Tootal Broadhurst Lee Co Ltd v. Inland Revenue Commissioners
[1949] 1 All ER 261(Judgment by: Lord MacDermott)
Between: Tootal Broadhurst Lee Co Ltd
And: Inland Revenue Commissioners
Judges:
Lord Simonds
Lord Normand
Lord Morton of Henryton
Lord MacDermottLord Reid
Subject References:
taxation
profits
Excess Profits Tax
"Income received from investments"
Royalty received from licence of patented invention
Legislative References:
Finance (No 2) Act, 1939 (c 109) - sched VII, pt I, para 6(1)
Case References:
Inland Revenue Comrs v Desoutter Bros Ltd - [1946] 1 All ER 58; 174 LT 162; 2nd Digest Supp
Gas Lighting Improvement Co Ltd v Inland Revenue Comrs - [1923] AC 723; 92 LJKB 665; sub nom, Inland Revenue Comrs v Gas Lighting Improvement Co Ltd; 129 LT 481; 12 Tax Cas 503; Digest Supp
Inland Revenue Comrs v Rolls-Royce Ltd - [1944] 2 All ER 340; 171 LT 238; 2nd Digest Supp
Inland Revenue Comrs v Broadway Car Co (Wimbledon) Ltd - [1946] 2 All ER 609; 2nd Digest Supp
Judgment date: 20 January 1949
Judgment by:
Lord MacDermott
My Lords, I agree that this appeal should be dismissed and only wish to add a brief statement of the reasoning which has led me to that conclusion.
The income here in question arose under a series of agreements made by the taxpayers in the course of carrying on their business whereby the taxpayers used their rights as proprietors of several patents or (in the case of the agreement of 12 March 1940) their claim to become such proprietors, to obtain certain advantages, pecuniary and otherwise, in the way of their trade. My Lords, I do not think any business man would describe the income so obtained as "income received from investments." He would be bound to admit that the purpose of the agreements was a trade purpose, but I do not think he would look on this alone as conclusive against so describing the income, and in that, I apprehend, he would be right, having regard to the decision of this House in Gas Lighting Improvement Co Ltd v Inland Revenue Comrs. He would, no doubt, find difficulty in giving a precise definition of "investments" as the word is used in the relevant enactment, but I think he would be prepared to go the length of saying something like this:
"If, in the course of carrying on my business, I make active use of a business asset-be it my factory building, a piece of machinery, a patent, or my working capital-that asset is not an investment. Whatever else a business investment may have to be, it is an asset for the time being held intentionally aloof from the active work of the business. It is none the less an asset of the business and may have great business value. For instance, it may enable me to survive bad times and take advantage of good, or it may help me to control supplies or competition. And if it produces income that is income of the business. But I do not earn that income by my business efforts. The part I play there is essentially passive. I cannot, of course, afford to neglect my investment. I may have to preserve it and, on occasion, change its form, but normally I just hold it and receive what it brings in."
The question then arises whether that view of the matter accords with the use of the word "investments" in the Finance (No 2) Act, 1939, sched VII, pt I, para 6. In my opinion, it does. The term as there employed obviously relates to investments of the trade or business, for the income therefrom will be part of the profits unless excluded under s 14 and para 6, but it does not necessarily extend to all the assets of the trade or business. Section 12(4), it may be observed, speaks of "investments or other property," a phrase which is studiously avoided in para 6, and, apart from this, such an extended meaning would undermine the whole purpose of Part III of the Act. It is plain, therefore, that "investments" refers to some assets and not to others. The statute, however, does not lay down any method of segregation for its purposes, and, in the absence of such provision, the proper test must, in my opinion, be related to the limited sphere of trade or business with which the Act is here dealing and founded, accordingly, on the meaning of the word for the man engaged in trade or business rather than for the man in the street. Beyond this broad consideration the language of the enactment affords little help, but I think the special inclusion of "holding" companies and societies by s 12(4) and the expression "income received from investments" in para 6(1) go to support the distinction which, as it seems to me, a business man would draw. Having arrived at this conclusion it becomes unnecessary to attempt a definition of "investments" or to consider whether particular forms of property, such as patents, are capable of being brought within the term. On the facts of the present case it is enough to say that the income in question cannot be income from investments for the purposes of the statute because it arose from a series of commercial agreements, exploiting certain proprietary rights or claims, which were entered into by the taxpayers in the active prosecution of their trade or business. The rights concerned played their part, so to speak, in the arena and not from the grand-stand. For these reasons I am of opinion that the appeal fails and that the income must be included in the computation of profits.