1957 (4) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Tax liability on the value of shares transferred.
2. Determination of whether the shares were profits from office or employment.
3. Admissibility and impact of evidence explaining the deeds of covenant.
4. Timing of tax assessment based on the value of rights under the deeds.
5. Specific contention regarding the office held by Hewitt.

Issue-wise Detailed Analysis:

1. Tax Liability on the Value of Shares Transferred:
The primary issue was whether the value of shares transferred to the appellants constituted taxable income. The court considered that if there was any liability to tax, the taxable receipt consisted of the value of the shares on July 27, 1953, which would be a receipt for the year 1953-1954. The appellants argued alternatively that if there was any liability, it should be based on the value as of December 30, 1945, making it a receipt for the year 1945-1946 and thus out of time for assessment.

2. Determination of Whether the Shares Were Profits from Office or Employment:
The court examined whether the benefits received (the shares) were profits from the appellants' offices or employment under the company. The court referred to several authorities, including Herbert v. McQuade, Blakiston v. Cooper, and Seymour v. Reed, to determine the principles applicable. The court concluded that the shares were given "in consideration of the covenantee continuing in his present engagement with Meccano Ltd. until the expiry of four years from the date hereof," thus constituting remuneration for services rendered.

3. Admissibility and Impact of Evidence Explaining the Deeds of Covenant:
The court discussed the admissibility of evidence explaining the reasons for the inclusion of the consideration in the deeds of covenant. The special commissioners had rejected certain evidence as inadmissible. The court agreed with the Crown's submission that the evidence, even if admitted, would not assist the appellants. The court emphasized that the deeds' plain terms could not be contradicted by extrinsic evidence.

4. Timing of Tax Assessment Based on the Value of Rights Under the Deeds:
The appellants contended that the proper subject of assessment should be the value of the rights acquired under the deeds of covenant in December 1945. The court rejected this argument, holding that the taxable profit consisted of the value of the shares at the date they were transferred (July 27, 1953), not at the date of the deeds.

5. Specific Contention Regarding the Office Held by Hewitt:
Hewitt argued that since he ceased to hold the office of secretary in January 1951, the shares transferred in July 1953 should not be taxable. The court found that Hewitt continued to hold the combined offices of director and secretary for the requisite period and was still a director when the shares were transferred. Therefore, Hewitt could not escape liability to tax.

Separate Judgments:
- Jenkins, J.: Concluded that the shares were taxable as profits from the appellants' offices or employment. He emphasized that the deeds of covenant clearly indicated the shares were given in consideration of continued service, thus constituting remuneration.
- Morris, L.J.: Disagreed with Jenkins, J., and concluded that the shares were not taxable as they were given as a personal gift rather than remuneration for services. He emphasized the distinction between remuneration and personal gifts.
- Sellers, L.J.: Agreed with Morris, L.J., and concluded that the shares were a gift and not taxable. He emphasized that the transaction did not constitute remuneration or profit from employment.

Conclusion:
The majority (Morris, L.J., and Sellers, L.J.) allowed the appeals, concluding that the shares were not taxable as they were given as a personal gift rather than remuneration. Jenkins, J., dissented, holding that the shares were taxable as profits from the appellants' offices or employment. The final decision was to allow the appeals and restore the decision of the special commissioners.