9911796707
TMI Blog1970 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... pany you held 2,499 out of 5,000 issued ordinary shares of 1 pound each] of the 1 pound ordinary shares registered in your name in five companies, viz., Ancillary Machines Ltd., Auto-speed Machining Ltd., Midland Autowork Ltd., Modern Auto-Engineering Ltd. and Nutype Tools Ltd. for an aggregate consideration of £ 24,000, of which £ 10,000 was payable forthwith in cash, £12,000 pounds was satisfied by the issue of debentures, and £ 2,000 remained owing. The adjustments referred to : the computation or recomputation of your liability to surtax for the year of assessment 1960-61 on the basis that the said sum of £ 10,000 should be taken into account as if it were the net amount received in respect of a dividend payable at the date of receipt thereof from which deduction of tax was authorised by subsection (1) of section 184 of the Income Tax Act, 1952, and any assessment or further assessment to surtax which may be requisite to give effect to such computation or recompution. Note.-Further adjustments may be necessary if any or all of the debentures are redeemed and/or any part or all of the debt outstanding is settled in any way. 3. At the earlier hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,000 £ 1pound ordinary shares, of which the taxpayer and his wife Mrs. Brown (hereinafter called " Mrs. Brown ") each held 2,499, and their son, G. D. H. Brown, held 2. The business of General was carried on through another company, Reproductive Engineering Ltd. (" Reproductive "), as its agent. From within a year or two of 1952 and thereafter all the shares in Reproductive have been owned by the taxpayer and Mrs. Brown. Copies of the balance sheets of General as at April 30, 1958, April 30, 1959, April 30, 1960, and April 30, 1961, were annexed to the case as exhibits. As appears therefrom, on April 30, 1960, and April 30, 1961, the credit balances of the profit and loss account were £ 35,163 pounds, 17s. 10d. and £ 33,283 pounds 7s. 1d. respectively : these credit balances comprised either entirely, or very substantially, accumulated profits of General which were within the charge to income tax. On April 30, 1960, there was a current debt due to Reproductive of £ 24,880 8s. 7d., and at the same date Reproductive owed £ 37,516 7s. on current account to General Auto-Work Ltd. & Partners, details of which partnership are set out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery to General in 1957, General Auto-Work Ltd. admitted the five companies into partnership with it on January 1, 1958. Briefly put, the deed of partnership. . . .provided--(a) that the partnership business should be that which had been carried on by General, (b) that the partners should carry on the business under the firm name of General and should continue to employ Reproductive as sole agents to carry out the business of the partnership as the business had theretofore been carried out on behalf of General, (c) that the capital of the partnership should consist of--(A) the value of the assets brought in by General, being the benefit of a lease of property, the plant and machinery owned by General and used in the business, motor car, office furniture and fittings, stock-in-trade, loose tools, machinery spares and consumable stores. (B) capital invested by the new partners, the five companies--£ 4,000 each, (d) that each of the five companies should pay into the partnership the sum of £ 5,000 (£ 25,000 in all) as the nucleus of a plant and machinery replacement fund, (e) that the net profits of the partnership should be divided as to l/40th to each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and give the benefit of its advice on questions arising on prices and plant utilisation; (e) that the profits of the partnership should be divided as to 26 per cent, to Trade Participation, and as regards the remaining 74 per cent., the first £5,000 equally among the five companies and the remainder to General ; (f) that upon determination of the partnership the goodwill of the business should not be regarded as a partnership asset, but each partner should be at liberty to commence and carry on similar businesses so long as he did not use the firm name General; (g) that if Trade Participation left the partnership, the former partnership between General and the five companies should be revived. (xiii) On May 1, 1961, Trade Participation retired from the partnership referred to in (xii) above. . . . (xiv) On May 1, 1962, General and the five companies took into partnership with them the taxpayer's two sons Mr. J. 0. Brown and Mr. G. D. H. Brown. (xv) By an agreement dated May 9, 1960, the taxpayer and Mrs. Brown sold to General their holdings of shares in the five companies .... The sale by the taxpayer was the transaction which was the subject of the notice served in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mrs. Brown wished to buy some property for their intended retirement to Jersey; that Mrs. Brown wished to obtain some security for their old age, and, unless this were obtained, was not prepared to continue to be permanently concerned in the business of the companies and the risks attendant thereon ; that money would have to be raised and for this purpose Mrs. Brown was prepared to sell her shares in the five companies ; that the taxpayer envisaged that, if money could be borrowed from the bank to enable the shares in the five companies to be bought by General, with the money received from such sales, together with other money provided by the taxpayer, property for their retirement could be bought in Jersey ; that to enable this object to be attained, the taxpayer was prepared to guarantee the money borrowed from the bank by General to buy the shares in the five companies; that after the shares were so purchased, a block of flats was bought in Jersey and is still retained . . . 10. It was contended on behalf of the taxpayer--(i) that the provisions of section 28 were not applicable to the transaction of the sale of the shares in the five companies to General, (ii) That the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -only some nine days before the shares of the five companies were purchased--that company admittedly had a balance on its profits and loss account in excess of £25,000. But we held that that could not of itself answer the question raised for our decision, because section 28(2)(c) and {d) required us to determine whether the company had sufficient assets available for distribution by way of dividend. " As the balance sheet as at April 30, 1960, showed, the company then had current assets of approximately £22,855 made up as follows : Sundry debtors and prepayments £250 Quoted investments (Market value £11,768) 12,474 Bank Balance 10,131 £22,855 " Regard cannot, however, be had to assets alone: the liabilities of a company must also be considered in order to determine whether there are assets available for distribution. As at April 30, 1960, the creditors amounted to £28,110, including a provision of £2,144 for a proposed dividend. " The company therefore had at April 30, 1960, an excess of current liabilities over current assets and did not have the funds available to pay a dividend of anything like £25,000. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the bank. The Inland Revenue Commissioners served a notice under section 28 in respect of the alleged tax advantage which the taxpayer obtained through receiving the £ 10,000 free of tax, and notified the taxpayer that certain adjustments were requisite for counteracting the tax advantage, the adjustments in effect consisting of treating the £ 10,000 as if it had been the net amount received in respect of a dividend subject to deduction of tax. The shareholders in General, Reproductive and the five companies consisted of the taxpayer and his wife, with in some cases a few shares vested in one of their sons or in an employee of the taxpayer's accountancy business. The taxpayer, I may say, is a chartered accountant. I do not think that I need deploy in any detail the network of transactions between the companies, though I should say that Reproductive carried on a genuine light engineering business on behalf of General from the incorporation of General in 1952 or soon afterwards. As to the five companies, the tax- payer and his wife bought one in 1952, and incorporated the other four in the same Year. They all carried on the business of hiring out plant and machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shares, for he owned shares in General. His wife was in a similar position, though I should mention that the proportion of indirect ownership was not precisely the same as that of the direct ownership. General's ownership of the shares was, of course, offset by the debt to the bank that General had incurred ; but the £10,000 pounds had come to the taxpayer out of General not as a dividend subject to tax, but as the purchase price of shares, and so free of tax. I accordingly turn to section 28. It is far from simple. It contains twelve subsections and occupies over five pages of the statute book, in addition to relying upon definitions to be found in section 43. Sub- section (2), with which I am primarily concerned, is over a page long, and it is not conspicuously successful in its scheme of sub-division. Subsections (1) and (2) are concerned with defining the circumstances in which the section applies to a person in respect of a transaction, and thus the circumstances in which the tax advantage obtained by him is to be counteracted by making the appropriate adjustments under subsection (3). Subsections (4) to (10) inclusive are mainly procedural, subsection (11) la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in respect of future receipts of the company or is, or represents the value of, trading stock of the company, and the said person so receives the consideration that he does not pay or bear tax on it as income ; " Paragraph (d) runs as follows : " (d) in connection with the distribution of profits of a company to which this paragraph applies, the person in question so receives as is mentioned in paragraph (c) of this sub-section such a consideration as is therein mentioned. " Paragraph (d) thus makes two borrowings from paragraph (c), namely, " such a consideration " and " so receives. " " Such a consideration " in paragraph (d) thus embraces three types of consideration. The consideration must be a consideration (i) " which either is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend, " or (ii) " is received in respect of future receipts of the company, " or (iii) " is, or represents the value of, stock of the company. " What the words " so receives " in paragraph (d) bring in from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments. " This point is short, and I shall deal with it before turning to the main question. The decision of the tribunal on this point was expressed with brevity. The members of the tribunal decided " that on all the evidence, oral and written, the respondent had not shown to our satisfaction that the sale of the shares in the five companies to General Auto-Work Ltd. was carried out for bona fide commercial reasons, or in the ordinary course of managing investments. " Accordingly, on this point the Crown succeeded. Mr. Bates' attack on this decision was to the effect that the members of the tribunal had misdirected themselves in that they reached this conclusion because they decided against the taxpayer under the second of the two conditions under subsection (1) in respect of which the burden of proof lay on the taxpayer, namely, that none of the transactions " had as their main object, or one of their main objects, to enable tax advantages to be obtained. " The members of the tribunal, said Mr. Bates, had misdirected themselves i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the tribunal in fact found that one of the main objects of the transactions was to enable tax advantages to be obtained, then the taxpayer had necessarily failed to establish the second of the two conditions that he had to establish if he was to escape the section. Where the taxpayer must satisfy the conditions, how can it profit him to destroy the tribunal's decision against him on the first condition if the process of destruction involves the demonstration that the tribunal decided against him on the second condition ? If the case stated were to be sent back to the tribunal for amplification, as Mr. Bates sought, I cannot see how on this point it could help the taxpayer. In any case, I am very far from satisfied that there are any grounds for sending this case back, even though there is the curious omission of any express finding on the second condition. In my judgment, there is no ground for impugning the decision of the tribunal that the taxpayer had not established that the sale of the shares was carried out for bona fide commercial reasons, or in the ordinary course of managing investments. There was evidence on which the tribunal could reach this decision, and I answe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a dividend of anything like £25,000 " The second point was that the £25,000 was borrowed from the bank specifically in order to buy assets, namely, the shares in the five companies. " It appeared clear ", said the tribunal, " that the bank would not have lent the£ 25,000 on the sole credit of the company and in our opinion it would have been improper, or at any rate not justified, for the directors to procure the company to incur a bank overdraft of £25,000 for the purpose of declaring and paying a dividend. " One thing seems plain, and that is that the tribunal did not treat " available " as meaning " legally available," as the Crown contends, but treated it as having a more restricted meaning, of the nature of " commercially available, " or " available from the point of view of sound company practice, " or " available " in some sense such as that which Mr. Bates put forward. I do not propose to set out in detail the figures in the balance sheet for April 30, 1960, but I must refer to them in outline, rounding them off. On the right hand side there was £46,000, representing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the tribunal's decision on such a point as the word " available. " I can indeed see the force of this : and if it appeared that the tribunal had adopted and applied the right test in law, the submission would be almost irresistible. But that is what troubles me : I do not know what standards the tribunal have adopted in using and applying the word " available, " or the words " improper " and " not justified. " It has not been suggested before me that the bank loan was subjected to any trust or binding legal obligation to apply it in the purchase of shares, nor has it been suggested that £25,000 or any other sum could not have properly been borrowed for the purpose of paying dividends. It is at least possible that " improper " and " not justified " have a moral favour about them. It would also be odd if it were to be said by the company " We could have borrowed£ 25,000 expressly for paying dividends, and without strings attached to it, and if we had, section 28 would have applied. But as we borrowed it on a basis which made it wrong for us to use it for dividends, section 28 is excluded. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business ? In any case, what is there in the Act to point to any one of these standards instead of the others ? It seems to me that I should be indulging in a bout of speculative judicial legislation if I were to adopt one standard instead of the others. There is one other part of subsection (2) to which I should refer. In the latter part of subsection (2) there are the words which I have already quoted, running " the assets mentioned in paragraph (c) of this subsection do not include assets which (while of a description which under the law of the country in which the company is incorporated is available for distribution by way of dividend) are shown to represent a return of sums paid by subscribers on the issue of securities : " For brevity, I may call this the " foreign law clause. " These words make it plain that whatever may be said by the law governing a foreign company, assets which represent a return of capital are not to be included in " assets " for the purposes of the subsection. The word " available " is there used in relation to what is legally available, and so, says Mr. Monroe, " available " simpliciter in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, " he said, meant that the assets were there, and so it imported something more than being legally distributable. I am not at all sure that even in the end I succeeded in perceiving the cogency of this part of the argument. I would have thought that assets could hardly be " distributable " unless they are there, any more than they can be " available for distribution " unless they are there. In any case, experience is not sufficiently uniform to support any presumption that the draftsman of a statute invariably uses an irreducible minimum of words. The fruit of undue brevity, like that of undue prolixity, is often a heigetened obscurity ; and no two draftsmen, set the same problem, are likely to emerge with drafts identical language and length. Certain authorities were put befor me, but I found them of little assistance on the points that I have to decide. Of the cases on the phrase " profits available for dividend, " Fisher v. Black & White Publishing Co. * and Long Acre Press Ltd. v. Odhams Press Ltd. did not seem to me to carry the matter further. " Profits " are, of course, very different from " assets ". Mr. Monroe, inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pjohn said in Cleary's case , at page 791 : " This may seem a harsh conclusion, as indeed it is, but this is a matter for Parliament. It must always be remembered that this section does not hit, and is not intended to hit, a bona fide commercial transaction or the management of investments in the ordinary course, unless a main object is to obtain a tax advantage. Furthermore, there are certain other built-in safeguards of which the taxpayer can avail himself. By virtue of sub-section 10(b) the taxpayer can inform the Inland Revenue of his intention, and can get a ruling from them as to whether, in their opinion, it falls within the ambit of section 28. Then if the transaction is challenged by a notice given by the Inland Revenue, the taxpayer can (and in this case did) file a statutory declaration by virtue of sub-section (4), and then there is an appeal to a tribunal constituted as mentioned in sub-paragraph (7) who are empowered to determine whether or not there is prima facie case for proceeding in the matter. " Section 28 is a wide-ranging section, and having provided reasonable safeguards for the bona fide or ordinary transaction, I do not think that the legis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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