Appeal from the decision of MACNAGHTEN, J.
The following statement of facts is taken substantially from the judgment of Greene, M.R. :
This is an appeal by the Consolidated African Selection Trust, Ltd., from a decision of MACNAGHTEN, J., who reversed the decision of the General Commissioners of the City of London on an appeal in which the company was claiming to have allowed to it for the purpose of its income tax asseddment for the vear ending April 5, 1937, a certain deduction. The company is a prosperous company, and on DEcember 6, 1933, it passed a special resolution increasing its share capital by the creation redeemable preference shares and 400,000 new ordinary shares of 5s. each. By the same resolution it was resolved that 10,000 of such new ordinary shares be reserved for issue to employees of the company at such time and upon such terms and conditions as the directors should determine. The directors determined to issue 6,000 of those ordinary shares to employees of the company upon terms which would give to employees a substantial benefit, and that benefit was to be by way of remuneration for services rendered. Accordingly, on June 5, 1934, a letter was sent to the employees in question offering to give then an allotment of the new ordinary shares at per, that is to say 5s. a share. That offer was accepted. The 5s. was paid and the 6,000 shares, which was the number the directors had determined to allot in this way, were issued to the employees. It is found in the Case that the value of that opportunity to subscribe for the shares at par was Pound 2 3s. 9d. per share, less the 5s. paid; that is to say, each employee received by way of remuneration a benefit eqvivalent in cash value to Pound 1 18s. 9d. The employees were assessed to income tax in that amount, and that assessment was justified by the law as laid down in the case of Weight v. Salmon. It is agreed, and the case proceeds upon the footing, that if the company, instead of making the issue in the way it did, had issued those shares to the public, it could have obtained for them Pound 2 3s. share; that is to say, it would have obtained a premium of Pound 1 18s. 9d. Had it done so, the premium so obtained in the hands of the company would have been free money, in the sence that the company could have used it for any purpose that it chose. It could have used it to pay current expenses. It could have carried it to reserve. It could have used it for the purpose of acquiring a capital asste. In other words. so far as the law is concerned, the company could have dealt with the money received in respect of the premium in any way that it pleased, including, of cource, if it had so minded, remuneration of employees. Now the position when the company created those new share was this : when the shares were created the company acquired the power to admit to membership such persons as should subscribe for those shares. That right was one of value to the company, because if the company had exercised that right it could have secured for itself, not merely the par value of the shares which by law it would be bound to obtain, bacause it could not issue shares at a discount, but it would also have been able to obtain a premium. It therefore had a right which was of value to itself, the exercise of which would have brought money into its coffers. That right the company did not exercise. Instead of doing so, it diverted into the pockets of its employees the equivalent of the cash profit which it otherwise would have obtained. It may be said from one point of view that it forbore to make that cash profit and presented its equivalent instead to the employees. In those circumstances the company claims to have allowed as a deduction for the purpose of its assessment the value of that premium which it might have obtained; or, putting it in another way, the amount of the special remuneration which it has given to its employees. The General Commissioners held that the company was entitled to make such deduction. MACNAGHTEN, J., however, reversed the decision of the General Commissioners. The company appealed.
GREENE, M. R. - [His Lordship stated the facts and continued :] It is incontestable that the company has remunerated its employees; it is incontestable that the remuneration in the hands of the employees is liable to tax. From where did the remuneration come It did not come out of nothing. It came from some where. The place where it came from was the company. The company has provided the remuneration, and it has provided it out of a right belonging to itself, namely, the right to issue those shares.
Now, it is said on behalf of the Crown that although the employees have received remuneration for which they stand to be taxed, the company is not entitled to the dedication of the equivalent amount. It is said that to forebear the making of a profit is not an expense incurred by the company, and it was said that the argument were accepted, would involve affirming the proposition expense. Speaking for myself, I have no intention of affirming any such general proposition, nor did the argument presented on behalf of the company expressly or impliedly affirm any such proposition. The question that we have to decide lies in a very much narrower compass.
In the course of the argument the question was approached by steps, pursuant to certain questions which were put to counsel for the Crown from the Bench, and taking an illustration suggested by the speech of Lord Akin in Weight v. Salmon, Counsel for the crown were invited to consider two cases. The first case was where an employers, being a company which was mining coal, remunerated its director by giving him instead of each a quantity of coal. The questions was; could the company in those circumstances treat the value of the coal so given to the director by way of remuneration as a disbursement for the purposes of the tradei I am right in saying that the learned leading counsel for the Crown assented to the proposition that in those circumstances the value of the coal could be dedicated. His junior, on the other hand, unless I am unconsciously doing him an injustice, maintained that in those circumstances the value of the coal could not be dedicated but only its purchase price. However that may be, in the next illustration there was unanimity. The next illustration was this : that the company, instead of giving the call to the director by way of remuneration, sells it to him at half its valued, thereby giving him a benefit which in his hands would be a taxable benefit measured by one-half the value of the coal. The question which counsel for the Crown were invited to answer was : In that case could the company deduct as an expense one-half the value of the coal And here both the lending and junior counsel for the Crown replied stoutly in the negative, and asserted that the only deduction that could be made was the actual purchase price paid by the director for the coal. I must confess that the answer struck me as a surprising one, because if there is one principal which the Crown quite rightly, quite consistently and quite successfully has always stood for the income-tax law, it is principle that he who receives moneys worth is, for taxation purpose, in the same position as he who receives money. I cannot myself understand how it can be asserted that a person who pays remuneration to his servant in moneys worth belonging to himself is not entitled to deduct the money worth and expense. If an employer having two receptacles, one containing cash and the other containing goods, chooses to remunerate his employee by giving him goods out of the goods receptacles, instead of the cash out of the cash receptacle, the expenditure that he makes is the value of those goods, not their purchase price, or anything else but their value and that is the amount which is entitled to deduct for income-tax purposes. If instead of giving to the employees he gives the employee the privilege of acquiring those goods at less than their value, he is equally remunerating him to the extent of the difference between the cash receives and the value of the goods which he transfers. I myself do not see how the contrary could be argued for one moment. Nevertheless the foundation of the Crowns argument was based on the proposition that this answer was wrong. Now, the importance of that illustration and the relevance of it are I think, confirmed by the observations of Lord Atkin, which were accepted and agreed to by all the other members of the House, in Weight v. Salmon, because it is from those observations that the illustration comes. I should say that that was a case where it was sought to assess the directors on the premium value of the shares in their company for which they had been given the privilege of subscribing : I forget whether it was at par or at a price below the market value. That assessment was upheld in the House of Lords. Lord Atkin said this (19 Tax Cas., at p. 193) : 'I think it is really impossible to appreciate the argument which suggests that that was not an immediate profit in the nature of the moneys worth received by the director as remuneration for his services. It appears tome to correspond very closely in substances to a case where a company might have sold 1,000 tons of its product, if the company were a colliery, to a director who was in the coal trade, at a price which one third of the market price of the day. There no question could arise that the person was receiving a profit in the nature of moneys worth and he was receiving that profit in the nature of the money worth to the extent of the difference between the price he could get for it and the price he had actually paid.' It is perfectly true that the case that Lord Atkin was dealing with there was the case not of the payer but of the recipient. Nevertheless it seems to me that in that case that it follows, and necessarily follows, as a matter of principle that the company which he is imagining there would have been entitled in those circumstances to treat as dedication the difference between the cash paid by the director and the value of the coal that was given to him. That was the method of remunerating the director. It was a remuneration in moneys worth. To say that the director was receiving the moneys worth for his remuneration on which he was to be taxed, and in the same breath to say that the company, which out of its own assets and to say that the company, which out of its own assets and to its own determent provided that exact moneys worth by way of remuneration, was not entilted to deduct the value of what it handed over, seems to me to produce an inconsistency which evening income-tax law would be surprising and I myself I am quite unable accept it.
Nowi, of course, in the present case the facts are not the facts assumed in that example. Nevertheless it is, I think, important to notice that the parallels between that case and the present case was one which for all parallel between that case and the present case one which for all relevant purposes is the same as that used by Lord Atkin in the course of his reasoning, and it my judgment it is parallel which can be used in the present case, where it is the employer whose tax is in issue and not the employee. The company, as I have said, was possessed of a valuable right. It is perfectly true that the value of that right was not which would ever appears in its balance sheet as such. No director, no auditor, on aniseed shares which the company might obtain if it chose to make an issue. No one has ever seen such a thing. That does not alter the fact that the company in its unissued shares, having not alter the fact that the company in its unissued shares, having regards to its financial position, had a valuable right which I could true into cash. If it issued those shares to the public it would have received that cash from the public. It issued those shares to the employees, but instead of receiving the cash from the employees it allowed the employees to keep that cash by way of remuneration. That being so, I cannot myself see how it can argued that the company by the course that it book has done otherwise than give to its employees to its own prejudice, money worth which the company, had it been so minded, could have converted into money; but instead of doing so it has transferred that privilege to the employee. For all relevant purposes it appears to me that the position is a three parallel to the case which Lord Atkin took by way of illustration. A company, instead of selling its coal and thereby putting the market value of the coal into the pocket, gives the coal to its employee at a reduced price below its market value, thereby depriving itself of the possibility of making that profit but using the potential profit to remunerate its employee.
Now that is what has been doing in the present case, and it seems to me that the result in one which necessarily follows. Once it is established as it was established in Weight v. Salmon, that the value so received by the employee is received by way of remuneration, it follows that the company provided that remuneration in meal or in malt, in cash or in kind, and is entilted to deduct the amount which it has provided.
One other argument was put forward to this effect, that is the company had issued its shares to the public and obtained the premium, that premium would not have been taxable profit in its hands. That, of course, in disputable. From that it is argued, as I understand it, that the value of the premium must be treated as capital, and accordingly that the company has remunerated the employee out of the capital. I must confess, with all respect, that I am quite unable to follow that argument. As I have said, the premium, if it had been received, would have been capital or income is completely misleading. That the company could have treated of that kind, is perfectly true. It is equally true to say that the company could have used it as income - in other words, the nature of that sums, had it been received, would have been entirely neutral and would have depended on the volition of the company and nothing else. The circumstances that for income-tax purposes it would not have been taxable seems to me irrelevant, and for this reason, that money paid by way of remuneration to an employee is of necessity in its nature for income-tax purposes a payment on revenue account. It matters not out of what drawer the company obtains the money or the goods for the purpose of making that payment. That is a matter with which the Revenue has concern. If the company draws a cheque on its account to pay its employee, its situation at the time may be such that the only fund available for making that payment is part of its own capital; it may have no profits, it may have no reserves. Its stole asset may be the capital fund represented by subscriptions for its shares. Nevertheless when it draws that cheque and pays its employee, as between itself and the Revenue it has incurred a revenue expense, and that revenue expenses can be deducted for the purpose of its assessment.
I have not referred so far to any of the authorities which were quoted to us, nor do I find it necessary to refer to any of them except one, and that is the case of Ushers Wiltshire Brewery, Ltd. v. Bruce. That was case in which various points arose, but the point which is relevant to the present discussion was this. The brewery company was interested in a number of public houses which is let to tenants upon terms that the tenants should be subject to the usual tie. Some of those houses were owned by the company as freeholders if some of them they were leaseholders; but the rents which they charged their tenants, were in the case of the leasehold less than the rents the company themselves paid, and in cases where the company were the freeholders were less than the Schedule A assessment. The company claimed to deduct for the purposes of its ascertainment of profits the difference between the rents paid by it for the leasehold houses or the Schedule A assessments, and the rents actually received from its tenants. That claim was upheld. I will take a passage in the other speeches which, if I read them rightly, are based upon the same view, but that view is most clearly expressed in the passage which I will now read. It is (84 L. J. K. B., at p. 435;  A. C. at p. 469; 6 Tax Cas., at p. 437) : 'Next as to rent. A trader who utilizes, for the purposes of his trade, something belonging to him, be it chattel or real property of his trade, which he could otherwise let for money, seems to me to put himself to an expense for the purposes of his trade. He does so equally to an expense for that purpose belonging to another. The amount of his expense is prima facie what he could have got for it by letting it in the one case and what he pays for it when hiring it in the other. Where he gets something back for it, while employing it in his trade, by receiving rent or hire for it in connection with that trade, the true amount of his expense can only be arrived at by giving credit for such receipt. In principle, therefore, I think that in the present case rent forgone, either by letting houses, which the brewers own, to tied tenants at a low rent instead of to free tenants at a full recurrent in the open market, or by letting houses in the same way, which they hire and then relate at a loss, is money expended within the First Rule applying to both the first two Cases of Schedule D, and that upon the findings of the Special Case, which are conclusive, it is wholly and exclusively expended for the purposes of such trade.' It is, perhaps, worth noticing that in a later case in reference to the decision in Ushers Case the House of Lords again use certain expressions which agree with what Lord Sumner was there saying; that is the case of Hoare & Co. v. Collyer, and I will read three short passages. The first is from the speech of Lord Warrington, who (101 L. J. K. B. at p. 277;  A. C., at p. 414; 17 Tax Cas., at p. 212) says this : 'Ushers Case is in no way inconsistent with this view. All that was decided in that case was that certain expenses incurred by the owners and certain items of rents forborne by them for the purpose of extending their trade might properly be treated as money wholly and exclusively laid out or expended for the purposes of such trade, and therefore forming a proper item of debit in the account under Schedule D'. Lord Atkin said this (101 L. J. K. B. at p. 278;  A. C., at pp., 416, 417; 17 Tax Cas., at p. 213) : 'Whether the expense allowed in Ushers Case is based upon a deduction of the Schedule A valuation as on premises used in the brewers business mitigated by the sum received from the tied tenant, or whether it is regarded as a notional sum paid for the advantage of the tie, it is allowed as an expense incident to the particular house in respect of which it is incurred.' Lord Tomlin said (101 L. J. K. B., at p. 279;  A. C. at p. 419; 17 Tax Cas., at p. 215) : 'In Ushers Wiltshire Brewery Ltd. v. Bruce where tied houses of a brewery company were held by the tenants at rents below the Schedule A valuations, your Lordships House, as I understand the case, treated the difference between the rent and the valuation in the case of each house as rent forgone or money spent exclusively for the purpose of earning profits, and held that expense to be one which could be deducted for the purpose of ascertaining profits and gains under Schedule D'. Now, it was suggested that the decision in Ushers Case was really based upon the narrow language of certain of the rules applicable to Schedule A valuations. It appears to me that the case is based upon a broader principle - a principle which, at any rate in its application to the present case, is to my mind clear. As I have said, from one point of view, the company in the present case has forborne to make a profit; but that is really only a partial statement of the position. The company has not merely forborne to make a profit; the company has done an active thing, not merely suffered a passive thing; it has remunerated its employee, and it has remunerated its employee, to its own financial prejudice, by giving to its employee the power which it had itself of obtaining a monetary sum in respect of these shares. As I said earlier in this judgment, there is nothing which I have said which in any way affirms the general proposition that money forgone is money expended. A proposition so wide and so vague is one which this Court would never consciously lay down, and I am quite unable to see that anything in the opinion which I have expressed involves the assertion of any such proposition. Whether or not a company or an employer has given moneys worth by way of remuneration to an employee is a question of fact. Whether the company in giving that moneys worth has done so to its own pecuniary detriment is again a question of fact. I can imagine cases where a company by way of remuneration to its employee gives the employee a privilege which in his hands has a money value but which in the companys hands has no a money value at all. Cases of that kind must be decided upon their facts. The facts of the present case are narrow and simple, and in my judgment with all respect to the learned Judge who took a different view of the case, it is a clear one, and the appeal is allowed with costs here and below.
FINLAY, L. J. - I agree.
LUXMOORE, L. J. - I also agree.