TMI Blog1962 (3) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... d in 1948 and carried on business as merchants up to some date in the year 1953-54 when that business ceased...For the year 1952-53 the company incurred in the said business a loss of 13,585, which was admittedly available for carry forward to 1953-54 for the purposes of relief under...section 341... 3. At an extraordinary general meeting of the company held on October 8, 1953, the following resolutions were passed... (1) Resolved that the provisions of the memorandum of association of the company be altered by inserting...the following new paragraph, namely: To carry on the business of buying or...selling...or dealing in...or otherwise turning to account...shares, stocks, bonds, debentures or other securities of any company...which may seem capable of profitable handling. (2) Resolved that the articles of association of the company be altered in that clause 66 of Table A to the Companies Act, 1929, shall henceforth not apply to the company...' 4. On December 4, 1953, the company purchased all the issued share capital (1,000 1 shares) of Julius Bendit Ltd. for 16,900 borrowing for the purpose from another company, Boclift Ltd. Shortly afterwards Julius Bendit Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d among current assets: Income tax recoverable (not yet agreed) 13,010 14s. od. Sir Jocelyn Simon Q.C., S.-G. and Allen Orr for the Crown. The submissions for the appellant are: (1) The criterion of trade is (in general) the objective of making a trading profit: Brighton College v. Marriott [1925] 1 K.B. 312, 319, 321-322, 326-327; 41 T.L.R. 165, C.A.; [1926] A.C. 192, 203-204; 42 T.L.R. 228, H.L.; Inland Revenue Commissioners v. Livingston 1927 S.C. 251, 255, 256; 11 Tax Cas. 538, 542, 543.; Smith's Potato Estates Ltd. v. Bolland [1948] A.C. 508, 517, 520, 527; 64 T.L.R. 430; [1948] 2 All E.R. 367; [1949] 17 I.T.R. (Suppl.) 1, H.L.; Johnson v. Jewitt [1961] 40 A.T.C. 109, 117, 121-125; [1961] 40 A.T.C. 314, C.A.; Jenkinson v. Freedland 1960] 39 A.T.C. 452; [1961] 40 A.T.C. 190, C.A. This was in fact the criterion applied by the Court of Appeal. (2) In determining whether a trading profit has been sought, it is net profit, not gross profit, which is relevant: Edwards v. Bairstow [1956] A.C. 14, 37; [1955] 3 W.L.R. 410; [1955] 3 All E.R. 48; [1955] 28 I.T.R. 579, H.L. (3) Recovery of tax is not part of the trading activities of a company and tax repaid is not pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther evisceration of the shares and tax recovery: Inland Revenue Commissioners v. Livingston.( 1927 S.C. 251, 256; 11 Tax Cas. 538, 543.) (6) No inference can be drawn from the fact that Parliament subsequently legislated specifically to ensure that a transaction such as this would not result in repayment of tax, since; (a) the beliefs and assumptions of those who frame legislation do not make the law: Dowdall O' Mahoney Co. Ltd. v. Inland Revenue Commissioners([1952] A.C. 401, 414-417, 421, 426.); Kirkness v. John Hudson Co. Ltd.( [1955] A.C. 696, 713-714; [1955] 2 W.L.R. 1135; [1955] 2 All E.R. 345, H.L.) (b) In the sphere of tax avoidance Parliament must act expeditiously, and from abundance of caution and in advance of adjudication: Johnson v. Jewitt 40 A.T.C. 109. (c) There may be dividend stripping operations where a commercial profit is sought as well as a tax repayment; the subsequent legislation would in any event have been needed to deal with such transactions. This is a sphere where it would be particularly unsafe to make assumptions as to Parliament's beliefs. (7) For the reasons given by Donovan L.J. in the Court of Appeal (with or without th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .J. Brennan for the respondent company. The case has now been put differently from the way it was put in the Court of Appeal. All the evidence was directed to the Crown's contention that the appellant company was not carrying on a trade or an adventure in the nature of trade of dealing in shares in 1953-54. That was the Crown's only contention. By reference to the decision in Edwards v. Bairstow [1956] A.C. 14; [1955] 28 I.T.R. 579., the Crown does not submit that the decision of the Special Commissioners was perverse, but it is said that the only reasonable conclusion would have been that there was not here either trading or an adventure in the nature of trade: see Lord Radcliffe in Edwards v. Bairstow. Ibid. 36, 39. On the facts before the Special Commissioners everything points to trade or an adventure in the nature of trade unless as a matter of law the company's activities cannot amount to trade because the trader had his eyes wholly or mainly on the fiscal results of the transactions. That confuses the transactions themselves with the results of the transactions. By all normal tests of trade, this was a trading activity. The only ground upon which this loss canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also agree to the Crown's third proposition, but it does not affect the result in this case, for the recovery of tax is the result of the trading activities of the company. The cases of Smith's Potato Estates([1948] A.C. 508; [1949] 17 I.T.R. (Suppl.) 1.) and Rushden Heel([1948] L.J.R. 1570; [1949] 17 I.T.R. (Suppl.) 19.) do not advance the matter because they are not relevant to the issue. The Crown's fourth and fifth propositions are extensions of its earlier propositions. The fifth harks back to the first. Trading activities are not vitiated as such because the intention is not to make a profit but to recover tax. One must see what is done, and if what is done is in the usual line of business concerned, there is a strong inference that it is an activity of trade. Farming is nonetheless a trade because a man carries on a dairy farm for pleasure, because he likes animals or because he likes fresher butter than he can get in the shops, even if he makes a loss. Men go into hobby farming regularly assuming that they will make a loss. The only reason why a burglar is not assessed to tax on the profits of his vocation is that burglary is not a trade: see Southern v. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out this case. The transaction was normal. There was no fact found from which the commissioners could have come to their conclusion. Sir Jocelyn Simon Q.C., S.-G. in reply. The respondent company also is not arguing here the same case as it did in the Court of Appeal([1961] 40 A.T.C. 132, 134.). The commissioners were not precluded in law from considering the fact that no trading profit was sought here. If it is objected that the object of making a profit is not the criterion of trading, I am content to say that it is of the very essence of trade : Livingston v. Inland Revenue Commissioners(1927 S.C. 251, 256; 11 Tax Cas. 538, 543.). One is not shut out from considering the purpose of the transactions: see the Brighton College case([1925] 1 K.B. 312. 579.), the Smith's Potato case([1948] A.C. 508, 527; [1949] 17 I.T.R. (Suppl.) 1.) and the Stonehaven case() 1930 S.C. 206, 211-212; 15 Tax Cas. 419, 426.). Rutledge v. Inland Revenue Commissioners(1929 S.C. 379; 14 Tax Cas. 490.) is a useful illustration, because the only way to tell whether a man buys a picture to resell at a profit or to put it on his wall and enjoy it and sell it later, is to look at his intention at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it must be assumed that their determination can only have been based on the facts (1) that the Claiborne transaction was an isolated one in the year of assessment, and (2) that the shares were purchased with a view to obtaining a dividend against which it could claim to set off its losses. The first of these reasons, if not formally abandoned, was not seriously maintained before your Lordships and appears to me quite unsustainable. It was the second reason that was urged as justifying the commissioners' determination. I hope that I do no injustice to the argument for the Crown if I say that it rested entirely on the proposition that the essence of a trading transaction is that its object is to make a profit and that the found object of this transaction was the ulterior one of obtaining a dividend against which it could claim to set off its losses. This proposition was supported by the fact that the shares were bought for 15,900 and sold for 1,000, a transaction which, thus baldly stated, could not be regarded as a favourable or even a normal one from the point of view of a dealer in shares. But, my Lords, attractive as this proposition is, and attractively as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s bought these shares for 16,900. The commissioners found as a fact, and it is not disputed, that they bought the shares with a view to obtaining a dividend against which they could claim to set off losses. Claiborne, now controlled by the respondents, duly declared a dividend on January 26, 1954, and the net sum of 15,901 19s. 3d was received by the respondents. The shares were then immediately sold for 1,000. So the respondents made neither profit nor loss beyond having to pay any expense involved in carrying through these operations: they spent 16,900 and they got back 15,901 19s. 3d. plus 1,000. But they got what they had planned to get, a large dividend paid out of money which had borne tax. If this was a trading operation, that enabled them, as the law then stood, to recover from the Revenue a large amount of income tax which they had never paid. The respondents were originally merchants. In that trade they incurred substantial losses. They ceased to carry on that trade but were entitled to carry forward a loss which was available to be taken into account in their claim for relief under section 341. In October, 1953, two months before they bought the Claiborne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, its object and intention are certainly relevant to show that the price was not a trading expense. The respondents relied on what was said in five cases. In each the question was whether there was trading or an adventure in the nature of trade. Certainly these cases establish that operations of the same kind and carried on in the same way as those which characterise ordinary trading should be held to be trading, though there may be no intention to earn profit or though the transaction may be an isolated one. In Inland Revenue Commissioners v. Incorporated Council of Law Reporting([1888] 22 Q.B.D. 279, D.C.), Carnoustie Golf Course Committee v. Inland Revenue Commissioners(1929 S.C. 419; 14 Tax Cas. 489.) and Inland Revenue Commissioners v. Stonehaven Recreation Ground Trustees(1930 S.C. 206; 15 Tax Cas. 419.) there was no intention or attempt to earn a profit, but profit was in fact made. Inland Revenue Commissioners v. Livingston(1927 S.C. 251; 11 Tax Cas. 538.) and Edwards v. Bairstow([1956] A.C. 14; [1955] 28 I.T.R. 579.) were cases of isolated transactions where a profit was earned. But in none of these cases were the activities which were held to be trading mere steps tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the particular Act is concerned. The court or tribunal may be assisted by legal principles or by so-called rules of construction, but these cannot solve the question. The question whether the words of an Act apply to particular facts is generally called a question of law. But, to my mind, it is in reality neither a question of law nor a question of fact. It cannot be solved either by the application of legal principles or by evidence. A court or tribunal could, no doubt, proceed by first translating the words of the Act into other words (whether or not those other words be called the meaning of the words of the Act) and then seeing whether those other words apply to the particular facts. But we have been warned time and again that it is dangerous and wrong to proceed in that way. The question is whether the words of the Act apply to the facts of the case. In some exceptional cases the question whether a particular word or phrase in an Act applies to particular facts has come to be regarded, for reasons that I do not fully understand, as a question of fact. A line of authorities culminating in Edwards v. Bairstow [1956] A.C. 14; [1955] 28 I.T.R. 579 has decided that that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... add that what I have said does not mean that it would never be unreasonable to say that a case of dividend-stripping was not trading. There may well be elements of trading involved in other cases to such an extent that it would be unreasonable to deny that there was trading. The question may be one of degree. But in the present case almost the whole of the money put out, some 95 per cent., was transformed into a dividend, and the commissioners were, I think, well entitled to say that was not trading. LORD DENNING. My Lords, your Lordships are here faced for the first time with a dividend-stripping transaction. What is it? To put it bluntly it is a way of getting money out of the Revenue authorities. To succeed in it the prospectors must get into their hands: (1) a dividend on which tax has been paid; and (2) losses sustained in trade. They then claim repayment of the tax on the ground that it is relief due to them on account of the losses. The best way to understand it is to take first a straightforward case of relief against losses. Suppose a man carries on the trade of farming and makes a loss on it of 250 in the year. But he has also an investment in shares which br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., and with that sum they paid back the 15,900 they had borrowed, and then resold the shares for 1,000. Now, what was the net result of that dividend-stripping operation? In point of fact (apart from tax benefits) Harrisons made a gross profit of 1 19s. 3d. This trifling sum was, of course, not the object of the exercise. The object was two-fold: first, to get a dividend in hand on which tax had already been paid, secondly, to get losses in hand which would serve as a basis for a claim for repayment of tax. The losses of Harrisons came to 29,485 as follows:-- Losses on merchandise ... ... 13,585 Loss on the shares of Claiborne Bought for ... ... 16,900 Sold for ... ... ... 1,000 Loss ... ... ... 15,900 15,900 29,485 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an could reasonably come to that conclusion. Then, but not till then, he is entitled to interfere. It is just like the position in the old days with juries when questions arose whether goods were necessaries, whether words were defamatory or whether conduct was negligent. It was a question of law for the judge to rule whether the inference could reasonably be drawn, but a question of fact for the jury whether it ought to be drawn. Likewise we have nowadays the cases before magistrates whether a speed was dangerous, or before the Lands Tribunal whether part of a plant was in the nature of a structure, or before the Commissioners of Inland Revenue whether a transaction was an adventure in the nature of trade. It is a question of law for the judge whether the conclusion could reasonably be drawn, but, given that it could reasonably be drawn, it is a question of fact for the tribunal whether it ought to be drawn. Mr. Borneman urged your Lordships to say that on the undisputed facts the commissioners could not reasonably have come to the conclusion they did. There was only one true and reasonable conclusion to which the commissioners could come, namely, that the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was none here, you at least have some grounds, and reasonable grounds at that, for thinking there was not a trade nor an adventure in the nature of trade. The judges below seem to have realised this and only got over it by finding that the profit-motive was present. They thought this transaction had, as its object, the making of profit and was therefore an adventure in the nature of trade. Thus Danckwerts J. Said [1969] 39 A.T.C. 287, 290 that Harrisons acquired the shares in question for the purpose of making a profit out of those shares. Holroyd Pearce L.J. said 40 A.T.C. 132, 134., that the object was a substantial profit through repayment of tax. Upjohn L.J. said Ibid. 135 the purpose was making a profit on the adventure, a profit by recovery of tax. Mr. Borneman did not seek to support this reasoning. He was reluctant to accept the gift thus held out to him. He feared the dangers of it. He had to admit that the object of Harrisons was not to make trading profits. It was to get repayment of tax, which is a very different thing. Can repayment of tax be properly described as profits of a trade? Surely not. If it were so, the repayments of tax which a dividend-stri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so entered into the company will pursue its application for relief under section 341 of the Income Tax Act, 1952. In this appeal your Lordships are not concerned to consider that application or its results. The company bought the shares in question on December 4, 1953. The shares consisted of all the issued share capital of Julius Bendit Ltd. Shortly afterwards Julius Bendit Ltd. changed its name to Claiborne Ltd. When on December 4, 1953, the company bought the shares the memorandum of association of the company as altered showed that among the objects of the company was that of carrying on the business of buying or otherwise acquiring and selling or dealing in and disposing of shares and stocks of any company. On January 26, 1954, Claiborne Ltd. declared a dividend. The net dividend was received by the company. On June 4, 1954, the company sold the shares. There was no evidence that in the year 1953-54 the company bought or sold any other shares, but it was not disputed that in the following year the company was carrying on a trade of dealing in shares. There has never been any doubt as to what was the motive or reason which inspired the decision of the company to enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of that nature merely because it was entered into with expectation that as a result (but not as part of the trading activity of the company as such) some tax recovery might be claimed. It is doubtless true to say that in general a trader embarks upon trade with the intention of making a profit: but it cannot be said that if this intention is lacking there is no carrying on of a trade. A trade may be carried on with the knowledge that losses will result. Equally it seems to me that if on any ordinary examination of them certain transactions must be regarded as trading transactions or adventures in the nature of trade they do not cease to be such because those conducting them have embarked upon them with a view to obtaining some fiscal benefit. It was urged in the present case that the transaction in the shares of Claiborne Ltd. ought to fail to be regarded as a trading transaction because in its real nature it was a fiscal transaction. My Lords, I cannot regard these as alternative descriptions. There may be trading transactions which can be the prelude, if the state of the law so allows, to tax-recovery activities. If tax recovery is possible it is as taxpayers and not as trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference between the price paid for the shares of 16,900 and the price realised of 1,000 upon sale of the shares. This loss, they claimed, was available for relief under section 341 of the Income Tax Act, 1952. The commissioners found that the transaction was not entered into as part of any trade of dealing in shares and was not an adventure in the nature of trade, and that the company was not carrying on any such trade in 1953-54. Danckwerts J. and the Court of Appeal reversed the determination of the commissioners and held that the company was carrying on trade during the relevant period. The finding of the Commissioners cannot be disturbed unless it was arrived at upon a view of the facts which could not reasonably be entertained: Edwards v. Bairstow [1956] A.C. 14; [1955] 28 I.T.R. 579. --Viscount Simonds Ibid. 29 and Lord Radcliffe Ibid. 30, 39. The commissioners give no reasons for their finding: they simply state the facts and their conclusion. One is therefore left in doubt as to the reasons which led them to their conclusion. It can, of course, be said that their finding was upon a review of all the facts. But if it can be substantiated that any reason which they mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itations from cases were quoted in order to show that to ascertain whether there was trading it was relevant to look at the object, result or intention of the activity: see, for example, Inland Revenue Commissioners v. Livingston(1927 S.C. 251; 11 Tax Cas. 538.), Lord President Clyde(1927 S.C. 251, 256; 11 Tax Cas. 538, 543.); Inland Revenue Commissioners v. Stonehaven Recreation Ground Trustees(1930 S.C. 206; 15 Tax Cas. 419.), Lord President Clyde(1930 S.C. 206, 211-212; 15 Tax Cas. 419. 426.). No doubt if it is established that a transaction is entered into with the evident intention of making a profit, that may be a strong indication that the company was trading. But the corollary by no means follows that the absence of an intention to make a profit or the intention to make a loss negatives trading. The test is an objective one. The question to be asked is not quo animo was the transaction entered into but what in fact was done by the company: see Inland Revenue Commissioners v. Incorporated Council of Law Reporting(22 Q.B.D. 279.), Lord Coleridge C.J.( Ibid. 293-294.); Carnoustie Course Golf Committee v. Inland Revenue Commissioners(1929 S.C. 419; 14 Tax Cas. 498.), Lord Presi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
