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: Warrington 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
Judges:
Pollock MR
Warrington LJSargant 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
Judgment date: 17 December 1923
Judgment by:
Warrington LJ
Before dealing with the separate cases I should like to make a few general observations on the construction of s. 52. In the first place the tax is one upon profits, and the object of sub-s. 2 is to define the profits to which the section applies. They are the profits of a British company bearing a certain character. This character is described by the words "carrying on any trade or business," etc.
These words seem to me intended, on the one hand, to exclude companies, whether limited by shares or guarantee, and whether the word "limited" is omitted from their names or not, which are formed for purposes other than commercial purposes, such, for example, as philanthropic or religious purposes, and which in substance confine their activities to the purposes for which they are formed.
On the other hand, the words are made wide enough to include companies which, though bearing the characteristic of commerciality, might conceivably be regarded as not carrying on a trade or business in a strict interpretation of those words, and particularly companies not directly carrying on business but holding investments in the securities of other concerns which do so, and from which the company in question derives profits. Following out the same idea, s. 53, sub-s. 2 (a), contains a very wide definition of profits ending with the words "other income arising from investments or any other source."
The Commissioners in each case found in favour of the subject and discharged the assessment; on the two first they described the conclusion at which they arrived as a finding of fact, and it has been contended that as such it is not open to review by the Court. In my opinion, this contention is not well founded. The findings of fact in the proper sense are those stated in the body of the case. The decision involves the true construction of the section having regard to those facts, and is therefore a conclusion of law or mixed law and fact, and as such is open to review.
I will now deal with the cases separately.
INLAND REVENUE COMMISSIONERS v. WESTLEIGH ESTATES COMPANY LIMITED
The question is whether the Commissioners and the learned judge were right in the conclusion at which they respectively arrived, that the company was not carrying on any trade or business or any undertaking of a similar character. The company is admittedly a British company. Amongst the objects of the company as set forth in the memorandum of association are those mentioned in para. 3 of the special case, and it is unnecessary to repeat here the description of them. Perhaps the most important is the general one which, in the special case, is lettered (e), but in the original is (p), and is as follows:
"To sell, improve, repair, manage, develop, exchange, lease, mortgage, farm or work as market gardens, dispose of, turn to account or otherwise deal with all or any part of the property and rights of the company."
In my opinion the doing of any of the things so described would certainly be the carrying on of a business. In fact the company has acquired the property, the acquisition of which was its immediate object, and has not acquired any other. The land is coal-bearing land, and the bulk of it is in lease to various lessees who pay the company rents and royalties. Some of the leases have fallen in and have been renewed by the company, in each case to the same lessees, a fact mentioned by the Commissioners, but in my opinion immaterial. There are also surface leases from which rents are derived. Two small portions of land have been sold and the proceeds have been invested.
I think the facts found by the Commissioners result in this: the company was formed with certain objects. They have done various things in pursuit of one or other of those objects, and they have thereby derived profits. I have already said that in my opinion the description of the objects is the description of a trade or business. It follows that, in my judgment, the company have been and are carrying on a trade or business.
A number of cases have been referred to, but in my opinion there is nothing in any of them which would lead to a conclusion different from that at which I have arrived. It was contended indeed that the company was merely in the position of an ordinary landowner dealing with his land and granting leases thereof and so receiving rents and profits. But assuming that in the case of an individual to do such things would not be to carry on a trade or business, it does not at all follow that the conclusion would be the same in the case of a company the end and object of whose being is to transact the business in question and thereby to make a profit for division amongst its shareholders: see the remarks of Lord Sterndale M.R. in Inland Revenue Commissioners v. Korean Syndicate. [F18]
It seems to me also quite immaterial that the actual operations of the company have been few in number and perhaps of no great importance. If you find a company formed to carry on a business, and in fact carrying it on, it cannot matter that its activities have been restricted. The learned judge seems to ground his decision largely on the notion that the company "did nothing except what would have been done by the executors and trustees of a will administering the trusts for the beneficiaries." With all respect, this at all events is a false analogy. The company is not a trustee in any sense; it is doing on its own account and for its own profit the several things authorized by its memorandum. In this connection I may mention an obvious error of the Commissioners in point of fact. They say in para. 6 (f):
"The shares in the company can only be transferred among the existing shareholders and their families."
In truth the articles give to members and certain other persons a right of pre-emption only; failing the exercise of this right the shares may be sold to any one and at any price.
In my judgment the learned judge has arrived at the wrong conclusion, and his order should be reversed and an order made expressing the opinion of the Court that the decision of the Commissioners for Special Purposes of the Income Tax Acts was incorrect and that the assessment appealed against ought to stand. The Commissioners of Inland Revenue ought to have their costs here and below.
INLAND REVENUE COMMISSIONERS v. SOUTH BEHAR RAILWAY COMPANY LIMITED
This case raises the same question, but under slightly different circumstances. The company here was undoubtedly at one time carrying on a business, but it is said that it ceased to do so in 1906, and that it was not at any material time a "company carrying on a trade or business" and so forth.
The company was incorporated in the year 1895 with the primary object of entering into and carrying into effect an agreement with the Secretary of State for India for the financing by the company of the construction and equipment of the South Behar Railway, which was to be constructed, worked and maintained by the Secretary of State through the agency as afterwards arranged of the East Indian Railway Company.
The memorandum, however, contained wide powers going beyond the carrying into effect of the particular agreement. It was provided by the agreement that the gross earnings of the railway were to be divided between the Secretary of State and the company in certain proportions, and the proportion allotted to the company was to be the net earnings of the company and dealt with accordingly. Provision was also made for the determination of the contract by notice to be given by the Secretary of State, and in that event for the purchase of the railway works and so forth at their fair value. The rolling stock and working plant was to be provided by the Secretary of State.
The railway was duly constructed by the East Indian Railway Company as the agents of the Secretary of State, the money therefor being supplied by the South Behar Company. It was worked by the East Indian Railway Company as the agents of the Secretary of State. In 1906 a further agreement was made between the Secretary of State and the company. By this agreement it was provided that from January 1, 1906, until the termination of the original agreement the Secretary of State might hold, use, and deal with the railway for his own benefit without any interference or control on the part of the company and should be at liberty to work and maintain the railway in such manner as he should think fit, but without being under any obligation to the company in reference thereto. He was to pay to the company the yearly sum of 30,000l., and the payments provided for in the original agreement were to cease to be payable. The sum to be paid as the fair value of the railway works and so forth on the termination of the original contract was fixed at 684,580l.
No notice of termination has been given.
Since the agreement of 1906 the company has taken no part in working, inspecting or maintaining the railway. It has no office or representative in India. The 30,000l. is paid by equal half-yearly payments, and is brought into the half-yearly accounts of the company as revenue. The company also derives revenue from a sum of 6000l. War Bonds held by them. The company has three directors and a secretary, and presents to its shareholders regular reports and accounts every half-year when ordinary general meetings are held for declaring dividends and transacting the ordinary business of the company, including the declaration of dividends and the election of officers.
The company, having been assessed to corporation profits tax on their profits, appealed to the Special Commissioners, who discharged the assessment, holding as a fact, as in the previous case, that the company was not carrying on a trade or business or any undertaking of a similar character, and being of opinion that the holding of the investment above referred to did not of itself cause liability to corporation profits tax. They then, at the request of the Inland Revenue Commissioners, stated a case for the opinion of the Court, the question being whether the company was under the circumstances liable to be assessed to corporation profits tax.
It is said that the company is not now, and has not since 1906, been carrying on any business. With all respect, I cannot concur in that view. Referring to the opinion already expressed as to the true construction of the section, the source of income from which the profits are derived has its origin in and could not have existed but for the business which the company was formed to carry on and did in fact carry on. The company bears the character required by the section - namely, that of a company carrying on a business, and it has not, in my opinion, lost that character because the particular venture in which it engaged has been finished, except that the company receives revenue therefrom and may hereafter receive repayment of capital. I prefer to base my judgment on this broad view, but if this is incorrect I should be prepared to hold that it has never ceased to carry on the business for which it was established. It is part of its business to declare dividends and pay them to its shareholders, to elect officers and transact the other business of its general meetings. There remains also the duty of dealing with the 684,580l. if and when received, whether it be by returning their capital to the shareholders through the process of winding-up or by embarking it in new financial transactions within the memorandum of association.
On the whole I think the view of the Special Commissioners and Rowlatt J. is incorrect, and this appeal ought to be allowed, and the question put to the Court in para. 9 of the special case answered in the affirmative.
INLAND REVENUE COMMISSIONERS v. ECCENTRIC CLUB LIMITED
In this case the company was incorporated as a company limited by guarantee. Its main object as described in the memorandum of association was: [His Lordship read clause 3 (a) and (f) and clause 6 and continued:] The company was formed to take over the assets and liabilities of and to continue the working of an existing members' club. The members of the company are all members of the club, and every member of the club on election becomes ipso facto a member of the company, and, therefore, a guarantor of the appointed contribution in the event of winding up whilst he continues a member or within a year from his ceasing to be one. As is usual in clubs of this nature, no payments for provisions supplied in the club are taken from any person not a member.
The learned judge has held that the company is carrying on an undertaking similar to the trade or business of a club proprietor. With all respect, I should have thought that if its profits could be charged with the tax at all it would be because the company, regarded, as in law it is, as a separate entity or persona, is carrying on the actual trade or business of a club proprietor. But can this properly be said of it?
The club proprietor, whether an individual or a company, carries on a business with a view to profit as an ordinary commercial concern. This the present company certainly does not do. I think the proper mode of regarding the company in the present case is as a convenient instrument for enabling the members to conduct a social club, the objects of which are immune from every taint of commerciality, the transactions of sale and purchase being merely incidental to the attainment of the main object. What is in fact being carried on, putting technicalities aside, is a members' club and not a proprietary club, nor any undertaking of a similar character. That in such a case one may go behind technicalities and look at the substance is, I think, shown by the mode in which the House of Lords dealt with a question, similar in this respect, in New York Life Insurance Co. v. Styles. [F19]
That transactions of sale and purchase may be merely incidental to non-commercial objects and not regarded as in themselves a trade is, in my opinion, shown by the contrast recognized by the Court in Religious Tract and Book Society of Scotland v. Forbes, [F20] between the book-selling business which was held to be a trade, and the colportage which was held not to be of that character; and in Grove v. Young Men's Christian Association [F21] between the public restaurant and the educational and religious undertaking, although the latter involved the taking of fees from members attending classes, and so forth.
On the whole I am of opinion that the appeal of the company in this case succeeds, and that the order of Rowlatt J. should be set aside, and the assessment discharged with costs here and below.