Electric and Musical Industries Ltd v. Inland Revenue Commissioners
[1950] 2 All ER 261(Judgment by: Lord Reid)
Electric and Musical Industries Ltd
v Inland Revenue Commissioners
Judges:
Lord Simonds
Lord Normand
Lord Morton of Henryton
Lord Macdermott
Lord Reid
Judgment date: 23 June 1950
United Kindom
Judgment by:
Lord Reid
My Lords, the sole question at issue in this case is whether £17,265, which was received by the Gramophone Co Ltd from Phonographic Performance Ltd in respect of the year ending 31 May 1944, was received by the Gramophone Company as income from an investment within the meaning of the Finance (No 2) Act, 1939, sched Vii, Part I, para 6(1). If it was income from an investment it is excluded from profits which are subject to excess profits tax. "Investment" is not defined in the Act, and the word is not used in any special or technical sense. It is used as an ordinary word of the English language and, being used in connection with business transactions, it must be interpreted as an ordinary English word used in connection with business affairs. To see whether in a particular case something is an investment it is, therefore, necessary to consider and weigh all the facts which can assist towards a decision of this practical question. Stated briefly, the facts which appear to me to be material in this case are as follows. A number of companies, including the Gramophone Company, manufactured gramophone records. It has been decided that manufacturers of such records have a copyright which entitles them to the exclusive right of performance of their records in public and thus enables them either to restrain such performance or to draw revenue by licensing public performance. It was soon found convenient by the manufacturers to establish one organisation which would act for all of them in maintaining their rights and drawing revenue for them from this source. A committee was first set up, but it was found to be inadequate, and in its place the manufacturers, seven in number and including the Gramophone Company, set up Phonographic Performance, Ltd which was incorporated on 12 May 1934, as a company limited by guarantee. It is the interest of the Gramophone Company in this company which is said to be the investment which yielded the income in question in this case. So it is necessary to see just what that interest was. The nature of the interest must be sought in the memorandum and articles of association of the Phonographic Company. It is not suggested that the formation and operation of this company was a cloak or device. It was a perfectly proper use of the Companies Act, 1929, for business purposes and it is not suggested that the memorandum and articles do not truly exhibit and define the rights of the Gramophone Company.
The main objects of the Phonographic Company as set out in its memorandum of association are to exercise and enforce on behalf of its members their rights and remedies in respect of the public performance of records; in the exercise of such rights and remedies to grant licences, to collect royalties and to restrian infringements; to make 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:"
and to distribute the net moneys received by the company
"among the members of the company entitled thereto in accordance with the rules for the time being in force with respect to the distribution thereof."
The articles of association permit the directors at their discretion to admit an owner of performing right as a new member and provide that members grant to the company the sole right and authority to authorise, permit or forbid public performance of their records and authorise the company to collect fees, institute proceedings, and protect generally a member's interest in records of which performing rights are controlled by the company. Article 9 provides:
"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."
There are provisions authorising the directors to set aside a reserve fund and requiring income and expenditure accounts and balance sheets to be kept. Article 28 provides that every member shall have one vote.
I have no doubt that the substance of the matter was that the seven manufacturing companies which became members of the Phonographic Company, trusting each other, empowered a body controlled by the majority of their number not only to collect the revenue which each could have collected for itself, but also (and this is the peculiar feature of this case) empowered that body to determine whether or not the whole of the revenue was to be distributed, and in what proportions the revenue to be distributed was to be divided among them. No doubt there were good practical reasons against providing that each member should receive each year precisely what had been collected in respect of that member's records, less expenses of collection, and the expectation was that the sum paid to each member would roughly represent what that member's records had earned. In fact, this expectation appears to have been realised, but it need not have been. If a majority of the members had chosen to use their voting power to cause the Phonographic Company to distribute on some other basis, there does not appear to be anything in the memorandum or articles which would have prevented that. The decision how much any member should get was the decision of the Phonographic Company, an independent person in law. It is this feature which makes me doubt whether this case can properly be brought within the category of agency, but I do not think it necessary to determine that question. The question under the statute is whether there was an investment. It may well be that where there is agency there is no investment, but it does not at all follow that if the case is not one of agency it must, therefore, be one of investment. The commissioners appear to me to have misdirected themselves on this matter in deciding in favour of the appellant.
If the Gramophone Company invested anything, it can only have been the right to collect and deal with a part of its trading income, and the investment which resulted can only have been the rights and interests which the Gramophone Company had in the Phonographic Company. The only money in the hands of the Phonographic Company was the proceeds of the exercise by that company of the rights which it had acquired to collect part of the trading income of the Gramophone Company and the other companies which were members of the Phonographic Company, and, even on the construction most favourable to the appellant, the only substantial right or interest which the Gramophone Company had in the Phonographic Company was the right to receive such part of that money as the Phonographic Company might decide to pay to it. I cannot believe that any business man would call this an investment, and that, in my opinion, would be an end of the case but for one argument which I must now notice.
It was said that, instead of setting up a company limited by guarantee, the manufacturing companies could have achieved the same result in substantially the same way by setting up an ordinary limited company of which they would have become shareholders, and that, if they had done that, their holdings in such a company must, on the authority of decisions of this House, have been held to be investments, and the sums paid to them by the company must have been held to be income from such investments. I am by no means satisfied that it would have been possible by setting up a company limited by shares to achieve the result that payments similar in character to those in this case could be made as dividends and income from investments, but if it were possible, it could I think be only by such unusual provisions as to raise the question whether the use of such machinery was a mere device. I agree with what has been said on this matter by my noble and learned friend, Lord Simonds, about the decision of this House in Inland Revenue Comrs v Tootal Broadhurst Lee Co Ltd [1947] 2 All ER 409 , a decision to which I was a party. I am unable to accept this argument for the appellant as sufficient to affect the decision of what otherwise appears to me to be a clear case. I agree that the appeal should be dismissed.