Tootal Broadhurst Lee Co Ltd v. Inland Revenue Commissioners
[1949] 1 All ER 261(Judgment by: Lord Normand)
Between: Tootal Broadhurst Lee Co Ltd
And: Inland Revenue Commissioners
Judges:
Lord Simonds
Lord NormandLord Morton of Henryton
Lord 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 Normand
My Lords, the question in this appeal is whether income described as royalties received by the appellant company under three separate agreements relating to patent rights, and admittedly part of the appellant's business profits, is also "income from investments" within the meaning of the Finance (No 2) Act, 1939, sched VII, pt I, para 6.
The meaning of "investment" is its meaning, not in the vernacular of the man in the street, but in the vernacular of the business man. It is a form of income yielding property which the business man, looking at the total assets of the company, would single out as an investment. It certainly does not include all the property of the company, and I am unable to accede to the proposition of counsel for the taxpayers that every item of the company's property is an investment, and that while the company uses those items itself the profit it derives from them is a profit of trade, but, if it hands one of them over to others to use in return for a periodic payment, it begins to receive an income from an investment. The business man would not limit income from investments to income from the kinds of securities which are quoted on the stock exchange, and he would, I think, regard as income from investment a profitable rent from a sub-lease of office premises or the like surplus to the company's requirements: Inland Revenue Comrs v Broadway Car Co (Wimbledon), Ltd; but he would regard income from an asset in which a company might reasonably have invested its cash reserves in order to have them ready to hand if it needed to employ them in its business as the typical income from an investment. In Inland Revenue Comrs v Desoutter Bros Ltd Lord Greene MR gave as a possible example of an income from an investment the royalties passively received by a barrister who exploited a patent inherited or acquired by him by granting licences. I think that a business man would find no difficulty in taking the same view. In these cases the investment is made when the lease or licence is granted, and it seems the preferable view that it is the lease or the licence which is the investment. It is conceivable that an ordinary trading company as well as an individual might enjoy an income from investments in the form of royalties under patent licences, but it would be a rare occurrence, and a company claiming to be in the enjoyment of such an income must satisfy the income tax commissioners, or the court on appeal, that it is not merely a profit of the business but truly of the nature of an income from investment.
The taxpayers carry on trade as manufacturers and merchants of cotton, linen, woollen and other goods. The company has for 20 years maintained a research department for the purpose of perfecting old processes and devising new processes used in its business or for finishing the products. It grants from time to time non-exclusive licences to other manufacturers and finishers. Exhibit A1 is an example of an agreement granting a licence to use a patented process developed in the company's research department. The process is used in finishing. The company itself does not finish its own goods, which are, in fact, finished by the other parties to the agreement, who are bound to treat the materials of third parties at prices not less than minimum prices prescribed by the taxpayers, not to sell or allow to be sold materials treated by the process at less than minimum prices fixed by the taxpayers, to keep accounts and to allow the taxpayers' accountants to inspect their books, accounts, receipts and other documents, to mark as prescribed by the taxpayers all materials sold or treated under the licences, and in other respects to conduct their business of finishing goods under the licence in a manner advantageous to the business of the taxpayers. I am of opinion that no business man would classify the royalties received under this agreement as anything but the profits accruing from the company's business of manufacturing, finishing and marketing treated goods.
Exhibit B1 is another agreement. It is used when licences are granted by the taxpayers to use a patent purchased by them from the original patentees. The patented invention is for a process to prevent felting in woollen goods, and this process is used by the company in the manufacture of its own goods. The material clauses in this agreement resemble that in A1 to which I have made reference, and no distinction between the two can be drawn. Both are trade agreements entered into as a means of promoting the taxpayers' business and increasing trade profits. Neither is an investment. Exhibit C deals with devices which control the transit of cloth on conveyor belts on drying machines. These devices were invented by Mr Laurie who is connected with the taxpayers. There had been a joint application for a patent by him and the taxpayers and almost simultaneously an application by another company which had produced a similar invention. The parties came to a compromise agreement, embodied in Exhibit C, by which the taxpayers and Mr Laurie assigned their rights in their application to the other company in return for royalties. I am unable to find in this compromise arrangement anything that a business man would describe as an investment. I think that it also was a means of promoting the trade and increasing the business profits of the taxpayers, or, to put it no higher, that the taxpayers have failed to show that it was more than that. I am, therefore, for dismissing the appeal.