Frodingham Ironstone Mines Ltd v Inland Revenue Commissioners

 Frodingham Ironstone Mines Ltd v Inland Revenue Commissioners

COMPANY; Shares: TAXATION; Other Taxation

KING’S BENCH DIVISION

MACNAGHTEN J

30 OCTOBER 1945

Revenue – Excess profits tax – Purchase of shares in another company – Direction – Construction – Whether investment or capital employed in business –

Finance Act, 1940 (c 29), s 28 and Sched V – Finance Act, 1941 (c 30). s 35.

The shares in both the appellant company, which made excess profits, and in another company, which was being run at a loss, were held in toto by trustees of

a will. With a view to reducing the liability of the appellant company to excess profits tax the trustees sold to the appellant company their holding in the

second company at a purchase price part of which was paid in cash, the balance remaining on mortgage. By virtue of the Finance Act, 1940, s 28, the second

company thus became a subsidiary of the appellant company for purposes of excess profits tax. The Commissioners of Inland Revenue made a direction under

the Finance Act, 1941, s 35, that the excess profits tax liability of both companies should continue to be computed on the basis that they remained independent

companies to which the provisions of the Finance Act, 1940, s 28 and Sched V do not apply. The question for the determination of the court was whether,

upon a true construction of the direction, the sum employed in the purchase of the shares by the appellant company should for the purposes of excess profits

tax be regarded as an investment or as capital employed in the business. It was contended on behalf of the appellants that since the provisions of the Finance

Act, 1941, s 35, enabled the Commissioners to give directions for adjustments to be made so as to counteract the avoidance or reduction of liability to excess

profits tax it could not be right that a direction should, as this direction in fact did, increase the liability to excess profits of the appellant company beyond the

amount which it would have been if the transaction had never taken place:—

Held – The transaction was in fact a purchase of an investment and the 􀂭 168􀀉 sum expended in the purchase of the shares must be so treated in the accounts

of the appellant company whose liability to excess profits tax for the accounting periods affected should be computed accordingly. The appeal must,

therefore, be dismissed.

Notes

It is argued that a direction given by the Commissioners under the Finance Act, 1941, s 35, must not be construed in such a way as to impose a greater liability

to excess profits tax than if the direction had not been given. The purchase of the shares, however, undoubtedly constituted a payment of capital moneys for

the acquisition of an investment, and it is held that it must be so treated although the scheme for tax avoidance failed by reason of the direction of the

Commissioners.

For the Finance Act, 1940, s 28 and Sched V, see Halsbury’s Statutes, Vol 33, pp 179, 194; and for the Finance Act, 1941, s 35, see ibid, Vol 34, p 131.

Case Stated

Case Stated under the Finance (No 2) Act, 1939, s 21(2) and the Income Tax Act, 1918, s 149, by the Commissioners for the Special Purposes of the Income

Tax Acts for the opinion of the King’s Bench Division of the High Court of Justice.

The sole point for determination was whether upon a true construction of a direction of the Commissioners of Inland Revenue a sum paid in cash by the

appellant company towards the purchase of shares in another company should be regarded for the purposes of excess profits tax as an investment or as capital

employed in the business.

It had been conceded in a previous appeal to the Commissioners, on the ground that the direction ought not to have been made, that the main purpose of

the transaction of the purchase of the shares was the reduction of excess profits liability and that appeal failed.

The decision of the Commissioners was that the sum expended in the purchase should be properly regarded as an investment by the appellant company

and not as capital employed in its business and that the company’s liability to excess profits tax should be computed accordingly.

The facts are fully set out in the judgment of MacNaghten J.

G G Honeyman for the appellants.

The Solicitor General (Sir Frank Soskice KC) and Reginald P Hills for the respondents.

30 October 1945. The following judgment was delivered.

MACNAGHTEN J. The appellant, the Frodingham Ironstone Mines Ltd is a company limited by shares which was registered under the Companies Act, on 1

June 1918. It was formed by the late Lord St Oswald to take over and operate certain ironstone mines which belonged to him, and which he theretofore had

been operating himself. About the same time he formed another company called the Nostell Colliery Ltd to take over a colliery belonging to him which up to

that date he had been working. All the shares in these companies belonged to the late Lord St Oswald. When he died, he bequeathed the shares to the trustees

of his will on the trusts therein contained.

By the Finance Act, 1940, s 28, it was provided that, where one company held more than a certain percentage of shares in another company, the two

companies should be treated as a single unit for the purposes of the excess profits tax. It so happens that the appellant company is a prosperous company

making excess profits; whereas the colliery company is being carried on at a loss. For the purposes of reducing the liability to excess profits tax, the trustees

of the estate of the late Lord St Oswald, who hold all the shares in both the companies, decided that the appellant company should buy all the shares in the

colliery company so that that provision might come into effect, and the amount payable as excess profits tax by the appellant company would be diminished.

It was provided by the Finance Act, 1941, s 35, that, where the Commissioners of Inland Revenue are of opinion that the main purpose for which any

transaction was effected was the avoidance or reduction of liability to excess profits tax, they may, if they think fit, direct that such adjustments shall be made

as respects liability to excess profits tax as they consider appropriate “so as to counteract the avoidance or reduction of liability to excess profits tax which

would otherwise be effected by the transaction.” The price paid by the appellant company for the shares of the colliery company was £99,950, of which

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All ER 1946 Volume 1

Preamble

£19,950 was paid in cash, and the balance of the purchase price remained on mortgage.

There is no doubt that the purchase of the shares of the colliery company 􀂭 169􀀉 was entered into for the purpose of reducing the liability of the

appellant company to excess profits tax. Therefore, the Commissioners of Inland Revenue thought fit to give a direction making the adjustments which they

considered appropriate so as to counteract the reduction of that liability. The direction they gave was this:

‘That the excess profits tax liability of both companies should continue to be computed on the basis that they remained independent companies to

which the provisions of the Finance Act, 1940, s. 28 and Sched. V, do not apply.’

The result of that direction is that the £19,950 which the appellant company has paid in respect of the purchase of the shares in the colliery company

must, for the purposes of the calculation of the excess profits tax of the appellant company, be treated as capital moneys paid away for an investment acquired

by the company, with the consequence that the standard of the appellant company, for the purposes of excess profits tax, is proportionately reduced, and the

reduction of the standard raises the amount of the excess profits payable by the appellant company. There was an appeal against the direction on the ground

that it ought not to have been made, but that appeal failed. There was no alternative appeal that this direction should be modified.

This present appeal is only concerned with the true construction of the direction. It is said that, since the provisions of sect 35 [of the 1941 Act] enable

the Commissioners of Inland Revenue to give directions for adjustments to be made so as to counteract the avoidance or reduction of liability to excess profits

tax, it cannot be right that a direction should actually increase the liability to excess profits tax of the appellant company beyond the amount which it would

have been if the transaction which gave rise to the power of the Commissioners to give the direction to make the adjustments had never taken place.

The direction seems to me to be perfectly right. Up till the time when the direction was given, for the purposes of excess profits tax, the profits of each of

these companies was treated as a separate subject-matter of taxation. That has continued. In their assessment the excess profits tax is to remain the liability of

each company separate from the other. In ascertaining the amount, if any, of the tax to which the company is liable, all the transactions which have taken

place during the accounting period must be taken into account including the transaction whereby the appellant company parted with £19,950 in respect of the

purchase of the shares of the colliery company. As it was in fact a purchase of an investment, it must be so treated in the accounts. That is the construction

which the Special Commissioners placed upon the direction, and, in my opinion, they were right.

Therefore, this appeal must be dismissed with costs.

Appeal dismissed with costs.

Solicitors: Currey & Co (for the appellant); Solicitor of Inland Revenue (for the respondents).

P J Johnson Esq Barrister.

[1946] 1 All ER 170