JENKINS L.J. stated the facts and continued : I propose in the first instance to consider the question of tax liability on the footing that if there was any liability to tax at all the taxable receipt consisted of the value on July 27, 1953, of the shares transferred on that date to the appellants respectively (namely, Pounds 36,000 in each case), which accordingly constituted a receipt of the year 1953-1954; putting aside for later consideration the appellants alternative argument to the effect that if, contrary to their main contention, there was any liability to tax at all, the taxable receipt consisted of the value as at the date of the deeds of covenant (namely, December 30, 1945) of the benefits conferred on them respectively by those deeds, which would be a receipt of the year 1945-1946 and accordingly out of time for the purposes of assessment; and also the special contention put forward on behalf of Hewitt to the effect that the special contention put forward on behalf of Hewitt to the relevant office in his case was that of secretary which he ceased to hold in January, 1951, whereas the share were not transferred until July 27, 1953.
The statutory provisions relevant to the two appeals are to be found in section 156 of, and the Ninth Schedule to, the Income Tax Act, 1952. [His Lordship read the relevant parts of paragraph 1 of Schedule E as set out in section 156, and rule 1 of the Rules applicable to Schedule E, as set out in the Ninth Schedule, and continued :] These provisions do not materially differ from their predecessors in previous income tax legislation. It is clear that the appellants are taxable under Schedule E in respect of all profits from their respective offices or employments under the company. The question is whether the benefits they received in the shape of the value of the shares transferred to them respectively were profits from those offices or employments within the meaning of the Act.
We were referred, as was the judge, to many of the numerous authorities in which the courts, dealing with the particular facts of particular cases, have held benefits received by holders of offices or employments to be or not to be profits arising therefrom so as to attract or, as the case may be, escape liability to tax under Schedule E.
The following much quoted passages state the general principles to be applied :
In Herbert v. McQuade (the Clergy Sustentation Fund case) Henn Collins M.R. said : 'Now that judgment, whether or not the particular facts justified it, is certainly an affirmation of a principle of law that a payment may be liable to income tax although it is voluntary on the part of the persons who made it, and that the test is whether, from the standpoint of the person who receives it, it accrues to him in virtue of his office; if it does, not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it. That seems to me to be the test; and if we once get to this -that the money has come to, or accrued to, a person by virtue of his office - it seems to me that the liability to income tax is not negatived merely by reason of the fact that there was no legal obligation on the part of the persons with contributed the money to pay it.'
Stirling L.J. said : 'I think that a profit accrues by reason of an office when it comes to the holder of an office as such - in that capacity - and without the fulfillment of any further or other condition on his part; and what we have to determine is whether the sum in question does so come to the holder of this office.'
In Blakiston v. Cooper (the Easter offering case), Lord Loreburn L.C. said this : 'In my opinion, where a sum of money is given to an incumbent substantially in respect of his services as incumbent, it accrues to him by reason of his office. Here the sum of money was given in respect of those services. Had it been a gift of an exceptional kind, such as a testimonial, or a contribution for a specific purpose, as to provide for a holiday, or a subscription peculiarly due to the personal qualities of the particular clergyman, it might not have been a voluntary payment for services, but a mere present.'
In Seymour v. Reed (the cricketers benefit case) Lord Cave L.C. said, after referring to the relevant statutory provisions : 'These words and the corresponding expressions contained in the earlier statues (which were not materially different) have been the subject of judicial interpretation in case which have been cited to your Lordships; and it must now (I think) be taken as settled that they include all payments made to the holder of an office or employment as such, that is to say, by way of remuneration for his services, even though such payments may be voluntary, but that they do not include a mere gift or present (such as a testimonial) which is made to him on personal grounds and not by way of payment for his services. The question to be answered is, as Rowlatt J. put it : Is it in the end a personal gift or is it remuneration If the latter, it is subject to tax; if the former, it is not.'
I would also refer to the recent case in this court, Moorhouse v. Dooland, which may be said to be of the same order as the earlier cases above referred to, inasmuch as it concerned the liability to tax of the proceeds of collection on the ground which a Lancashire League professional cricketer was entitled to have made on his behalf by the terms of his contract with the club employing him and the rules of the league. All these cases, save Seymour v. Reed, went against the taxpayer on their particular facts.
I come next to Cowan v. Seymour, which is somewhat nearer the present case, in that it concerns a sum of money paid by the shareholders of a company to its secretary and liquidator, the company being in the final stages of liquidation, and the sum in question being the surplus available for distribution amongst the members. Atkin L.J. quoted the passages from Henn Collins M. R.s judgment in Herbert v. McQuade and Lord Loreburns speech in Blakiston v. Cooper to which I have already referred, and continued : 'So I should say the question here is whether if a sum of money is given to the secretary or liquidator substantially in respect of his services as secretary or liquidator, it accrues to him by reason of his office. The question therefore in this case in whether this payment was made to the appellant in respect of his services as secretary or liquidator.'
Younger L.J. said : 'And in the same connexion it is to be observed, as has already been pointed out by the Master of the Rolls, that this payment was not made by the natural paymaster, the company, under which the so-called office of profit was held and moreover it is, as I think, notwithstanding Mr. Edwardes Jones argument, clearly not a perquisite which might very naturally be paid by somebody else. That circumstance is, of course, not in any way conclusive, at least in connexion with an office still held, for which I would refer to the least in connexion with an office still held, for which I would refer to the observations in Herbert v. McQuade already read by Atkin L.J. But it may be a very relevant circumstances, and when it is remembered that this payment, if made by the company, the natural paymaster at the time when it was made, would have been ultra vires and illegal, and that the payment can only be justified as one by the individual contributories out of their own moneys, the circumstance lends further weight to the view that this was not a profit by reason of the office at all, but was really a gift by persons in the position of beneficiaries who had appreciated and it may be had benefited by the personal exertions of the holder of the office while he held it.'
In the result, the claim to tax on the sum provided by the shareholders was rejected. Great weight was attached to the fact that the office had ceased when the payment was made, and some to circumstance that the amount in question was provided by the shareholders individually and not by the company. 'the natural paymaster.' But the case does seem to me to show quite clearly that a benefit conferred on the holder of an office or employment for tax purpose although conferred by shareholders of the company and not by the company itself.
Cameron v. Prendergast provides authority for the proposition that a lump sum paid by a company to the holder of an office under the company in consideration of a promise on his part to serve the company in that office even for an unspecified period which might be a matter only of days is in the hands of the recipient a profit from his office and taxable accordingly.
Salmon v. Weight provides authority for the proposition that moneys worth, such as a right conferred by a company on a salaried director to subscribe at part for shares in the company of a market value greater than par, will if conferred in respect of the recipients office constitute a profit of the office for tax purposes.
If the present appeals fall to be judged simply by reference to the deeds of covenant, then in my judgment the terms of those deeds are fatal to the appellants. Under the deeds the appellants became entitled to receive from the two Hornby sons moneys worth in the shape of the shares to be transferred on their mothers death to the appellants respectively, and in each of the deeds this benefits was expressly stated ton be conferred 'in consideration of the covenantee continuing in his present engagement with Meccano Ltd. until the expiry of four years from the date hereof.'
As I have said, it is clear from Cowan v. Seymour that a benefit provided for the holder of an office or employment under a company may be a profit of that office or employment although provided by shareholders and not by the company itself, the 'natural paymaster.' An actual example of such a case is to be found in Patrick v. Burrows; and although where the character of the benefit is a matter of inference the circumstance that it was so provided may tend against the conclusion that it was in the nature of remuneration, that circumstance cannot displace that conclusion where the benefit is expressly described in a formal document as being in consideration of the recipient continuing to serve the company in the office or employment which he holds, which, as appears from Cameron v. Prendergast, stamps it unequivocally as remuneration.
The special commissioners found it possible to hold that even if the matter was to be decided by reference to the deeds alone nevertheless the shares were not remuneration provided for by the appellants in respect of their offices or employment with the company.
I find it impossible to accept that view.
Mr. Mustoe, for the appellants, contended that the whole history of the matter must be examined and the effect of the deeds must be considered in the light of the circumstances and events leading up to and surrounding their execution.
Mr. Bucher, for the Crown, very fairly admitted that the matter could not be determined by reference to the deeds alone, but he claimed that when all the surrounding circumstances were looked at the Crown must still be entitled to succeed.
Certain evidence adduced on behalf of the appellants was rejected by the special commissioners as inadmissible. This was evidence directed to explaining the reasons for the insertion in the deeds of the consideration moving from the appellants in the shape of their continuing in their 'present engagements' with the company for four years.
Mr. Bucher submitted that the special commissioners were right in rejecting this direct evidence of intention. Mr. Mustoe, while he did not go so far as to claim it was admissible for the purpose of nullifying the deed of covenant as merely fictitious or colourable documents, said (in effect) that it could be used to show that the consideration consisting of the appellants continuing their present engagements with the company was never as essential element in the transaction but was introduced, as it were, by a side-wind, not as a stipulation which the Hornby brothers had propounded or insisted on as a condition of their promise to transfer the share on their mothers death, but as an embellishment recommended to the appellants by there own solicitor because he considered that its inclusion would strengthen the appellants position in the event of the Hornby brothers being disposed to change their minds.
Once this circumstances is taken into consideration, then, according to Mr. Mustoes submission, the transaction reveals itself as being substantially a matter of gift and not a matter of remuneration : see per Lord Loreburn L.C. in Blakiston v. Cooper and Atkin L.J. in Cowan v. Seymour. This involves the assumption, in all probability well founded, that the Hornby brothers would transferred the shares whether the consideration moving from the appellants had been inserted in the deed of covenant or not, and for that matter would have done so if the appellants had been content simply to rely on their oral undertaking, their substantial motive being to make good Frank Hornbys testamentary shortcomings by according to the appellants the tangible recognition of their loyal and efficient service which Frank Hornby had been under a moral obligation to accord to them by his will.
Having regard to the principles stated by the House of Lords in Inland Revenue Commissioners v. Duke of Westminster, which was in a sense the converse of the present case, inasmuch as the attempt to go behind the deed was there made by the Crown, I think Mr. Butcher is well justified in his support of the commissioners view on this point. But Mr. Bucher goes on to submit that this evidence if admitted affords no assistance to the appellants, and here again I find myself in agreement with him.
If in response to the appellants representation Frank Hornby had in his lifetime transferred to each of them 8,000 shares in the company, it may be that such shares could, in all the circumstances of the case, and on the principles laid down by the authorities to which I have referred, properly have been held to have been given by Frank Hornby and received by the appellants as a present made in token of their and successful business association with him, and not as remuneration.
It Frank Hornby had given the appellants substantial holdings of shares in the company by his will, as in effect he had promised to do, it seems clear that such shares would have come to the appellants purely by an act of testamentary bounty on the part of Frank Hornby wholly removed from the sphere of remuneration.
The result would, I think, in all probability have been the same if the appellants had rested content with the Hornby brothers oral and purely voluntary promise to transfer to each of them 8,000 shares in the company on Mrs. Hornbys death, and the shares had been transferred simply by way of performance of that promise. If the transaction had taken this form, then I think there would, on the facts found, have been strong support for the view that the Hornby brothers were by a pure act of bounty making good their fathers omission to leave the appellants by will the shares which he was under a moral obligation to leave them having regard to the part they had taken in the building up of the companys business, and to his promise, or what the appellants took as amounting to a promise by him, to provide them with substantial holding of shares in this way. It would then, as I think, hardly have been possible to maintain that the share were given by the Hornby brothers or received by the appellant as remuneration and not as a mere present.
But the appellants did not rest content with the simple promise of the Hornby brothers, and in the result the deed of covenant were brought into existence. As I have already indicated, I think these deeds are on the face of then fatal to the appellants case; and even if all questions of admissibility are resolved in their favour I can find nothing in the extrinsic evidence to displace that conclusion.
The evidence, admissible or inadmissible, directed to explaining how it was that the consideration moving from the appellants in the shape of their continuing their 'present engagements' with the company came to be included in the deeds of covenant as executed is thus summarized in paragraph 10 of the case stated with respect to Bearsley.
[His Lordship read paragraph 10 of the case, and continued :] Treating the whole of this evidence as admissible, I cannot see that it comes to any more than this :
The Hornby brothers were ready and willing, in the circumstances stated at length above, to transfer the shares to the appellants on Mrs. Hornbys death purely as a matter of bounty without any consideration or condition with respect to the appellants continuing in the service of the company. The appellants on Mr. Dawsons advice conceived that it would be more advantageous to them and put them in a stronger position, if instead of their taking their shares purely as a gift, and relying simply on the Hornby brothers voluntary promise to transfer them on Mrs. Hornbys death, the transaction was carried out as a transaction for valuable consideration under which the Hornby brothers would transfer the shares to them in consideration of their continuing their 'present engagements' with the company. Accordingly, Mr. Dawson prepared his draft deed of covenant in this form, the submission of which to the Hornby brothers solicitors was tantamount to a request that the transaction should be carried out in this way. The approval by those solicitors of the draft submitted to them with the alterations to which I have referred, the acceptance of such alterations by Mr. Dawson, and the execution by the Hornby brothers of the deeds of covenant in the form of the draft as altered, signified that the Hornby brothers acceded to the appellants request, and bound the Hornby brothers to carry out the transaction on the terms stated in the deeds as executed. There is no reason to suppose that the Hornby brothers would not have been quite content to give purely voluntary covenants, or that the inclusion of the consideration moving from the appellants in the deed as executed was a matter to which they attached any importance. It can, I think, fairly be assumed that they regarded themselves simply as carrying out moral obligation they felt themselves to be under. So far as the appellants were concerned, they no doubt regarded the deeds simply as securing to them on Mrs. Hornbys death the shares which they conceived to be morally their due. The fact remain that under Mr. Dawsons advice the appellants chose to take the shares not simply as a gift but on the terms of the deeds, based as they were on the draft propounded by Mr. Dawson, The appellants (in effect) asked that the benefit should taken that form, and the Hornby brothers gave it to them in that form. Given in that form, and accepted in that form, it seems to me that by the plain terms of the deeds it must necessarily be held to have been given to the appellants, and accepted by them, in their capacity of managing director in the case of Bearsley, and of director and secretary in the case of Hewitt, and in consideration of services to be rendered by them to the company in those respective capacities. To argue, as did Mr. Mustoe, that the transaction was substantially a matter of bounty in which the consideration expressed in the deeds played an insignificant and indeed nominal part seems to be to confound the motive for conferring the benefit with the character of the benefit conferred.
I do not think the mistake as to the effect of the restrictive covenants in the service agreements which is said to have led to the selection of four years as the period for which the appellants were to continue in their 'present engagements' with the company can affect the result. I confess I am not clear as to the precise nature of the mistake. The position was that at the date of the deeds the service agreements had only about nine months to run, and the restrictive covenants were in the cases of Bearsley and Jones for the period for three years from their respectively ceasing to be directors of the company, and in the case of Hewitt for the period of three years from his ceasing to be secretary. The suggestion, apparently, is that the service agreements were mistakenly regarded as continuing until the expiration of the periods of restriction imposed by the restrictive covenants. That would make approximately three years from the date of the deeds of covenants. It is to be noted, however, that no such mistake can have led to the fixing of six months as the period of continuance in his 'present engagement' stipulated in the deeds of covenant in favour of Jones, which was no doubt attributable to the state of his health. I think all one can do in the circumstances is to take the consideration to be as expressed in the deeds as they stand. The 'mistake', whatever its exact form, only had the effect of making the consideration moving from the covenantees more valuable in the case of the appellants than the parties may have thought.
Nor, in my opinion, is the result altered by the circumstance that in the end the share were in fact transferred on July 27, 1951, when Mrs. Hornby was still alive. The transfer were, I think, clearly made in pursuance of and in satisfaction of the Hornby brothers obligation under the deeds of covenant and not as a new departure.
Although no new service agreements were entered into after the expiration of the ten-year agreement on September 30, 1946, I think that having regard to the minutes of the board meeting of October 8 - 11, 1946, the appellants must be taken to have duly continued their 'present engagements' with the company for the stipulated period of four years from the date of the deeds of covenant.
For these reasons I am of opinion that the judge came to a right conclusion on the main question involved in the appeals.
As to the alternative contention to the effect that the proper subject of assessment consisted of the value of the rights acquired by the appellants under the deeds of covenant in December, 1945, which constituted income of the appellants for the financial year 1945-1946; on the footing that the appellants fail in their main contention the position was that by the deeds of covenant the Hornby brothers covenanted that, in consideration of the appellants continuing their respective engagements with the company for four years from the date of the deeds, the Hornby brothers would transfer to them on the death of Mrs. Hornby the specified number of shares in the company by way of remuneration for the services rendered by them to the company during that period. The time at which the appellants were to receive this additional remuneration for their services to the company for this further period was thus fixed by the terms of the bargain as the death of Mrs. Hornby, or, to be strictly accurate, the expiration of three months from her death. In fact, the appellant duly completed their four years further service in Mrs. Hornbys lifetime, and the shares were transferred to them shortly before he death, although the Hornby brothers would have been entitled to withhold such transfer until three moth after the happening of that event. I see no reason for treating the stipulated remuneration, that is, the shares, as received or receivable on any earlier date than that on which the shares were actually transferred, which, as I have said, was in fact earlier than the date on which the Hornby brothers were obliged under the deeds of covenant to transfer the shares to the appellants. In Salmon v. Weight the benefit held to constitute remuneration consisted on an immediate right to subscribe at par for shares worth in the market substantially more than par. In Tait v. Smith it was held that the taxpayer was wrongly assessed for the year 1949-1950 in respect of the surrender value of an endowment police on his life which, under the terms of his service he had become entitled to have immediately transferred to him in 1946. I do not think that either of these cases, on which Mr. Mustoe relied, supports his contention that in the present case the taxable profit consisted of the value of the rights conferred by the deeds of covenant at the date of those deeds, and not of the value of the shares at the date when they were transferred. On this point I need say nothing further beyond expressing my complete agreement with the reasoning and conclusions of the judge.
A further point taken below to the effect that the value of the shares should be spread for tax purposes over the four years during which the appellants were respectively to continue their engagements with the company was, as I think rightly, rejected by the judge, and Mr. Mustoe has not pursued it in this court.
As to the special point taken in Hewitts case to the effect that as Hewitt ceased to hold the office of secretary to the company in January, 1951, whereas the shares were not transferred until July 27, 1953 : on this point, which does not appear to have been dealt with by the judge, I see no reason to differ from the special commissioners conclusion to the effect that the engagement referred to in the deeds of covenant with him was not exclusively his engagement as secretary. He continued to hold of the requisite period of for years the combined offices of director and secretary which he held at date of deeds of convent with him, and after he ceased to hold office as secretary he continued in office as a director of the company and was still in that office at the date when the shares were transferred. Accordingly, I do not think Hewitt can escape liability to tax on the ground that the date of the transfer he had ceased to hold any relevant office under the company.
Finally, I think it is plain that the special commissioners decision in favour of the appellants was a decision on a mixed question of fact and law and, therefore, open to appeal. This is sufficiently demonstrated by the large number of cases in which appeals on similar questions have been entertained.
It is not without regret that I find myself constrained to reach a conclusion adverse to the appellants, as it may well be that if the transaction had been differently carried out the appellants could have received the same benefits free of the heavy inroads which the law, as I understand it, now requires to be made upon them for tax. But the effect of the deeds appears to me be inescapable.
For my part, I must accordingly hold that the judge was right in the conclusion to which he came, and that the appeals fail and should be dismissed. But a different conclusion has been reached by both my brethren, and the result will therefore be as indicated in the judgment they are about to deliver.
MORRIS L.J. The appellant, Bearsley (with whose appeal I propose first to deal), was assessed under Schedule E for the year 1953-1954 because he was managing director of Meccano Ltd. Having that office or employment he was chargeable 'in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment.' When on July 27, 1953, the brothers Roland and Douglas Hornby transferred shares in Meccano Ltd. worth Pounds 36,000 to Bearsley, did Bearsley, become chargeable to income tax for the year 1953-1954 under Schedule E on Pounds 36,000 so as to make him assessable for that year in the sum of Pounds 50,465 That is the question raised in his appeal. It is not suggested that Bearsley received these shares worth Pounds 36,000 as salary for his services as managing director : nor as fees : nor as wages. The Crown do not invoke the word 'perquisites.' The Crown case is founded upon the words 'profits whatsoever therefrom for the year of assessment.' It is said, therefore, that the result of the transfer of shares from the two brothers was that Bearsley received Pounds 36,000 from his office as managing director for the years 1953-1954.
The word 'therefrom' must be construed in its context. A profit accruing by reason of holding an office or employment may be a profit 'therefrom'. This may be so even though some payment which is received is not made by the employer of the recipient, and even though the payment is made voluntarily. The profit need not necessarily be in the form of a cash payment. The conception which is introduced by the word 'therefrom' is that some taxable remuneration may accrue to a person by reason of his having or exercising an office or employment of profit. The reference is to what is received by the holder of an office or employment in that capacity : to holder of the holder of an office or employment as such. This was pointed out by Lord Cave in his speech in Seymour v. Reed. said : 'These words and the corresponding expressions contained in the earlier statutes (which were not materially different) have been the subject of judicial interpretation in cases which have been cited to your Lordships; and it must now (I think) be taken as settled that they include all payments, made to the holder of an office or employment as such, that is to say, by way of remuneration for his services, even though such payments may be voluntary, but that they do not include a mere gift or present (such as a testimonial) which is made to him on personal grounds and not by way of payment for his services. The question to be answered is, as Rowlatt J. put it : Is it in the end a personal gift or is it remuneration If the latter, it is subject to the tax; if the former, it is not.'
In his speech in the same case, Lord Phillimore, having referred to some of the authorities, said : 'My Lords, I do not feel compelled by any of these authorities to hold that an employer cannot make a solitary gift to his employee without rendering the gift liable to taxation under Schedule E. Nor do I think it matters that the gift is made during the period of service and not after its termination, or that it is made in respect of good, faithful and valuable service.'
It does not seem to me that the words and meaning of the deeds of covenant can be affected or altered by any evidence as to how the wording of the deeds of covenant came about. It is not submitted on behalf of the appellants that the consideration stated in the deeds should be regarded as either fictitious or illusory. I agree with Danckwerts J. that evidence is not admissible to contradict the plain terms of the deeds by attempting to show that the intentions of the parties were to give a meaning to the provisions of the deeds contrary to the words which the deeds plainly contain.
If the evidence which the commissioners regarded as admissible was received and regarded only to the extent that it threw light on the question as to whether the appellants received remuneration for services, then I consider that there was no objection to it.
But I consider that the case must be approached on the basis that the deeds of covenant fully mean what they state.
When, therefore, Bearsley received shares worth Pounds 36,000 in July, 1953, while he was still managing director, did he receive them as a profit from his office Was he receiving remuneration for his services or was he receiving a personal gift
The deeds of covenant show that the Hornby brothers had two desires in December, 1945. First, they wanted to show appreciation of Bearsleys past services in the employment of the company. Those service extended in the first place over the period of twelve years from 1907 to 1919. That was before Bearsley became a director. From 1919 Bearsley was a director and from 1936 he was a managing director. Secondly, the desire was that Bearsley would continue his then existing engagement with the company for four years from December 30, 1945. Bearsley could only do so if the company wanted him to do so. The company were not parties to the deed of covenant. If Bearsley continued to hold office as managing director after October 1, 1946 (when his ten-year contract was due to expire) then he would be paid by the company for his services in that office : he would be paid such sums (and they were considerable) as would be arranged by him with the company.
The continuing in office was made the consideration for a legally enforceable covenant to transfer the shares. It need not now be considered what would have been the position if Bearsley had been willing to continue to serve the company but the company had not required his services. In fact, he continued to serve and he was still serving when he received the shares. He received them before he was actually entitled to receive them under the covenant, for he received them while Mrs. Clara Hornby was still alive.
Once Bearsley had continued to serve the company for the four-year period he became entitled to the shares on the death of Mrs. Clara Hornby. After serving for the four-year period he might then have retired - but he would still have been entitled to the shares. His receipt of the shares in July, 1953, had nothing to do with his employment as managing director at that time. If the shares had been transferred strictly in accordance with the deeds the transfer would not have been until within three months after October, 1953, when Mrs. Clara Hornby died. But the right to the shares would then have arisen whether Bearsley had already retired or not. If he had already retired from the company he would not have been assessable under Schedule E. He was, however, still in office, and he received what was worth Pounds 36,000. he certainly did not receive the shares in respect of any services rendered during that year. Nor did he ereceived them in respect of any services rendered during that year. Nor did he receive them in respect of any services rendered since the end of the four-year period after the deeds of covenant. He would not have received them but for what he had done in the past, that is, (a) in all the years before 1945, and (b) in the four years after December 30, 1945. But the question which arises is whether he received them as remuneration or as a personal gift. In one sense Bearsley received the shares by reason of his office. Had he not held the office he would not have had them. But them merely shows that he would not have had the shares (either as remuneration or as a gift) if he had not given many years of service to the company down to December 30, 1949. The mere fact that the arrangement between the Hornby brothers and Bearsley resulted in the latter having a legally enforceable right does not, in my judgment, necessarily show that Bearsley was to receive remuneration so as to be chargeable under Schedule E. The Hornby brother made it a condition of their promise that Bearsley would go on serving the company for four years. They did not exact from him a promise that he would continue to serve the company. I cannot think that if Bearsley had decided to retire from the company within the period of four years from December 30, 1945, he would have been in breach of contract vis-a-vis the brothers Hornby. It was for him and the company to decide whether he should continue. Bearsley could not, therefore, contract with the Hornby brothers in positive terms that he would serve the company. But the Hornby brothers in effect said : 'Because of your good work in the past we will at some uncertain future date transfer to you some shares that will come to us provided that you go on serving the company for four years.' It does not seem to me that the promise that they made had the attributes of remuneration, or that it lacks the features of a personal gift. It was a personal gift which was to be made provided that further remuneration service was for a period rendered to a limited company that would pay full remuneration for the value of such service.
The shares were not, therefore, to be transferred as payment for services to be rendered in the four-year period. Indeed, the deeds recite that one part of the desire of the covenantors was to mark their appreciation of Bearsleys past services.
It may be difficult to describe in precisely accurate language the features of payments or benefits received which must attract tax and the features of those which will not. The general distinction as outlined by Lord Cave is between payments made by way of remuneration for services and payments made by way of personal gifts. Yet some payments may seem to have a blend of both these elements. The tip given to the taxi-driver is in one sense a gift : a particular tip may be somewhat above what would normally be expected by the taxi-driver and may reflect a bountiful impulse. Yet all the tips received, including the specially generous one, must be regarded as being by way of remuneration for services. But on the other hand, it seems to me that a payment which has the attributes of being a personal gift does not necessarily lose those attributes merely because the gift is in recognition of services, or because the donor agrees to bind himself so as to be compellable at law to make the payment. So it seems to me that the fact that the position in the year 1945 was that Bearsley would only gain his benefit if to his past services he added that of staying the course for four more years does not cause his benefit, when received, to be remuneration for services rather than a gift.
The present case differs entirely from Cameron v. Prendergast. In that case a director wished to resign, and a letter was written to him asking him not to do so, and he was told that 'in consideration of your acceding to this request, the company will, within 21 days or by such instalments as you will accept, pay you the sum of Pounds 45,000 os. od. and will embody their undertaking so to do in a formal deed reciting this letter.' The director did not send in his resignation, and two weeks later the company executed a deed which annexed the letter and provided that for the consideration referred to in the letter the company agreed to pay the director the sum of Pounds 35,000 on the date of the deed and a further Pounds 10,000 on March 31 following. It was held that the sum received arose from the office as director and was properly assessable under Schedule E. The sum of Pounds 45,000 was the remuneration paid by the company to the director for his services as director. Lord Russell of Killowen put the matter thus : 'The question is whether the sum of 45,000 which was paid to Mr. Cameron was a profit from his directorship. I feel no doubt, upon the facts of this case, that it was. It was paid to him in his capacity of a director, and as a consideration for his agreeing not to cease giving his services as a director to the company, an agreement which, as Luxmoore, L.J. pointed out, necessarily involves an agreement to continue to render those services. Money paid as a consideration for such a bargain appears to me clearly a profit from his directorship.'
Lord Romer said : 'Nor does it matter that the sum is so large as to present the appearance of a capital rather than an income payment. If a company chooses to pay a directors remuneration in a lump sum it can, no doubt, lawfully do so. But the sum nevertheless represents income whatever its amount, and will be taxable as such. Remuneration which, if paid by instalments over a number of years, would be income, is income though paid once and for all in a lump sum; just as much as the capital consideration for a sale (say) of land is capital even though payable by instalments spread over a number of years.'
The fact that a payment which can properly be regarded as a gift may involve a measure of recognition of faithful service was pointed out by Lord Phillimore in the above cited passage from Seymour v. Reed. The cricketer in that case had given good service; he had earned well of his supporters; he had given pleasure to lovers of the game; he had deserved well of the club whose fortunes he had advanced. But the gate money at his benefit match was held to be a personal gift and not a profit or perquisite arising from his employment. It was his little 'nest egg,' as Lord Dunedin called it in his speech, in the course of which he recalled Lord Macnaghtens reminder that income tax is a tax upon income.
The circumstance that a large payment is to be made by someone other than an employer may be a considerable indication, though by no means a conclusive one, that the payment is not by way of remuneration. Remuneration is, as a rule, something than an employer has arranged or contemplated or at least knows about. This is so even though payments may come other than the from employer and may depend upon the liberality of others. In Moorhouse v. Dooland the contract of employment laid it down in great detail when the cricketer could expect or receive the contents of collecting boxes sent round the cricket field.
Remuneration for services is generally effected by systematic and recurring payments, though this is certainly not always so.
Remuneration has further the element of reward or payment for some specific services rendered.
Where some payment, and particularly some non-recurring payment, is received from someone other than an employer it will probably only have the attributes of remuneration in those classes of cases where it is reasonable to expect that remuneration would come other than from the pocket of an employer. Thus, as pointed out above, the cricketer in Moorhouse v. Dooland arranged with his employers that for his services he would receive certain amounts in addition to what they paid him direct : those amounts would accrue to him when his performances were sparkling : he could expect the payments and he was entitled to them. The taxi driver in Calvert v. Wainwright was in the employment of a limited company. He received a definite wage, and tips were no part of the bargain. But he was clearly assessable in respect of the tips which he received from passengers in the capacity of taxi driver. A tip is in the ordinary way given as a remuneration for services rendered. Similarly, a waiter may expect to receive, and will usually receive, gratuities from those whom he serves : the waiter receives the gratuities in respect of his services : he receives them by way of remuneration for his services even though the payments are voluntary and are not made by the employer of the waiter.
In Blakiston v. Cooper the voluntary Easter offerings given to the incumbent of a benefice were assessable. Lord Loreburn L.C. said : 'In my opinion, where a sum of money is given to an incumbent substantially in respect of his services as incumbent, it accrues to him by reason of his office. Here the sum of money was given in respect of those services. Had it been a gift of an exceptional kind, such as a testimonial, or a contribution for a specific purpose, as to provide for a holiday, or a subscription peculiarly due to the personal qualities of the particular clergyman, it might not have been a voluntary payment for services, but a mere present. In this case, however, there was a continuity of annual payments apart from any special occasion or purpose, and the ground of the call for subscriptions was one common to all clergymen with insufficient stipends, urged by the bishop on behalf of all alike.' It was pointed out by Lord Ashbourne that the offerings had been made for several years to the appellant as the vicar of East Grinstead and were made in response to a systematic appeal initiated by the bishop and supported by the churchwardens to induce collections to eke out slender stipends. In all the circumstances it was clear that the offerings were received by the vicar as vicar and that they formed part of the profits accruing by reason of his office.
In the passage which I have cited Lord Loreburn pointed out that where a sum of money is given to an incumbent substantially in respect of his services as incumbent it accrues to him by reason of his office. Where this is the case it matters not that the payment made if voluntary. If from the point of view of the recipient the money is received 'in respect of services,' or, as Lord Cave put it in the later case of Seymour v. Reed 'by way of remuneration for his services,' then the receipt is, I think, a profit from the office held; or in the language that applied in Cowan v. Seymour, it would be a profit 'accruing by reason of' the office held. A profit may accrue by reason of an office when it comes to the holder of an office as such. Payments that come to the holder of an office as such are payments which from the recipients point of view have the features of remuneration. The Easter offerings for the incumbent in Blakiston v. Cooper were given to the incumbent as such and were given to supplement income. In Herbert v. McQuade a beneficed clergyman received for several years an annual grant from a body incorporated with the object of providing adequate remuneration for beneficed clergy : he received the annual sums by virtue of his office so that his remuneration in that office should be augmented. In those cases there was also what Lord Phillimore in Seymour v. Reed described as' an element of periodicity.'
In contrast to those case there might be cases (see the judgment of Younger L.J. in Cowan v. Seymour) where a payment is made to someone by way of a gratuity on ceasing to hold an office - or a gift after someone had left an office : or there might be a gift by way of 'testimonial' to someone still holding an office (see speech of Lord Loreburn in Blakiston v. Cooper : or there might be personal gifts to the of an office as marks of esteem and respect (see speech of Lord Ashbourne in the same case) : or there might be 'a donation, honoris causa' (see judgment of Lord Coleridge C.J. in Turner v. Cuxon).
In the present case the transactions of the transfers of the shares seem to me to lack the elements of remuneration. Bearsley had been paid and was paid for his services by the company that employed him. It is important also to remember that in October, 1946, Bearsleys remuneration was revised. The directors took note of the fact that his agreement had expired and of the fact that owing to the illness of Jones additional duties were devolving upon Bearsley, and of the fact that no increase in the salary of any director had been made since 1936. There was no suggestion of paying heed to any expectation that Bearsley might have of receiving shares. Bearsleys salary was raised : so also was his rate of commission on the net profits of the company. His work was not of a nature such that he would ever expect to look to any other source of remuneration than the company. From no other source could there be commissions and there were no gratuities. The shares were not measured in number so as to be equated to the worth of certain services rendered. It is plain that the shares would never have been transferred but for the fact that Bearsley had rendered years of valuable service. That service had helped to make the shares of Frank Hornby valuable. That circumstance might have led Frank Hornby to make some bequest of shares to Bearsley. But when the brothers Hornby agreed in 1945 that they would in due course make over to Bearsley some part of the capital assets which later would be theirs, the arrangement would not in my judgment constitute remunerating Bearsley but was rather the making of a gift to him.
In their personal capacities and from their personal possessions and actuated by their personal motives of doing what they thought that their father might have done by his will, the brothers were willing to make a gift provided that Bearsley served the company for four years more. The gift might have accrued to Bearsley after he had retired and would in any event accrue at a time when a testimonial for a lifetime of faithful service would not be inapposite.
The fact that the brothers entered into deeds of covenant does not by itself negative the view that the transactions were by way of gift. Donors are frequently willing to deny themselves the opportunity of changing their minds about their intended gifts. I agree with the judge that the acquisition of the shares was 'linked up with' the services of Bearsley as an officer of the company. Bearsley had served in the past and was not to get his shares unless he served the company for four years from December, 1945. In one limited sense Bearsley was to receive his shares by reason of his - for if he had not served and held office in Meccano Ltd. he would never have had the shares. But I do not think that it follows from this that the shares were profits from the office.
In my judgment the shares were not a profit from the office of managing director because they were not received by way of remuneration for services rendered as managing director. They were received while Bearsley was managing director, but they represented an expression of gratitude or a testimonial for what he had done, including what he had done before ever he became a director or managing director. Once the condition for the receipt of the shares was satisfied, then the shares were to be received by Bearsley whether he continued in office or not. The mere fact that when he received the shares he was still in office cannot by itself convert the receipt of the shares into a receipt as remuneration for services unless the receipt otherwise possessed that quality or attribute. The kind of gift which Lord Phillimore envisaged as being free from liability to tax even though made by an employer to an employee, and even though made in respect of faithful service, does not lose its immunity because made while the employee still remains in service. Accordingly, the fact that someone who receives a benefit is the holder of an office does not by itself prove that what he received was a profit from the office. That has to be decided by considering on the evidence whether what was received was received as remuneration for the services rendered in the office.
If contrary to the view which I have formed the shares which were transferred must be regarded as remuneration to Bearsley, then, as the deeds show, the remuneration (if such it was) was in respect of his services (a) in the years 1907 to 1919, (b) in the years from 1919 to 1936 during which he was a director, (c) in the years from 1936 to December 30, 1945, when he was managing director, (d) in the four years from December 30, 1945, to December 30, 1949, during which he continued as managing director. I find it difficult to see why the entire remuneration, if such it was, should be regarded as being a profit 'from' his office of managing director.
On the view which I have formed the same general considerations apply to Hewitts case as apply to Bearsleys case. The shares transferred to Hewitt were by way of gift or testimonial and not by way of remuneration. He was secretary from 1913 to 1951; he was a director from 1932 to October, 1953. He was assessed for the year 1953-54 because he was a director. The shares which he received in July, 1953, were partly in recognition of his work as secretary and partly in recognition of his work as a director. In my judgment they did not, when received, constitute a profit from his office as director for the year 1953-54.
For these reasons it does not seem to me that the decision of the special commissioners was founded upon a misconception of the law or proceeded upon a view of the facts which could not reasonably be entertained. I consider, therefore, that the appellants were not assessable in respect of the value of the share which they received, and I would allow the appeals.
SELLERS L.J. In the tax period 1953-54 the appellant Hewitt was a director of Meccano Ltd. until October, 1953, when he resigned on account of ill health. He had ceased to be secretary of the company in January, 1951. The appellant Bearsley in the same tax period was managing director of the company.
On July 27, 1953, the two appellants received 8,000 shares each in Meccano Ltd. on two transfers to each of them of 4,000 shares each from Roland and Douglas Hornby. The value to each of the appellants of the transferred shares was Pounds 36,000, and the Crown included in each case these sums in an assessment to income-tax, Schedule E, making a total assessment of Pounds 39,022 in the case of Hewitt and Pounds 50,465 in the case of Bearsley. There is no indication that in the financial year under review, or indeed in any immediately preceding year, either of the appellants rendered any abnormal or unusual services to the company meriting such enhanced remuneration. On the contrary, Hewitt as a director only and in ill-health would apparently have been much lees active than in any year during his long tenure of the secretaryship on relatively modest remuneration.
On the face of things it would seem unreasonable and against good sense that shares in the hands of the Hornby brothers, which were part of large holdings which were not subject to income tax except in respect of the dividends paid thereon, should cease to be capital and become income of the recipients by the transfer to the two appellants, who from their long association with and their devotion to the company were well qualified to have some substantial stake and standing as shareholders of the company. It created a more equitable distribution of the share capital.
The special commissioners, who had heard substantially the same arguments as have been advanced before us on behalf of the Crown (and which appear to have been advanced similarly before Danckwerts J.) held clearly that the value of the shares was not income from the office or employment of either of the appellants.
Although this decision cannot be treated as if it were a finding of a jury, in so far it embraces a view of the facts it is of real importance. It must, however, be regarded as a decision of mixed law and fact and therefore open to review.
The charging power relied on by the Crown in contained in rule of the Ninth Schedule of the Income Tax Act, 1952, dealing with the rules applicable to Schedule E.
The Crown do not allege that the Pounds 36,000 was in either case a salary, a fee, a wage or a perquisite, but they say it was a profit from the respective offices or employments of the appellants.
The fundamental question is in each case, was the Pounds 36,000 in share value transferred to each appellant a gift or a profit from his position with the Meccano company Each had an office with the company. Was this windfall a profit 'therefrom' ?
At the outset it was intended to be a gift. It was not prompted by and was not in respect of any special services rendered to the donors. The transactions were inspired by high motives and with the intention of fulfilling moral obligations. The transactions could have been carried out in accordance with the intention of the Hornby brothers without any documents at all except the transfer forms, and there is no real reason to think they would not have been fulfilled. There was no need to introduce anything of a business character into them. In all the circumstances, so large a sum in value, and a transfer of shares in the company, indicate bounty and generosity rather than remuneration in respect of the appellants respective employments. (The facts are to be contrasted with those in Salmon v. Weight, where clearly tax liability arose.)
These matters need not be stressed. Had it not been for the deeds Danckwerts J. would have found in favour of the appellants and would have been satisfied that the shares in question were gifts. Without the deeds I do not feel any doubt that that would have been the right view to take.
The judgment continues as follows : 'But the transaction was changed. It was conceived that it was desirable to introduce the element of consideration in order to make the promises legally enforceable, and the consideration which was selected was a promise by Bearsley and Hewitt to continue serving in their offices with the company for four years from the date of the deeds of covenant. In this way, the acquisition of the shares under the terms of the deeds irretrievably was linked up with the services of the taxpayers as officers of the company. It 'seems to me to be impossible to deny that under the obligations created by the deed the shares were received by the taxpayers by reason of their offices, and, therefore, as profits of these offices.'
Jenkins L.J.s judgment has taken from one of the deeds the recitals and clause 1, and I do not repeat those extracts, but I would read in addition only clause 3 : 'If the covenantee shall die before he had become registered as the holder of the said four thousand shares then his legal personal representative shall be entitled to the benefit of the covenants and agreements hereinbefore contained.' The company was not a party to the deeds. The continuation in the employment was, therefore, not in the hands of the appellants alone, and I do not read the deeds as containing a promise by the covenantee in each case to remain four years in his existing engagement with Meccano Ltd. It would seem that if four further years of service were not fulfilled the consideration would have failed. There was, however, an express covenant by the Hornby brothers to transfer and assign the shares within three months of the death of Mrs. Clara Hornby, and as she was 93 when she died in October, 1953, it might have happened that the three months would have expired before the four years had run.
There is no need to seek to solve complications which might have arisen in that event.
Hewitts written contract as secretary dated April 1, 1937, and Bearsleys written contract as managing director dated February 15, 1937, expired on September 30, 1946, but both appellants were retained in their respective offices at enhanced remuneration by minutes of the directors in meetings held on October 8 and 9, 1946.
No provision seems to have been made for their duration, and both employments would appear to have been terminable by reasonable notice. As far as the issues arising on these appeals are concerned, I see no difference between the cases of the two appellants.
In my opinion, the effect of each deed as drawn is that the service of four years as stipulated was a condition to be fulfilled before the Hornby brothers could be called on as a matter of law or legal obligation to transfer the shares within the specified date, that is, within three months after the death of Mrs. Clara Hornby, their mother. The fact that the transfer date was expedited has, as I see it, no effect on the questions involved in this appeal.
In this way the transfer of the shares is 'linked up' with the respective offices, but the question is whether that necessarily or on a reasonable view involves that the transfer was a payment of remuneration for services rendered to the company or a profit of the employment. I would not regard the transfer as having those attributes or of such a character.
The effect of the deed was, as I appreciate it, to make the transfer contingent on the appellants remaining four years with the company, but it imposed no duty or obligation on them to serve the company. Once the condition of four years service had been fulfilled, as it in fact was by the end of 1949, the appellants became entitled to the shares whether they were in office, or in retirement, or dead, as clause 3 of the deed makes the benefits accrue to the covenantees estate in case of death before completed transfer. The two appellants were, in fact, in office with the company at the time of the receipt of the shares, but that was an irrelevant circumstance in no way affecting the transfer. Jones had died, and the transfer was to his executors. Hewitt would have been in retirement if the transfer had been three months after Mrs. Hornbys death and had not been advanced.
I would hazard this illustration, realizing the pitfalls in so doing, but in an endeavour to reveal an essential feature of the case. If a father promised his son 10,000 shares in the family company, from his own holdings, if the son would remain four years with the company at normal and proper remuneration for his work with it, and the condition was fulfilled and the shares transferred, it would not, in my view, make the value of the shares remuneration or profit of the sons employment in the year in which the transfer took place, or at all. There would be a 'link' with the business and the recipients employment, but the character, nature and quality of the transaction, as I see it, would be the same, or substantially so, as if the father had made the same offer of shares to the son and fulfilled it on the basis that the son would not marry for four years. The contingency would be different, but the transfer would be a gift in each case.
The special commissioners have taken the view that such link as there was with the office or employment was not sufficient to make the transfer either remuneration or profit therefrom. In my judgment, that was not a wrong view to take.
Such a payment (treating it as Pounds 36,000 in money) cannot be related to any express or implied term of the appellants contracts of employment or of their directorships, or as any 'incident' of that class of employment. Nothing of the kind was contemplated as a means of supplementing the remuneration which the company was from time to time agreeing to pay for the services of these two gentlemen.
I have read beforehand the judgment of Jenkins L.J., who has reviewed the authorities with such clarity and completeness that I have relied on the many extracts without repeating them or adding to them in this judgment. I would agree with Danckwerts J. that none of the cases cited is conclusive. It is, I feel, hardly necessary for me to add that I have reached my decision with great deference, as it is not in accord with the conclusions of Jenkins L.J., and the trial judge.
I will deal briefly with the other issues raised before us, on which I am in agreement with Jenkins L.J., and with the judge. I do not think the evidence with regard to how the deeds came to be drawn up in the terms they were is admissible any further than the commissioners were prepared to allow it, but even if it can be regarded I doubt if it makes any effective difference.
It is not, in my view, in harmony with the tax provisions that if the transactions fell within the terms of Schedule E the income was the value of the rights acquired by the appellants when the deeds were entered into. I agree with judge when he says : 'If the conclusion is correct that the transfers of the shares were profits of the taxpayers offices and remuneration for the services to be performed by them, they were paid for those services when the shares were transferred to them (though the shares were not immediately realized), and assessable accordingly.'
As I think that conclusion is not correct, I would allow the appeals and restore the decision of the special commissioners.
Leave to appeal to the House of Lords.
Solicitors : Lightbounds, Jones & Crean for Owen, Dawson & Wynn-Evans, Liverpool; Solicitor of Inland Revenue.