SCOTT, L. J. - This in an appeal by the taxpayer from a judgment of Lawrence, J., with regard to the measure of its liability to National Defence Contribution under the Finance Act, 1937. The operative provisions of Part III of that Act are these; Section 19, ' (1) There shall be charged, on the profits arising in each chargeable accounting period falling within the five years beginning on the first day of April, nineteen hundred and thirty-seven, from any trade or business to which this section applies a tax (to be called the national defence contribution) of an amount equal to five per cent. of those profits in a case where the trade or business is carried on by a body corporate and four per cent. of those profits in any other case. (2) Subject as hereafter provided, the trades and businesses to which this section applies are all trades or businesses of any description carried on in the United Kingdom, or carried on, whether personally or through an agent, by persons ordinarily resident n the United Kingdom.' Then in the Fourth Schedule the statute provides :'7. Income received from investmenents or other property shall be included in the profits in the cases and to the extent provided in this paragraph, and not otherwise.
(b) in the case of any other trade or business, being a trade or business carried on by a body corporation, the profits shall include all income received by way of dividend or distribution of profits from any other body corporate in which the first mentioned body corporate has a controlling interest and which is not liable to be assessed to the national defence contribution.'
The appellant company is a very large concern. It carries on business in the United Kingdom and is therefore liable to pay National Defence Contribution on its profits. It also possesses shares, with voting power attached, in each of eleven corporate bodies which carry on business outside the United Kingdom, some within the British Empire, others in foreign countries. These corporations, to which for convenience I will refer generally as ' the foreign corporations', are there fore themselves ' not liable to be assessed to national defence contribution', for they fall within the concluding words of the part of the provision which i have quoted. The crown, however, contends that the company itself is liable to National Defence Contribution in respect of dividends received from all the eleven foreign corporations, on the ground that it has a ' controlling interest ', direct or indirect, in each one of them (whether registered in its own name or in that of its nominees), partly by itself owning shares in the controlled companies, or partly by owning shares in intermediate foreign corporations over which it has de facto control, either direct or indirect, which, in turn, own shares in the controlled companies. The Commissioners upheld that contention; and the judge in a short judgment upheld their conclusion, holding in effect that there was evidence to support the finding and that the Commissioners had committed no error of law.
I agree with his judgment, but as the legal issue is one of general importance, it is perhaps better to state my reasons. The whole appeal turns on the simple but far reaching question what does the phrase ' controlling interest ' mean in its context in paragraph 7 of the Fourth Schedule The company contends that ' interest ' necessarily means a proprietary interest in the foreign corporation owned by the British company of the foreign corporations shares registered in the name of itself, or its nominee, or by means of some other proprietary interest such as an option over shares. To such a control counsel for the company gave the name ' direct ' and contended that the statute excludes indirect control through another corporation, however complete may be the British companys effective control over its intermediary. He relied on the omission from the paragraph of any qualifying epithet, attached to the phrase, such as ' direct or indirect ', of the Finance Act, 1920, which dealt with corporation profit tax. That section contains a proviso, sub-section (2) (c) as follows : ' any deduction allowed in respect of the remuneration of any director, manager or other person concerned in the management of a company, who has a controlling interest in the company, whether directly or indirectly, and whether solely or jointly with any other persons, shall not exceed an amount calculated at the rate of one thousand pounds per annum.' The object of that provision is plain. It was to prevent a person having a decacto control over the companys annual finance debiting the companys profits with an annual payment to himself which properly should be regarded as distribution of profits when earned, as if it had been an expenditure incurred inearning those profits. The possibility of such persons exercision influence in many different and devious ways, or even of endeavouring to conceal the fact of such exercise, seems to me sufficient to account for the elaboration and particularly of language there used. I therefore do not regard the use of that language in that context as having any relevant bearing, or affording any sufficient argument for denying to the simpler words of paragraph (7) of the Fourth Schedule to the 1937 Act, their natural meaning.
The Oxford Dictionary contains two definitions, with illustrations, which appear to me to convey the natural meaning of the English verb ' control ' and of the English noun ' interest ', as used in the present context.'control. 4. To exercise restraint or direction upon the free action of : to hold way over, exercise power or authority over; to dominate, command. (1809 Pinkney Trav. Fance 184 Castles... built with the evident purpose of controlling... the navigation). Interest. 2. The relation of being concerned or affected in respect of advantage or deteriment; especially an advantageous relation of this kind'.
The commercial device of exercising company control through one or more intermediate corporations, British or foreign, was already notorius and therefore well known to Parliament in 1937; as was the financial economy in investment open to a company A, desiring the control over a foreign operative cooperative corporation B, if it interposed a holding corporation C to acquire a share control in corporation B. Assuming the sufficiency of a 51 per cent. majority in each stage to give 'control', company A could thus achieve control of Corporation B at half the investment cost to itself of acquiring the direct shares of both C and B would be paid for by others whilst As investment would be limited to 51 per cent of the holding company C. The commercial practice was and is really addressed to results rather than mens. Ownership by the controlling company of the control shares in the controlled company was irrelevant; and it was appropriate to choose a word for expressing the relationship from controller and controlled which had a wide meaning, not limited to that of a proprietary relationship. Had Parliament intended so to limit the provision by a reference to direct shareholding by the British controlling company, liable to National Defence Contribution, in the controlled corporation, that intention could have been easily and would have been naturally expressed by adding the word 'proprietary.' In the circumstances I have no doubt that the Chancellor of the Exchequer, if I may personify Parliament in him, had no such intention; for he was concerned to bring within his net such part of the profits of controlled corporation carrying on business abroad, as is in fact brought to this country through this well known system of company control exercised by controlling companies here. An obvious fiscal gap had been discovered in the escape, actual or potential, of such profits from the tax-gatherers net. If the appellants arguments were accepted, the introduction of any intermediate holding company not carrying on business within the United Kingdom would at once re-open the sluices and let the Chancellors fertilising wather escape again. In dealing with the usual method of so-called ' indirect ' control, I have only taken for the purpose of illustration the case of one intermediate company, but the principle is the same if there are more links in the chain, as there are in several of the eleven foreign corporations affected by the appeal. The arithmetical economy is of course multiplied by each link-as the power of levers can be multiplied by repetition. But in law a point may, of course, be reached where the legal limit of remoteness may arrive through repetition of intermediate stages or other elaboration.
A subsidiary point was raised on behalf of the appellant company to the effect that a mere majority of shares (whether directly held or held indirectly within the method I have attempted to describe) is not enough to give the control contemplated by paragraph (7) (b). It was pointed out that for various purposes both of the articles of association of the appellant company and of the constitutions of the eleven foreign corporations a 75 per cent. majority is required. It was argued that the statutory control is intended to be a complete control, and that therefore an appropriate mathematical adjustment must be made in the relations of the appellant company to each of the eleven foreign corporations before it can be ascertained whether in the case of any one of the eleven the appellant company has or has not control. The Attorney General relied upon a decision of Rowlatt, J., in Noble v. Commissioners of Inland Revenue, that the degree of control afforded by a 51 per cent. holding is control within the statute. Lawrence. J., took the same view and so do I. I agree with the whole of his judgment, and the appeal must be dismissed with costs.
F. A. CLARK AND SON LTD. v. INLAND REVENUE COMMISSIONERS. The appeal of F. A. Clerk and Son, Ltd., was heard in both Courts with the appeal of the British American Tobacco Co., because it, too, depended on the meaning of the phrase 'controlling interest', although the primary question there was whether the two sole-directors of that company had such an interest in it so as to bring them within paragraphs 4 and 11 of the Fourth Schedule to the Finance Act, 1937, where the phrase is used. Paragraph 4, Sub-paragraph (b), forbids any deduction from the profits of a business carried on by a company of 'any interest, annuity or other annual payment paid to any person carrying on the trade or business, or any royalty or rent so paid'; and the paragraph continues 'and, for the purpose of paragraph (b) of this proviso, where the trade or business is carried on by a company the directors whereof have a controlling interest therein, the directors shall be deemed to be carrying on the trade or business'. Paragraph 11 is a similar provision limiting the deduction to be allowed in respect of remuneration of directors where they have a controlling interest'. The case was heard by different Commissioners from those who heard the British American Tobacco Co, s Case and they came to the conclusion that the two directors had not such a 'controlling interest.' But there was no dispute about the facts, and the issue depended on a pure question of law. It is the same question as in the British American Tobacco Co.s Case except that the phrase 'controlling interest' is applied to directors who control the company, instead of to one company controlling another. The learned Judge could find no sufficient legal ground for giving the phrase one meaning in paragraph 7 and another in paragraphs 4 and 11 and we agree with him. In my opinion it contemplates, when standing alone in the context of any one of the three paragraphs, such a relationship as bring about a control in fact-by whatever machinery or means that result is effected. This appeal, like the other, must be dismissed with costd.
CLAUSON. L. J.-I agree and I have nothing to add.
GODDARD, L. J.-I agree.
(1) (1936) 12 Tax Cas 911
(2) Page 67 ante