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inland Revenue Commissioners Vs. Pollock and Peel Ltd. (In Liquidation). - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1958]34ITR379(Cal)
Appellantinland Revenue Commissioners
RespondentPollock and Peel Ltd. (In Liquidation).
Cases ReferredIn Inland Revenue Commissioners v. Burrell Sargant L. J.
Excerpt:
- appeal from upjohn j.pollock and peel ltd. was incorporated in may, 1942, for the purpose of carrying on an engineering business. at the close of the calendar year, which was also the chargeable accounting period, ended december 31, 1951, the issued share capital of that company consisted of 2,004 fully paid shares of pound i each, all of the same class. mr. and mrs. pollock were the sole shareholders and the two directors of the company. on november 6, 1952, by an appropriate resolution under the articles, the company capitalised a sum of pound 28,056 of profits and applied that sum in paying up on behalf of the two shareholders 28,056 pound i shares, the capital being increased accordingly. thereafter, the issued share capital was 30,060 shares of pound i each. on october 31, 1953, that.....
Judgment:

APPEAL from Upjohn J.

Pollock and Peel Ltd. was incorporated in May, 1942, for the purpose of carrying on an engineering business. At the close of the calendar year, which was also the chargeable accounting period, ended December 31, 1951, the issued share capital of that company consisted of 2,004 fully paid shares of pound I each, all of the same class. Mr. and Mrs. pollock were the sole shareholders and the two directors of the company. On November 6, 1952, by an appropriate resolution under the articles, the company capitalised a sum of pound 28,056 of profits and applied that sum in paying up on behalf of the two shareholders 28,056 pound I shares, the capital being increased accordingly. Thereafter, the issued share capital was 30,060 shares of pound I each. On October 31, 1953, that company went into voluntary liquidation, and a week later, on November 6, the liquidator entered into an agreement for the sale of the assets and undertaking of the company, with one exception hereafter mentioned, to a new company incorporated for the purpose of acquiring the assets, and having the same name as the liquidated company and having also as its shareholders Mr. and Mrs. Pollock. The consideration for the sale was the issue by the new company to the liquidator of the old of 30,060 shares of pound I each fully paid up in the new company, and those shares in the course of the liquidation were distributed, or transferred and handed over, to the two shareholders, Mr. and Mrs. Pollock. On November 8, 1953, Mr. Pollock died, so that his part of the share consideration passed to his personal representatives. The one exception was a sum of cash which, so far as is relevant, may be stated as pound 15,030, a figure which was arithmetically exactly 50 per cent. of the amount of the issued share capital of the old company. The balance figure of pound 15,030 was in the due course of liquidation paid out to the representatives of Mr. Pollock and to Mrs. Pollock as the contributories of the old company.

The Crown claimed that a distribution charge was payable by virtue of section 35(I) of the Finance Act, 1947.

The relevant parts of the case stated by the Commissioners for the Special Purposes of the Income Tax Acts are set out in the report of the proceedings before Upjohn J.

The commissioners held that the sum of pound 15,030 was not a 'gross relevant distribution to proprietors' for the purposes of a charge to profits tax.

On appeal by the Commissioners of Inland Revenue, Upjohn J. dismissed their appeal, and they now appealed to the Court of Appeal.

Sir Reginald Manningham-Buller Q.C., A.G., Sir Reginald Hills and E. Blanshard Stamp for the Crown.

Roy Borneman Q.C. and Hilary Magnus Q.C. for the respondent company.

Cases cited in argument not referred to in the judgments : Inland Revenue Commissioners v. Bell & Nicholson Ltd. 1; In re Doughty 2; Montague Burton (in liquidation) Ltd. v. Inland Revenue Commissioners 3; Lamson Paragon supply Co. Ltd. v. Inland Revenue Commissioners 4; In re Ramel Syndicate Ltd. 5

LORD EVERSHED M.R. The question raised in this appeal is whether the tax known as profits tax, or more strictly a certain aspect of profit tax called the 'distribution charge,' is leviable in respect of the sum of pound 15,030 which was paid out, to use a neutral phrase, by the liquidator of a company known as Pollock & Peel Ltd. to the two shareholders of that company in the course of its liquidation.

[His Lordship stated the facts and continued :] The claim of the Crown has been that a distribution charge, that aspect of profits tax, is payable in all the circumstances in respect of that sum of pound 15,030.

Profits tax, nee National Defence Contribution, began its fiscal life in the year 1937. It require its later appellation under section 44 of the Finance Act, 1946. For the purpose of this appeal none of the statutory provisions is relevant until the Finance Act, 1947.

In substance this appeal turns on the meaning, in the proper context of the other relevant sections, of section 35 of the Act of 1947, and of section 31 of the later Finance Act, 1951, which in certain respects amended or supplemented the provisions of the Act of 1947.

I must, however, make a brief reference to certain other sections of the Act of 1947. Section 30, after varying the rate of profits tax, proceeded in sub-section (2) to make provision for what was called non-distribution relief. It suffices for my purpose to state that the purpose of non-distribution relief was this; that if the profits of the company which prima facie would bear profits tax were not in fact all distributed in any chargeable accounting period, a certain relief was given in respect of that part of them which was not distributed. For the purpose of making the necessary calculations and of arriving at the amount of the levy a formula was devised, known as 'net relevant distributions,' and the relief was arrived at in respect of the difference in any chargeable accounting period between the net relevant distributions and the total profits for that period. But by sub-section (3) there was imposed what is called in later sections of the Act a distribution charge. The point of that charge was as follows : where a company had obtained non-distribution relief and during a later chargeable accounting period distributed profits which were in excess of the profits for that period, that is to say, where the company availed itself, for the purpose of distribution in that year, of profits previously earned and not distributed, and in respect of which, therefore, non-distribution relief had been claimed, there was this imposition of a distribution charge on the excess distributed over the profits for the year of distribution. That distribution charge was subject to a limit stated in the proviso to sub-section (3). I hope I have stated, with sufficient accuracy but with necessary brevity, the point of that section.

Its relevance is first in regard to the introduction of the formula 'net relevant distributions,' and, secondly, because a distribution charge, in or in respect of any chargeable accounting period, depends in fact upon the business, or in this case the company, having previously had the benefit of non-distribution relief. It is an undoubted fact in this case that Pollock & Peel Ltd., that is the first company, the liquidated company, had in a previous year enjoyed the non-distribution relief so that the question of a distribution charge did arise in the period with which we are concerned.

The formula 'net relevant distributions' is defined in section 34 of the Act of 1947. Again I need not pause further than to state that 'net relevant distributions' are discovered by taking a proportion therein indicated of the gross relevant distributions. So one comes to section 35, one of the two vital sections for present purposes, which provides the meaning of the latter phrase 'gross relevant distributions.'

It will, I think, be convenient now if I read, not in its entirety but substantially, the first sub-section of section 35. 'Subject to the provisions of this and the two next succeeding sections,' - I pause to say that only the immediately succeeding section is relevant to mention for present purposes - 'the gross relevant distributions to proprietors for any chargeable accounting period of a body corporate, society or other body, are the total distributions to the members of the body corporate, society or other body, not being distributions......' therein stated, '......and being either (a) dividends declared......' as therein more precisely defined; '.....or (b) distributions.....' other than such dividends '.....made in the period; or (c)' - and this is the most relevant - 'in the case of the last chargeable accounting period in which the trade or business is carried on, so much of any distribution made after the end of that period (not being a distribution to which paragraph (a) of this sub-section applies)' - that is the paragraph relating to dividends - 'as is not a distribution of capital, and, for the purposes of paragraph (c) of this sub-section, the distributions which are to be treated as distributions of capital shall not, in the case of distributions made by a body corporate with a share capital, exceed an amount equal to the nominal amount of the paid-up share capital thereof together, where the body corporate has issued shares at a premium for cash, with the aggregate of the amounts of the premiums.' The last two lines have no application here, for this body corporate had not issued shares at a premium at all.

Relating briefly paragraph (c) to the facts of this case, the last chargeable accounting period of the first Pollock & Peel company was the period beginning on January 1, 1953, and ending with its liquidation on October 31 of the same year. As a matter of fact, at that date the total nominal amount of the paid up share capital of the company was pound 30,060, if you treat, as I think you must, the bonus shares issued in the previous year as being paid up share capital at the relevant date. There is nothing else in section 35 which it is relevant to mention.

Section 36 defines distributions. It will be recalled from my reading of section 35 that gross relevant distributions consist of certain distributions, not all distributions, but such distributions as are specified in section 35(I); and I emphasize the fact that all the distributions which go to make up gross relevant distributions are, by the wording of the sub-section, distributions to the members. Section 36 provides what are distributions, forming as it were the general class out of which the gross relevant distributions will be extracted. I do not propose to read them all, but it suffices to take one example. Sub-section (I) : 'Subject to the provisions of the next succeeding sub-section, wherever.....(b) assets are distributed in kind to any person.....there shall be deemed for the purposes of the last preceding section' - that is section 35 - 'to be a distribution to that person..... of an amount equal to the value of those assets.' If, therefore, any assets in the first company were distributed to any person, then that person would have been treated as having had distributed to him an amount equal to the value of those assets. There follows a proviso : 'Provided that no sum applied in repaying a loan or in reducing the share capital of the person carrying on the trade or business shall be treated as a distribution.' That is to say, as I read it, sums applied in reducing capital are not regarded as distributions at all, and therefore it follows that, as the Act then stood, such distributions could not be regarded as possibly comprising gross relevant distributions.

Section 36(4) has to do with a particular kind of case, of which the present is one, namely, a scheme of amalgamation or arrangement whereby the assets of one company are transferred to another. The object of that sub-section was this : that if both the transferor and the transferee companies agreed in writing, addressed to the commissioners as therein stated, then, putting it again quite generally, certain of the obligations for a distribution charge which might have fallen upon the first company were thrown upon the second. Thus, where such a transfer and election have been made, it is provided in this sub-section that this Part of the Act applies, '..... subject to the following modifications, that is to say -(i) any distribution of those shares' - that is, shares in the second company - 'to any person in a winding up of the first company shall, notwithstanding anything in sub-section (I) of this section,' - which I have read -'not be deemed for the purposes of the last preceding section' - that is section 35 - 'to be a distribution to that person.' Then it goes on in paragraph (ii) to say this : 'in considering what distribution charge, if any, falls to be made on the second company, any difference on which non-distribution relief for chargeable accounting periods before the transfer was given to the first company .....shall, except so far as it has already opreated to increase a distribution charge on the first company, be taken into account as if it had been a difference arising in relation to the second company on which non-distribution relief had been given to that company, and shall also be taken into account, in the case of the last chargeable accounting period of the second company, so as to increase the amount which, for the purposes of paragraph (c) of sub-section (I) of the last preceding section, is to be treated as not a distribution of capital.' That, of course, throws one back to the provisions of section 30, and particularly to sub-section (3) of section 30. But the effect is that in making ones calculations to see (among other things) what limit ought to be placed on the distribution charge, the second company is treated as though the differences from which the non-distribution relief was calculated for the first company have been facts in the life of the second company.

The last few lines of the sub-section, to which some attention was directed in the argument, do not I think assist to solve the present problem. For one thing the last chargeable accounting period of the second company has not arisen, and I cannot find in these last few lines, and in particular in the reference to 'distribution of capital,' anything which materially affects, when I come to it, the proper construction of the phrase 'distribution of capital' in section 35.

But there is this significance to the present facts of section 36. Election by the first and second Pollock & Peel companies was made pursuant to sub-section (4), and it seems to me inevitably to follow that the distribution of the shares in Pollock & Peel No. 2 to the persons who were in fact the shareholders of Pollock & Peel No. I cannot be treated as distributions to those persons at all for any relevant purposes, including, of course, for the purposes of the earlier sub-section (I) of section 36 and also of section 35.

Having mentioned those facts I can at this point consider, in passing, an argument of Mr. Stamp to the effect that we should, or might, treat the distribution of the shares in Pollock & Peel No. 2 to the shareholders in Pollock & Peel No. I as being a relevant distribution of capital on any view under section 35 (I)(c), so that the limit of the last six lines of section 35(I) would have been passed before the pound 15,030 came to be distributed. I do not think that can be right because in my reading of these sections, in the circumstances, one cannot look upon the distribution of the Pollock & Peel No. 2 shares as being distributions at all for any relevant purpose.

So much for the Finance Act, 1947; and I will now pass to section 31 of the Finance Act, 1951. Again I must read a substantial part of the first and second subsections, and also make a reference to the definitions. [His Lordship read section 31(I) and continued : Subsection (2) I will not read in full, but I summarize it by stating that it covers the converse case where the reduction of capital precedes the capitalisation. Subsection (5) contains some definitions, the last five lines of which are in these terms : '.... and references to the reduction of capital shall be deemed to included references to the repayment or return of share capital and the repayment or redemption of loan capital.....' That completes the reading which I must make from the Acts, and I will now proceed to deal as best I can with the arguments.

To dispose, however, first of a point which is significant though it was never in dispute in this court; it will be recalled that in section 35 of the Act of 1947 paragraph (c) relates to distributions which take place after the end of the last chargeable accounting period referred to. It is in that respect unlike, for example, paragraph (b) which is limited to distributions made in the chargeable accounting period itself. It will, however, be remembered from my reading of paragraph (c) that it does not in terms deal with a case of a company which has ceased to carry on any trade or business because it is being wound up, as distinct from a company which ceases to carry on a particular trade or business though it continues to exist as a company carrying on perhaps other trades or businesses, the sort of case which has been met with in these courts in coal mining companies where the coal mining operations of the businesses have ceased. There is no doubt, I think - and, indeed, it was so held in Inland Revenue Commissioners v. Universal Grinding Wheel Co. Ltd. - that section 35(I)(c) does apply to cover the case, though it is not limited to that case, of a company which has ceased to carry on business altogether by virtue of its having gone into liquidation.

In this court the argument of the Crown, who are appellants from the judgment of Upjohn J., was first based upon section 31 of the Act of 1951. The case, let me say at the beginning of this part of my judgment, has involved some refinement of argument upon the language which is sought to be construed : and it is, as I think, one of the difficulties, though not of course fatal, in the way of the Crowns argument that they have sought to say, and do say, that although the payment out of the pound 15,030 is a repayment of capital within section 31 of the Act of 1951, it is not a distribution of capital within section 35 of the Act of 1947. The maintenance of that distinction has made the argument at times a little difficult to follow, although it is fair to say that each side has accused the other of putting forward arguments on one section which are inconsistent with their arguments upon the other. However, I do not myself think that the argument of the respondents here, which prevailed before Upjohn J., fails through any inconsistency, and, indeed, I say at once that my conclusion of the case is that Upjohn J.s judgment was right and ought to be affirmed.

The argument of the Crown was that this payment of the pound 15,030 was a return of capital within the meaning of section 31 of the Act of 1951. One question which arises, at the first reading of section 31, is whether the section is really intended to apply at all otherwise than to a company which is at all relevant times continuing in existence.

To practitioners in company law the process known as reducing capital is, of course, familiar. It may take the form of reducing capital which is lost by reducing the amount of the nominal as well as the paid up share capital by cancellation, nothing being returned to any shareholder. It may, on the other hand, take the form where capital is in excess of the companys wants, of returning excess capital to the shareholders, at the same time reducing the nominal amount of the capital by corresponding figures; and to my mind, at first reading, the reference in the definition phrase that a reduction of capital is to be deemed to include a repayment or return of share capital is, as a matter of ordinary sense, applicable to the sort of case, of which my last example was an illustration, where the shareholder receives a return of his capital in the case supposed because the capital is in excess of the companys business requirements.

I think that Upjohn J., was inclined to the view that section 31 really was not dealing at all with a case where the company at ant stage had gone into liquidation. It is, of course, quite plain that the second subsection cannot apply to a company which has gone into liquidation at any relevant date because the second of the two operations there mentioned is the capitalisation which much ex necessitate rein take place during the companys life; but it is possible, referring to the first subsection, that the reduction of capital which takes the form of repayment might be said to occur after the company has gone into liquidation - provided that the repayment in the liquidation could be regarded as a repayment or return of share capital within the meaning of that sub-section as defined.

I will assume in favour of the Crown, without expressing any view on it, that one should not treat section 31(1) as limited in its application only to cases where the whole of the operations have occurred during the companys life. I will assume that, if there has been a capitalisation and the company then goes into liquidation, the subsection may be apt to cover an operation taking place after liquidation - provided, of course, that operation can fairly be described as a return of share capital. But it was Upjohn J.s view that the payment out by the liquidator to the shareholders in this case could not properly be described as a return of share capital, as a repayment of share capital, with in the meaning of section 31(1); and I agree with him for my part upon that point.

I think, as did the judge, that in some cases where a companys capital consists of shares of different classes and where shareholders of one class are limited under the companys regulations strictly in liquidation to what has been described as a return or repayment of capital paid up, one might (on the assumptions I am making) treat such an operation as falling within section 31(1) to the extent that the shareholders whose capital has been 'reduced' were shareholders of a class whose rights were limited as I have mentioned. But in this case the shares rights were limited as I have mentioned. But in this case the shares are all of one class, and I cannot myself fit into the scheme of the actual operations anything which could fairly be described as a return or repayment of of share capital as contemplated by section 31(1) of the Act of 1951.

The Attorney-General, in support of this part of his argument, referred to language used by Scrutton L.J. in Inland Revenue commissioners v. Blott : 'A company is liquidated during the year of assessment, and the liquidator returns to the shareholders, (1) their original capital, (2) accretions to capital due to increase in value of the assets of company, (3) the reserve fund of undivided profits in the company, (4) the undivided profits of the last year of assessment.' The Lord Justice, however, went on : 'Heads (3) and (4) will have have paid income-tax through the assessment of the company; but it appears to me that none of the heads will be returnable to super-tax as assessment; they are not income from property, but the property itself in course of division.' It is no doubt quite accurate as a factual statement of what happens in the case of a solvent company that the liquidator may proceed in the order that Scrutton L.J. stated. But the Lord Justice was not, I think, intending to make a general statement applicable to a case in which the point to be considered was that with which we are concerned in this case. It is to be remembered that in Inland Revenue Commissioners v. Blott the question was as to an assessment to super-tax of individuals under the Finance Act, 1910, the claim of the Crown being to charge the individuals with super-tax on certain shares which had been allotted as bonus shares. I therefore do not think that any help for present purposes can be taken from the particular language Scrutton L.J. used in that context.

But, again, let me assume that is proper and possible to say that the Pound15,030 might be treated as a return or repayment of capital, at any rate for some purposes, within section 31 of the Act of 1951. It is, I think, clear that that alone does not gain the necessary result for the Crown.

What the Attorney-General therefore then goes on to say is that one must treat section 31 of Act of 1951 as adding, as it were, two additional paragraphs, which he called (d) and (e), to section 35(1) of the Act of 1947, following after paragraph (c); with this effect, that 'gross relevant distributions' will include as a separate head, and unlimited by any restrictions one finds in paragraph (c), the distributions which are described in section 31. The Attorney-General frankly stated that he did nod press that argument too strongly upon us, and encouraged perhaps by that admission, I reject it. I do so on two grounds. In the first place it seems to me that difficulty would be created in that there is no statement in section 31 (which would at any rate be applicable in this case) of the chargeable accounting periods to which these distributions would be related; and, secondly, as Upjohn J. pointed out, all section 31 is doing is stating that certain sums of money, or the equivalent of certain sums of money, are to be treated as 'distributions' for the purpose of section 35; and as I have earlier said, not all distributions constitute gross relevant distributions automatically : it is only such of the distributions as fulfil the qualifications of section 35 that become gross relevant distributions. It seems, therefore, to me that the attempt to rely exclusively upon section 31 by adding something new and distinct to section 35 fails.

The Attorney-General next submitted that one must treat paragraph (c) of sub-section (1) of section 35 as having added to it, by virtue of the Act of 1951, some words to this effect, 'and including so much of any distributions as are deemed to be such by virtue of section 31 of the Act of 1951.' Those words or comparable words would, it was contended, remove 'the deemed distributions' of section 31 from the limitation of the last few words in paragraph (c), 'as is not a distribution of capital.' I cannot see any justification for adding such words to section 35.

It seems to me that the joint effect of the two sections is this : that in considering what distributions may amount to gross relevant distributions you bear in mind that section 31 has said that certain things are distributions; and then, if they answer the other characteristics set out in section 35, they may become gross relevant distributions.

It is sometimes not difficult, and always a little tempting, to criticise the results of the efforts of parliamentary draftsmen. But the matter is perhaps in the present case made a little complicated in that, although section 31 of the Act 1951 is expressed as amending or adding to section 35, its more immediate effect was rather to amend section 36; for it will be recalled from my reading that at the end of sub-section (1) of section 36 there was this proviso : 'Provided that no sum applied......in reducing the share capital......shall be treated as a distribution.' It seemed, therefore, to follow, as the Act originally stood, that sums applied in reducing share capital were not distributions at all. It it now, I think, manifest that, by virtue of section 31 of the Act of 1951, certain sums applied in reducing share capital may be distributions. But I cannot myself accept the argument, if I rightly apprehend it, that the Attorney-General put forward, that the amendment went further, and bad the rather oblique result of making the proviso to section 36(1) read : 'Provided that no sum applied......in reducing the share capital......shall be treated as a distribution' of capital within section 35. It seems to me there is no justification for making that emendation to the language of section 36.

I therefore come to the last point upon which the argument mostly turned in the end, namely, that apart altogether from anything that section 31 did or might have done, this was not a case in which the sum of Pound 15,030 could be fairly described as a 'distribution of capital' at all within section 35(1)(c). I have already indicated that the argument of the Crown on this point is in some respect not entirely easy to reconcile with some of the argument on section 31. But nevertheless it is obviously, I think, a legitimate alternative argument for the Crown to say that this sum of Pound 15,030 is not as distribution of capital within section 35(1)(c). Put in its simplest form, what the Attorney-General was saying is this : that once the company has gone into liquidation all the distinctions between capital and income for the liquidators purposes are gone. No such distinction exists. All he has got is assets; and all he can distribute is assets. They cease to have labels such as capital, or income, or revenue, or profits, or anything like that. And he said, accordingly, that this formula 'distribution of capital' ought to be confined to something which really was and could fairly be described on the facts of the case as a return economic of capital to some class of shareholder - which this payment was not.

I said a little earlier in my judgment that paragraph (c) clearly applies to a company in liquidation, but I said also that it is not exclusively referable to such a case. The language which the draftsman selected is language which must be applicable both to the case of a company in liquidation and to the case of a company which is making a payment out to shareholders when a particular business has ceased in the last chargeable accounting period to be carried on; and it seems to me that the formula chosen, and I suggest happily chosen in the circumstances, is 'distribution of capital.' Of course, if the draftsman had said, not 'distribution of capital,' but 'return or repayment of capital,' having his eye mainly, if not exclusively, on the case of a company still a going concern, it might have made the argument in the present case easier, particularly where it could be said in the liquidation that there was not, strictly, a return of capital at all. I do not repeat what I have already said of the same kind in reference to section 31 of the Act of 1951. But the draftsman has not said 'return of capital.' He might again, if he had been thinking only of a company in liquidation, have said 'distribution of assets.' But that, as a phrase, would have been inapposite in the case of a company which was still a going concern; and although, if he had said that, it would have made the argument in this case very short and simple, again the answer to the point is that he has not said it. What he has said is 'distribution of capital.'

In the course of the argument many references were made to well-known authorities in regard to the duties of liquidators and what is the subject-matter of their operations when they carry out the final winding up of a company. In particular, reference was made to Birch v. Cropper and to Inland Revenue Commissioners v. Burrell. There are in the judgment of Upjohn J. citations from both those cases, and since the case has already found its way into the law reports there is no necessity for me merely to repeat citations which are already found in the judges judgment. I confine myself to one extract from the speech of Lord Macnaghten in Birch v. Cropper, which will also be found in Upjohn J.s judgment. Lord Macnaghten said : 'I think it rather leads to confusion to speak of the assets which are the subject of this application as surplus assets as if they were an accretion or addition to the capital of the company capable of being distinguished from it and open;pen to different considerations. They are part and parcel of the property of the company - part and parcel of the joint stock or common fund - which at the date of the winding up represented the capital of the company. It is through their shares in the capital, and through their shares alone, that members of a company limited by shares become entitled to participate kin the property of the company. The shares in this company were all of the same amount.' The last sentence I have read because it is strictly applicable to this case.

The formula used by the draftsman is, for better or worse, 'capital' is not appropriate in a winding up, nevertheless the formula has been used by the draftsman in a winding up, nevertheless the formula has been used by the draftsman in a context which requires it to be applied to a winding up. If then it is true to say that in the hands and in the mind of the liquidator the distinction between capital and income is not significant, it is none the less true that to a shareholder the question whether what he receives is capital or income may well be significant. If you take the case of shares held under a trust, whereunder person are entitled to income for life only and others are entitled to corpus, it is well established that once a liquidation has supervened, then anything which comes to trustees from the liquidator, whatever its source may earlier have been, must in the absence of something special in the trust instrument be received by the trustees as capital.

I think that in using this short phrase the draftsman must be taken to have had in mind something of that kind. The vital word, after all, I think, is 'distribution' for present purposes. Here is a distribution of assets which in their nature and certainly in the hands of the recipients will be capital rather than, or as distinct from, revenue. That is the consequence of the liquidation. I therefore think it inescapable, without elaborating the point at length, that on the fact as of this the Pound 15,030 was a 'distribution of capital' in the sense that it was a distribution of something which, so far as it was relevant to consider the distinction between capital on the one hand and income or revenue in the other, was capital. If that is so, then, of course, the qualification of the last six lines of section 35(1) applies. Indeed, I think the existence of that qualification, '......and, for the purposes of paragraph (c) of this subsection, the distributions which are to be treated as distributions of capital shall not......exceed an amount equal to the total nominal amount of the paid up share capital thereof together' does lend emphasis and support to the view that it was that consideration which draftsman had in mind. I have already started that for the purpose of the last six lines I think the limit was Pound 30,060 and not the original figure of Pound 15,030 was a distribution of capital, it has not exceeded the limit and is therefore excluded from the gross relevant distributions under paragraph (c).

Upon all this last part of the case I am well content to accept and, if I may say so, endorse the following language of Upjohn J. : 'Section 36 of the Finance Act, 1947, provides that a reduction of capital is not to be treated as a distribution. Section 31 of the Finance Act, 1951, in effect amends that section by providing that if certain conditions are fulfilled a reduction of capita; is for the purposes of section 35 to be a distribution not be it noted, to be a gross relevant distribution. Reference back to section 35 is then necessary to see whether this distribution is included in the definition of gross relevant distribution for the relevant chargeable accounting period, that is the period that ended with the commencement of the liquidation. The relevant paragraph is (c)and that does not apply to distributions of capital. This this return of capital though a distribution for the purposes of section 35 is found not to be a gross relevant distribution because it is a distribution of capital. If the liquidator had returned not Ios. in respect of each pound I share but a sum which exceeded the total allowed as capital by the concluding words of the subsection, the excess would not for the purposes of the tax be treated as capital, but income and would fall to be included in the gross relevant distribution for the period. Reading the sections together, that seems to me how the scheme works and I see no conflict real or apparent between the sections and certainly no justification whatever for reading in the words which the Attorney-General submits ought to be read in.'

One final point should be mentioned, though it was not much pressed before us. It was said, and said quite truly, that the Special Commissioners in the case did not in terms find that the pound 15,030 was capital. It was therefore suggested, particularly in the court below, that the proper course would be to refer the matter back to the Special Commissioners in order that they might investigate the origins of this figure and say whether it, or if not the whole what part of it, was capital. I am quite satisfied that it would be wrong for us to follow that course, and for two reasons. In the first place it has been laid down authoritatively that this court should be extremely slow to send a case back to the Special Commissioners. But, more important, I do not think any useful purpose could be achieved by so doing. All the necessary facts about the history of this company and what happened to its assets in the liquidation have been found, and are not in dispute. The question whether this particular figure is a distribution of capital is not, as I apprehend it, one of fact for the Special Commissioners, but one of law to be determined on the meaning of paragraph (c) of section 31(I) of the Finance Act, 1947.

For the reasons which I have tried to state, I think this appeal fails, and should be dismissed.

MORRIS L. J. The question which arises is whether for the purposes of profits tax the payment by he liquidator of the sum of pounds 15, 030 to the members of the company constituted a distribution which was a 'gross relevant distribution within the meaning of section 35(1) of the Finance Act, 1947, while having regard to the provisions of section 31 of the Finance act, 1951.

It is said by the Crown that the effect of section 31 of the Finance Act, 1951, as applied to the facts of this case is that an amount equal to the sum of pounds 15,030 is deemed for the purposes of section 35 of the Finance Act, 1947, to be a distribution to members. It is further said that the consequence of this is that such a distribution should be regarded as being or forming a part of a 'gross relevant distribution for the purposes of section 35 of the Act of 1947. It is said that this results either, first, because the intent and the effect of section 31 of the Finance Act, 1951, was nationally to add distributions described either under paragraph (a) or (b) or (c) of subsection (1) of section 35 of the Finance Act, 1947, or, secondly because the wording of paragraph (c) of section 35(1) of the Act of 1947 must be read as impliedly modified in the case of any distribution covered by section 31 of the Act of 1951.

In considering these submissions the questions arises where section 31 of the Finance Act 1951, has application to the facts of this case. A section which relates to capitalizing distributable sum and to redacting capital would not seems on first approach to be a section which would operate during the course of a liquidation. The provisions of section 31(2) would not be came into operation after the commencements of a liquidation. There would not after such date be a capitalization of a distributable sum in the sense in which the word 'capitalization' is in the section defined. It is said, however, that the provisions of section 31(1) could operate after a liquidation. It is said that her provision of paragraph (a) of subsection (1) are satisfied because of the capitalization of profits which took place in November, 1952. It is then said that the provision of paragraph (c) are satisfied in that the pounds 15,030 which the liquidator paid to the members of the company of was a sum applied in reducing its capital.'

When the liquidator paid out the pounds 15,030 it would be surprising if the process could be described as one which effected a 'reducing' of capital. By sub-section (5) of the section it is, however, provided that reference to the reduction of capital are to be deemed to include references to the repayment or return of share capital. It said submitted that a distribution by a liquidator of money which remains in his hands can be regarded as including or performing the operation of repaying or returning share capital.

Reliance was placed upon certain observations to be found in Inland Revenue Commissioners v. Blott, Inland Revenue commissioners v. Burrell, and Hill v. Permanent Trustee Co. of New South Wales, and in certain other cases.

But even assuming that the payment out by the liquidator of the sum of pounds 15,030 could be regarded as a repayment or return of share capital in my judgment the only result is that the sum is than by the operation of section 31, the deemed for the purposes of sections 35 of the Finance Act, 1947, to be a distribution to the members of the company a of an amount equal to the sum so applied. On this footing attention must been be directed to section 35 of the Act 1947, and I do feel able to accept the submissions that at this stage the provisions of section 35 must then merely as be regarded as either extended or, alternatively, modified. I can see not statutory provisions which warrant this. The provisions of section 35 must then merely be construed and operated. This will be so whether section 35 comes directly under consideration or comes under consideration because made applicable by section 31 of the Act of 1951.

Section 35 extends to cover a liquidation. In his speech in Inland Revenue Commissioners v. Universal Grinding Wheel Co. Ltd. Lord Cohen said : 'It deals with the position in a liquidation when every distribution is strictly a distribution of assets not of profits and it imposes a necessary limitation for the protection of the revenue.'

In considering section 35 it is clear that the payment out of the pounds 15,030 is not covered by either the words of paragraph (a) or paragraph (b) of sub-section (I). In regard to paragraph (c) the last chargeable accounting period was that between January 1, 1953, and October 31, 1953. The payment out of the the pounds 15,030 was, I think, a distribution. It was made after the end of the period. The question then arises : was it a distribution of capital If it was, then, subject to the operation of the proviso, it was not a 'gross relevant distribution,' and it did not fall to be treated as a part of or as dwelling the total of the gross relevant distributions.

There is, however, the proviso. The sum which for the purposes of paragraph (c) is to be treated as a distribution of capital must not, in the case of a distribution made by body corporate with share capital exceed an amount equal to the total nominal amount of the paid up share capital together with the aggregate of the amounts of any premiums where the body corporate has issued shares at a premium for cash. In the present case the pounds 15,030 was less that the nominal amount of the paid up share capital, which must, I think be said to be pounds 30,060.

The only question, therefore, is whether the pounds 15,030 which was distributed was capital. The word 'capital' is used in a context which distinguished it from 'share capital.' It is recorded in the case stated that, after the transfer of assets to the new company and after the liquidator had paid all debts and liabilites of the company, including to the company amounting to pounds 15,030. The shares in the new company, which were received in consideration of the transfer of the business to the new company, were distributed; but subsection (4) of section 36 enjoins that such distributions must be ignored. In those circumstance was the pounds 15,030 capital In my judgment it was.

It was submitted on behalf of the Crown that proof should be forthcoming that the sum was capital. But, leaving aside any question where the onus of proofs lies the facts as found lead toe the conclusion that the sum was capital. The pounds 15,030 represented that surplus assets in his hands.

In Inland Revenue Commissioners v. Burrell Sargant L. J. said : 'In the liquidation a of limited company the distribution of the surplus assets of the company is almost necessarily of a final and non-recurrent character, and reaches the hand of the shareholders quite irrespective of the sources from which the assets have accrued to the company.'

In my judgment the payment out of the pounds 15,030 was a distribution of capital within the meaning of paragraph (c) of sub-section (1) of section 35. I would dismiss the appeal.

PEARCE L.J. I agree.

Appeal dismissed.

Solicitors : Solicitor of Inland Revenue; Frank Simmonds, Parker & Hammond for Percy Holt & Nowers, Croydon.


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