Gas Lighting Improvement Company Ltd v Commissioners of Inland Revenue

[1923] A.C. 723

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(Decision by: Lord Sumner)

Between: Gas Lighting Improvement Company Ltd - Appellant
And: Commissioners of Inland Revenue - Respondents

Court:

Judges: Viscount Cave LC
Viscount Finlay
Lord Atkinson

Lord SumnerLord 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

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Decision by:
Lord Sumner

My Lords, the Commissioners of Taxes 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." This is a conclusion of law. The facts never were in dispute and they are fully set out in the case. I think the evidence is all one way and shows that the money employed in the foreign companies was not employed in the business of the company as capital or at all, but the really material part of the finding is that the money was not employed as an investment within the statutory words, and this is in any view a matter of law. The whole case is therefore open to consideration.

The question is whether the capital sunk (to use a neutral word) in the shares of the three foreign companies in question falls to be deducted in computing the amount of the appellants' capital for the purposes of Part III. of the Fourth Schedule to the Act, which depends in turn on this question, whether it is capital, the income on which, if any, is not taken into account for the purposes of Part I. of the Fourth Schedule, that is, whether it falls within the words "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."

In the sense in which the word "investments" is commonly used among men of business I think there can be no doubt that the appellants' holdings of shares now under discussion were "investments"; indeed I note that the appellants themselves brought them into account in a series of annual balance sheets under this very term. I am not treating this as conclusive, or relying on it as an admission, but I think it is an illustration of the ordinary and proper use of the word. It is for the appellants now to show why these investments, though they are "investments," should not be treated as para. 8 of Part I. of Sch. IV. of 5 & 6 Geo. 5, c. 89, prescribes.

I understand the reason given to be that the money paid for the shares was really employed as part of the appellants' trading capital in their own business carried on in this country, or (possibly) in Belgium as regards their holding in the Belgian Benzine Company, and that, truly considered, the words above quoted only refer to investments extraneous to that active business, whose profits are chargeable with excess profits duty; that they only refer to inactive investments made for the purpose of utilising in a suitable manner funds not for the time being required in any chargeable business.

My Lords, it is plain that this reason might be expressed in the terms of an implied exception in para. 8, or of an implied qualification upon the word "investments," therein contained. In the first case there might be implied, after the word "investments," such words as "other than investments made for the purpose of furthering the business under charge": or before it in the second case the word "extraneous" or the word "non-trading."

The appellants were not, however, desirous of resting their case on the implication of any words in the paragraph, and naturally so. It already contains express exceptions, in the cases of two named kinds of business, of investments, which are at least made for the purpose of furthering the business and even may be made as the principal business carried on, and any implication applicable to other cases is impossible. Equally impossible to my mind is the suggestion, that these two kinds of businesses are expressly referred to merely ex abundanti cautela, to quiet the apprehensions of those interested in them. Taxing Acts are not so considerate of the feelings of taxpayers.

It is said that any form of property, into which a trading company puts its money while acting intra vires, is to it an investment of that money, and so, if the word "investments" is an unqualified word in computing the appropriate datum for excess profits duty, nothing would ever be "capital" except unexpended cash. I think it may equally be said on the other hand, that, in the case of such a company, no property is ever purchased except for the purpose of furthering its business, and therefore, everything it owns, as the result at any rate of purchases with its money, would to it always be a constituent part of its capital, as well as its unexpended cash. Both contentions really rest on the meaning of the word "investments," and I think the appellants were right in resting their argument on the mere construction of this word.

My Lords, it is quite plain on the facts that the money "employed in the foreign companies referred to," that is, employed by the appellants, was employed by them in buying shares in those companies and no further. After that, the money was employed by those companies, along with the rest of their subscribed capital, in their own business and not in the appellants' business. After the Belgian Benzine Company was organized the appellants carried on no business in Belgium. On the contrary they actually and under covenant abandoned that field in the Belgian Benzine Company's favour. In Roumania they never carried on any business at all, except, perhaps, that they bought from the Roumanian companies, in which they held shares, crude Roumanian oil, though where they contracted for it and where it became their property, we do not know.

It is said that all this was "machinery," but that is true of all participations in limited liability companies. They and their operations are simply the machinery, in an economic sense, by which natural persons, who desire to limit their liability, participate in undertakings which they cannot manage to carry on themselves, either alone or in partnership, but, legally speaking, this machinery is not impersonal though it is inanimate. Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham (of which there is no suggestion here), the idea that it is mere machinery for effecting the purposes of the shareholders is a layman's fallacy. It is a figure of speech, which cannot alter the legal aspect of the facts.

The truth is that these investments were made, as I suppose all good traders' investments are made, with a sound business motive. They may well have been forced on the appellants by circumstances which they could not otherwise deal with, and the prospect of dividends may have had little to do with the matter, but a noun substantive in a statute does not take its colour, like a chameleon, from such surroundings as the motives of the persons, whose property it correctly describes, and I think the whole question comes to this:

"Does the context cut down the meaning of the word 'investments,' which prima facie it bears and which prima facie would include the holding of the shares in question?"

My Lords, it is true that the words "invest" and "investment" are often used loosely for the act of buying and for the thing bought, whatever it be, but we have nothing to do with that. I accept what the appellants urged, that not all "investments" proper are stocks and shares, though it does not follow that, in the case of a trading company, not all stocks and shares are investments. What, however, is the context, in which the word is used here?

The Schedule prescribes rules for an operation closely akin to preparing a balance sheet of the assets and liabilities of a trading company. It does so for the purpose of ascertaining sometimes its trading capital, sometimes its trading profits or gains. The provisions as to charging excess profits duty are only concerned with profits, which are trading profits, and they are taxed with reference to a pre-war standard depending upon the one or the other. In such a connection why should an ordinary business term be used in any but its ordinary business sense? It is practically necessary that the sense should be definite, neither enlarged figuratively nor controlled by some notion about the scheme or the policy, if there was one, of this emergency tax. These words may in some cases operate to relieve the taxpayer and in some to enhance his charge. I think that in such a statute the plain meaning is the true one, and I am unable to see any ground here for adopting any construction, which is less than plain.

My Lords, I should dismiss the appeal.