Commissioners of Inland Revenue v Blott; Commissioners of Inland Revenue v Greenwood
[1921] 2 A.C. 171(Decision by: Viscount Cave)
Between: Commissioners of Inland Revenue - Appellants
And: Blott - Respondent
Between: Commissioners of Inland Revenue - Appellants
And: Greenwood - Respondent
Judges:
Viscount Haldane
Viscount CaveViscount Finlay
Lord Dunedin
Lord Sumner
Subject References:
REVENUE
Super-tax
Assessment
Shareholder in Company
Distribution of Dividends in the Form of fully paid Shares
Capital or Income
Liability of Shareholder to Super-tax
Legislative References:
Income Tax Act, 1842 (5 & 6 Vict. c. 35) - ss. 40, 54, 163, 164
Finance (1909-10) Act, 1910 (10 Edw. 7, c. 8) - s. 66
Case References:
Bouch v. Sproule applied - (1887) 12 App. Cas. 385
Swan Brewery Co. v. The King distinguished - [1914] A.C. 231
Judgment date: 3 June 1921
Decision by:
Viscount Cave
My Lords, in Blott's Case the question to be determined on this appeal is whether, under the resolutions of February 8, 1915, and February 7, 1916, the respondent received anything which can be called income, so as to be assessable to super-tax under s. 66 of the Finance (1909-10) Act, 1910. I do not think he did.
The circumstance that the profits dealt with by the above-mentioned resolutions were current profits of the company and had borne income tax in the company's hands is obviously not sufficient by itself to make them income of the shareholders. The company's profits were at its own disposal and were in no sense income of the shareholders unless and until they were distributed among them. The question is whether there was a distribution of profits among the shareholders in money or money's worth. When the resolution of 1915 (which I take as an example), with its attendant documents, is examined, it will be seen that the last thing which the company or its directors desired was that the profits in question should be divided among the shareholders.
The directors reported that, the company having heavy commitments which called for all its available capital, it would be unwise to make any distribution beyond the usual dividends, and it was in order to avoid such a distribution that they recommended the shareholders to declare a further dividend to be satisfied in second preference shares. The notice referred only to an additional payment in shares.
The resolution, which is the most important document, declared that it was desirable to capitalize the sum of 33,333l., and accordingly that a bonus be declared and the directors be authorized to satisfy such bonus by the distribution of shares credited as fully paid up. Did this amount to a distribution of profits? I think not. The resolution did not give to any shareholder a right to sue for the dividend in cash, his only right being to have an allotment of fully-paid shares in the capital of the company. The profits remained in the hands of the company as capital, and the shareholder received a paper certificate as evidence of his interest in the additional capital so set aside. The transaction took nothing out of the company's coffers, and put nothing into the shareholders' pockets; and the only result was that the company, which before the resolution could have distributed the profit by way of dividend or carried it temporarily to reserve, came thenceforth under an obligation to retain it permanently as capital.
It is true that the shareholder could sell his bonus shares, but in that case he would be realizing a capital asset producing income, and the proceeds would not be income in his hands. It appears to me that if the substance and not the form of the transaction is looked to, the declaration of a bonus was as Rowlatt J. said "bare machinery" for capitalizing profits, and there was no distribution of profits to the shareholders. I think, therefore, that neither the shares nor their face value should be treated as income of the respondent. The same observations apply to the resolution of 1916. Some time was occupied in the discussion of the question, whether in paying income tax on its profits the company acted as agent for its shareholders, and some cases were cited where this expression had been used. Probably the word was intended only to express in an abbreviated form the effect of s. 54 of the Income Tax Act, 1842.
Plainly, a company paying income tax on its profits does not pay it as agent for its shareholders. It pays as a taxpayer, and if no dividend is declared the shareholders have no direct concern in the payment. If a dividend is declared, the company is entitled to deduct from such dividend a proportionate part of the amount of the tax previously paid by the company; and in that case the payment by the company operates in relief of the shareholder. But no agency, properly so called, is involved.
With regard to the authorities, Bouch v. Sproule [F57] appears to me to be directly in point. It is true that the actual decision related to the rights inter se of a tenant for life and remainderman under a will; but for the purpose of deciding that question it was necessary to determine whether a transaction such as is here in question was or was not a distribution of income. The conclusion of the House is expressed in the statement of Lord Herschell that
"the substance of the whole transaction was, and was intended to be, to convert the undivided profits into paid-up capital upon newly created shares,"and in his further statement that
"the company did not pay, or intend to pay, any sum as dividend but intended to and did appropriate the undivided profits dealt with as an increase of the capital stock in the concern."
I think it right to add that if in the present case (as in Bouch v. Sproule) [F58] an option had been given to the shareholders to take or refuse the bonus shares, different considerations would have arisen; and I desire to reserve my judgment as to the effect of such an option upon the liability to tax.
In Swan Brewery Co. v. The King [F59] it was held that transactions similar to those now in question were, in effect, a declaration of a dividend within the meaning of the Dividend Duties Act, 1902, of Western Australia, and accordingly that duty was payable under that Act. The decision in that case is no doubt fully supported by the definition clause in the Western Australia Act; but if it were not for the definition clause the decision would, I think, be inconsistent with the decision in Bouch v. Sproule. [F58] In an American case of Eisner v. Macomber [F60] a similar question arose for the decision of the Supreme Court of the United States.
The question there was, whether Congress had power under the 16th Amendment to the Constitution to tax as income of the stockholder and without apportionment among the States a stock dividend made in good faith by a corporation; and the question was decided by a majority of the Court in the negative. The law there in question, no doubt, differs from ours; but the luminous reasoning of Pitney J. in that case is relevant to the question now under consideration, and compels my assent.
For the above reasons, I am of opinion that the order made by Rowlatt J., and affirmed by the Court of Appeal, was right, and that this appeal should be dismissed.
In Greenwood's Case your Lordships were informed that the facts of that case were not distinguishable in any material respect from those in Blott's Case, and I think that the result should be the same.