Electric and Musical Industries Ltd v. Inland Revenue Commissioners

[1950] 2 All ER 261

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(Judgment by: Lord Macdermott)

Electric and Musical Industries Ltd
v Inland Revenue Commissioners

Court:

Judges: Lord Simonds
Lord Normand
Lord Morton of Henryton

Lord MacdermottLord Reid

Hearing date: 8, 9, 10 May 1950
Judgment date: 23 June 1950

United Kindom

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Judgment by:
Lord Macdermott

(read by Lord Morton Of Henryton): My Lords, the issue in this appeal is whether a sum of £17,265 received by the Gramophone Company from the Phonographic Company in respect of the year ended 31 May 1944, was "income received from investments" within the meaning of para 6(1) of Part I of sched Vii to the Finance (No 2) Act, 1939. The Gramophone Company was admittedly a subsidiary of the appellant company, within the meaning of s 17(6) of the said Act, throughout the relevant accounting period, and it was common ground that if the sum mentioned was not such income the present appeal could not succeed. The material facts have been fully set out in the Case Stated and I need not recapitulate them. The decision of the Special Commissioners was in favour of the appellant company, but I am satisfied that their finding was based on the construction of the memorandum and articles of association of the Phonographic Company and that the whole question remains open to consideration

My Lords, the "investment" of the Gramophone Company was said to be its interest as a member of the Phonographic Company, and, as it was a company limited by guarantee without a share capital, the interest therein of the Gramophone Company could not readily he measured or defined. This circumstance and the character of the relationship existing between the two companies make it convenient to follow the course pursued in the courts below and to consider first of all the nature of the income received rather than that of what was alleged to be the investment within the meaning of the statute. The rival contentions on this aspect may be briefly summarised. For the appellant company it was said that the income in question was a dividend paid by the Phonographic Company out of its divisible profits to a member as such. For the respondents, on the other hand, it was submitted that this payment was of quite a different order in that it was made by the Phonographic Company, not out of its profits, but as the Gramophone Company's share of the net amount of the proceeds received by the Phonographic Company, as agent for its members, from the issue of licences on their behalf. This point turns on the true construction of the memorandum and articles of association of the Phonographic Company, and the Court of Appeal, so regarding it, accepted the contention of the respondents. I think this decision was right and I find myself so fully in agreement with the reasoning of Cohen LJ (who delivered the judgment of the court), as regards the interpretation of these documents that I do not propose to enter on a detailed examination of their various clauses, or to add more than a few observations by way of supplement to what the learned lord justice has already said on this particular matter.

In my opinion, the memorandum conferred no power on the Phonographic Company to turn to its own account the net amount of the moneys it obtained by dealing in the rights and remedies granted to its members, in respect of the public performance of their records, by the law of copyright. Clause 3 (d)(ii), it is true, empowered the Phonographic Company to determine how and when such net moneys were to be "divided and appropriated among the members of the company." "The members," however, are in effect defined by cl 3(a) as those with rights and remedies in respect of the public performance of records-they are referred to as "the proprietors"-and I do not think this power can be taken as pointing clearly either one way or the other. To my mind, the whole tenor of the document is crystallised in the words of cl 3(a):

"To exercise and enforce on behalf of members of the company, being manufacturers of gramophone records ... and/or the owners of ... the copyrights in such records (hereinafter called 'the proprietors') all rights and remedies of the proprietors by virtue of the Copyright Act, 1911, or otherwise in respect of the public performance of records."

These are apt words to confer a power to act as agent. That, I think, is clearly their prima facie meaning, and I do not see anything in the rest of the memorandum to modify it. Clause 3(c), which provides for acquisition by the company of the legal estate in the copyrights, and cl 3(d)(i), which provides for the manner in which the proprietors "shall authorise the company to exercise and enforce the rights and remedies aforesaid of the proprietors ... " are but alternative means of accomplishing this end, and it is not without significance that the choice between them seems in no way to affect the applicability of cl 3(e) which deals with the distribution of "the net moneys received by the company ... "

The articles, in my judgment, are consistent with this view of the memorandum. I will only refer to two of them. Article 9 provides that all moneys received by the company in respect of the exercise of the rights, etc, "shall be the property of the company." This, of course, if contrary to the true meaning of the memmorandum, could avail the appellant nothing. In my opinion, however, it is quite compatible with what I may call the agency construction. An agent's ownership of moneys received for his principal may facilitate the agency and be agreed for that purpose, and such ownership is entirely consistent with a duty to account. Article 8(d) provides that the membership of any member is to cease

"upon the expiration of the period for which copyright subsists in all the records in respect of which such member is entitled to participate in the distribution of moneys received by the company."

I mention this provision as reflecting in a sentence the view of the memorandum which, in my opinion, ought to be accepted. It recognises the essential linking of membership and proprietorship, and its concluding words cannot well be regarded as intended to refer to the distribution of profits earned by the company. Had that been the intention there is no reason why it should not have been expressed in the terms usual and appropriate for the purpose. It was conceded that, if the agency construction prevailed, the sum in question could not be treated as income from an investment within the meaning of the Act of 1939, and the conclusion I have reached is, therefore, sufficient to dispose of the appeal. For this reason I do not express any opinion on an alternative argument advanced by the Crown which, as I understand it, was to the effect that, even if there was no agency, the income in question arose from the exploitation of trading assets of the Gramophone Company in the course of a commercial relationship with the Phonographic Company, and could not be regarded as income from an investment for the purposes of the statute. That argument appears to involve inquiry not only as to the true source of the income but also as to the scope of the decision of this House in Gas Lighting Improvement Co Ltd v Inland Revenue Comrs [1923] AC 723 , and that is a matter which can best be dealt with when it becomes necessary to do so. I agree that the appeal be dismissed.