Commissioners of Inland Revenue v Blott; Commissioners of Inland Revenue v Greenwood
[1921] 2 A.C. 171(Decision by: Lord Dunedin)
Between: Commissioners of Inland Revenue - Appellants
And: Blott - Respondent
Between: Commissioners of Inland Revenue - Appellants
And: Greenwood - Respondent
Judges:
Viscount Haldane
Viscount Cave
Viscount Finlay
Lord DunedinLord 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:
Lord Dunedin
(Read by Lord Sumner.) My Lords, I have found it difficult to come to a conclusion on this case. As the majority of your Lordships have determined that the appeal should be dismissed, it would be easy for me to acquiesce in that result and say no more, but I have not thought it right to refrain from expressing an opinion, as to the soundness of which I must not, after what your Lordships have said, be confident, but which represents the view which, on the best consideration I could give to the subject, I had formed.
I may say at once that I do not feel that the case is concluded by a decision. Swan Brewery Co. v. The King [F61] was a decision upon an Australian statute in the words of which if anything became "an advantage" it would fall within the tax. Bouch v. Sproule [F62] was a decision whether, according to the expressed wishes of the testator, certain shares in a company were to be handed over in their entirety to the tenant for life or were to be held for the remainderman, the produce thereof only going to the tenant for life. Whether the dicta in these cases afford material to settle this is another matter to which I shall refer hereafter.
My Lords, the way the question presents itself to my mind is this: The company accumulate a large sum of profits on which they duly pay income tax. What could they do with it? They might have done nothing, in which case the money would just have remained part of the assets of the company. The expression "floating capital" is rather a convenient form of description than a legal definition of the nature of the fund. It might have paid it to its shareholders as dividends, in which case it is obvious that the recipient shareholder, if his income was above the minimum figure, would have had to include the dividend in his specification of his income for super-tax. Lastly, however, it is said the company might and did "capitalize" its profits.
I confess I am shy of the word "capitalize." It seems to me to leave one in a hazy state of mind as to what is the legal operation which is so described. Undoubtedly it is to add something to capital. Now how can a company add to its capital? It has an authorized capital. There are certain ways in which authorized capital may be increased, but assuming the company has not taken advantage of what it can do in this way it can only issue shares to the extent to which it still has shares authorized but not issued. If, however, it does so it cannot issue the shares for nothing. They must be paid for in money or under certain conditions in money's worth. Further, it cannot itself provide the money to pay for the new shares. If it did so it would do what is equivalent to buying its own shares, and that it cannot do: Trevor v. Whitworth. [F63]
It must therefore get the money from some one else. It may get it from the public or it may say to its shareholders:
"We will give you the option of subscribing before we apply to the public,"
and when I say
"it may,"
I always mean the same thing - namely, that the company can do and must do what the majority of the shareholders decide it shall do.
In the present case the company did neither of these things, but it did a thing which it was in its power to do. It may say, and it did say to the shareholders:
"There is a large sum of undivided profits. We shall allot to each shareholder his proportional amount of these profits, but we will not pay that amount in cash, but will impute it to the payment of the shares we are issuing, and give each shareholder the shares for which his allotted amount effectuated payment."
I cannot myself escape from the feeling that that is just giving to the shareholder his share of the undivided profits, not in cash but in the shape of paid-up shares, and if that is so it seems to me to fall within the description of taxable income. Let me by way of illustration put the following possibilities. Undivided profits distributed as dividend in cash - there is no question.
Next, suppose that profits are in the shape of some chattels, and that the chattels are distributed; here, again, it is conceded in argument that these chattels would be income. Next, let me suppose that a company had power to acquire shares of another company, that it has used its profits to buy such shares and distributed these shares to its own shareholders. There, again, would be something which was the equivalent of profit, though viewed in the light of the other company's affairs it would be capital. The last step is to do what was done here, to use its own profits to pay up the shares which it then gave to its shareholders. I fail to see any difference in this position.
I am, however, of necessity compelled to consider the case of Bouch v. Sproule. [F64] As I have already said I do not think the decision rules the matter. It remains to see whether the dicta of Lords Herschell and Watson do so. It is evident that their Lordships had no such case as the present before their minds. Super-tax did not at that time exist. I am of opinion that the Judgment in Bouch v. Sproule [F64] can be considered as based on propositions which have no application to the present case. The legal title to all the property in that case was in trustees. Shares in the company, representing the capital of the company, and dividends declared in respect of these shares alike fell within that legal title.
But the beneficial title was, by the provisions of the testator's will, shared between two persons. One took the life interest, the other the remainder. The testator knew that his shares and all interests flowing from the possession of those shares were subject to be affected by such powers as the company lawfully possessed. If, therefore, the company decided that profits, instead of being divided and paid as dividend, should be used for the purpose of increasing the capital account, and that that increase should be divided among the shareholders, the testator might well be content that the decision of the company should affect the rights inter se of his beneficiaries. If the company settled that the profits were to be added to capital then they would form part of the corpus which must remain intact for the remainderman when his time of enjoyment emerged. If the profits were paid over as dividend then the tenant for life would receive that dividend.
That does not, however, so far as I can see, settle that for the proper interpretation of a taxing act the profits because added to the capital of the company are to lose their nature as profits; and I think that the expressions used by the noble and learned Lords must be taken secundum subjectam materiem, and not given such a universal application as to meet a case which was far from their thoughts.
In conclusion, I would only add that I have in this opinion of set purpose refrained from relying on the dictum of Lord Sumner delivering the judgment of the Judicial Committee of the Privy Council in the Australian case, not because I in any way disagree with it, but because I recognize that if it is in conflict with the necessary grounds of decision in Bouch v. Sproule, then as I am sitting in the House I should be bound to follow the latter-mentioned case. I think the appeal should be allowed.