Tootal Broadhurst Lee Co Ltd v. Inland Revenue Commissioners

[1949] 1 All ER 261

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Between: Tootal Broadhurst Lee Co Ltd
And: Inland Revenue Commissioners

Court:

Judges: Lord Simonds
Lord Normand
Lord 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

Hearing date: 29, 30 November 1948
Judgment date: 20 January 1949

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A company, trading as manufacturers and merchants of cotton, linen, woollen and other goods, in the course of manufacture used patents covering inventions and processes which had for the most part been developed in its own research department. From time to time the company granted non-exclusive licences of a number of these patents to other manufacturers, and royalties in respect thereof were received by the company both in the standard period for excess profits tax purposes and during the chargeable accounting period, 1 July 1939, to 30 June 1940. The Crown claimed excess profits tax in respect of the royalties received in that accounting period from licences granted in respect of three patents:-

(1)

a crease resisting process developed in the company's research department. The company did not itself employ this process, but the cloth produced by the company was treated in accordance with the process either by a subsidiary of its own or by licensee finishers.

(2)

A process to prevent felting in woollen goods, the patent rights in respect of which the company bought in 1939 from the original patentees, taking over the burden and benefit of existing licences. The company had granted further licences, and the process was used in the manufacture of its own goods.

(3)

Controlling devices on stentering machines, invented by a person connected with the company. A joint application for a patent in respect of this device was made by the company and the inventor at the same time as an application by a second company which had produced a similar device. The company and the inventor assigned their interest to the second company in return for a royalty.

On the question whether the patent royalties were "income received from investments" within the meaning of the Finance (No 2) Act, 1939, sched VII, pt I, para 6(1), for the purposes of excess profits tax,

Held - The income in question arose from a series of commercial agreements, exploiting certain proprietary rights or claims, which were entered into by the company in the active prosecution of its trade or business, and, therefore, was not "income received from investments" for the purpose of para 6(1).

Inland Revenue Comrs v Desoutter Bros Ltd ([1946] 1 All ER 58; 174 LT 162) and Inland Revenue Comrs v Broadway Car Co (Wimbledon) Ltd ([1946] 2 All ER 609), approved.

Decision of Court of Appeal ([1947] 2 All ER 409), affirmed.

Notes

For the Finance (No 2) Act, 1939, sched VII, pt I, para 6(1), see Halsbury's Statutes Vol 32, p 1220.

Appeal

Appeal by the taxpayers, Tootal Broadhurst Lee Co Ltd from a decision of the Court of Appeal ([1947] 2 All ER 409), who held that no part of the royalties received in respect of three patents was "income received from investments" within the Finance (No 2) Act, 1939, sched VII, pt I, para 6(1), and that the royalties should, therefore, be included in the computation of the taxpayers' profits for the purpose of excess profits tax.

The Special Commissioners of Income Tax decided that the income arising was entirely income from investments, but stated a Case which was heard by Atkinson J who held that the royalties in respect of the first two patents were not income from investments, but affirmed the Special Commissioners as regards the third. The Court of Appeal dismissed the appeal of the taxpayers as regards the first two patents and allowed the cross-appeal of the Crown in respect of the third patent. The House of Lords now dismissed the taxpayers' appeal. The facts appear in the opinion of Lord Simonds and are summarised in the headnote.

Appeal dismissed with costs.