Inland Revenue Commissioners v Westleigh Estates Company Ltd; Inland Revenue Commissioners v South Behar Railway Company Ltd; Inland Revenue Commissioners v Eccentric Club Ltd

[1924] 1 K.B. 390

---

(Judgment by: Sargant LJ)

Between: Inland Revenue Commissioners
And: Westleigh Estates Company Ltd
Between: Inland Revenue Commissioners
And: South Behar Railway Company Ltd
Between: Inland Revenue Commissioners
And: Eccentric Club Ltd

Court:

Judges: Pollock MR
Warrington LJ

Sargant LJ

Subject References:
REVENUE
CORPORATION PROFITS TAX
British company carrying on any trade or business, or any undertaking of a similar character
Company formed for more convenient Management of Family Estates
Railway Company merely in receipt of Annual Payment in Consideration of Funds and Materials supplied for Construction of Railway
Company carrying on Social Club

Legislative References:
Finance Act, 1920 (10 & 11 Geo. 5, c. 18) - s. 52, sub-s. 2 (a); s. 53, sub-s. 2 (h)

Case References:
American Thread Co. v. Joyce - (1913) 6 Tax Cas. 1; 163
Birmingham Theatre Royal Estate Co - Unreported 1923
Carlisle and Silloth Golf Club v. Smith - [1912] 2 K. B. 177; [1913] 3 K. B. 75
Commissioners for Special Purposes of Income Tax v. Pemsel - [1891] A.C. 531
Erichsen v. Last - (1881) 8 Q. B. D. 414
Farmer v. Cotton's Trustees - [1915] A.C. 922
Grainger & Son v. Gough - [1896] A.C. 325
Great Western Ry. Co. v. Bater - [1922] 2 A.C. 1
Gresham Life Assurance Society v. Styles - [1892] A.C. 309
Gresham Life Assurance Society v. Bishop - [1901] 1 Q. B. 153
Grove v. Young Men's Christian Association - (1903) 4 Tax Cas. 613
In re Clayton's Trusts - Unreported July 18, 1917. Eve J
In re Incorporated Council of Law Reporting for England and Wales - (1888) 22 Q. B. D. 279; 3 Tax Cas. 105
Inland Revenue Commissioners v. Marine Steam Turbine Co - [1920] 1 K. B. 193
Inland Revenue Commissioners v. Korean Syndicate - [1920] 1 K. B. 598; [1921] 3 K. B. 258
Last v. London Assurance Corporation - (1885) 10 App. Cas. 438
Liverpool and London and Globe Insurance Co. v. Bennett - [1911] 2 K. B. 577; [1912] 2 K. B. 41; [1913] A.C. 610
Mersey Docks and Harbour Board v. Lucas - (1883) 8 App. Cas. 891
Mitchell v. Egyptian Hotels, Ld. - [1915] A.C. 1022
Muat v. Stewart - (1890) 2 Tax Cas. 601
New York Life Insurance Co. v. Styles - (1889) 14 App. Cas. 381
Paddington Burial Board v. Inland Revenue Commissioners - (1884) 13 Q. B. D. 9
Port of London Authority v. Inland Revenue Commissioners - [1920] 2 K. B. 612
Rand v. Alberni Land Co - (1920) 7 Tax Cas. 629
Religious Tract and Book Society of Scotland v. Forbes - (1896) 3 Tax Cas. 415
Scottish Mortgage Co. of New Mexico v. McKelvie - (1886) 2 Tax Cas. 165
Smiles v. Australasian Mortgage and Agency Co - (1888) 2 Tax Cas. 367
Smith v. Anderson - (1880) 15 Ch. D. 247
Sutherland v. Inland Revenue Commissioners - 1918 S. C. 788
William Esplen, Son & Swainston, Ld. v. Inland Revenue Commissioners - [1919] 2 K. B. 731

Hearing date: 15-16, 29-30 November 1923, 1 December 1923
Judgment date: 17 December 1923

---

Judgment by:
Sargant LJ

INLAND REVENUE COMMISSIONERS v. WESTLEIGH ESTATES COMPANY LIMITED

In this case Rowlatt J. has found as a conclusion of fact that "this limited company came into existence not with any notion of trade or business but merely as a convenient form under which the duties and powers of an executor could be exercised," ^[F22] and also that "the family company did nothing except what would have been done by the executors and trustees of a will administering the trusts for the beneficiaries," ^[F23] and his conclusions of law are based upon this view of the facts. In my judgment, the learned judge in so finding the facts has not fully appreciated the results of the agreement of August 20, 1900, which appear to me to be much more important and far-reaching than he has supposed.

If under the agreement the company had merely been put in the position of an executor and trustee, its operations would necessarily be limited in point of time, and would result within some reasonable period in the realization of the estates and the distribution of the proceeds, or possibly; as to the whole or part of the estates in the allocation or appropriation to and amongst the beneficiaries of aliquot portions thereof; and further the company would be in a fiduciary position and accountable to the beneficiaries in that capacity. But in fact the position is an entirely different one. The company has become the absolute legal and beneficial owner of the estates, and no relation of trustee and cestui que trust exists between it and the beneficiaries. They are relegated to the ordinary position and rights of shareholders in an ordinary limited company, and have no further or other interest in the properties which formerly belonged to them in fractional shares; and there is no time limit whatever to the activities of the company, which may very well endure and carry on the leasing and management of the estates for a century or more.

I am altogether unable to distinguish the case from the ordinary case of the out and out sale of a mining or urban estate to a company which is thereafter to manage, improve and develop it, and to distribute the profits to arise therefrom amongst its shareholders in the ordinary way. Companies of this kind are, of course, quite common, and their operations in my view involve the carrying on of a trade or business, or at least of an enterprise of a commercial character such as to be aptly described as "an undertaking of a similar character." The mere fact that the formation of the company and the exchange of the vendors' fractional interests for corresponding amounts of share capital were rendered desirable by the difficulty of otherwise dealing with the estates is, in my view, immaterial; as is also the fact that the shares cannot be freely dealt with in the open market unless there has been a failure to exercise for one month certain special rights of pre-emption. Neither of these circumstances affects the existing position of the company as one formed for the purpose of dealing with land so as to return profits to its shareholders, and actually engaged in carrying out the business or enterprise in question. The decision here of Rowlatt J. seems somewhat inconsistent with his previous decision a few days earlier in the case of the Birmingham Theatre Royal Estate Co. ^[F24]

It is also clear that the finding in the case stated that the company are not carrying on any trade or business or any undertaking of a similar character is not a mere finding of fact, but is at least a finding of mixed law and fact.

In my opinion, therefore, this appeal should be allowed.

INLAND REVENUE COMMISSIONERS v. SOUTH BEHAR RAILWAY COMPANY, LIMITED.

On August 7, 1895, this company, in pursuance of its memorandum, entered into an indenture (hereinafter called the principal contract) with the Secretary of State in Council of India for the provision of funds and materials for the construction and equipment of a railway called the Behar Railway. The railway when constructed was to be worked, managed and (except for the first two years) maintained by the Secretary of State through such agency as he might choose (the selected agents being in fact the East Indian Railway Company), and the remuneration of the company was to consist in the receipt as their net earnings after the first two years of 55 per cent. of the gross earnings of the railway.

The principal contract contained a clause 54 (2.), under which the Secretary might, by giving not less than twelve months' previous notice of purchase, determine the contract on June 30, 1919, or on June 30 in the last year of any subsequent period of ten years, and on the expiration of such notice of purchase the company had to relinquish to the Secretary of State all claim whatsoever to the Behar Railway or the equipment thereof, and the Secretary of State within four months of the determination of the principal contract was to pay to the company in England such a sum as when added to the unspent capital of the company should amount to the total paid-up capital of the company so far as such capital other than unspent capital had been expended on the railway with the authorization of the Secretary of State.

By another indenture (hereinafter called the supplemental contract) dated December 11, 1906, and made between the Secretary of State in Council of India of the one part and the company of the other part, after recitals which showed that the railway had been constructed in accordance with the principal contract and had been worked down to January 1, 1906, by the East Indian Railway Company on behalf of the Secretary of State, and that the capital stock of the company amounting to 379,580l. and the proceeds amounting to 305,000l. of an issue of 290,000l. debenture stock, making together a total sum of 684,580l. of capital, had been expended by the company with the authorization of the Secretary of State on the undertaking of the company, and after reciting that the parties had agreed that as from January 1, 1906, until the determination of the principal contract such fresh arrangement as thereinafter appeared should be substituted for the provisions of the principal contract relating to the working and maintenance of the railway, and otherwise as thereinafter mentioned, it was amongst other things agreed and declared to the effect following, that is to say, cl. 2, the Secretary of State was as from January 1, 1906, to deal with the railway for his own benefit without any interference or control by the company, and accordingly the company should relinquish the same to him together with any stores belonging or appropriated to the railway.

(Clause 3) the Secretary of State should during the period aforesaid be at liberty to work, maintain and improve the railway by any working agency and in any manner he should think fit.

(Clause 4) the Secretary of State should be under no obligation to the company to keep the railway in working order or to work the same or to execute any works in relation thereto, and the company receiving from the Secretary of State the yearly payment therein mentioned should at all times keep him and the working agency indemnified against all claims in respect of the debenture stock or any other incumbrances of the railway through or under the company.

(Clause 5) as from January 1, 1906, until the determination of the principal contract the Secretary of State should pay the company the yearly sum of 30,000l. as therein mentioned, and the company should not be entitled to any charge, lien or security on the railway or the earnings thereof in respect of the said yearly sum; and (clause 6) on the determination of the principal contract by notice of purchase the said sum of 684,580l. should be the sum payable under the principal contract as capital expended on the undertaking with the authorization of the Secretary of State.

I have summarized these two contracts because of the extreme importance I attach to the change effected by the supplemental contract in the position of the company.

The net result of that contract, as applied to the principal contract, is plain. It is that as from January 1, 1906, the company made an out and out sale of the railway to the Secretary of State and ceased to have any interest therein whatever. The sale was not the less an out and out sale because the consideration was not a lump sum, but was a perpetual annuity commutable into a lump sum at any one of certain intervals at the option of the Secretary of State. As from the signing of the supplemental agreement the company lost all right and interest to or in the business and undertaking of the railway, and became simply and solely the recipients of a perpetual personal annuity redeemable by a capital payment.

The only reason for the continued existence of the company as a corporation appears to be to enable the 30,000l. annuity to be received and (after payment of or provisions for income tax) distributed by way of interest to the holders of debenture stock and by way of dividend to the shareholders. The receipts of the company from this annuity, from dividends and interest on certain small sums of capital thereinafter mentioned, and from transfer fees amount to an annual sum slightly exceeding the total of the interest on the company's debenture stock and a dividend of 5 per cent. on its issued capital, and accordingly there appear on the company's balance sheet certain small capital items which would seem to be the result of the accumulation of this excess, or of some balance of revenue before January 1, 1906, or of both; and the most important of these items is a sum of 6000l. National War Bonds 1922 which in all probability is the result of a purchase made during the war in response to the appeal issued by the Government at that time. But these capital items are mere balancing items of small importance, and the holding of them cannot in my view amount to a "carrying on of a trade or business" by way of "holding investments" within the later words of sub-s. 2 of s. 52 of the Finance Act, 1920, if the company are not otherwise within the words of sub-s. 2 as "carrying on a trade or business, or any undertaking of a similar character."

The question then is whether at the date of the passing of the Finance Act, 1920, or at any time since, the company have been "carrying on any trade or business, or any undertaking of a similar character." The Special Commissioners have found as a fact that they have not been doing so; and there is nothing in my view to indicate that in so finding the Commissioners have done more than come to a conclusion of fact or have put any legal construction on the words of the statute. Further, the learned judge has definitely come to the same conclusion, and speaking for myself, I am unable to see how the operations of the company since the year 1906 can be properly described in any ordinary meaning of the words as a carrying on of a trade or business or any undertaking of a similar character.

The company did at one time carry on a trade or business which they have disposed of, and they are now merely in the position of receiving the purchase money resulting from the out and out sale of that business. If the company had been a mere individual or individuals they would certainly be held to have ceased to carry on any trade or business, and to be living on the proceeds of the disposal of his or their former trade or business. I cannot see that the fact of the company being a corporation makes any difference in this respect. The fact that they keep a staff for the distribution of their income between their shareholders and the holders of their debenture stock seems to me to make no difference. Such a process of distribution cannot be called in any ordinary sense of the words "carrying on a trade or business, or any similar undertaking." No doubt the company are acting within the powers of their memorandum of association; but every company must be supposed to do this. To come within the statute they must not only act within their powers, but act in such a way as to be carrying on a trade or business or a similar undertaking.

The Korean Syndicate Case ^[F25] has been cited as being in favour of the appellants' contention, but the facts there are quite different. There the syndicate had disposed of their concession on the terms that the purchasers should work it and pay them a percentage of the profits. They were directly interested in the working through their purchasers, and were in the position of sleeping partners. Rowlatt J. had held that the arrangement amounted to a lease and that the syndicate were not liable. The Court of Appeal did not indicate that on this view of the transaction he would have been wrong; they differed as to the nature of the transaction. Till the year 1906 the South Behar Company may have been in a position analogous to that of the Korean Syndicate; but as from that year they were in an even more detached position than that of a lessor or even of an owner of a rent-charge. They were merely owners of an annuity, having no relation at all to the railway except as a matter of history.

The Marine Steam Turbine Company Case ^[F26] is, like the Korean Syndicate Case, ^[F25] a decision on a somewhat different statute from that now in question, and is therefore only useful by way of analogy. But so far as it is applicable the decision in that case is in favour of the company here, and it is to be remarked not only that the annuity here, though perpetual, represents a purchase price just as much as the terminable annual payments did there; but that the payments here are completely detached from any business, while there they continued to arise from the business sold by the Marine Steam Turbine Company.

In this case I differ from the majority of the Court. I think that the learned judge was right and this appeal should be dismissed.

INLAND REVENUE COMMISSIONERS v. ECCENTRIC CLUB LIMITED

In this case it is admitted that under the constitution of the company the members of the club and the members of the company are necessarily identical. This is clearly shown by the form of application which has to be made in writing and signed by each candidate before election. That application is addressed to the honorary secretary of the Eccentric Club, Ld., and contains an agreement by the candidate to become, if elected, a member, and to be bound by the memorandum and articles of association and by-laws of the club. Such an agreement is undoubtedly sufficient within s. 24, sub-s. 2, of the Companies (Consolidation) Act, 1908.

The club is thus in substance an ordinary members' club, since it is managed by the members for the members as completely as if the property of the club were vested in the ordinary way in trustees and the management of the club were conducted by a committee of the members, and the sole question of law is whether the circumstances that the members of the club are formed into a corporation, and that as a matter of law the property of the club and the management of its affairs are vested in that corporation, are sufficient to bring the company within the definition of sub-s. 2 (a) of s. 52 of the Finance Act, 1920.

Within some of the words of the sub-section the club by its incorporation must undoubtedly fall; they have become and are a British company; but are they a British company carrying on any trade or business or any similar undertaking? They contend that their activities do not partake in any way of the nature of a trade or business, but consist solely in the supply to their own corporators of the ordinary amenities of a social club. They insist that this limitation of activities to a system of self-supply altogether differentiates their enterprise from that of an individual or company carrying on an ordinary proprietary club with the object of making a profit out of the supply of club amenities, and they rely in support of this contention on the reasoning of the majority of the House of Lords in New York Life Insurance Co. v. Styles. ^[F27]

In my judgment this contention is correct, and the reasoning of the majority there is completely applicable here. In the speeches of each of the majority of four, Lord Watson, Lord Herschell, Lord Bramwell and Lord Macnaghten, there was a clear recognition of two principles: the first was that no difference was made by the mere fact that the actual dealing was with an incorporated company when in substance the insurer and the insured were the same; and the second was that in the case of such a scheme of mutual insurance not only were there no profits but (the important point here) there was no question of a trade or business in any ordinary sense of the words. On the same principle it seems to me that the present case stands as a question of substance on the same footing as if no incorporated company had been interposed between those who are mutually providing and receiving social amenities, and accordingly that this process of providing these amenities cannot be considered the carrying on of a trade or business any more than the provision in that case of mutual insurance.

Mr. Hills, in the course of his careful argument, was driven to admit the difficulty of his position so far as resting on the words of sub-s. 2 (a) of s. 52 only, and he sought to extend the prima facie meaning of these words by the reference to mutual trading concerns in sub-s. 2 (a) of s. 53. But to this argument, quite apart from the consideration that it would hardly be appropriate to enlarge a definition section by the language of a section aimed at processes of calculation, there appears to be this conclusive answer. The phrase "mutual trading concerns" involves "trading," which in itself is a word of rather narrower denotation than the earlier phrase "trade or business or any undertaking of a similar character"; and therefore cannot suggest the inclusion in the earlier and wider phrase of any activity or enterprise not already comprehended in that phrase.

I agree that the appeal should succeed in this case.

All three appeals allowed.

Solicitor for Inland Revenue Commissioners: Solicitor of Inland Revenue.

Solicitor for Westleigh Estates Company: P. R. Christie, for Bullock, Worthington & Jackson, Manchester.

Solicitors for South Behar Railway Company: Sandersons & Orr Dignams.

Solicitors for Eccentric Club: J. D. Langton & Passmore.