Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd; Evans Medical Supplies Ltd v Moriarty (Inspector of Taxes)

[1957] 3 All ER 718

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Between:
And:

Court:

Judges: Viscount Simonds
Lord Morton of Henryton
Lord Tucker
Lord Keith of Avonholm
Lord Denning

Subject References:
TAXATION
INCOME TAX
INCOME
Payment of lump sum for imparting secret processes and for furnishing plans, etc, for creating factory
Whether income or capital receipt

Legislative References:
Income Tax Act, 1952 (15 & 16 Geo 6 & 1 Eliz 2 c 10) - Sch D, Case I

Case References:
Butterworth (Inspector of Taxes) v Page - [1935] All ER Rep 943; 153 LT 34; sub nom Handley Page v Butterworth, (1935) 19 Tax Cas 328
Edwards v Bairstow - [1955] 3 All ER 48; [1956] AC 14; 36 Tax Cas 207
British Dyestuffs Corpn (Blackley) Ltd v Inland Revenue Comrs - (1923) 12 Tax Cas 586; 129 LT 538; 28 Digest 19, 96
Trustees of Earl Haig v Inland Revenue Comrs - (1939), 22 Tax Cas 725
Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) - (1905), 5 Tax Cas 159; 28 Digest 23, b
Ducker v Rees Roturbo Development Syndicate, Inland Revenue Comrs v Rees Roturbo Development Syndicate - [1928] AC 132; 97 LJKB 317; 138 LT 598; sub nom Rees Roturbo Development Syndicate Ltd v Ducker, Rees Roturbo Development Syndicate Ltd v Inland Revenue Comrs, 13 Tax Cas 366
Nethersole v Withers - [1946] 1 All ER 711, affd HL; sub nom Withers v Nethersole; [1948] LJR 805; [1948] 1 All ER 400; 28 Tax Cas 501; 2nd Digest Supp
Leeming v Jones - [1930] 1 KB 279, affd HL; (1930) 15 Tax Cas 333; sub nom Jones v Leeming, [1930] AC 415; 99 LJKB 318; 143 LT 50; Digest Supp
Kates v Jeffery - [1914] 3 KB 160; 83 LJKB 1760; 111 LT 459; 78 JP 310; 33 Digest 420, 1308
London County Council v Farren - [1956] 3 All ER 401; 120 JP 542; 3rd Digest Supp
Herbert Morris Ltd v Saxelby - [1916] 1 AC 688; 85 LJCh 210; 114 LT 618; 43 Digest 24, 154
Trego v Hunt - [1896] AC 7; 65 LJCh 1; 73 LT 514; 43 Digest 9, 44

Hearing date: 30-31 October, 4, 6 November 1957
Judgment date: 4 December 1957

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The taxpayer company carried on business as manufacturers of pharmaceutical products and wholesale druggists with world-wide sales and an agency in Burma. Under an agreement with the Burmese government, it undertook (by Part 1 of the agreement) to supply the government with information (which the government undertook not to divulge) relating to the manufacture of pharmaceutical products and also technical data, drawings, designs and plans for the erection of a factory and the installation of machinery suitable for the manufacture of pharmaceutical and other products in Burma. Some of this information related to secret processes. As consideration for the undertaking, it received a "capital sum" of £100,000. In an assessment to income tax made on the company under Case I of Sch D to the Income Tax Act, 1952, the £100,000 was treated as a receipt of its trade liable to be included in the computation of its profits. The Special Commissioners of Income Tax held that the sum was properly so included, on the ground that it was received in respect of the provision of services and arose to the company "either in the course of the trade which it had hitherto carried on or in the course of a new trade which it commenced" at the date of the agreement.

Held

Lord Morton of Henryton and Lord Keith of Avonholm dissenting): the whole of the £100,000 should be excluded from the computation of the company's profits because-

(a)

(per Viscount Simonds and Lord Tucker) on the true construction of the agreement the payment of the £100,000 was solely referable to the promises given by the company under Part 1 of the agreement, and by disclosing secret processes in accordance with those promises the company was parting with a capital asset for which it was receiving a capital sum (Butterworth v Page, [1935] All ER Rep 943, applied) and

(b)

(per Lord Denning) though the £100,000 was income, being received for the supply of "know-how" over years, yet it was not established that the £100,000 was received in the course of the existing trade which was being taxed, as the commissioners had made the alternative finding of its being received in the course of a new trade.

Decision of the Court of Appeal (sub nom Evans Medical Supplies Ltd v Moriarty (Inspector of Taxes), [1957] 1 All ER 336) reversed in part.

Notes

Lord Morton of Henryton agreed, in his opinion, with the conclusion of the Court of Appeal. There was, therefore, a majority of the House of Lords in favour of the view that the consideration attributable to the company's divulging secret processes was capital and not income, though there was not a majority in favour of the view that the whole £100,000 was capital.

As to what constitutes trade receipts and income as opposed to capital for income tax purposes, see 20 Halsbury's Laws (3rd Edn) 150, para 263; as to casual payments and isolated transactions, see ibid, p 120, para 213; and for cases on the subject, see 28 Digest 17-20, 87-99.

Appeal

Appeal by the Crown and cross-appeal by the taxpayer company, Evans Medical Supplies Ltd from an order of the Court of Appeal (Lord Evershed MR Birkett and Romer LJJ), dated 13 December 1956, and reported sub nom Evans Medical Supplies Ltd v Moriarty (Inspector of Taxes), [1957] 1 All ER 336, reversing in part an order of Upjohn J dated 18 May 1956, and reported [1956] 2 All ER 706. The taxpayer company appealed to the Special Commissioners of Income Tax against an assessment to income tax for 1954-55 made on it under Case I of Sch D to the Income Tax Act, 1952, in the sum of £281, 163, less capital allowances £56,305, in respect of its profits as wholesale druggists. The sole question for determination was whether a sum of £100,000 paid to the company by the Government of the Union of Burma was a receipt of the company's trade liable to be included in the computation of its profits for the purposes of the assessment. The facts appear in the opinion of Viscount Simonds, pp 720, et seq, post.

Sir Frank Soskice QC and A S Orr for the Crown.

J Senter QC and D C Miller for the taxpayer company.

Their Lordships took time for consideration.

4 December 1957.  The following opinions were delivered.