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TMI Blog1960 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... sified shares of 1 each in the capital of the company be classified as ordinary shares, and that the directors be authorised to grant options over such shares, or any of them, to executives of the company or its subsidiaries at such times, and generally on such terms and subject to such conditions, as the directors should think proper. Pursuant to this resolution the directors of the company at a board meeting held on October 6, 1954, resolved that options upon the terms contained in a draft letter then produced to subscribe for ordinary shares in the company at 68s. 6d. per share (being the middle price ruling on the Bristol Stock Exchange on that day) be granted to the executives. The appellant, accordingly, as secretary of the company, sent to each of the executives, including himself, a letter, of which the salient conditions were that he was granted at the price of 1 for every 100 shares an option to purchase a specified number of shares at the price of 68s. 6d. per share, such option to be exercisable at any time within 10 years from the date of the grant of the option. The option was expressed to be nontransferable and was to expire upon the death or retirement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal, as I have already said, decided in favour of the Crown. My Lords, once more your Lordships have to consider the words of rule 1 of the Rules applicable to Schedule E contained in the Ninth Schedule to the Income Tax Act, 1952, which are as follows: Tax under Schedule E shall be annually charged on every person having or exercising an office or employment of profit mentioned in Schedule E... in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment........... Summarily the question is: Was the difference between (a) the market price on March 28, 1956, 1,025, and (b) the option price, 856 5s., plus a proportionate part of the cost of option, 2 10s., a perquisite or profit therefrom, that is, from the office of secretary held by him, for the year of assessment? The curious feature of this case is that the Crown appears to reach the conclusion that, the sum of 166 was assessable for the year 1955-56 by first denying that the grant of the option was itself a perquisite or profit of the year 1954-55, and this is, I think, the aspect of the case that must first be examined. For it would not, as I unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. With great respect to the learned Lord justice and to counsel who put it in the forefront of his argument, I find great difficulty in giving any weight at all to this consideration. It is mere guess-work what use of the option was intended or desired, I would not myself assume that the company intended that the grantee of an option should for ever, or for a day longer than he wished, hold the shares that he took up, or that he should not at once, if he wished, reap the benefit of a rise in price. But, guess right or wrong, there is nothing to prevent him doing so: that is his legal right, and, if he could so deal with the shares when acquired, nothing could prevent him so using his option by arrangement with a third party as to secure for himself a similar advantage. Two other adjectives are used by the Lord justice, unrealised and unvalued. But the fact that there was no realisation in the sense of actual turning into money is irrelevant. The test is whether it is something which is by its nature capable of being turned into money. Nor is it relevant that it is unvalued. I have little doubt that, if the Revenue authorities had addressed their minds to the proper questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e due to numerous factors which have no relation to the office of the employee, or to his employment in it. The contrast is plain between the realised value, as it has been called, of the option when the shares are taken up (though the realisation falls short of money in hand) and the value of the option when it is granted. For the latter is nothing else than the reward for services rendered or, it may be, an incentive to future services. Unlike the realised value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the Crown. My Lords, as I have said, the Court of Appeal were constrained to decide this case in favour of the Crown in deference to the decision of the Court of Session in Forbes [1958]S.C. 177. I agree that the two cases are not in any material respect distinguishable and think that they took the proper course in following it. The single fact upon which Roxburgh J. [1959] 1 W.L.R. 667, 682 appeared to rely, that in that case, unlike this, the grant of the option was gratuitous, cannot in my opinion affect the issue. The reasoning by which the learned judges in Forbes [1958]S.C. 177 supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1957] 2 All E.R. 281; 37 T.C. 289; 33 I.T.R. 653, 885 C.A there are to be found observations of Danckwerts J. and Jenkins L.J. which support the contention of the respondent. But the substantial issue in that case was whether shares which had been issued to the taxpayer were or were not profits of his office. The question whether the profit lay in the right to acquire shares or in the shares when acquired was a subsidiary issue which in the event did not arise. If, as I think they probably were, the relevant facts of that case were indistinguishable from those of the present case, I must with respect decline to follow that decision. Upon a consideration of the whole case I am of opinion that this appeal should be allowed with costs here and below. LORD REID. My Lords, in 1954 the company of which the appellant is secretary offered to its executives options to buy a number of unissued shares at 68s. 6d., which was then the market price. The options were not transferable and were to endure for 10 years if the purchaser remained so long in the company's service. The price of the option was 1 per 100 shares and in October, 1954, the appellant acquired an option on 2,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of grace of the company 10 years earlier. If in 1965 he held 2,000 shares which he had acquired in 10 different parcels under his option he would have made precisely the same profit on each share -the difference between 68s. 6d., the price under the option, and the then market price. But he would have been taxed very differently in respect of each parcel, the tax depending on the market price at the date when he had acquired it--for it is not suggested that further appreciation after shares have been allotted can be taxed. Moreover, let me suppose that the option had been exactly the same except that it was to last for 10 years whether the appellant remained in the service of the company or not. It could hardly be that that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option and not the issue-of the shares the perquisite. If, then, it was exercised years after the servant had retired what would the position be: would the issue of shares then be the perquisite and for what year of assessment would it be a perquisite? There would be no assessment under Schedule E for the year in which the shares were issued beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng options to buying stares. I am not, prepared to assume in the absence of a finding that this option could not have been turned to pecuniary account when it was granted. But if there is any doubt about that let me assume that the option had been to acquire shares at 10s. below the then market price. I cannot doubt that that could have been turned to immediate pecuniary account, and surely it could not be said that an option to buy at 58s. 6d. is itself a perquisite but an option to buy at 68s. 6d. is not. And that was not argued. The argument for the Crown was not based on any special difficulty in turning the particular option to pecuniary account. It was based on the nature of the right: it was said that a right of option does not have the necessary qualities to make it a perquisite. I must confess that I do not understand that. If in fact this type of option is a kind of right which can be turned to pecuniary account, what more is necessary to make it a perquisite? I have not been able to find any clear answer to that question in the authorities cited or from the argument in this case. It appears to me that if a right can be turned to pecuniary account that in itself is eno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Court of Session in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177. I say very properly, because it is undesirable that there should be conflicting decisions on revenue matters in Scotland and England. So I must now examine the reasons for that decision. In that case Mr. Forbes, having been appointed manager, was granted by his company an option in 1938 which was repeated in a further agreement in 1944. This option was in all essentials similar to the option in the present case. The only distinction I need note is that the option in the 1944 agreement was to purchase a large number of shares at par, though the market price was then above par; and it was argued that the option gave Mr. Forbes an immediately enforceable right to the shares and that right could have been converted immediately into cash. Mr. Forbes exercised his option in 1946 and he was assessed under Schedule E as in this case on the difference between the value of the shares when they were allotted to him and the price which he paid for them. This assessment was upheld by the First Division. The Lord President's (Lord Clyde) grounds of judgment appear from two passages which I sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument that it could be turned to pecuniary account by exercising it and taking up. shares worth more than the option price may have seemed even stronger. That argument is dealt with in the second passage which I have quoted. In the second passage the Lord President finds two fallacies in the argument for the taxpayer, but I am afraid I have been unable to see the force of his objections. If you get a share it is capable of being turned to pecuniary account because you can immediately sell it. There is generally no difficulty about that and if there is any difficulty there are other ways of raising money on it though you have to remain on the register. Similarly, if you get an option to buy shares below the market price it seems to me that the option is capable of being turned to pecuniary account by exercising it, acquiring the shares, and immediately selling them. It is true that that involves an extra step, but why should that matter? I can see no difficulty, unless it be in financing the transaction. But if the whole operation will Yield a substantial profit I would not assume that that would be difficult. The second fallacy appears to be a variant on the first. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d unassignable and was qualified by the condition that he must tender cash in payment, while still remaining managing director, before being in a position to enforce compliance by the companies with their conditional obligation to allot. It appears to me that the latter contingency, coupled with the personal and unassignable nature of the right, prevents it from being something which could be 'turned to pecuniary account'. I think that I have already dealt with the reasons which he gives but I can sum up my view by saying that conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant on the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account. I am therefore of opinion that Forbes's Trustees 1958 S.C. 177 was wrongly decided and should be overruled, and that this appeal should be allowed. LORD RADCLIFFE. My Lords, on March 28, 1956, the appellant applied for and received from E.S. A. Robinson Ltd. 250 of its ordinary shares. He paid the company 856 5s. for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The difficulty in dealing with this point lies wholly in relating word used by several members of the House in Tennant v. Smith [1892] A.C. 150, apparently of general import, to circumstances that they were not dealing with. The benefit of a right of occupation of part of bank premises which the occupier could only enjoy for the service of the bank is no very like the benefit of an option to take up freely transferable shares at a fixed price. The basis of the Revenue's claim in Tennant v. Smith [1892] A.C. 150 was really to tax the ban manager on expenditure which he was saved, not on any money that he got or could get, while tax on the full annual value of the premises was taken from the bank itself. It was not, however, the view of the House that profits or perquisites, to be taxable could consist only of money paid. It was accepted that they could include objects or things of value received, payments in kind, so long as they were capable of being turned into money (Lord Halsbury L.C. [1821] A.C. 150, 156, money--or that which can be turned to pecuniary account (Lord Watson Ibid. 159, money payment or payments convertible into money (Lord Macnaghten Ibid. 163, That w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvertible into money. Being in that position he could also at any time, at his choice, sell or raise money on his right to call for the shares, even though he could not put anyone he dealt with actually into his own position as option holder against the company. I think that the conferring of a right of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt so long as the right itself can fairly be given a monetary value, and it is no more relevant for this purpose whether the option is exercised or not in that year, than it would be if the advantage received were in the form of some tangible form of commercial property. The claim to tax the advantage obtained in the year 1955-56 is not claimed by the Revenue if the right view is that the option Itself was taxable in 1954-55. Even if there were no taxable subject in the earlier years I should regard the 1955-56 claim as failing on its own terms. The advantage which arose by the exercise of the option, say 166, was not a perquisite or profit from the office during the year of assessment: it was an advantage which accrued to the appellant as the holder of a legal right which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Inspector of Taxes) v. Hewitt [1957] I W.L..R. 674; 33 I.T.R. 885 (C.A.), to some cause other than remuneration for service in the company. The specially in the present case is that the matter started with the grant of an option to subscribe at 68s. 6d. a share for 2,000 ordinary shares of 1 each in the capital of the company. For this the appellant paid the sum of 20, a somewhat illusory price of rather less than 2 d. per share on the number of shares over which the option extended. The option was subject to certain terms and conditions. Among others, it was not transferable and, so long as the appellant was in the company's service, it would last for 10 years. As Lord Carmont pointed out in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177, 185, in my opinion correctly, such an option is no more than a standing personal offer. An offer open for 10 years is certainly something usual, but in Scots law, if expressed in writing, it could not be challenged and would not be revocable. In English law it may be that some element of consideration is required to prevent such an offer being Withdrawn, and this may be the reason for the offer in the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd by selling his rights has, in effect, secured a benefit equivalent to what he would have received if he had applied for the hares to be registered in his own name. I assume always that the renunciation would be for a genuine and not for a fictitious price. The result, in my opinion, assuming it could be regarded as a profit of the employment, would be in no way different in principle from that of Salmon v. Weight 51 T.L.R. 333. Though that case was presented as a case of a privilege given to the servant of applying for shares, it is clear from Lord Atkin's speech in this House, concurred in by all their other Lordships, that it was only upon the application being granted by the issue of shares that a profit was regarded as having been received by the servant. Nor is it material, in my opinion. that the offer of shares is at a price which, if accepted, will show an immediate profit, as where the market value of the shares is higher than the offer price. Until accepted, or otherwise dealt with in accordance with the terms of the offer, the offer cannot, for the reason I have given, be regarded as securing for the servant a profit from his employment. It follows, also, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed benefit. The contractual right given by the company, and it was by the company to the servant, the taxpayer, in this case could not, be transferred, and the view I should be inclined to take of the case, which, I think, is in harmony with the Forbes's Executors case 1958 S.C. 177, is that that merely set up the machinery for creating a benefit--that was its intention--which benefit ultimately accrued. I would only add that a transferable option, if transferred, might produce corresponding results, for the reasons which I have endeavoured to explain, though it is unnecessary so to decide for the purposes of this appeal. I would dismiss the appeal. LORD DENNING. My Lords, when I asked Mr. Heyworth Talbot in the course of the argument whether there was any special virtue in the sum of 20 which Mr. Abbott paid for: this option, he said there was no particular merit in it. If the sum had been one shilling or one penny, the result would be the same. It was a nominal sum, he said, which was paid so as to provide consideration for the contract and make it legally enforceable. But it soon appeared that it was essential to his argument that there should be some considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in either case, until the option is exercised, he has not the profits themselves. And as I read the Act it is not the expectation to make profits, nor the right to make profits, which is taxable, but only the profits themselves. Just as it is not the expectation to salary nor the right to salary which is taxable, but only the salary itself. A bird in the bush is not taxable, even if you have the right to get it in the future, if it is still there. You must have it in hand before you can be taxed for it. And when you come to consider what profits the servant receives form his employment by virtue of the option, surely it makes no difference whether he pays a nominal sum or not. In either case the employer grants him the option as a reward or return for his services: and the profits he makes out of it are the same save for this: if he paid nothing, it is all profit; if he paid a peppercorn, it is all profit less the value of a pepper berry; if he paid 1s., less a 1s.; if he paid 20, less 20. There is, moreover, a very compelling reason why no distinction should be drawn according to whether a nominal sum is paid or not: for it would mean that profits in the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding offer, and in the other he made it under a service agreement. It will be noticed that, just as Lord Atkin's illustration corresponded very closely in substance to the facts in Salmon v. Weight 51 T.L.R. 333, 334, so my illustration of a service agreement corresponds very closely in substance to the facts in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177: and it leads me to the conclusion that that case was correctly decided. And it is indistinguishable from the present case, as everyone agrees. But Mr. Heyworth Talbot took a further point. He likened the grant of this option to the gift of a physical thing, such as a diamond, or a chose in action, such as an issue of shares, to a servant as a reward for his services. The value of it has to be assessed, he said, for tax purposes at the time of the grant, and it is immaterial that its value should rise or fall afterwards. But I would point out those are all interests in property, and they are very different from purely personal rights such as this option. Take the issue of shares on which Mr. Heyworth Talbot so much relied. It is clearly an interest in property. Parke B. said that the shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould have thought it very difficult to get a third person to do this. There is, so far as I know, no market in options which are purely personal to the holder. But even if the option could be turned to pecuniary account in such a devious way, I do not think it should be regarded as taxable. It was, as I have said, only a right to make profits in the future, if the opportunity arose. It was not itself a perquisite or profit. My Lords, in all the cases hitherto when a servant has been granted by his employer a purely personal right to receive in the future a benefit during his service, the judges have with one accord held that he receives the perquisite or profit when the thing is actuary transferred to him and not before. So said Danckwerts J. in Bridges (Inspector of Taxes) v. Hewitt[1957] 1 W.L.R. 59, 68, 69; [1958] 33 I.T.R. 653 (Ch.D.), and both Jenkins and Sellers L.JJ. agreed with him on this point [1957] 1 W.L.R. 674, 689, 703. So said all the judges in Forbes's Trustees v. Inland Revenue Commissioners 1958 S.C. 177. And I must say that I agree with them. It is the same point as I have insisted on throughout. Tax is not payable on the right in the future to receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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