Tootal Broadhurst Lee Co Ltd v. Inland Revenue Commissioners
[1949] 1 All ER 261(Judgment by: Lord Morton of Henryton)
Between: Tootal Broadhurst Lee Co Ltd
And: Inland Revenue Commissioners
Judges:
Lord Simonds
Lord Normand
Lord Morton of HenrytonLord MacDermott
Lord 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 Morton of Henryton
My Lords, the royalties to which this appeal relates admittedly form part of the profits arising from the business of the taxpayers, within the Finance (No 2) Act, 1939, s 12(1), and the question to be decided is whether or not these royalties are "income received from investments" within para 6 of pt I of sched VII to the Act. If they are, they must be excluded from the computation of the taxpayers' profits for the purpose of excess profits tax.
I agree with the views expressed by Lord Greene MR in Inland Revenue Comrs v Desoutter Bros Ltd that the word "investment" in this context is not a word of art, and that the question whether or not a particular piece of income is "income received from an investment" must be decided on the facts of each case. I think that the question must be approached from the standpoint of an intelligent man of business, and, in my view, such a man, being informed of the facts set out in paras, 3, 4 (A) and 5 of the Stated Case, and being shown the agreement which is exhibit A, would not think that the royalties received under that agreement were aptly described as "income received from investments." I think he would rightly say that the royalties were income received from a commercial agreement, conferring advantages on each of the parties to it, and entered into as a part of the company's business. By that agreement the taxpayers grant to the finishers a non-exclusive licence, in a specified territory, to make, use and sell certain materials manufactured or treated under the patents therein mentioned, at such factory or factories of the finishers as shall from time to time be nominated by the finishers to the taxpayers and not elsewhere, for the period commencing on 1 August 1937, and terminable at any time by six months' previous notice in writing given by either party to the other. Clause 5 provides for the payment of royalties by the finishers to be taxpayers, and other clauses provide for various commercial advantages to the taxpayers, and for a substantial measure of control to be exercised by the taxpayers over the business of the finishers. It is contended, on behalf of the taxpayers,
- (i)
- that the royalties payable under the agreement are income received "from" the patents therein mentioned;
- (ii)
- that these patents are an "investment" within para 6 of pt I of sched VII.
As to the first contention, I think it can more accurately be said that the royalties are income received "from" the agreement A, but I shall assume for the moment that the taxpayers are right on this point. Making this assumption, I cannot regard the patents described in para 4 (A) of the Stated Case, used as they were being used at the relevant time, as being an "investment" within para 6. I need not further elaborate my reasons for this view, as they are in substance the same as the reasons about to be expressed by my noble and learned friend, Lord MacDermott.
As to the process mentioned in para 4 (B) of the Stated Case, I do not overlook the fact that the patent rights in respect of this process were bought by the taxpayers, whereas the process mentioned in para 4 (A) was developed by the taxpayers' own research department, but I do not think that this fact is sufficient to distinguish, for income tax purposes, the royalties payable under the exhibit B from the royalties payable under the exhibit A. The royalties payable under the agreement of 12 March 1940, mentioned in Para 4 (C) of the Stated Case are, in my view, still further removed from being "income received from an investment," and I agree with the comment of Somervell LJ ([1947] 2 All ER 413): "I am not sure what the suggested investment is." However, I need not pursue this matter, as counsel for the taxpayers felt themselves unable to press his argument under this head. I would dismiss the appeal.