• Legal database
Legal database

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: Pollock MR (including background))

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:
Court of Appeal

Judges:
Pollock MRWarrington 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:
Pollock MR (including background)

Sect. 52, sub-s. 1, of the Finance Act, 1920, imposes a duty called "corporation profits tax" on certain profits. Sub-s. 2 of the same section provides that

"the profits to which this Part of this Act applies are .... the following, that is to say -

(a)
the profits of a British company carrying on any trade or business, or any undertaking of a similar character,

including the holding of investments. ...."

By s. 53, sub-s. 2 (h), it is enacted that

"profits shall include in the case of mutual trading concerns the surplus arising from transactions with members. ...."

A limited company was formed for the purpose of more conveniently administering an estate which had become vested in a large number of beneficiaries, and it duly performed this function. Its revenue was derived from leases of land and mines, and as the leases fell in the company renewed them. The company never worked the land or the mines:-

Held, that the company answered the description of "carrying on any trade or business or any undertaking of a similar character," and was therefore liable to corporation profits tax.

Decision of Rowlatt J. [1923] 2 K. B. 514 reversed.

In 1895 a railway company entered into a contract with the Secretary of State for India under which the company was to provide funds, material, and equipment for a railway to be constructed by another company, and was to receive as remuneration a certain percentage of the gross earnings of the railway, which was to be worked and managed by the Secretary of State. The railway having been constructed the parties in December, 1906, entered into a supplemental contract under which the railway company in effect, as from January, 1906, made an out and out sale of the railway to the Secretary of State in consideration of a perpetual annuity of 30,000l. commutable at the option of the Secretary of State into a lump sum at any one of certain intervals.

Held (by a majority of the Court) that the company likewise answered the above description, and was therefore liable to corporation profits tax.

Decision of Rowlatt J. [1923] 2 K. B. 514 reversed.

A company limited by guarantee carried on a social club in the ordinary way, the club being a members' and not a proprietary club. By the memorandum of association profits were not distributable among the members nor, in the event of the winding up of the company, was any surplus distributable among them, but was to be applied as the committee might determine. Payments were made by members for services they received at the club premises, such as the provision of meals, etc. For the year in question the company's account showed a surplus of income over expenditure.

Held, that the company was not carrying on an "undertaking of a similar character" to that of a trade or business, and was therefore not liable to corporation profits tax.

Decision of Rowlatt J. [1923] 2 K. B. 514 reversed.

Appeals from three decisions of Rowlatt J. [F1] on cases stated under the Finance Act, 1920, s. 56, sub-s. 6, and the Income Tax Act, 1918, s. 149, by the Commissioners for the Special Purposes of the Income Tax Acts.

INLAND REVENUE COMMISSIONERS v. WESTLEIGH ESTATES COMPANY LIMITED

At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on November 29, 1921, for the purposes of hearing appeals the Westleigh Estates Company, Ld. (hereinafter called "the company") appealed against an assessment to corporation profits tax in the sum of 190l. for the accounting period ending June 30, 1920, made upon it by the Inland Revenue Commissioners under the provisions of the Finance Act, 1920, Part V.

The company claimed exemption from the provisions of corporation profits tax as contained in the Finance Act, 1920, Part V.

The company was formed in August, 1900, to acquire the interests of the persons hereinafter mentioned in certain freehold estates (hereinafter referred to as "the property") in the Manchester district. The nominal capital of the company consisted of 96,000l. ordinary stock, of which 94,833l. 6s. 8d. was issued.

The objects of the company as set out in cl. 3 of the memorandum of association were (inter alia) as follows:-

"(a)
To acquire and take over certain real estate and rent charges, subject to the leases and agreements for tenancies of some part thereof already granted, situate in or issuing out of land in Westleigh and Hindley in the county of Lancaster or the majority of the undivided shares therein, and with a view thereto to enter into the agreement referred to in cl. 3 of the company's articles of association and to carry the same into effect with or without modifications.
"(b)
To acquire and take over from time to time any shares in such real estate and rentcharges not comprised within the said agreement.
"(c)
To grant leases for any term of years or from year to year and whether absolute or determinable of all or any part of the property of the company whether with or without the concurrence of the owner or owners of any other undivided shares or share herein, in consideration of such royalties, rents or reservations as the company may think fit.
"(d)
To purchase, take on lease or in exchange hire or otherwise any real and personal property and any rights and privileges which the company may think necessary or convenient for the purposes of its property or business, and in particular, any land, buildings, easements, machinery, plant, stock in trade.
"(e)
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.
"(f)
To invest and deal with the monies of the company not immediately required upon such securities and in such way as may from time to time be determined."

The property was formerly owned by two brothers, J. Hall and W. Hall, who both died many years ago. At the date of the incorporation of the company about twenty-four persons were beneficiaries under the will of J. Hall and became entitled to his share of the property. Mrs. Bubb, the daughter of W. Hall, became entitled to the whole of the latter's share of the property under his will.

In view of the great number of beneficiaries entitled under the wills and the diversity of their interests it was considered desirable that Mrs. Bubb and the beneficiaries under J. Hall's will should agree to pool their interests and to place the control of the property in the hands of a limited company; and accordingly the property was conveyed by the beneficiaries to the company. The agreement was dated August 20, 1900, the consideration for the conveyance being the issue to the beneficiaries of stock in the company. Mrs. Bubb and the beneficiaries under J. Hall's will received fully paid shares in proportion to their respective interests.

At the hearing before the Special Commissioners the following facts were proved or admitted:-

(a)
The company took over the property exactly as it stood under the wills of J. and W. Hall. When so taken over the greater part of the property (which was coal-bearing land) was in lease to colliery owners, so that the company acquired the reversions, while as to the unlet remainder the company acquired the freehold in possession.
(b)
No land was ever purchased by the company other than that obtained under the agreement of August 20, 1900.
(c)
No land was sold by the company except (1.) an inn sold in 1910 for 1050l. owing to a difficulty with regard to licensing and (2.) a small piece of land sold for 310l. in 1905 to the Leigh Corporation for public purposes.
(d)
The company's revenue was derived from rents from surface and mining leases.
(e)
The minerals had been worked by various lessees under leases several of which had still many years to run. On their expiration leases had been renewed or fresh leases granted to the same lessees. The company never itself worked any of the mines.
(f)
Mrs. Bubb held half the shares in, and her husband was a permanent director of, the company. Shares could only be transferred among the existing shareholders and their families. [F2]

On behalf of the company it was contended:

(1.)
that the company was not carrying on a business or any undertaking of a similar character, and
(2.)
that where no trade or business was carried on the mere holding of investments was not an undertaking of a character similar to a trade or business and was not sufficient to bring the company within the provisions of s. 52, sub-s. 2 (a), of the Finance Act, 1920. [F3]

To involve the profits of an undertaking of a character similar to a trade or business to liability under this section the undertaking must be one in which there had been activities of a business character in the way of change of or dealings in investments, and that in this case there were no such activities. The property did not constitute an investment within the meaning of s. 52, sub-s. 2 (a), of the Finance Act, 1920.

On behalf of the Inland Revenue Commissioners it was contended

(1.)
that the company was in fact at all material times carrying on a trade or business or undertaking of a similar character;
(2.)
that the company was at all material times carrying on a trade or business or undertaking of a similar character within the meaning of s. 52, sub-s. 2 (a), of the Finance Act, 1920, for the reason
(3.)
that the mere holding of investments was sufficient to bring the company within the provisions of s. 52, sub-s. 2 (a), of the Finance Act, 1920; and
(4.)
that the company held an investment within the meaning of the section.

The Special Commissioners held as a fact that the company was not carrying on any trade or business or any undertaking of a similar character, and although they considered that the company held investments they were of opinion that the words in the statute. did not operate. to tax profits derived from investments held by a company which did not in some way trade or carry on business, whether in connection with the holding of investments or otherwise. Accordingly they discharged the assessment, but stated this case for the opinion of the Court.

Rowlatt J. affirmed the decision of the Special Commissioners.

The Inland Revenue Commissioners appealed. The appeal was heard on November 15 and 16, 1923.

Sir Thomas Inskip S.-G. and R. P. Hills for the appellants.

Latter K.C. and Cyril King for the respondent company.

The arguments sufficiently appear from the case stated and from the judgments.

The following cases were referred to: Liverpool and London and Globe Insurance Co. v. Bennett; Inland Revenue Commissioners v. Marine Steam Turbine Co.; In re Clayton's Trusts; Inland Revenue Commissioners v. Korean Syndicate; Birmingham Theatre Royal Estate Co.; Rand v. Alberni Land Co.; Commissioners for Special Purposes of Income Tax v. Pemsel; William Esplen, Son & Swainston, Ld. v. Inland Revenue Commissioners; Scottish Mortgage Co. of New Mexico v. McKelvie; Smiles v. Australasian Mortgage and Agency Co.; Smith v. Anderson; Muat v. Stewart.

Cur. adv. vult.

INLAND REVENUE COMMISSIONERS v. SOUTH BEHAR RAILWAY COMPANY LIMITED

At a meeting of the Commissioners for Special Purposes of the Income Tax Acts held on January 13, 1922, for the purposes of hearing appeals the South Behar Railway Company, Ld. (hereinafter called "the company"), appealed against an assessment to corporation profits tax in the sum of 1454l. 16s. for the accounting period ending December 31, 1920, made upon it by the Inland Revenue Commissioners under the provisions of the Finance Act, 1920, Part V.

The company, which was a British company within ss. 52 and 53 of the Finance Act, 1920, was incorporated in 1895, under the Companies Acts. Its objects were to purchase and acquire the

"right to enter into and to make with the Secretary of State in Council of India (hereinafter called the 'Secretary of State') .... the contract which has been prepared and is expressed to be made between the Secretary of State of the one part and the company of the other part ...."

and for the other objects set out in the memorandum and articles of association.

By a deed dated August 7, 1895, made between the Secretary of State and the company it was agreed that the company should supply to the Secretary of State the funds and materials required for the construction and making fit for traffic a railway to be called the South Behar Railway; that the Secretary of State should provide free of cost to the company the land requisite for the before-mentioned purpose; that surveys, etc., should be furnished by the company to, and be subject to the approval of, the Secretary of State; that the construction of the railway would be undertaken by the Secretary of State through such agency as he should appoint, but at the entire cost and risk of the company, the funds being supplied by the company; that until the determination of the contract the Secretary of State should work and maintain the railway; that all the business connected with the management and maintenance of the railway and the conduct of the traffic, including that interchanged with the East Indian Railway, should, so far as practicable, be carried on in the same manner and subject to the same regulations and control by the Secretary of State as the like business on the East Indian Railway.

By a deed dated August 22, 1895, made between the Secretary of State and the East Indian Railway, it was agreed that the latter should construct the South Behar Railway.

By a deed dated December 11, 1906, made between the Secretary of State and the South Behar Company, supplemental to the deed of August 7, 1895, after reciting that it had been agreed that the Secretary of State might determine the contract contained in the principal deed as therein mentioned, and that on such termination the company was to give up to the Secretary of State the railway and its existing stores, and the Secretary of State was to pay to the company the sum therein indicated, and after reciting that it had been agreed between the parties that as from January 1, 1906, until the determination of the principal contract such fresh arrangement between the parties as thereinafter appeared should be substituted for the provisions of the principal contract relating to the working and maintenance of the railway, it was agreed that the Secretary of State should, as from January 1, 1906, until the determination of the principal contract, be entitled to hold and use and deal with the railway for his own benefit without any interference or control on the part of the company, and the company should accordingly relinquish the same and all stores to him; that the Secretary of State should be at liberty to work, maintain, and make alterations or additions to the railway as he might think fit, any such works which he might deem necessary to be executed free of cost to the company; the Secretary of State should be under no obligation to the company to keep the railway in working order or to work the same, and the company receiving from the Secretary of State the yearly payment thereinafter mentioned should keep him and the working agency indemnified against all claims by any one claiming to be interested in the railway through or under the company; that as from January 1, 1906, until the determination of the principal contract, the Secretary of State should pay to the company in London the yearly sum of 30,000l. by half-yearly payments, the company not being entitled to any charge or lien on the railway or its earnings in respect of the said yearly sum, and during the same period the company should not be required to pay interest to the Secretary of State on its indebtedness to him for advances on capital account, nor should the company be liable to repay the amount of that indebtedness on the determination of the principal contract; that upon the determination of the principal contract by notice of purchase the 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.

At the hearing before the Special Commissioners it was proved or admitted that the agreement of December 11, 1906, was still in force; that the whole work of construction and all repairs and maintenance of the South Behar Railway were effected by the East Indian Railway on behalf of the Secretary of State; that the company, since the indenture of December 11, 1906, took no part in working, inspecting or maintaining the railway, all being done by the Secretary of State and by the East Indian Railway on his behalf; the company never possessed any rolling stock in India, nor at any material time had it any agent or representative or office in India; that the company received the sum of 30,000l. yearly from the Secretary of State; that the shares in the company were quoted on the London Stock Exchange, there being about 200 debenture holders and about 400 shareholders in the capital stock of the company; that there were three directors of the company, the chairman receiving 200l. per annum and each of the other two directors receiving 150l. per annum; that the secretary of the company received a salary of 150l. per annum; and that the company had a sum of 6000l. invested in National War Bonds, bringing in an income of 300l. per annum, and in addition small sums were received from transfer fees and from money placed temporarily on deposit.

On behalf of the company it was contended:

(1.)
that the company had in no way constructed or maintained or used the Behar railway, and was not carrying on business as a railway company, or any business at all;
(2.)
that under the provisions of and since the making of the agreement of December 11, 1906, the sole rights of the company had been and were to be paid the sum of 30,000l. per annum payable half yearly by the Secretary of State, or the sum of 684,580l., if and when the Secretary of State determined the said agreement:
(3.)
that the company was not dependent upon the receipts or the existence of the Behar railway and had no interest or concern in the same;
(4.)
that the company was not lessor or landlord of the Behar railway;
(5.)
that the company did not carry on any trade or business, or any undertaking of a similar character within the meaning of the Finance Act, 1920, s. 52, sub-s. 2 (a);
(6.)
that the company did not hold investments within the meaning of the same sub-section; alternatively,
(7.)
that the mere holding in the circumstances stated of an investment or investments apart from the carrying on of any trade or business, or any undertaking of a similar character therein, did not impose liability to corporation profits tax under the provisions of the said section.

On behalf of the Inland Revenue Commissioners it was contended (inter alia):

(1.)
that the company was carrying on a trade or business;
(2.)
that the company was carrying on an undertaking of a character similar to a trade or business;
(3.)
that the company was carrying on an undertaking of a character similar to a trade or business which included the holding of investments;
(4.)
that the company was carrying on a trade, business or undertaking of holdings investments; and
(5.)
that the company was rightly assessed.

The Special Commissioners held as a fact that the company was not carrying on any trade or business or any undertaking of a similar character, and they were of opinion that the mere holding, in the circumstances above stated, of investments apart from the carrying on of any trade or business or any undertaking of a similar character did not cause liability to corporation profits tax. They accordingly discharged the assessment, but stated this case for the opinion of the Court.

Rowlatt J. affirmed the decision of the Special Commissioners.

The Inland Revenue Commissioners appealed. The appeal was heard on November 16 and 29, 1923.

Sir Thomas Inskip S.-G. and R. P. Hills for the appellants.

Hon. Sir William Finlay K.C. and A. M. Bremner for the respondent company.

The arguments sufficiently appear from the case stated and from the judgments.

The following cases were referred to: Inland Revenue Commissioners v. Korean Syndicate; Birmingham Theatre Royal Estate Co.; Sutherland v. Inland Revenue Commissioners; Erichsen v. Last; American Thread Co. v. Joyce; Inland Revenue Commissioners v. Marine Steam Turbine Co.; Mitchell v. Egyptian Hotels, Ld.; Grainger & Son v. Gough; Farmer v. Cotton's Trustees; Great Western Ry. Co. v. Bater.

Cur. adv. vult.

INLAND REVENUE COMMISSIONERS v ECCENTRIC CLUB LIMITED

At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on June 15, 1922, for the purpose of hearing appeals, the Eccentric Club, Ld. (hereinafter called "the company"), appealed against an assessment to corporation profits tax in the sum of 284l. 4s. for the accounting period ending December 31, 1920, made upon it by the Inland Revenue Commissioners under the provisions of the Finance Act, 1920, Part V.

The company was incorporated under the Companies (Consolidation) Act, 1908, on December 11, 1912.

By cl. 3 of the memorandum of association the objects for which the company was established were stated to be (inter alia):

"(a)
To promote social intercourse amongst gentlemen connected (directly or indirectly) with literature, art, music, the drama, the scientific and liberal professions, sport and commerce, and, with a view thereto, to establish, maintain and conduct a club of a non-political character for the accommodation of members of the club and their friends, and to provide a club house and other conveniences, and generally to afford to members and their friends all the usual privileges, advantages, convenience and accommodation of a club."
"(f)
To buy, prepare, make, supply, sell and deal in, or arrange for the supply of all kinds of provisions and refreshments required or used by the members of the club or other persons frequenting the club house or premises of the club."

By cl. 5:

"Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member, or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and the costs, charges and expenses of winding up and for the adjustment of the rights of the contributories among themselves, such amount as may be required not exceeding twenty shillings."

By cl. 6:

"The income and property of the club shall be applied towards the promotion of the objects of the club as set forth in this memorandum of association, and no member of the club in his character as such member shall be entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property, but nothing herein shall prevent payments in good faith to persons in other capacities (such as servants, lenders, landlords, vendors, or in any capacity other than membership), notwithstanding their membership of the club, or the application of the property of the club upon its winding up in accordance with the company's articles of association for the time being."

By the articles of association of the company "The club" was defined as meaning "The Eccentric Club, Ld."

Art. 5:

"The members of the club shall be the subscribers to the memorandum of association, and such other persons as shall apply for admission and be admitted as members."

Art. 9:

"Honorary members shall not be entitled to receive notices of or to attend or vote at any general meeting of the club, or to be elected members of the committee or other officers of the club, or to introduce visitors or to propose or second candidates for membership, but subject and except as aforesaid, or in these articles otherwise provided:-

(a)
All members of the club shall have the same rights, privileges and duties, and
(b)
The term 'members' in these articles or in the memorandum of association, in reference to members of the club, shall be deemed to include all members of whatever class."

Art. 67:

"The profits of the club whencesoever derived shall be applied solely towards the benefit of the club, or otherwise in the promotion of the objects of the club as set forth in the memorandum of association, and no portion thereof shall be paid by way of dividend or bonus to members of the club."

Art. 68:

"If upon the winding up or dissolution of the club there remains, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of the club, but shall be given or transferred as the committee may determine."

The company's accounts for the year ending December 31, 1920, showed a surplus of income over expenditure of 5382l. 17s. 10d., which sum was carried to the balance sheet of the same date.

At the hearing before the Special Commissioners the following facts were proved or admitted: That the company was a British company within the meaning of the Finance Act, 1920, s. 52, sub-s. 2 (a), and s. 52, sub-s. 3; [F4] that the club was purely a members' club and not a proprietary club; that if the amount of the members' subscriptions and entrance fees during the year ending December 31, 1920, totalling 11,442l. 7s., was eliminated, instead of there being a surplus of income over expenditure, there would have been a deficit, and no liability to corporation profits tax would have existed; that the company was not, and never had been, assessed to income tax in respect of any profits or surplus; that there were no receipts from anything in the nature of trade from persons other than members.

It was admitted that to involve liability to corporation profits tax the company must be brought within the provisions of s. 53, sub-s. 2 (h), of the Finance Act, 1920, as read in conjunction with s. 52, sub-s. 2, of the same Act.

The sole question for the determination of the Court was whether the company was liable to corporation profits tax on the sum of 5684l. or any sum.

On behalf of the company it was contended:

(1.)
that what the company was formed for, and did, was not the carrying on of any trade or business or any undertaking of a similar character within sub-s. 2 of s. 52 of the Finance Act, 1920, and that, therefore, the company was not within the charging section (s. 52) at all;
(2.)
that even if the carrying out of the objects for which the company was formed might in certain circumstances amount to the carrying on of a trade or business or undertaking of a similar character within sub-s. 2 of s. 52 of the Finance Act, 1920, the constitution of the company in this case was such as to preclude the carrying on of any trade or business or undertaking of a similar character within the meaning of the subsection;
(3.)
that s. 53 of the Finance Act, 1920, [F5] was a "machinery" section, that its provisions did not extend the scope of the charge which was laid on by s. 52, and that if the company was not within the charge laid on by s. 52 liability to the tax could not be imposed upon it by virtue of s. 53 or any part of it;
(4.)
that the company was not a mutual trading concern within the meaning of para. (h) (1.) of the proviso to sub-s. 2 of s. 53 of the Finance Act, 1920;
(5.)
that the company was not liable to corporation profits tax at all; and
(6.)
that if the company were so liable then the amounts received by the company by way of subscriptions and entrance fees should be eliminated from the computation of its liability.

On behalf of the Inland Revenue Commissioners it was contended (inter alia)

(a)
that the company was carrying on a trade or business or undertaking of a similar character within the meaning of the Finance Act, 1920, s. 52, and
(b)
that the assessment appealed against was rightly made and should be confirmed.

The Special Commissioners differed in opinion, one thinking that the company did not come within either s. 52, sub-s. 2, or s. 53, sub-s. 2 (h), of the Act, and was therefore not liable to the tax, while the other thought the company was a mutual trading concern within s. 53, sub-s. 2 (h), and was liable at any rate on the surplus arising from the provision of meals, bedrooms, etc.; but in accordance with the practice of the Commissioners of deciding in favour of the taxpayer where the Commissioners came to opposite conclusions, the second Commissioner withdrew his opinion, and the assessment was discharged, whereupon this case was stated for the opinion of the Court, the sole question being whether the company was liable to corporation profits tax on the sum of 5684l. or any sum.

Rowlatt J. held that the company was carrying on an "undertaking of a similar character" to that of a trade or business, and was therefore liable to corporation profits tax.

The company appealed. The appeal was heard on November 29, 30 and December 1, 1923.

Konstam K.C., A. M. Bremner and R. W. Needham for the appellant company.

R. P. Hills (Sir Thomas Inskip S.-G. with him) for the Inland Revenue Commissioners.

The arguments sufficiently appear from the case stated and from the judgments.

The following cases were referred to: New York Life Insurance Co. v. Styles; Gresham Life Assurance Society v. Styles; Last v. London Assurance Corporation; Gresham Life Assurance Society v. Bishop; Inland Revenue Commissioners v. Korean Syndicate; Religious Tract and Book Society of Scotland v. Forbes; Grove v. Young Men's Christian Association; Carlisle and Silloth Golf Club v. Smith; In re Incorporated Council of Law Reporting for England and Wales; Mersey Docks and Harbour Board v. Lucas; Paddington Burial Board v. Inland Revenue Commissioners; Port of London Authority v. Inland Revenue Commissioners.

Cur. adv. vult.

Dec. 17. The following written judgments were delivered:-

Judgment of Pollock M.R. -

These three cases depend upon the right construction to be placed upon the relevant portions of ss. 52 and 53 of the Finance Act, 1920. By s. 52 there is charged the tax, called the corporation profits tax, upon all profits to which Part V. of the Act applies and which arise in the accounting period. By sub-s. 2 (a) the profits, to which Part V. of the Act applies, are determined to be "the profits of a British company carrying on any trade or business, or any undertaking of a similar character, including the holding of investments." In that sub-section there is a proviso which eliminates for a limited period the profits of certain companies which may broadly be described as public utility undertakings, and which are precluded by statute from charging increased prices or distributing higher rates of dividend than those specifically authorized by the Acts regulating their powers. There is a further exception - under sub-s. 3 - of certain other companies. The effect, therefore, of s. 52, according to the structure of the Act, appears to be this - that prima facie sub-s. 2 (a) is a wide, embracing section, at first sight operative to include all British companies carrying on trade or business or any undertaking of a similar character, from which it was necessary to exclude certain companies and undertakings which would otherwise be embraced in its terms.

Some light perhaps may also be thrown upon the inclusive nature of the section by s. 43 of the Finance Act, 1922, whereby the profits of charitable and other companies registered without the word "limited" are expressly exempted from the corporation profits tax. This statutory exception appears to have been necessary because, without it, the words which I have referred to in s. 52, sub-s. 2 (a), would prima facie have included the companies expressly excluded by s. 43. Sub-s. 2 (a) is undoubtedly difficult to construe. The words "trade or business" are very wide words. In the Income Tax Act, 1918, the word "trade" is used without the word "business." In the present section both the words "trade" and "business" appear, and it is not easy to appreciate what undertaking there could be similar in character to a trade or business which is not embraced within the two words "trade" or "business." In the Act which imposes the excess profits duty, the Finance (No. 2) Act, 1915, by s. 39, the trades or businesses to which the part of the Act imposing excess profits duty applies are "all trades and businesses (whether continuously carried on or not) of any description carried on in the United Kingdom," and then follow certain exceptions.

It is not possible to form any accurate measure of construction to be put on the words in sub-s. 2 (a) by reference to, or analogy from, the Income Tax Acts, or the Excess Profits Duty Act; the words must be taken as they stand. They impose the tax upon the profits first of all of a British company carrying on any trade or business, and these latter words are, in my opinion, used in an adjectival sense. There may be a British company which is not carrying on a trade or business. Thus, unless it can be said to be carrying on an undertaking of a similar character, whatever those words may hereafter be held to mean, the company's profits are not subject to tax if it is not carrying on a trade or business. It is not, in my judgment, possible, nor is it necessary for the purpose of the decision of the three present cases, to give a final definition of what companies are within or without sub-s. 2 (a). It is enough that a British company is prima facie included, provided that it carries on a trade or business. It is admitted that in the three cases now before us the companies whose profits the Crown seeks to tax are British companies. The question to be determined is whether they are carrying on a trade or business, for those are the words relied upon by the Solicitor-General as embracing the three cases before us.

A number of cases have been referred to for guidance. In Liverpool and London and Globe Insurance Co. v. Bennett, [F6] it was held by Hamilton J. (now Lord Sumner) that an insurance company, which had investments abroad, particularly for the purpose of fulfilling a condition of permission to carry on business in a foreign country, must pay income tax in respect of the interest received on the investments abroad, whether made to comply with the foreign law, or voluntarily, to accumulate a reserve in the foreign country, on the ground that the interest on both classes of investments was a part of the profits or gains accruing to the business from the trade it carried on. The interest received was received in the course of carrying on the business of the company. The sums representing that interest, whether remitted to this country or not, would form a part of the assets in the balance sheet of the company, and so be subject to tax.

In Inland Revenue Commissioners v. Marine Steam Turbine Co. [F7] it was held that a company, the liquidation of which was stayed for the purpose of receiving royalties, which were found to be in effect payment by instalments of part of the price of the property which the company had definitely disposed of to a new company, was not carrying on business. The liquidation of the old company was only stayed in order that it might receive from the new company the price to be paid by the new company for the property handed over to the latter, and although the payment was made by instalments instead of by a lump sum, Rowlatt J. held that the company receiving these royalties as a payment was not carrying on business and was not liable for excess profits duty.

The third case is that of Inland Revenue Commissioners v. Korean Syndicate. [F8] In that case the company had dealt with certain concessions belonging to it, and had secured royalties to be paid to it by the lessees under a lease of the concession granted by it. Rowlatt J. held that the company was not carrying on business within s. 39 of the Finance (No. 2) Act, 1915. This decision was reversed by the Court of Appeal. [F9] That Court held that the operation carried out by the company was a turning to account of the concession within the memorandum of association of the company, and was, therefore, part of the legitimate business carried on by it.

Lord Sterndale M.R. calls attention to the importance of seeing what the purpose of the company was as expressed in its memorandum of association, and had regard to that purpose as a factor for consideration when a decision had to be made in the particular circumstances before him on the question whether the company was carrying on business or not. It may be well to remark, in this connection, that although I agree with Rowlatt J.'s observation in the present case that every British company which is fulfilling the objects of its memorandum of association is not thereby ipso facto, and of necessity, brought within s. 52, sub-s. 2 (a), of the Act of 1920, yet if its objects are business objects and are in fact carried out, it follows that the company carries on business, and consequently comes within the sub-section. Atkin L.J. in the Korean Syndicate Case [F10] expressly holds that the interpretation of the word "business" given by Rowlatt J. in Inland Revenue Commissioners v. Marine Steam Turbine Co., [F11] if intended to be a precise definition, would be too narrow.

The judge had said that the meaning of "business" was an active occupation or profession continuously carried on, and Atkin L.J. pointed out that if any emphasis is to be attached to the word "active" he would not agree with it. Whether Rowlatt J. did so intend may be open to doubt, for in the Korean Syndicate Case, [F12] when before him, he makes a reservation with which I agree. "It does not follow," he says, "that, whenever at some particular moment a company is doing nothing but receiving an income from its investments, it is not carrying on a business"; and he indicates that in a certain class of cases, although a company is not actively doing anything, the right conclusion would be that the company was nevertheless carrying on a business.

INLAND REVENUE COMMISSIONERS v. WESTLEIGH ESTATES COMPANY LIMITED

Coming now to the particular cases which are before us, the first is that of the Westleigh Estates Co., Ld., in which the Commissioners held that the company was holding investments, but inasmuch as it was not carrying on business, in their view, the holding of investments did not bring the company within the range of the Act. The company, however, appears to have power to exchange any of its investments and to deal with the moneys of the company as may be from time to time required. They have, as stated in para. 6, sub-cl. (c), of the case stated, on two occasions altered their investments; and in the note attached to the accounts of the company for the year ending June 30, 1920, the last account attached to the case, there is a statement: "Your directors would draw the attention of the shareholders to the important fact that the property is to a large extent a wasting asset, and leave it in their hands to say whether the balance was to be all divided as dividend, or dividend and bonus, or whether any part should be set aside and invested by way of sinking fund."

It is a clear rule that the questions of fact are to be found by the Commissioners, and that their decision cannot be upset if they have rightly applied the law to the facts found by them. It is an equally clear rule that the law must be interpreted by the Courts before which the case stated comes. In my judgment the Commissioners have not applied the true rule of law to the facts found. It is impossible to say that the Westleigh Estates Company had ceased to do any business. One of the facts found (see para. 6 (e) of the case) is as follows:

"The minerals under the surface of the property have been worked by the various lessees under leases which had, and still have, many years to run. On expiration these leases have been renewed, or fresh leases granted, to the same lessees. The company has never itself worked any of the mines under the property."

As and when, therefore, occasion arises, further leases may and will be granted by the company. It was in my judgment exactly in that state referred to by Rowlatt J. in the Korean Syndicate Case. [F13] Its business may have been quiescent, but it was still carrying it on, and I think that it falls within the words "a British company carrying on a trade or business" without the necessity of having reference to the words "including the holding of investments." Those words appear, in my judgment, to sweep into the category of companies whose profits are subject to tax, a company which is formed for the purpose of holding the shares of another company and divide the dividends received as may be determined from time to time, and, it may be, other companies as well.

In this case, however, it is not necessary to invoke their aid. The Westleigh Estates Company was, in my judgment, carrying on a trade or business, and, therefore, I am of opinion that the appeal should be allowed, with costs here and below.

INLAND REVENUE COMMISSIONERS v. SOUTH BEHAR RAILWAY COMPANY LIMITED

The original purpose of this company was to supply to the Secretary of State for India the funds and material required for the construction, completion, and making ready and fit for public traffic a railway to be called the South Behar Railway. The railway was in fact constructed by the East Indian Railway Company, as agents for the Secretary of State.

By the indenture dated December 11, 1906, supplemental to the indenture of August 7, 1895, the railway, by that time constructed, was to be held by the Secretary of State "for his own benefit, without any interference or control on the part of the company, and the company was accordingly to relinquish the same to him, together with all stores now belonging or appropriated to the railway." By cl. 5 of this indenture, as from January 1, 1906, until the determination of the principal contract of August 7, 1895, it is provided that the Secretary of State shall pay to the company in London the yearly sum of 30,000l. by half yearly payments on every June 30 and December 31 in each year. A number of the clauses contained in the principal contract were determined, but in particular cl. 27 remains in force. It is as follows:

"In the event of an agreement being entered into between the Secretary of State and the company for the construction of any branch of the Behar Railway, the company, subject to the terms of such agreement, shall either construct the same, or provide the funds or material in lieu thereof, required for the construction and completion of the same by an agency to be approved by the Secretary of State."

The case states that the shares of the company are quoted on the London Stock Exchange, though the company's stocks do not frequently change hands. There are about 200 debenture holders and about 400 shareholders of the capital stock of the company. There are three directors of the company: the chairman receiving 200l. per annum, the other two directors 150l. per annum as remuneration, and the secretary receives a salary of 150l. per annum. The company has a sum of 6000l. invested in National War Bonds, bringing in an income of 300l. per annum. In addition smaller sums are received from fees, paid on the transfer of stock, and their money placed temporarily on deposit. The Secretary of State has power to take over the railway on payment to the company of a sum of 684,580l., which is the sum determined to be payable under cl. 56 of the principal contract, as capital expended on the undertaking, and upon this purchase the principal contract will become determined.

It is agreed that the company is a British company. Immunity from liability to corporation profits tax is claimed by the company on the ground that it is not carrying on any trade or business. In my judgment it is impossible to say that the company is not carrying on any trade or business. It could not be wound up on the ground that its objects had been attained and completed. It is, in my opinion, in the same state that I have already referred to in the previous case. Its business may be quiescent, and, to a large extent, a matter of routine. Its receipts may be derived, if not wholly, at least almost entirely from the annual payments made to it by the Secretary of State; but it remains a company alive, and still requiring, if only in smaller details, the direction of its directors and the duties carried out by its secretary. It is still concerned in the business of disposing of and dividing the profits which it has become entitled to by reason of its greater activity in the past, and that activity, as well as possibly others, may be awakened and quickened in the future. For these reasons I am of opinion that the appeal must be allowed, with costs here and below.

INLAND REVENUE COMMISSIONERS v. ECCENTRIC CLUB LIMITED

The next case, that of the Eccentric Club, Ld., involves different considerations. It is admitted that the company is a British company. The two Commissioners who heard the case were divided in their opinion. Rowlatt J. has held that it is carrying on business. The limited company was formed for the purpose of carrying on the Eccentric Club.

[His Lordship read clauses 3 (a) and 6 of the memorandum of association and continued:]

The members of the club are to be the subscribers to the memorandum of association, and such other persons as shall apply for admission, and be admitted as members. Each person who proposes to be a member of the club signs an application by which he affirms:

"I desire to become a member of the Eccentric Club, and I agree, if elected, to become a member, and to be bound by the memorandum and articles of association and bye-laws of the club."

The election of members is vested solely in the committee, and is to be by ballot. An applicant cannot become a member of the company unless he has first of all been chosen to be a member of the club. But if and when he is elected to be a member of the club, he is required to become a member of the company. The business of the company is to carry on the club, and any profits must be devoted, in accordance with the memorandum of association, to the advancement of the objects of the club. It is argued on behalf of the Crown that the company is carrying on the business of the club: while the contention on behalf of the club is that although in form it is a company, it does not carry on any trade or business in any just appreciation of those terms, that its object is not business, but to promote social intercourse, and that the club and the company do not seek to gain, nor do their activities result in profits.

The two cases of Last v. London Assurance Corporation [F14] and New York Life Insurance Co. v. Styles [F15] were cited and relied upon respectively on either side. It is a well recognized principle that, in revenue cases, regard must be had to the substance of the transactions relied on to bring the subject within the charge to a duty, and that the form may be discarded. In the New York Life Insurance Co.'s Case [F15] the majority of the House of Lords held that in substance the surplus of the premiums contributed by the members was the result of the mutual insurance between members only, and that although the members were united in a corporation, in truth and in fact the case could be regarded as if they were an unincorporated association of individuals. Lord Herschell [F16] asks:

"Can it be said that the persons who are thus associated together for the purpose of mutual insurance, carry on a trade or vocation from which profits or gains accrue to them?"

And he answers:

"I cannot think so."

Lord Macnaghten says: [F17]

"It happens here that the persons who combined to obtain the benefit of mutual insurance became, by the very act of insuring their lives, members of an incorporated company. But the company (so far as regards the participating policyholders) was not formed for the purpose of carrying on a business having for its object the acquisition of gain. The fact, therefore, that the insured, who are also the insurers, carry on their business through the medium of a company, was properly treated as immaterial. And yet I cannot help thinking that the difficulty in the case, such as it is, has been caused by the existence of the company. Put the company out of sight altogether, and what remains? Certain persons agree to insure their lives among themselves, on the principle of mutual insurance."

Although the New York Life Insurance Co.'s Case [F15] was decided upon the Income Tax Acts, and could not be invoked as governing the present, the reasoning in it may be used when, as in the present case, one has to decide whether the form of the Eccentric Club alone is to be looked at, or whether one may test the question whether the company is carrying on business, by looking at the nature and purpose and substance of the transaction by which the members of the club are aggregated in the company. It seems a somewhat far-fetched interpretation of the relevant section of the Act to hold that the association and activities of the members of the club connote the carrying on of business. In my judgment the company was the structure only; it did not carry on a trade or business in the sense intended by s. 52, sub-s. 2 (a), so as to impose a liability to corporation profits tax. The facts of this case are special and peculiar, and while as a general rule in cases of a company registered with the appendix "Limited" there would be a strong presumption that it was intended to, and did carry on a trade or business, yet, in my judgment, that presumption can be rebutted, and is so, where the facts are such, as in this case, as to negative both the aim and the prospect of gain. The appeal in this case also will be allowed, with costs here and below.


Back to top