1959 (11) TMI 60 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the residence of the African subsidiaries for income tax purposes.
2. Application of the central management and control test.
3. Validity of management acts contrary to the company's constitution.

Detailed Analysis:

1. Determination of the Residence of the African Subsidiaries for Income Tax Purposes:
The central issue was whether the African subsidiaries of the appellant company were resident in the United Kingdom for income tax purposes during the relevant years (1952 and 1953). The appellant company argued that the subsidiaries were resident in the UK because their central management and control were exercised from London. The respondent contended that the subsidiaries were resident in Kenya as per their incorporation and the articles of association, which stipulated that directors' meetings could not be held in the UK.

2. Application of the Central Management and Control Test:
The appellant company relied on the principle established in De Beers Consolidated Mines Ltd. v. Howe [1906], where it was held that a company resides where its central management and control actually abides. The appellant argued that the factual control and management were exercised by the parent company in London, making the subsidiaries resident in the UK. The respondent argued that the central management and control must be exercised in accordance with the company's constitution, which in this case, required management to be outside the UK.

3. Validity of Management Acts Contrary to the Company's Constitution:
The respondent argued that since the management of the African subsidiaries was conducted in a manner contrary to their articles of association, such acts should not be considered in determining the company's residence. The Court of Appeal had upheld this view, stating that only constitutionally lawful acts should be considered. The appellant contended that the factual reality of where the management and control were exercised should determine residence, regardless of whether those acts were constitutionally lawful.

Judgments:

Viscount Simonds:
Viscount Simonds emphasized that the residence of a company is determined by where its central management and control actually abide, as established in De Beers. He rejected the argument that management acts contrary to the company's constitution should be disregarded, stating that the factual reality of management and control is what matters. He concluded that the African subsidiaries were resident in the UK because their central management and control were exercised from London.

Lord Radcliffe:
Lord Radcliffe agreed with Viscount Simonds, emphasizing that the central management and control test is a factual inquiry. He criticized the Court of Appeal's reliance on the company's constitution, arguing that it is the actual exercise of management and control that determines residence. He also addressed the issue of dual residence, noting that a company can have more than one residence for tax purposes. He concluded that the African subsidiaries were resident in the UK.

Lord Cohen:
Lord Cohen reiterated the central management and control test from De Beers, stating that the factual exercise of management and control determines residence. He rejected the argument that only constitutionally lawful acts should be considered, emphasizing that the factual reality of management and control is what matters. He concluded that the African subsidiaries were resident in the UK.

Lord Keith of Avonholm:
Lord Keith expressed some doubts about whether the African subsidiaries could be considered resident in the UK, given that the management and control were exercised by a different company (the parent company). However, he ultimately agreed with the other judges that the factual exercise of management and control determines residence and that the African subsidiaries were resident in the UK.

Conclusion:
The appeal was allowed, and the determination of the commissioners that the African subsidiaries were resident in the UK was restored. The court held that the factual exercise of central management and control, regardless of whether it was constitutionally lawful, determines the residence of a company for income tax purposes. The respondent was ordered to pay the appellants' costs.