thereof by a court should be to secure that object, unless crucial omission or clear direction makes that end unattainable. Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next there is the assessment. Liability does not depend upon assessment. That, ex hypothesi, has already been fixed. But assessment particulars the exact sum which a person taxed does not voluntarily pay." I am afraid I do not see how this passage helps in the present case. The declaration of liability we have to consider is that made by the statute in the shape of Schedule D. The question is, howeve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arly point to income derived by the individual as a trader himself, and not merely as a shareholder in a trading company, so that the preceding words, "charged under Schedule D", would seem to connote a charge on the individual himself. Furthermore, if Mr. Talbot is right, an extraordinary difference would result for present purposes between a company whose income consisted of dividends from a fund of profits charged in some other company's hands under Schedule D, and a company whose income consisted of dividends from a fund of profits charged in some other company's hands under Schedule C. The latter company would be an investment company while the former would not, a distinction for which there would be no rhyme or reason. Accordingly I reject this alternative argument. I should add that in any event the court does not know that the dividends now being considered came out of trading profits taxed under Schedule D in the hands of the three subsidiary companies or any of them. There is no finding in the case one way or the other. Mr. Major Allen also submitted, for additional reasons, that the word "charged under Schedule D" ought to be regarded as satisfied in the case of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... day to day but the income tax income when ascertained," and he quoted the remark of Lord Atkin in Fattorini (Thomas) v. Inland Revenue Commissioners*** that "Actual income does not mean the specific receipts that come in from time to time, but the 'income tax income' as calculated at the end of the year of assessment." Lord Pearce# says the same thing, and these observations support the views I have so far expressed. At the end of the argument for the respondent, however, Mr. Major Allen raised another point. Consistently with the decision in the Cenlon case##, all the dividends received by the company in the period under consideration must, he said, be considered as part of the receipts of the company's trade in dealing in stocks and shares. When these are brought into the computation of the profits of that trade, the result is to produce a trading profit. The figures are: dividends received from quoted securities, GBP 3,043; from unquoted securities (that is, the "stripped" shares), GBP 1,686,198; totalling GBP 1,689,241. Deduct the trading loss of GBP 895,487, and the balance of profit is GBP 793,754. That figure, which I will call a round GBP 800,000, is the fig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....GBP 800,000, it is proper to go on and dissect that profit to see whether it contains any investment income. When the dissection is performed, here it is found that it contains GBP 1,689,241 of investment income. He says that this is the result of applying section 257(2) and is consonant with Lord Simon's speech in F.P.H. Finance Trust Ltd. v. Inland Revenue Commissioners (No. 2)**. As I have said, section 257(2) defines an investment company as a company "the income whereof consists mainly of investment income...", and the Crown here argues that the word "consists" justifies the dissection or analysis of the company's trading profit to find out whether it "consists" to any extent of investment income. In F.P.H. Finance Trust Ltd. v. Inland Revenue Commissioners (No. 2)* the House of Lords decided that the words "the income whereof" appearing in the provision which was the predecessor of section 257(2), meant the total income of the company from all sources, and it was with that total income that such part of it as consisted of investment income had to be compared, to see whether the company was an investment company. For the period in question F.P.H. Finance Ltd., a com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t this is a very different thing from saying that once you have found what the trading income is, you can then further analyse that income, to see whether dividends have contributed to it. In the present case the company's trading income computed in accordance with the Cenlon decision* was, as I say, GBP 800,000 and this was its total income. That being so, the company cannot be an investment company, unless it is permissible to dissect that admitted trading income to see whether it has been computed by including dividends as trading receipts, and then treating such receipts to that extent as "investment income." Such dividends have become part of the trading profit which is "earned income" within the definition contained in section 257(2). They are not, for the purposes of the inquiry, one thing one moment and another thing the next. To my mind this new point allowed to be taken by the company is conclusive of the appeal in its favour. In the concluding part of their decision the commissioners refer to the company's primary object in purchasing the shares in the three "stripped" companies as being to obtain the dividends and not to deal in the shares themselves, which w....