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Anglo-french Exploration Co. Ltd. Vs. Clayson (inspector of Taxes). - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1956]30ITR309(Cal)
AppellantAnglo-french Exploration Co. Ltd.
RespondentClayson (inspector of Taxes).
Cases ReferredBerghs Ltd. v. Clark
- relates to a sum of pounds 16,138 4s. 2d. which was received by the appellant company, anglo-french exploration company ltd. in the year is right that, at the outset of my judgment, i should refer to the terms of the schedule under which the claim is made, namely, schedule d of the income-tax act, 1918, which was the act of parliament then in force. its terms are very familiar, but i hope i shall be excused if i recite them : 'tax under this schedule shall be charged in respect of -(a) the annual profits or gains arising or accruing - ... (iii) to any person... from any trade, profession, employment, or vocation, whether the same be respectively carried on in the united kingdom...' i have thought it right and relevant to refer to the terms of that schedule because, in.....
LORD EVERSHED M. R. The question involved in the present case relates to a sum of Pounds 16,138 4s. 2d. which was received by the appellant company, Anglo-French Exploration Company Ltd. in the year 1949.

It is right that, at the outset of my judgment, I should refer to the terms of the schedule under which the claim is made, namely, Schedule D of the Income-tax Act, 1918, which was the Act of Parliament then in force. Its terms are very familiar, but I hope I shall be excused if I recite them : 'Tax under this schedule shall be charged in respect of -

(a) The annual profits or gains arising or accruing - ... (iii) to any person... from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom...' I have thought it right and relevant to refer to the terms of that schedule because, in my judgment, Mr. Borneman correctly reminded us that the cases of individual persons sought to be charged under Schedule E of the Act, where the charge is 'in respect of every employment of profit,' do not form a safe guide to cases under Schedule D, at least as a general proposition. We must consider the correctness or otherwise of the assessment here made in the light of the language which I have read of Schedule D.

The question, so interpreted, as it is before us can be thus expressed : Does this sum of Pounds 16,000 odd represent profits or gains of the Anglo-French Exploration Company Ltd. arising from its trade In other words, was it a sum received by the appellant company in the ordinary course or stream of its trading operations

The facts of the case are not in dispute, and since they are fully recited in the case stated, it is unnecessary for me to repeat the whole of the narrative. The essential facts, however, are as follows. The Anglo-French Exploration Company Ltd. - I will henceforth call it 'Anglo-French' - was formed as an English company at the end of last century : its its business being that of a mining and finance company particularly concerned, according to the terms of the case stated, with seeking scope for the investment of capital in South Africa.

Among the South African companies in which Anglo-French held for many years a substantial shareholding was the Kleinfontein Estates and Township Ltd., which I will henceforth call 'Kleinfontein.' In that company Anglo-French held, at all relevant dates, rather less than one third of the total of its share capital which consisted of shares of 5s. od. denomination. A similar but slightly larger shareholding in Kleinfontein was at all material times held by persons who were the trustees of the late Sir George Farrar. Anglo-French and the Farrar trustees had each of them two nominee directors on the board of Kleinfontein, but in fact, the fees, which were paid to the Anglo-French nominee directors, were in turn paid over by them to Anglo-French.

In addition to that shareholding interest, Anglo-French for many years acted, under the terms of a written agreement and certain correspondence, as agents and secretaries of Kleinfontein for the annual fee of Pounds 1,500 sterling. The substance of the obligation as agents and secretaries undertaken by Anglo-French was that they provided office accommodation and office staff for Kleinfontein in Johanesburg. The agreement was determinable by six months notice on either side; but in practice, and so Anglo-French and the Farrar trustees co-operated together, would not be able to determine the agreement against the Anglo-French. In May, 1949, Philip Hill securities Corporation other English company, made an offer for share of the company at a price of 35s. od. per share. It was also part of that offer that, when the stage was reached whereby more than 50 per cent. of the issued shares of Kleinfontein had been acquired, the Philip Hill Company would pay the sum of Pounds 20,000 in consideration of the resignation by Anglo-French of its office as agents and secretaries.

As Mr. Monroe has said, and said rightly, the true transaction must be carefully analysed. I will read part of paragraph in the offer which related to that last-mentioned matter. 'Subject to your companys acceptance of this offer and upon delivery to our company of 43,000 of the said shares' - 43,000 being just over 50 per cent. - 'with transfer forms as aforesaid attached thereto, your company will tender its resignation as agents and secretaries to the Kleinfontein Company, acceptance of which we undertake to procure forthwith upon its being tendered, and upon the tender of such resignation we shall pay to your company in cash the sum of Pound 20,000.' Those offers, the offer to buy the shares at 35s. od. each, and the offer in respect of resignation by Anglo-French, were accepted by Anglo-French. In due course, and in accordance with the terms of the arrangement, the Pounds 20,000 having been received, part of it was paid over by Anglo-French to the Farrar trustees, the figure of Pound 16,138 4s. 2d. representing the balance of the Pounds 20,000 retained by Anglo-French.

I observe two things : (1) the Pounds 20,000 was not part of the purchase price of the shares, as was indeed conceded in the courts below, and as has been here conceded on the part of the Crown. Had it been otherwise, had it been part of the purchase price, then either Anglo-French would have had to distribute Pound 20,000 ratably among all the shareholders; (2) the agency agreement being on the face of its determinable by six months notice, it was quite plainly only worth a sum like Pound 20,000 so long as Anglo-French and its friends, the Farrar trustees, could control the Kleinfontein Company. That plain fact is recognised by the terms of the offer, as also by the distribution by Anglo-French of the Pounds 20,000 when they received it.

Mr. Monroes argument before us, which, if he will allow me to say so, was presented with cogency and lucidity, was to this effect : (1) The Pounds 20,000 was paid in truth as consideration for the giving up or destruction, as distinct from the mere discharge, of the agency, that being, he said, the legal effect of the true analysis of the bargain as recorded in the document; (2) it is nihil ad rem that Pounds 20,000 was far in excess of the true value of the agreement, since the parties to the arrangement could put any price they liked upon it; (3) it is also nihil ad rem that the Pounds 20,000 was, so to say, tied up with the trading transaction, namely, the

sale of the shares. It was separate bargain and constituted a capital payment. (4) It is nihil ad rem likewise that Anglo-French chose to divide the Pounds 20,000 between themselves and the Farrar trustees, as they did. (5) It therefore follows from the first proposition that the sum received was a capital payment in the hands of Anglo-French, because it was in truth paid to, and received by, them for the destruction, the assigning, the giving up, or whatever phrase you like to use, of a source of income, videlicet, a capital asset.

The Commissioners rejected this argument. They found that the sum in question was trade receipt, meaning thereby, as I understand, a receipt by Anglo-French in the ordinary course of their trade. In my judgment, the Commissioners were entitled, on the facts, so to find, and in so finding they made no error in law.

If the matter were res integra, I think that there is much to be said for the simple view that a sum of money received in consideration for the giving up or destruction of an agreement under which you look to earn an annual sum is capital and not income : for in such case the sum received might be described fairly as the capitalised equivalent at the present time of income prospects. But the question remains, not whether that sum in some senses or in some contexts might sensibly be called a 'capital' payment, but whether within the terms of Schedule D it is a profit or gain arising from the trade of the recipient.

And the matter is not in any case res integra. The line of cases to which we have had our attention directed, starting from the well-known trilogy : seem to me to emphasise that sums received for the cancellation of an agency or of other similar agreements which have been entered into by the recipient in the ordinary course of its trade will themselves, prima facie, be regarded as received in the ordinary course of trade unless the transition involves a parting by the recipient with a substantial part of its business undertaking. The case of Barr Crombie & Co. Ltd. v. Inland Revenue Commissioners was case of that exceptional character.

On the other hand, we have the cases to which we were referred in this case (as also in the case we decided recently of Wiseburgh v. Domville) of Kelsall Parsons & Co. v. Commissioners of Inland Revenue, and Inland Revenue Commissioner v. Fleming & Co. (Machinery) Ltd.

I have referred to the case of Wiseburgh v. Domville in which we gave judgment since the first bearing of this case now under consideration, and I may perhaps repeat in this case what I there said : that we have not though it right to express a different view from that which has been persistently entertained in the Court of Session in Scotland, where, as it happens, the majority of these cases seem to have arisen for determination.

I will make one or two references to the judgments in Kelsall Parsons & Co. 2 and Fleming & Co. 3 My first reference is to the judgment of Lord President Normand the former case. The Lord President said : It is not necessary that I should review all the authorities which were cited to us, but I must advert to the contentions able urged by the appellants counsel that the determination of the Commissioners is contrary to principles recognised in some these authorities. Counsel Maintained that a payment for loss of a profit-making apparatus was necessarily a capital payment in the hands of the recipient who received it as compensation for such loss. This proposition is. I think, too vague and too wide. I find it impossible to reconcile with some of the decided case.' The Lord President then referred, among others, to the case of Short Brothers Ltd. v. Inland Revenue Commissioners. He continued : 'These two cases were referred to by Lord Macmillan in his speech in Van den Berghs Ltd. v. Clark the payment should therefore be treated as a capital payment. I have already given reasons for thinking that the structure of the business carried on by the appellants was in fact, as the nature of the business required, so designed as to absorb such shocks as the cancellation of single, albeit an important, agency contract.'

I will next make a reference to the leading judgment of Lord President Cooper in Flemings case. That was a case in which a contract had been canceled and a restrictive covenant had also been entered into. The Lord President said : 'It is conceded by the Inland Revenue that the Pound 590 and the Pounds 800' (being the values paid in respect of the restrictive covenants) are not revenue payments and I imagine that this concession would equally have been made even if the proportions allocated to those parts of the agreement had been far larger. It is against the 5,320 alone that the challenge is directed, and taking the agreement at its face value the Inland Revenue maintain that clause I specifically records simply the loss by a selling agency of one agency (out of eight which they held in 1948) and that such a loss is or must be treated as a normal trading risk. I can see no satisfactory answer to this contention unless we can impart a special meaning to clause I by reading along with it the rest of the agreement.' Lord Russell put the matter thus, 'It may be difficult to formulate a general principle by reference to which in all cases the correct decision will be arrived at since in each case the question comes to be one of circumstance and degree. When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipients profit-making apparatus, involving the serious dislocation of the normal commercial organisation and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilisation of a capital asset and is therefore a capital and not a revenue receipt.' Finally, Lord Keith concluded his judgment thus : 'I think accordingly that the sum of Pounds 5,320 must be regarded as compensation for loss of profits and not for loss of a profit-earning asset. This may seem a large sum for loss of profits to an agency terminable at will : but it may reflect the long period during which the agency had continued and a desire on the part of Imperial Chemical Industries Ltd. to act generously. Also reasonable notice would have been required to terminate the agency and there might have been contentious questions as to what notice was required. Compensation in lieu of notice would in my opinion quite clearly be a revenue receipt.

Accepting the law applicable as being that which may be derived from these cases, Mr. Monroe was, in effect, compelled to say either one of two things : namely, either (1) that the agency contract in this case was a capital asset, and, therefore, that the proceeds of sale of that asset must be capital, unless the business of the company involves trading or dealing in that kind of asset; or (2) that the agency contact here was so long-standing and so important to the company as to distinguish the present case on the facts or as a matter of degree from such cases as Kelsall Parsons and Fleming.

It is true that the facts show that Anglo-French held some eight agency and secretarial contracts and had done so for a considerable time with little variation. Nevertheless, the making of such contracts was part of the business of Anglo-French, and the cancellation of this one contract in no sense affected the 'profit-making apparatus' of the company which retained its offices and staff, etc., in Johannesburg exactly as before. In my judgment, Mr. Monroes first alternative proposition is really inconsistent with the cases. The taxpayers in Kelsall Parsons case and the Fleming case were not dealers in agency contracts.

Mr. Monroes second alternative answer is a question of fact and degree. As I have said, at the beginning of this judgment, I think that the Commissioners were fully entitled to find the conclusion of fact which they did.

I should add that the fact that the Pounds 20,000 was paid, not by the Kleinfontein company, but by a stranger to the agency contract, namely, the Philip Hill company, in judgment, is immaterial. It has been clearly established that a question of this sort must be determined by having regard to the nature of the payment in the recipients hands. I, therefore, think that Harman J. arrived at an entirely correct conclusion in this case. He said at end of his judgment. 'Apart from the holding of the shares, the secretaryship was worth little or nothing. It was only the appellants special position that enabled them to obtain this money. It was in fact a sum earned in the course of the companys trade, namely, the sale of shares, and, even though not part of the purchase price, was only earned because of the holding of the shares and by way of inducement to part with them. On this analysis, as it seems to me, this was money earned by the company in the course of its trade and therefore a trading receipt and must be charged to tax accordingly.'

I agree with that conclusion, and I think that this appeal fails and must be dismissed.

JENKINS L. J. I agree, and I have nothing I can usefully add.

BIRKETT L. J. I also am of the same opinion, and also have nothing to add.

Appeal dismissed.

Leave to appeal to the House of Lords.

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