Gas Lighting Improvement Company Ltd v Commissioners of Inland Revenue
[1923] A.C. 723(Judgment by: Viscount Finlay)
Between: Gas Lighting Improvement Company Ltd - Appellant
And: Commissioners of Inland Revenue - Respondents
Judges:
Viscount Cave LC
Viscount FinlayLord Atkinson
Lord Sumner
Lord Phillimore
Subject References:
REVENUE
EXCESS PROFITS DUTY
Computation of Capital
Percentage Standard
Income received from Investments
Capital of Trade or Business
Deduction
Legislative References:
Finance (No. 2) Act, 1915 (5 & 6 Geo. 5, c. 89) - ss. 40, 41; Sch. IV., Part I., r. 8; Part III., r. 2
Judgment date: 11 May 1923
Judgment by:
Viscount Finlay
My Lords, this is a special case stated by the Commissioners of Taxes for the City of London on an appeal from an assessment made to the excess profits duty upon the Gas Lighting Improvement Company, the appellants in the present case, by the Commissioners of Inland Revenue for the accounting period from January 1 to December 31, 1917. The assessment stated the net amount of excess profits as 11,977l., the rate at which assessed as 80 per cent., and the excess profits duty payable as 9581l. 12s. The Commissioners of Taxes for the city allowed the appeal, and their decision was confirmed by Sankey J. upon the case stated by them. The decision, however, was reversed by the Court of Appeal and the appeal of the Commissioners of Inland Revenue was allowed. Your Lordships are now asked to restore the decision arrived at by the City Commissioners and by Sankey J.
The business of the company as latterly conducted was the refining and distribution of petroleum spirit and other petroleum products. This appeal relates to two separate matters - namely, arrangements made by the company with another company named the Belgian Benzine Company, and arrangements made by the company with two Roumanian companies. It is convenient to take the case of the Roumanian companies first, as the facts there are simpler and bring out very clearly the question of principle at issue.
I. For many years the company had obtained its supplies of petroleum spirit from the Asiatic Petroleum Company, but early in 1913 they failed to agree upon terms with that company and made arrangements with two Roumanian companies, the Beciu Company and the Stavropoleo Company, on the terms of two agreements made in June, 1913, with these two companies respectively. In pursuance of these agreements the company took up in 1913 25,0001l. ordinary shares in the Beciu Company, paying in cash for such shares the sum of 7s. 6d. per share, and, further, 18,825 1l. ordinary shares in the Stavropoleo Company, paying therefor the sum of 1l. per share in cash, and also advancing to the Stavropoleo Company the sum of 2000l. upon the security of debentures issued by that company.
The case states as a fact that the company would have been unable to obtain from these Roumanian companies the supplies of oil required for the purposes of the company's trade unless they had agreed to assist the finances of the Roumanian companies on these lines. During the year of assessment the company accordingly held in the two Roumanian companies shares and debentures to the amount of 27,831l. No dividends or interest were paid on these holdings in any of the years 1914, 1915, 1916 and 1917. The company contended that the capital employed to acquire these holdings should be included in computing for the purposes of the excess profits duty the amount of capital in the business of the company. The Commissioners and Sankey J. held that this was so, while the Court of Appeal took the contrary view and held that they should be excluded.
The question to be decided depends upon the construction to be put upon the Finance (No. 2) Act, 1915, and particularly r. 8 of Part I. and r. 2 of Part III. of the Fourth Schedule.
Part I. relates to the computation of profits for the purposes of excess profits duty, and r. 8 of that part provides as follows:
"In estimating the profits no account shall be taken of income received from investments except in the case of life insurance business and businesses where the principal business consists of the making of investments."
Part III. relates to capital, and provides by r. 2 as follows:
"Any capital the income on which is not taken into account for the purposes of Part I. of this schedule, and any borrowed money or debts, shall be deducted in computing the amount of capital for the purposes of Part III. of this Act."
The ground of the decision of the City Commissioners is stated in the last paragraph but one of the special case, Appendix, pp. 10 and 11:
"The Commissioners held that the money employed in the foreign companies referred to was employed in the business of the Company as capital and not as an investment within the meaning of the Finance (No. 2) Act, 1915, and they accordingly allowed the appeal."
This is in reality a finding in point of law that investments made in the course of the business of a company are not investments within the meaning of r. 8. In other words, the Commissioners held that r. 8 applies only to investments made outside of the conduct of the company's business, such as investments of profits which have been realized in the business or have accrued to it aliunde.
I am unable to concur with this construction of r. 8. The rule must, on the face of it, have been intended to deal with cases in which but for its provisions the income of these investments would have formed part of the profits of the business. The rule is meaningless if it was intended to apply only to income which formed no part of the profits of the business, as such income would be already outside the scope of the excess profits duty. I do not see how it is possible to escape from the conclusion that r. 8 includes within its operation cases in which the money from which the income was derived was employed in the business of the company assessed to excess profits duty. If it does not, the rule has really nothing to operate upon.
It is, indeed, clear that in the present case the debentures and shares of the Roumanian companies were taken merely because this was made a condition of the supply of oil by the Roumanian companies. The investment was made purely for the purpose of carrying on the business by enabling the company to acquire the oil it wanted, but it remains none the less an investment. To qualify the rule in the sense suggested by the Gas Lighting Improvement Company is really to introduce into it words which are not there. There are no words to exempt from the operation of this r. 8 cases in which the investment has been made as here merely for the purposes of the business. It appears to me that it must have been intended by this rule to lay down a rule of general application subject only to the exceptions specified in the rule itself - namely, the case of life assurance business and businesses where the principal business consists in the making of investments. This is the broad rule which the Legislature has laid down. It may be that the principle on which the City Commissioners have acted would be more correct, but it can be reached only by treating the Act as amended. I cannot see how it can be adopted on the construction of the language of the clause.
It is, of course, for the advantage of the taxpayer that certain classes of income should be excluded from the profits on which excess profits duty is to be paid, and he gets such an advantage under r. 8. It is also to the advantage of the taxpayer that the capital in the business should be increased, as this may diminish very greatly the amount on which the excess profits duty is to be charged. The higher the standard the less the excess liable to excess profits duty. But it would not be fair that the standard should be raised by including in its capital any sums the income on which is excluded from the computation of profits for the excess profits duty. It was no doubt for this reason that the Act adopts the exclusion under Part III. of any capital the income on which is not taken into account for the purpose of computation of profits liable to the excess profits duty under Part I.
I think that the finding of the City Commissioners as to the investments in the Roumanian companies cannot be supported in point of law. These are admittedly investments, and they do not fall within the exceptions specifically provided for in r. 8. There is no exception for investments made in the course of the business. The rule must have been intended to deal with such investments; indeed it is only in the case of such investments that the rule could have any operation.
II. The finding in the penultimate paragraph of the special case was arrived at with regard to the investments in the Belgian Benzine Company as well as those in the Roumanian companies.
The shares in the Belgian Benzine Company acquired by the Gas Light Company and held by them in the year of assessment are represented by a capital amount of 1344l. There is no doubt that these shares were acquired and held merely for the purpose of carrying on business in Belgium, and it is not necessary to go into the facts in detail; they are set out in the special case. In this case, as in the case of the Roumanian companies, with which I have already dealt, the City Commissioners found that the money was employed in the business of the company as capital and not as an investment within the meaning of r. 8. For the reasons I have given in dealing with the Roumanian investments the decision appears to me to be erroneous, and in my opinion the Court of Appeal were right in reversing in both instances.
I am therefore of opinion that this appeal should be dismissed with costs.