Tootal Broadhurst Lee Co Ltd v. Inland Revenue Commissioners

[1949] 1 All ER 261

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(Judgment by: Lord Simonds)

Between: Tootal Broadhurst Lee Co Ltd
And: Inland Revenue Commissioners

Court:

Judges:
Lord SimondsLord Normand
Lord Morton of Henryton
Lord MacDermott
Lord Reid

Subject References:
taxation
profits
Excess Profits Tax
"Income received from investments"
Royalty received from licence of patented invention

Legislative References:
Finance (No 2) Act, 1939 (c 109) - sched VII, pt I, para 6(1)

Case References:
Inland Revenue Comrs v Desoutter Bros Ltd - [1946] 1 All ER 58; 174 LT 162; 2nd Digest Supp
Gas Lighting Improvement Co Ltd v Inland Revenue Comrs - [1923] AC 723; 92 LJKB 665; sub nom, Inland Revenue Comrs v Gas Lighting Improvement Co Ltd; 129 LT 481; 12 Tax Cas 503; Digest Supp
Inland Revenue Comrs v Rolls-Royce Ltd - [1944] 2 All ER 340; 171 LT 238; 2nd Digest Supp
Inland Revenue Comrs v Broadway Car Co (Wimbledon) Ltd - [1946] 2 All ER 609; 2nd Digest Supp

Hearing date: 29, 30 November 1948
Judgment date: 20 January 1949

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Judgment by:
Lord Simonds

My Lords, the question raised in this appeal relates to an assessment to excess profits tax made on the appellants for the chargeable accounting period ending on 30 June 1940, in respect of the profits of their trade or business. Shortly stated, it is whether in the computation of those profits certain sums received in respect of so-called patent rights belonging to the appellants, or in which they were interested, ought to be included. If, as the appellants contend, such sums were "income" from investments received within the meaning of the Finance (No 2) Act, 1939, sched VII, para 6, then they ought not to be included. Excess profits tax was first imposed by the Finance (No 2) Act, 1939, pt III, in respect of a certain excess of the profits arising from a trade or business over the standard profits as therein defined. It is in this context that your Lordships have to consider the meaning of the words "income received from investments."

It is convenient to set out, or state the effect of, the relevant sections of the Act that I have mentioned. By s 12(2) of the Act, the trades and businesses to which the tax applies are all trades or businesses of any description carried on in the United Kingdom, or carried on, whether personally or through an agent, by persons ordinarily resident in the United Kingdom. Section 12(4) of the Act is as follows:-

"Where the functions of a company or society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this section to be a business carried on by the company or society."

By s 14 of the Act it is provided that the profits from a trade or business shall be computed on income tax principles as adapted in accordance with the provisions of pt I of sched VII to the Act. Part I of sched VII to the Act is headed "Adaptations of income tax principles as to computation of profits" and it is provided in para 6 thereof as follows:-

"(1)

Income received from investments shall be included in the profits in the cases and to the extent provided in sub-para. (2) of this paragraph and not otherwise.

(2)

In the case of the business of a building society, or of a banking business, assurance business or business consisting wholly or mainly in the dealing in or holding of investments, the profits shall include all income received from investments, being income to which the persons carrying on the business are beneficially entitled."

The appellants do not carry on any of the businesses mentioned in para 6(2).

The facts, so far as they are material, are succinctly set out in three paragraphs of the Case stated by the commissioners. They are thus stated:-

"3.

The company carries on trade as manufacturers and merchants of cotton, linen, woollen and other goods. In the course of manufacture the company (together with its subsidiaries) uses patents covering inventions and processes which have been mostly developed in its own research department which has been in operation for 20 years. The staff of this research department is permanent and is employed largely for the purpose of perfecting old processes and devising new. The company has from time to time granted non-exclusive licences of a number of such patents to other manufacturers and finishers both in the United Kingdom and abroad at a royalty. Royalties from such licences were received by the company in the standard period and in the chargeable accounting period in question.

4.

The royalties the subject of this appeal were received in respect of three groups of patents:-

(A)

Crease-resistig Process. This process was developed by the company's research department, and is patented in many countries abroad. The company itself does not employ this process, but the cloth it produces is treated either by a subsidiary of its own or by licensee finishers. A specimen of the licences granted is annexed hereto, marked "A" and forms part of this case.

(B)

Process to Prevent Felting in Woollen Goods. In 1939 the company bought the patent rights in respect of this process from the original patentees taking over the benefit and burden of existing licences. The company has since granted further licences, and the process is also used in the manufacture of its own goods. A specimen of the licences granted is annexed hereto marked "B" and forms part of this Case.

(C)

Controlling Devices on Stentering Machines. These devices govern the transit of cloth on conveyor belts on drying machines. They were invented by a person connected with the company; a joint application by the company and this person was made almost simultaneously with an application by another company (hereinafter called "the assignees") which had produced a somewhat similar device. By an agreement made on 12 March 1940, the company and the person connected with it transferred their interest to the assignees in return for a royalty, and the assignees took out a consolidated patent under the two applications.

The royalties received under this agreement in the year in question amounted to about £150; the royalties received under (A) and (B) of this paragraph in the year in question amounted to about £100,000. The agreement made on 12 March 1940, is annexed hereto marked 'C' and forms part of this Case.

5.

None of the licences granted as referred to in para 4 above is exclusive, nor for the whole term of the patent. The company owns patents other than those mentioned in para 4 hereof, but no licences have been granted in respect of them. The negotiation of the licences gives the company a fairly substantial amount of trouble and expense, but once a licence is granted little is involved except collecting the royalty."

On the form of the licences and the agreement of 12 March 1940, I will make some observations at a later stage. For the licences originally annexed to the Case others were afterwards substituted, but nothing turns on this.

On these facts, the commissioners expressed the opinion that "patents which had been exploited by licensing them out at a royalty fall within the term 'investments'" and that the sums in question should, therefore, be excluded from the assessment. From this determination the Crown appealed by way of Case Stated to the High Court, and, after some interlocutory proceedings to which I need not refer, Atkinson J decided that the patents in groups (A) and (B) were not, but that the patents in group (C) were, investments. There was an appeal and cross appeal from his decision, and the Court of Appeal unanimously held that none of the patents was an investment, and, accordingly, that the whole of the sums in question must be included in the computation of profits for the purpose of assessment.

My Lords, I entertain no doubt that the decision of the Court of Appeal, which was founded on and followed an earlier decision of the same court, Inland Revenue Comrs v Desoutter Bros Ltd, was correct. I do not propose to attempt an exhaustive definition of the word "investments." It is a word of which the meaning may vary according to its context. I hesitate to say, as was said by MacKinnon LJ in the Desoutter case ([1946] 1 All ER 63), that it is to be construed as "a word of current vernacular." It is, for instance, a popular use of the word to say that a good education is a good investment. Here the meaning is limited by the context, and the context is one in which a distinction has to be made between the income of investments and the other profits of a trade or business. This does not mean that, if the assets (to use a neutral word), as to which the question arises, would necessarily be described as investments in any context, they can be anything but investments for the purpose of para 6. This was long since determined in Gas Lighting Improvement Co Ltd v Inland Revenue Comrs, a case decided on the strictly comparable language of the Finance (No 2) Act, 1915, sched IV, pt I, para 8, which was much pressed on this House. There the question was whether certain shares, which were admittedly investments, were investments within the paragraph, the then appellant company contending for an implied qualification to the effect that to be within the paragraph the investment must be made outside the operations for which the business of the company was constituted, but, as Viscount Cave LC said ([1943] AC 730), there was nothing in the Act which compelled or admitted of such a limitation of the meaning of the word. Your Lordships will, I think, get no assistance from this case and I mention it only because, first and last, learned counsel for the taxpayers asserted its relevance.

The problem, my Lords, is a different one-not whether these assets, being investments, are within the paragraph, but whether they are "investments" at all, and, as I have already said, that is a word whose scope will depend on its context. It appears to me that the problem may be solved in this way. I would take a schedule of the assets of the trading company concerned and, omitting assets such as stocks and shares to which, in view of the decision in the Gas Lighting Improvement Co case, the title of investments can in no circumstances be denied, would ask of each other asset: "Is this an asset which the company has acquired and holds for the purpose of earning profits in, or otherwise for the promotion of, its particular trade or business?" There might be borderline cases in which the answer would be uncertain, but I do not doubt that in the vast majority of cases the answer would be clear cut. If it was in the affirmative, the asset would not be an investment within the paragraph. It is possible, as was pointed out in the Desoutter case by Lord Greene MR that a particular kind of asset might in the hands of one trader be, and in the hands of another not be, an investment, though a less likely form of investment for any trader to make than a patent cannot readily be imagined.

Applying this test to the facts of the present appeal, I cannot believe that any business man (who may be regarded as the touchstone in such a case) would describe the patent rights here in question as investments of the taxpayers or the payments received by them under the licences or agreement as income of their investments. On the contrary, the elaborate character of the so-called licences, which are designed to further the commercial interests of the taxpayers and are directly related to their own particular trade, indicates clearly enough that these are assets of a kind which a trader carrying on such a business as that of the taxpayers might be expected to own, but are assets such as no company carrying on a different trade would be likely to acquire. The agreement of March, 1940, need not be particularly examined. It serves to emphasise the distinction that I have made. It is not from such a source as this that a trader would seek to derive an income, unless it was an integral part of, or at least, closely associated with, the trade he carried on.

I should finally say a word about the cases that were cited to this House. I need say no more about the Gas Lighting Improvement Co Ltd case. I have, I hope, given full weight to it in the opinion that I have formed. In Inland Revenue Comrs v Rolls-Royce Ltd MacNaghten J decided that income derived from the patent licences there in question was not income from an investment. He partly, at least, founded his decision on the view that, before there can be anything properly called an investment, money must be laid out to acquire it or bring it into existence. This test, though it was not accepted by Lord Greene MR in the Desoutter case, may, I think, have an element of considerable value. It is not decisive, but it would, at least, be easier to describe an asset as an investment if it had been purchased out of funds not needed for the immediate purposes of the business. In Desoutter's case, to which I have more than once referred, the facts were similar to those in the present case, and it was held that the royalties derived from certain patents were not income from investments. The judgment of Lord Greene MR in that case, which has been followed and applied in the courts below in the present case, is, in effect, now under review. I shrink, as he did, from attempting to lay down any general rule. The question is, as he pointed out, largely one of fact in each case. If for the purpose of drawing the right inference of fact I have suggested a certain test, I do not seek to depart from or to qualify what he said. Finally, reference was made to Inland Revenue Comrs v Broadway Car Co (Wimbledon) Ltd. There the court held that, applying the principle of Desoutter's case, it was impossible to say that the commissioners had erred in law in concluding that the transaction there in question had resulted in an investment. I am content without further investigation to accept the case as correctly decided on that ground. In the result, my Lords, I am satisfied that the decision of the Court of Appeal was correct, and move that the appeal be dismissed with costs.