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TMI Blog1924 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. Limited. There are a few other shareholders- nominees of these two companies-who hold shares for the purposes of the Companies Act. But we may treat this reference as if there were only two share-holders holding an equal number of shares each in the company. 3. During 1921, the Indo-Burma Petroleum Company, Limited, capitalized a sum of Rupees fifty-six and a half lakhs, being part of their profits, accumulated and current, and issued bonus shares, for this amount. Messrs. Steel Brothers Company, Limited, received bonus shares to the vslna of Rupees twenty eight and a quarter lakhs. 4. The question is whether these bonus shares are income, profit or gains oil which, subject to the provisions of the Act, Messrs. Steel Brothers Company, Limited can be called upon to pay super-tax 5. Acting in accordance with the powers conferred by their Articles of Association, the Indo-Burma Petroleum Company, Limited, increased their cardial, and to en proceeded to pass resolutions authorizing the issue of bonus shares with the object of transferring the accumulated profits of the Company to capital. There were two resolutions in respect of two sums, but the resolutions are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the conclusion on the general law of statutory companies as now settled by decisions, I turn to the case of Swan Brewery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199, I have re-examined she case of the appellants and the respondents represented to the Privy Council and the record on that appeal, the report in the Court below, and the Companies Acts of West Australia applicable to the case, that of 1893. I am quite clearly of opinion that what was said by the Judicial Committee, as to the effect in law and in business of a distribution of bonus shares, was part of the decision and cannot be distinguished from the present case. Of course it does not bind your Lordships, but I think it ought to be to lowed by all who do not feel themselves prepared to say that it was wrong and to say clearly why it was wrong. That case did not turn on the special definition of dividend in the taxing statute of West Aus(sic). 9. Further said: Bouck v. Sjiroude [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193 was cited and was. (sic) The passage in question was an essential part of the decision. It is in point now, and I adhere to it. My Lords, no author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be advantages to the members of the company, none the less that the making of the issue was probably an advantage to the company also. In so flourishing a business doubtless they really were advantages. And then comes the passage to which I have referred above : True, that in a sense it was all one transaction, but that is an ambiguous expression. In business, as in contemplation of law, there were two transactions, the creation and issue of new shares on the company's part, and on the allottees' part the satisfaction of the liability to pay for them by acquiescing in such a transfer from reserve to share capital, as put an end to any participation in the sum of 101,450 in right of the old shares, and created instead, a right of general participation in the company profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them. In the words of Parker, C.J. ' Had the company distributed the 101,450 among the share-holders, and had the shareholders repaid such sums to the company as the price of the 81,160 new shares, the duty on the 101,450 would clearly have been payable. Is not this virtually the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciled, I consider that we are bound to follow Bouch v. Sproude [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193. Warrington, L.J., referring to the Swan Brewery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 said (pages 610, 671): The decision itself was on the construction of an Act of Western Australia imposing on a company declaring a dividend a duty on the amount or value of such dividend and providing that ' dividend ' should include * * * And he then quotes the definition. He goes on : Obviously therefore the question for decision was far away from that in the present case. The discussion, both in argument and in the judgment, was mainly on the question whether there was any ' advantage ' to anybody in the mere transfer of accumulate profits to capital and the allotment of shares representing the capital but at the end, the judgment contains the following passage * ** And he then quotes the passage I have quoted. He goes on : It was admitted in the argument that Bouch v. Sproude [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193 and cases of that nature were inapplicable to the case under disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the payment mace by the company as equivalent to substances to a payment by the company to the share-holders, and by them back to the company. It may have been so, and without a fuller knowledge of the facts in the case and of the local law than the report discloses it is difficult to be quite sura about the point, but what is clear is, that the wide character of the word advantages' was primary consideration in whet was said by their Lordships who took part in advising His Majesty. I therefore do not feel embarrassed by the decision in that case. 14. Viscount Finlay merely stated (page 199): I must, thowever, confess that the reasoning on which the judgment is rested appears to me to be inconsistent with the decision of this House in Bouch v. Sproule. [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193 15. Viscount Cave stated (page 202) : In Swan Brewery Company v. The, King (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 it was held that transactions similar to those now in question were, in the (sic)ct. a declaration of a dividend within the meaning of the Dividend Dudes Act 1902, of Western Australia, and accordingly that duty was pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, in cases similar to the present one- a fact which had to be decided in that case, just as much, as it had to be decided in Blotl's case [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193 20. I have given the matte my most careful consideration, and in my opinion the Swan Brewery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 need not be taken to be a binding authority on us for the purpose of deciding the present reference, because it was a decision based on the special provisions of a particular Act of Wes tern Australia-an opinion in which I am supported by a very large number of authorities. 21. The question before us therefore, has been decided twice by the House of Lords, and in each case it has been held that bonus shares, such as were distributed in this case, are not income, profits or gain, and are not therefore, liable to super-tax. 22. There can be no question as to what was the object of the Indo-Burma Petroleum Company, Limited, and of its shareholders in passing the resolutions and making the large allotments of shares that they did. They were acting in exercise of the powers conferred by their Articles of Associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction to the directors to pay any dividend : on the contrary they were directed to distribute the bonus shares, and it, therefore, appears to me to be impossible to hold that there was, in effect, a payment to the shareholders, returned immediately by them to the company in satisfaction of the bonus shares. There was no option left to the shareholder; they had to take the bonus shares; they could not demand any cash payment. 28. It is said that they had an option, and that they exercised it prior to the passing of the resolution. Of course, they had; but we are not concerned with that, but with the question whether they had an op don, when the bonus shares were presented to them, of refusing them and demanding instead an equivalent m cash. 29. It unnecessary for me to recapitulate the arguments that are given much more ably than I could do in the judgments in the cases I have already referred to. 30. In my opinion, therefore, the question referred should be answered in the negative. Heald, J. 31. Up to the 2nd of June 1921 the Indo-Burma Petroleum Company had an authorised capital of one crore of rupees divided into one lakh of ₹ 100 shares of which 93,380 were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 34. That Company, like the Indo-Burma Petroleum Company, resolved to increase its capital, and did increase it by 101,450. It then resolved that 101,450 out of its reserve fund should be transferred to the share capital account to represent the capital value of the new shares. It also authorised its Directors to allot the new shares prorata amongst the existing ordinary shareholders of the company in consideration of the sum of 101,450 transferred to the capital account from the reserve fund which, it is to be noted, represented accumulated profits, exactly as it did in the present case. In Western Australia, a Dividend. Duties Act, provided for the levy of a duty on dividend and defined or described dividends as including every dividend, profit, advantage, or gain intended to be paid or distributed among any members... of any company. What therefore the Privy Council had so decide was. whether or not shares distributed in the same manner and by the same procedure as the shares in this case were a dividend, profit, advantage, or gain intended to he paid or credited to, or attributed among the shareholders. Their Lordships he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s case (SIC) 1 K.B. 114 on the ground as Lord Haidane put it, that it was a decision on a taxing statute which was couched in very different language from the English Act which the House was considering. But it must be remembered that the House of Lords was not bound by the decision of the Privy Council while we are bound by it, and I do not think that a mere difference in the purpose for which the decision on the facts is necessary would warrant us, in coming to a decision which was different from that of the Privy Council on the same facts. The purpose of the decision in Bouch v. Sproude [1907] 19 A.C 385 = 56 L.J. Ch. (sic)-57 I.T. 345 - 36 W.R. 193 was what Lord Harschell himself called the artificial division of the enjoyment of property between a tenant for life and remainder-man and there were special difficulties in that case, because it was not clear what part of the accumulated profits with which that case was concerned had been earned before the death of the testator. Nevertheless the House of Lords felt itself bound by that decision in Blott's case (SIC) 1 K.B. 114 which was a decision on a taxing statute couched in very different language from the law for divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .L.R. 199. and it must be admitted that the meaning of the word advantage as used in the Australian Dividend Duties Act. was probably wider than that of the word gain as used in the same Act. 43. I have little doubt that the meaning to be attached to the word gains in the Income-tax Act, is to some extent artificial, since it could hardly be read as including what might be called intangible gains. 44. Webster's Dictionary defines gains as profits in the form of sums of money or acquired assets arising from business transactions or dealings and although it is possible that in the Income-tax Act gains are not restricted to business profits, I think, that they must be restricted to profits in the form of money or acquired assets. 45. I think, therefore, that it does not follow, that because the Privy Council found, that shares distributed in the same way as the shares in this case were distributed were ' advantages' to the shareholders, we are bound to find that they represented gains. If the matter has been res integra, I should, I must admit, have felt justified in going a step further than the Privy Council actually went, in the Sir an Brewery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to and concentrated upon that particular taxing statute, and the statute it amended; and when Lord. Sumner delivered the judgment of the Privy Council on page 234. he stated as follows: The question in issue here is, whether or not the new shares were a dividend under the Act above-mentioned. (The Dividend Duties Amendment Act of 1902 of Western Australia.) If that were, dividend duty was and is payable, and the judgment appealed against, was right, S. 2 of the Act defines, or rather describes the word 'dividend' as used in the Act as including, 'every profit, advantage or gain intended to be paid or credited to or distributed among the members of any company'. And with the exception of the last few lines of Lord Sumner's judgment, the remainder of it, discusses throughout the question as to whether or rot this allotment of bonus shares was an advantage to the members of the company and therefore assessable to income tax. 50. Upon reading the report of the argument and the judgment in the Swan Brewery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199. I am of the opinion that the decision of the Privy Council was based upon the constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the particular Act. * * *. This decision, of course, is on another statute and is not binding on us, though entitled to the greatest respect * * *. 54. In the House of Lords, Viscount Haldane, in commenting upon the Swan Brewery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 expressed a very definite opinion that it had no bearing upon Blott's case (sic) 1 K.B. 114 because on page 188, he stated, that the taxing statute was couched in very different language and after some observations upon his requiring a fuller knowledge of the facts of the case, and of the local law, he further stated, but what is clear is that the wide character of the word 'advantages' was a primary consideration in what was said by their Lordships who took part in advising His Majesty. J therefore do not feel embarrassed by the decision in that case. 55. Viscount Cave in dealing with the Swan Brawery case (sic) A.C 231 - 83 L.J.P.C. 134 - (sic) T. 211 - 30 T.L.R. 199 on page 202 of the report stated that the decision in that case is no doubt fully supported by the definition clause, in the Western Australia Act; but if it were not for the definition clause the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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