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TMI Blog1970 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 hearing before the special commissioners pursuant to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 in paragraphs (ix) and (xii) below. (iii) Mrs. Brown and one J. A. Griffiths were sole directors of General at all m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral. (viii) The business of General was successful and in 1957 General purchased from each of the five companies all the plant and machinery owned by those companies, (ix) It being apparent in 1958 that General would require more money to purchase additional plant and machinery, and the five companies still having the money they received upon the sale of their plant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Trade Participation should not be required to bring any capital into the partnership, but General and the five companies would bring into the partnership all the existing assets of their partnership; (d) that Trade Participation should promote the interests of the partnership, concern itself with the economic running of the factory 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed 25 000 from Barclays Bank Ltd. 8. The reasons for the sale of the shares in the five companies to General referred to in paragragh 7(xv) above were stated in evidence by the taxpayer to be as follows : that he and 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the legislature directed us to determine the matter by reference to the position at the time the shares in the five companies were purchased by General alone. On the balance sheet of General as at April 30, 1960--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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000, General borrowed 25,000 from a bank. The bank charged only two per cent. interest on this loan, for the taxpayer, his wife and a company called Reproductive Engineering Ltd. (which I shall call Reproductive ) undertook to keep at least 25,000 on current account with 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 behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction, the taxpayer owned those shares : after the transaction he was their direct owner no longer, but he had the 10,000 in his pocket, and indirectly, through their new owner, General, he had an interest in 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 circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re (or apart from anything done by the company in question would have been) available for distribution by way of dividend, or is received 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments. 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 in that they held that when a main objects was to obtain a tax advantage, that showed that the transaction was not carried out for bona fide com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessarily 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 answer the first question in the case stated accordingly. I turn, then, to the main point, the words assets which are (or apart from anything done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 General's interest in the partnership assets. Current assets were 23,000 consisting in the main of 12,000, for quoted investments and 10,000 balance at the bank. On the left hand side was the issued share capital of 5,000 revenue reserves of 36,000 (consisting mainly of 35,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The real difficulty, however, lies in the word available. If that means, as the Crown contends, lawfully available, then there is little difficulty. It is usually easy enough to infer that words in an Act of Parliament referring to some state of affairs mean that state of affairs according to law and not contrary to it, or disregarding it, or applying other unspecified standards. Mr. Warner remained me that in Income Tax Special Purposes Commissioners v. Pemsel , Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scription 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 paragraph (c) ought to be read in the same way. One may expand this argument a little. If available in paragraph (c) means legally available, then the foreign law clause falls neatly into place. In the ordinary case, assets representing a return of capital are not available because they are not legally available ; and even if the company is a foreign company and under the relevant law such assets are legally available, the foreign law clause prevents them being available for the purposes of paragraph (c). All companies are thus on the same footing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th. 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, indeed, observed that in a balance sheet one may see where the profits are simply by looking at the left hand side, whereas the assets appear on the right hand side, and their availability in any sense can be determined only by looking at the left hand side as well. I am concerned here, too, with a statute directed against tax avoidance, and not merely with contractual rights in or against a company. Inland Revenue Commissioners v. Parker * and Inland Revenue Commissioners v. Cleary were helpful as providing background material on section 28, the latter case being of a similar type to the case before me ; but they did not throw any real light on what I have to decide. In the Tax Cases, Parker's case *, I may say, had one of the most uninformative headnotes that I can remember reading ; it may ..... X X X X Extracts X X X X X X X X Extracts X X X X
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