Electric and Musical Industries Ltd v. Inland Revenue Commissioners

[1950] 2 All ER 261

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(Judgment by: Lord Simonds)

Electric and Musical Industries Ltd
v Inland Revenue Commissioners

Court:

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

Hearing date: 8, 9, 10 May 1950
Judgment date: 23 June 1950

United Kindom

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Judgment by:
Lord Simonds

My Lords, the question for determination in this appeal is whether the appellant company is assessable to excess profits tax in the chargeable accounting period ending 30 June 1944, in respect of £17,265 received by its subsidiary company, Gramophone Co Ltd (which I will call "the Gramophone Company"), from Phonographic Performance Ltd (which I will call "the Phonographic Company"). If this sum was income from an "investment" within the meaning of para 6(1) of Part I of sched VII to the Finance (No 2) Act, 1939, the answer to this question is in the negative. Otherwise, it is in the affirmative.

The question arises in this way. The business of the Gramophone Company includes the manufacture of gramophone records, and when it had been judicially decided in 1934 that manufacturers of such records have copyright therein entitling them to exclusive right of public performance the company with other manufacturers formed a committee to co-ordinate the arrangements for granting licences for such public performance. It soon appeared, however, that this committee could not adequately perform the duty assigned to it, and on 12 May 1934, the Phonographic Company was incorporated under the Companies Act, 1929, as a company limited by guarantee without a share capital with the objects which I must state. At all material times the Gramophone Company was a member of the Phonographic Company as were a number of other companies which manufactured records. The objects of the Phonographic Company according to cl 3 of its memorandum of association were as follows:

"(a)

To exercise and enforce on behalf of members of the company, being manufacturers of gramophone records, perforated rolls and other contrivances by means of which sounds may be mechanically reproduced (all of which contrivances are hereinafter included in the term 'record') and/or the owners of being otherwise entitled to the benefit of or interest in the copyrights in such records (hereinafter called 'the proprietors') all rights and remedies of the proprietors by virtue of the Copyright Act, 1911, or otherwise in respect of the public performance of records.

(b)

In the exercise or enforcement of such rights and remedies to grant licences and to make and from time to time to rescind, alter or vary any arrangements and agreements with respect to the public performance of such records in any and every respect whatsoever, and to collect and receive and give effectual discharges for all royalties, fees and other moneys payable under any such licences, agreements or arrangements or otherwise in respect of such public performances by all necessary actions or other proceedings, and to recover such royalties, fees and other moneys, and to restrain and recover damages for the infringement by means of such public performances as aforesaid of the copyrights of such records or any other rights of the proprietors or of the company on their behalf in respect of such records, and to release, compromise or refer to arbitration any such proceedings or actions or any other disputes or differences in relation to the premises.

(c)

To obtain from the proprietors such assignments, assurances, powers of attorney, or other authorities or instruments as may be deemed necessary or expedient for enabling the company to acquire the legal estate in the copyrights of such records, and to exercise and enforce in its own name or otherwise all such rights and remedies as aforesaid, and to execute and do all such assurances, agreements and other instruments and acts as may be deemed necessary or expedient for the purpose of the exercise or enforcement by the company of such rights and remedies as aforesaid.

(d)

To make and from time to time alter or vary any rules for regulating

(i)

the manner in which the period or periods for which, and the conditions under which the proprietors shall authorise the company to exercise and enforce the rights and remedies aforesaid of the proprietors in respect of such records as aforesaid;

(ii)

the method and proportions by and in which and the times at which the net moneys received by the company in respect of the public performance of any such records as aforesaid shall be divided and apportioned among the members of the company;

(iii)

the administration of the property or business of the company and any matters incidental thereto.

(e)

To distribute the net moneys received by the company in the exercise of the foregoing powers after making provision thereout for the expenses and liabilities of the company incurred in such exercise or in otherwise carrying out the purposes and operations of the company, and for any contributions or payments for any of the purposes specified in the next following sub-clause hereof, amongst the members of the company entitled thereto in accordance with the rules for the time being in force with respect to the distribution thereof."

By cl 4 of the memorandum the liability of the members was limited, and by cl 5 each member undertook to contribute to the assets of the company in the event and for the purposes therein specified such sum as might be required not exceeding 1.

Before referring to the articles of association I pause to observe that nothing could be clearer than that the company was formed for the purpose of acting as agent for its several members in the exercise of its rights, and I do not use "agent" in any loose sense as it might sometimes be used to describe the relation which a so-called "one man company" bears to its founder. Nor is this strict relation of agency affected by the fact that under cl 3(d) of the memorandum it was for the company to make the rules therein referred to.

I do not think it necessary to refer in detail to many of the articles of association. They appear to me to confirm and emphasise the relation in which the company stood to its members. Learned counsel for the appellant company particularly relied on art 9, which provides that all moneys received by the company in respect of the exercise of the rights, licence or authority granted by the member shall be the property of the company and shall be by them dealt with in accordance with the rules for the time being in force. I do not think that in its context this article can affect the conclusion to which the memorandum and the articles as a whole clearly point. To this question I return later.

The Gramophone Company did not, in fact, assign to the Phonographic Company the copyright in records manufactured by it. It was held by the Special Commissioners (to whose determination I shall presently refer) that what the company did amounted to an equitable assignment of copyright, but this view was not seriously maintained before you Lordships and cannot be upheld. The Phonographic Company did just what it was formed to do, exercising the authority to grant licences on behalf of its members and collecting the fees. The distribution of the net moneys received by the Phonographic Company among its members proceeded in accordance with resolutions of the company which were passed from time to time. I take as typical of its proceedings a minute of the tenth annual general meeting held on 4 October 1944:

"3. The Directors' Report and the Accounts . The report of the directors and accounts were read by the acting secretary. It was then proposed by the chairman, seconded by Mr. E. R. Lewis and unanimously resolved that notwithstanding the provisions of the extraordinary resolution passed on 15 March 1937, the sum of £66,577 10s. 10d. (sixty-six thousand five hundred and seventy-seven pounds ten shillings and ten pence) being the net moneys available for distribution in respect of the period of twelve months ended May 31, 1944, should be distributed among the members entitled thereto in the proportions next stated:

                           

It appears that a minute similar to the above was passed in each year. Agreements were also made for further sub-division of the shares distributed to the members according to these minutes.

It was in these circumstances that in the assessment of the appellant company to excess profits tax in respect of the profits of the Gramophone Company for the chargeable accounting period 1 July 1943, to 30 June 1944, the sum of £17,265 received by the latter company from the Phonographic Company was brought into account as part of the profits liable to be charged to the tax and that the appellant company challenged the assessment on the ground that that sum constituted the income of an investment within the meaning of the relevant section to which I referred at the beginning of this opinion. The Special Commissioners before whom the matter came for determination were in favour of the appellant company. They held that

"for the Crown to succeed in this appeal it is necessary to establish that the Phonographic Company was throughout acting as an agent for its members including the Gramophone Co., Ltd., in granting licences and collecting payments."

And they held that the circumstances of the case and, in particular, cl 3 (d)(i) and (ii) of the memorandum and arts. 9 and 46 of the articles of association negatived the existence of an agency. They were of opinion that there was an equitable assignment by the Gramophone Company of the whole of its beneficial interest in the copyright as regards public performance of records, and that its interest was confined to membership of the Phonographic Company and the obtaining of its share of the profits available for distribution. On this view they regarded the receipt of the sum of £17,265 as in the nature of a dividend from an investment. At the request of the respondents the Special Commissioners stated a Case for the opinion of the High Court. Before the Case was heard the respondents, who appear to have so far relied only on what I may call the agency point, gave notice that they would rely on an alternative contention in these terms: 

"That the Gramophone Company handed over its property in its copyrights to be managed by the Phonographic Company along with the property of other members of the Phonographic Company upon the terms of receiving a share of the profits to be derived from the management of the property; that the sum of £17,265 17s. 1d. was the consideration received by the Gramophone Company in respect of the accountable period for the right of the Phonographic Company to collect the royalties for the period under the Gramophone Company's copyrights; and that the relation between the two companies was a contractual relation of trader and customer."

When the case was heard before Singleton J that learned judge allowed the appeal of the present respondents. Inevitably, perhaps, the original contentions and the new alternative contention of the respondents overlapped, and the learned judge expressed his view of the relation between the Gramophone Company and the Phonographic Company as ( [1948] 2 All ER 522 )

"... beginning with something in the nature of an agency but ending rather as contractual relation of trader and customer."

He was clear, at least, that the sum in question could not, according to the ordinary use of language, be described as income from an investment.

The appellant company appealed to the Court of Appeal which unanimously dismissed the appeal, the judgment of the court being given by Cohen LJ. I find it convenient first to say that I agree with the learned lord justice in rejecting the contention put forward on behalf of the appellant company that the finding of the commissioners was a finding of fact with which the court cannot interfere. Their decision was based on, and vitiated by, a view which is erroneous in law that there was an equitable assignment of copyright to the Phonographic Company. It was, therefore, incumbent on the court to determine what was the legal relation between the parties established by the memorandum and articles of association and their subsequent transactions. This course was pursued by the learned lord justice, who, after a penetrating and exhaustive analysis of the relevant provisions, sums up the position in these words on which I cannot improve ( [1949] 1 All ER 126 ):

"...the articles coupled with the contract of membership arising from the application for membership and the acceptance thereof constitute an arrangement between each member and the Phonographic Company and also between the members inter se , under which the members agreed to pool the proceeds of exploitation of the copyright on the terms recorded in the articles and art. 9 is mere machinery to enable the Phonographic Company to give effect to the pooling agreement."

This summing up is directed mainly to the contention on which learned counsel so strongly relied that art 9 coupled with cl 3 (d) of the memorandum displaced the view that the relation between the Phonographic Company and its members quoad the exploitation of copyright and collection and distribution of the net proceeds was that of agency, and follows on the expression of an opinion, in which I entirely concur, that apart from those specific provisions the true construction of the documents points to an agency relation.

I am, therefore, content to adopt the reasons and conclusion of Cohen LJ finding, as I do, that the Phonographic Company, though, no doubt, a separate legal entity from its members, was formed to act and did act as agent for them on terms which they agreed with it and with each other. It was, I suppose, from some vague notion that a contractual relation was created, as it, undoubtedly, was, that the respondents thought it necessary to formulate their alternative plea, but I do not myself attach any importance to it.

I think it right to add some observations on an argument which, if I understood it, was of this character. The Phonographic Company, it was said, happens to be a company limited by guarantee. It might, however, equally well have been a company limited by shares with precisely the same objects, functions and machinery. If it had been a company limited by shares, then it would follow from what was said in Gas Lighting Improvement Co Ltd v Inland Revenue Comrs and in Inland Revenue Comrs v Tootal Broadhurst Lee Co Ltd [1947] 2 All ER 409 that shares in such a company must be regarded as an investment within the relevant section. I am by no means satisfied that the same considerations would in all respects apply to a company limited by shares as to one limited by guarantee, but, however this may be, the observations of the noble and learned Lords who took part in the case first cited, and of those, particularly myself, who took part in the later case, were not directed to a company limited by guarantee and must not be divorced from their context. I adhere to the view which I conceive to be the basis of the decisions in both cases that ultimately the test must be, which (if any) of its assets, having regard to the nature of the trade carried on by the assessed subject, a business man would regard as an "investment," and I cannot suppose that such an interest as the Gramophone Company had in the Phonographic Company would be so described by him. I do not read the decisions in either of the cases cited as involving that the shares in any and every company limited by shares, much less the interest of a member in a company limited by guarantee, must necessarily be regarded as an "investment." In my opinion, the appeal must be dismissed with costs.