Gas Lighting Improvement Company Ltd v Commissioners of Inland Revenue
[1923] A.C. 723(Decision by: Viscount Cave LC (including background))
Between: Gas Lighting Improvement Company Ltd - Appellant
And: Commissioners of Inland Revenue - Respondents
Judges:
Viscount Cave LCViscount Finlay
Lord 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
Decision by:
Viscount Cave LC (including background)
Part III., r. 2, of Sch. IV. to the Finance (No. 2) Act, 1915, provides that, in estimating the capital of a trade or business for the purpose of ascertaining the percentage standard for excess profits duty, any capital the income on which is not to be taken into account for the purpose of Part I. of the fame Schedule (computation of profits) if to be deducted; and r. 8 of Part I. provides that, in estimating the profits of a trade or business, no account shall be taken of the income received from investments, except in the case of life assurance businesses and businesses where the principal business consists of the making of investments.
A company, whose business consisted in procuring, refining, and distributing petroleum and petroleum spirit, with a view to forwarding its trading operations, and, in particular, to ensuring a supply of crude oil, acquired shares in certain foreign companies trading in petroleum:-
Held, that for the purposes of excess profits duty, these shares were "investments" the income of which was not to be taken account of in estimating profits, and consequently that the value of the shares must, in estimating the capital of the business for the purpose of ascertaining the percentage standard, be deducted.
Decision of the Court of Appeal [1922] 2 K.B. 381 affirmed.
Appeal from an order of the Court of Appeal [F1] reversing an order of Sankey J. upon a case stated by the Commissioners for the General Purposes of the Income Tax Acts for the City of London.
The appeal related to the method of ascertaining the amount of capital of the trade or business of the appellants in order to compute the percentage standard for the purpose of excess profits duty under the Finance (No. 2) Act, 1915. The question shortly stated was whether the shares and debentures of certain foreign companies held by the appellants were "investments" within the meaning of r. 8 of Part I. of the Fourth Schedule to the Act, so as to exclude the dividends and interest thereon from the profits chargeable and the investments themselves from the capital of the trade or business in pursuance of r. 2 of Part III. of the Fourth Schedule.
The special case, so far as material, is set out in the report of the proceedings before the Court of Appeal and the facts sufficiently appear from the judgment of the Lord Chancellor.
The assessment appealed against proceeded on the view that these shares and debentures were "investments" within the meaning of r. 8 of Part I. of the Fourth Schedule to the Act, and were, under r. 2 of Part III. of the same Schedule, to be deducted in computing the amount of the appellants' capital for the purposes of the Act. On appeal, the Commissioners for General Purposes held that the money employed in the foreign companies was employed in the business of the appellant company as capital and not as an investment, and they allowed the appeal.
Sankey J. affirmed the determination of the Commissioners, but the Court of Appeal (Lord Sterndale M.R., Scrutton and Younger L.JJ.) reversed his decision, and held that the holdings were "investments" within the meaning of r. 8 of Part I. of the Schedule and should be deducted from the appellants' capital.
1923. April 19, 20. Sir John Simon K.C. and Latter K.C. for the appellants. On the true construction of r. 8 of Part I. of the Fourth Schedule to the Finance (No. 2) Act, 1915, the expression "income received from investments" is limited to income arising from those forms of capital which are not employed in the trading operations for which the business was constituted and to income which is not dependent on the result of those trading operations, and the limitation of the capital excluded by r. 2 of Part III. is coterminous.
The profits of a company obtained through the holding of stock or shares in another company may be profits of its trade or business assessable to excess profits duty; such profits are not necessarily income derived from investments. It is a false classification to say that stocks or shares are necessarily investments within the meaning of r. 8. The contrast is between what is being done in carrying on the business and the investment of money lying idle. Where money is employed in advancing the interests of a business it is capital of the business and not an investment: Usher's Wiltshire Brewery v. Bruce. [F2] [They also referred to Smiles v. Australasian Mortgage and Agency Co.; [F3] Reid's Brewery Co. v. Male; [F4] Commissioners for Special Purposes of Income Tax v. Pemsel.] [F5] The holdings in the Roumanian and Belgian Companies are really not investments at all, but are in substance merely machinery to enable the appellants to provide supplies of crude oil for the purposes of their business and to carry on more effectively that part of their previous business which consisted in selling and distributing petroleum spirit in Belgium. The Commissioners for the General Purposes of the Income Tax Acts have found the facts in the appellants' favour.
Sir Ernest Pollock K.C. and Reginald Hills (Sir Douglas Hogg A.-G. with them) for the respondents. The holdings of the appellant company in these foreign concerns are investments in the ordinary sense of the term, and it is in that sense that the word "investments" ought to be construed in r. 8. Money invested in an outside security is not the less an investment because it is used for the advantage of the business. The motive of the company in making the investment does not assist the matter. The intention of the Legislature was to exclude sources of profit which are not earned in carrying on the business. It is no answer to the claim of the Crown to say that the investment is an asset of the business, for if it were not there could be no question of deduction. A deduction can only be made of something which otherwise would be included. It is a fallacy to say that the appellant company is continuing to carry on business in Belgium through the agency of the Belgian company because it is a shareholder of that company: Gramophone and Typewriter, Ld. v. Stanley. [F6]
[They also referred to Liverpool and London and Globe Insurance Co. v. Bennett; [F7] English Crown Spelter Co. v. Baker; [F8] James Waldie & Sons v. Inland Revenue.] [F9]
Sir John Simon K.C. in reply referred to Apthorpe v. Peter Schoenhofen Brewing Co. [F10]
The House took time for consideration.
1923. May 11. Viscount Cave L.C. -
My Lords, this appeal from the Court of Appeal in England raises the question whether, in computing the capital of the appellant company for the purposes of excess profits duty, certain holdings of the appellants in foreign companies ought or ought not to be excluded.
The appellants, for some time before and down to the year 1908, carried on the business of refining and distributing petroleum, and had (among other branches) a distributing business in Belgium. In that year the appellant company, with two Belgian distributing firms who had been their competitors, agreed to sell their distributing businesses in Belgium to the Asiatic Petroleum Company upon the terms that the sole agency for the sale of the Asiatic Company's oil in that country should be entrusted to a new Belgian joint stock company in which the appellants and the two Belgian firms should each hold one-third of the shares.
It was provided by the agreement that the vendors should, as from the formation of the new Belgian company, discontinue their business in Belgium, and should not during the continuance of the agency be interested in the sale of petroleum in that country. A Belgian company was accordingly formed under the name of the Belgian Benzine Company (Societe Anonyme) with a nominal capital of 510,000 francs divided into 510 shares of 1000 francs each, which were subscribed for and held as to one-third (or 170 shares) by the appellant company and as to the remaining two-thirds by the two Belgian firms equally. The amount originally paid up by the appellants on their shares in the Belgian company was one-tenth of their nominal amount (or 675l.); but, in December, 1910, on the term of existence of the Belgian company being prolonged under Belgian law for a further period, a further sum was paid up, making 1344l. in all. The Belgian company duly took over and carried on the agency for the Asiatic Petroleum Company, and paid large dividends upon its shares until the commencement of the war, but thenceforth ceased to pay any dividend.
In the year 1913 the appellant company entered into another and a different transaction. Having difficulty in obtaining supplies of petroleum, they sent a representative to Roumania, and, as a result of his mission, agreed to take shares and debentures in two Roumanian oil companies upon the terms that the appellants should have a call on the crude oil at the disposal of those companies at market prices. The amounts paid by the appellants for these shares and debentures in the year 1913 and the following years amounted to upwards of 27,000l., but nothing was received by them in respect of dividends or interest on these shares and debentures.
In the year 1919 it became necessary to assess the appellant company to excess profits duty under the Finance (No. 2) Act, 1915; and the question then arose whether, for that purpose, the amounts paid by the appellants on the shares in the Belgian company and on the shares and debentures in the two Roumanian companies were or were not to be counted as part of the capital of the appellant company. The Commissioners of Inland Revenue took the view that these shares and debentures were "investments" within the meaning of r. 8 of Part I. of the Fourth Schedule to the Act, and accordingly were, under r. 2 of Part III. of the same Schedule, to be deducted in computing the amount of the appellant company's capital for the purposes of the Act.
The appellants, whose interest it was that the statutory capital should not be so reduced, appealed on this question to the Commissioners for General Purposes of the Income Tax for the City of London; and the last-mentioned Commissioners, after hearing the parties, allowed the appeal, but, on the application of the Crown, stated a special case for the opinion of the King's Bench Division of the High Court of Justice. The finding of the Commissioners for General Purposes on the above question was expressed in the special case as follows:
"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."
The case stated was argued before Sankey J., who treated the above finding of the Commissioners for General Purposes as a finding of pure fact, and, holding that there was some evidence upon which those Commissioners could come to their conclusion, dismissed the appeal from their decision. On appeal to the Court of Appeal, that Court (consisting of the Master of the Rolls and Scrutton and Younger L.JJ.) took a different view; and, holding that the question determined by the Commissioners for General Purposes was one of mixed fact and law and was accordingly open to review by the Court, they held unanimously that the holdings in question were "investments" within the meaning of r. 8, and accordingly should for the purposes of the Act be deducted from the company's capital. Hence the present appeal.
My Lords, I feel no doubt that the point is appealable. If the finding of the Commissioners for General Purposes were indeed one of pure fact, then it could not be reviewed except on the ground that there was no evidence upon which they could as reasonable men have come to their conclusion. But the finding involves not only a conclusion of fact, but the construction of the statute. It is a finding of mixed fact and law, and, as such, is open to review by the Courts.
The following are the material provisions of the Act: Sect. 40, sub-s. 1, provides that the profits arising from any trade or business to which the Act applies shall be determined on the same principles as they would be determined for the purpose of income tax, subject to the modifications set out in the first part of the Fourth Schedule to the Act. Sub-s. 2 of the same section enacts that the provisions contained in the third part of the Fourth Schedule shall have effect with respect to the ascertainment of capital for the purposes of excess profits duty. Rule 8 of Part I. of the Fourth Schedule declares that in estimating the profits no account shall be taken of income received from investments except in the case of life assurance businesses and businesses where the principal business consists of the making of investments. Rule 2 of Part III. of the same Schedule provides that any capital, the income on which is not taken into account for the purposes of Part I. of the Schedule, and any borrowed money or debts, shall be deducted in computing the amount of capital for the purposes of Part III. of the Act. The effect of these provisions taken together is that in estimating profits for the purposes of the Act no account is to be taken of income received from investments except in the special cases referred to, and that in estimating capital for the same purpose investments are to be deducted and excluded. The reason for this exclusion may have been that, the intention being only to tax excess profits arising out of the actual carrying on of a trade or business, it was thought right to exclude from the calculation profits from investments, which might rise or fall for causes wholly unconnected with the trade, and (as a consequence) to exclude from the capital the investments themselves. But whatever the reason, the enactment is clear that "investments" are not to count as capital; and the question, therefore, is whether the holdings which are in question in this case are or are not "investments" within the meaning of r. 8 of Part I. of the Schedule.
That they are investments in the ordinary sense of the term probably no one would deny. They are money put out in the shares and securities of undertakings other than the undertaking of the appellant company itself, with the expectation of receiving dividends or interest upon them; and they satisfy any one of the definitions quoted by the Master of the Rolls from well-known dictionaries and any other definition of an investment which I am able to conceive. In all the balance sheets of the appellant company issued since these holdings were acquired, they were classified as investments; and although this circumstance is not conclusive to show that they are investments within the meaning of r. 8, it has some weight as showing that they are investments in the ordinary sense. But it is argued on behalf of the appellants that on the true construction of the Act a restricted meaning must be put upon the word "investments" as used in r. 8; that (to quote the language of the appellants' case) "the income excluded by that rule is income arising from capital employed otherwise than in the trading operations for which the business was constituted; that is to say, income from capital which is invested outside such operations with the object of obtaining a return thereon either by way of income or capital appreciation independently of the result of such trading operations"; and that the investments here in question do not fall within that definition.
My Lords, I find nothing in the Act which compels or admits of such a limitation of the meaning of the word "investments." The expression cannot be intended to apply to investments wholly unconnected with the business to be assessed; for investments of that character could in no case be regarded as capital of the business, and it would be quite unnecessary to direct their exclusion. It must therefore refer to investments connected with the business, and I see no reason why it should not include an investment of part of the business capital in an outside security, though made with the object of forwarding the trading operations, for which the business was constituted. Part III. of the Fourth Schedule deals, as the Master of the Rolls pointed out, entirely with the capital employed in the business, and provides (by r. 2) that if there is found in that capital some part, the income of which is not taken into account under Part I., then that part is to be deducted. Investments fall within that category; and accordingly the direction is to deduct from capital any capital which takes the form of an investment. The point was put by Scrutton L.J. as follows: [F11]
"When we turn to the definition of 'capital' we find that the amount of the capital of a trade or business - and it is that that we have to assess - is to be made up of certain items valued in a way specified in clauses 1 (a), 1 (b), 1 (c) and 3 of that Schedule. But we find an express provision that 'Any capital the income of which is not taken into account for the purposes of Part I. of this Schedule .... shall be deducted in computing the amount of capital for the purposes of Part III. of this Act.'
It appears to me that the rule contemplates that the capital which it is talking about would, but for this provision, come into the capital of the trade or business, but is taken out by the express direction that if the profits on that capital do not come into the profits for the purpose of excess profits duty neither shall the capital from which the profits are derived come into the capital for the purpose of excess profits duty. The source and the fruit must both be included or both excluded, and if the fruit is excluded its source must also be excluded, although it may be otherwise capital of the trade or business."
I respectfully agree with the reasoning of the majority of the Court of Appeal. The finding of the Commissioners for General Purposes, upon which the appellants rely, appears to assume that, if an investment is capital employed in the business, it cannot be an investment within the meaning of r. 8; and the judgment of Sankey J. seems to proceed on the same footing. In my opinion it may be both. Of course the term "investments" does not include all money embarked in the business itself, for that would be to reduce the rule to an absurdity; but I think that it includes money embarked in the business and with a view to the advantage of the business invested in an outside security. In my opinion, therefore, this argument fails.
Apart from the general contention with which I have been dealing, and which was put forward in connection both with the Belgian shares and with the Roumanian shares and debentures, counsel for the appellants put forward certain special arguments as to each of the two classes of holdings; and I will deal separately with these special points.
As to the Belgian shares, it was said that the transaction was not an investment at all, but was mere machinery for defining the interests of the appellant company and the two Belgian firms in the profits of the distributing business proposed to be carried on by the Belgian Benzine Company (Societe Anonyme); that the last-mentioned company was nothing but a shell or shadow; and that in substance and in fact the appellant company continued after the transaction to carry on its distributing business in Belgium, and to receive the profits of that business.
I cannot take that view.
The documents show that there was a real sale to the Asiatic company of the appellant company's distributing business in Belgium, and that the appellant company wholly discontinued that business and agreed no longer to be interested in the distribution of petroleum in that country, except of course as a holder of shares in the Belgian company. It has been pointed out in many cases, of which Gramophone and Typewriter, Ld. v. Stanley [F12] is an example, that the business and profits of a limited company are not the business or profits of the shareholders; and it would be an infringement of that principle to treat the appellant company as continuing to carry on its Belgian business through the agency of the Belgian company. The appellants ceased in 1908 to have any business in Belgium and became shareholders in the Belgian Benzine Company and nothing more. This view is confirmed, if confirmation is necessary, by a reference to r. 6 of Part I. of the Fourth Schedule to the Act of 1915, which provides that where any company owns the whole of the ordinary capital of any other company carrying on the same trade or business, the provisions of the Act as to excess profits duty shall apply as if that other company were a branch of the first-named company. If the appellants' argument now under consideration were sound no such provision would be required.
As to the shares and debentures of the Roumanian companies a different point is made. It is said that the appellant company put money into those companies with no other motive except to obtain a supply of crude oil for its own trading operations; and accordingly that the money so applied was not money invested but money employed in the appellants' business. In my opinion the motive of an investment cannot be the determining factor on the question of its being an investment within the meaning of r. 8. A motor company may invest part of its capital in shares of a tyre company, or a tyre company may take shares in a rubber company, not with a view to the return in the shape of dividends (although that consideration would probably not be put entirely out of sight) but mainly with a view to obtaining a supply of tyres or of rubber, as the case may be; but the transaction in each case would none the less be an investment and r. 8 would apply. And so in the present case the fact (which I take as established) that the appellant company would not have embarked its funds in the shares and securities of the two Roumanian companies except for the purpose of obtaining supplies of oil, does not prevent that transaction from being an investment of those funds. In plain language, the appellants invested money in Roumanian shares and securities with a view to getting the control of oil for their trade; and that was for all purposes an investment, though made with a view to a collateral advantage.
For these reasons I am of opinion that the decision of the Court of Appeal was right both as to the Belgian and as to the Roumanian holdings, and that this appeal should be dismissed with costs.