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Lupton (inspector of Taxes) Vs. F. A. and A. B. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1970]75ITR544(Cal)
AppellantLupton (inspector of Taxes)
RespondentF. A. and A. B. Ltd.
Cases ReferredFinsbury Securities Ltd. v. Inland Revenue Commissioners and
- lord denning m. r. - the legislature has recently killed dividend-stripping, but this is one of its death struggles. the strippers seek to make the revenue pay them pounds 4,00,000. so it is worth fighting usual, the financial transaction are very complicated. they to be if they are to succeed. simple traders cannot manage them. nor can the general run of accountants or lawyers. it needs a specialist dividend-stripper to do it. the taxpayers, f. a. & a. b. ltd., were experts. that is apparent from the five transactions described in the case stated. in all five of them, megarry j. found that they were not trading transactions but tax devices, and nothing else. so the taxpayers received nothing. the taxpayers accepted his decision in four of them. they appeal in the fifth. this.....
LORD DENNING M. R. - The legislature has recently killed dividend-stripping, but this is one of its death struggles. The strippers seek to make the revenue pay them pounds 4,00,000. So it is worth fighting about.

As usual, the financial transaction are very complicated. They to be if they are to succeed. Simple traders cannot manage them. Nor can the general run of accountants or lawyers. It needs a specialist dividend-stripper to do it. The taxpayers, F. A. & A. B. Ltd., were experts. That is apparent from the five transactions described in the case stated. In all five of them, Megarry J. found that they were not trading transactions but tax devices, and nothing else. So the taxpayers received nothing. The taxpayers accepted his decision in four of them. They appeal in the fifth. This depends so much on the facts that I must explain them as best I can.

In the years up till 1959 a group of private companies called the Spencer Wire group carried on business as copper processors and smelters. The shareholders were all members of a family named Gill. The group had prospered exceedingly. They had made large profits on which they had paid tax. But they had not paid those profits to the shareholders. (This was, no doubt, because the shareholders did not wish to be charged with surtax on them.) In round figures they had made profits of pounds 1,360,000, on which they had paid tax of pounds 560,000, leaving a sum of pounds 800,000 available for distribution as dividend net of tax. This was a dividend ripe to be stripped. The Gill family early in 1960 went to a firm of dealers in stocks and shares, called F. A. & A. B. Ltd. The specialised in dividend-stripped. They thought up a most ingenious scheme by which the dealers hoped to recover pounds 400,000 of tax from the revenue and to split it between the Gill family and themselves. That is, pounds 200,000 apiece. It was not possible early in 1960 to recover tax by means of 'backward stripping' such as was described in J. P. Harrison (Watford) Ltd. v. Griffiths because that had been stopped by section 4 of the Finance (No. 2) Act, 1955. So the dealers thought of doing it by means of 'forward stripping' such as was described in Finsbury Securities Ltd. v. Inland Revenue Commissioners. This was a loophole which was still available to dealers early in 1960. 'Forward stripping' was not banned until April 5, 1960, when it was caught by section 28 of the Finance Act, 1960. 'Forward striping' meant that a company had be found which would in the future make profits on which it could declare a dividend net of tax. The dealers would then buy the stares pregnant with further dividend, then later on the dealers would take the dividend, sell the shares, show a loss, and recover the tax.

The plan was carried out in this way : a parent company was found, called Oakroyd Investments Ltd. The Gill family held all the shares in Oakroyd. Then an intermediate company was found, called Elm Tree Industrial Finance Co. Ltd. Oakroyd held all the shares in Elm Tree. So the Gill family were, through Oakroyd, in control of Elm Tre. Elm Tree, in turn, held nearly all the shares in the Spencer Wire Co. So the Gill family were still in control of the Spencer group. The Spencer Wire Co. declared a dividend of pounds 800,000 net of tax. It was paid to Elm Tree. The result was that on March 20, 1960, Elm Tree had in hand a sum of pounds 800,000 net of tax (grossed up it was pounds 1,360,000, less tax paid of pounds 560,000, making pounds 800,000 net of tax). On that date - March 20, 1960 -Oakroyd had no profits in hand from this venture, but it could confidently expect that in the future Elm Tree would declare a dividend of pounds 800,000 net of tax. This was the future dividend to be stripped. By stripping it, the dealers hoped to get pounds 400,000 out of the revenue and divide it between the Gill family and themselves. Then these elaborate transaction took place, just before the Budget.

On March 30, 1960, the dealers bought from the Gill family all their shares in Oakroyd. The price was nearly pounds 1,700,000. This price was arranged on the basis that Oakroyd would soon received from Elm Tree a dividend of pounds 800,000 net tax. In addition Oakroyd had other investment worth nearly pounds 700,000. Moreover, the dealers were in due course to pay the Gill family a sum of pounds 200,000, being their share of the expected tax recovery. Thus these figures, pounds 800,000, pounds 700,000 and pounds 200,000, made up the pounds 1,700,000. The dealers paid the Gill family pounds 1,500,000 in cash or its equivalent, and paid the pounds 200,000 to stakeholders to await the tax recovery.

A year later, on March 30, 1961, Elm Tree declared a dividend of pounds 800,000 net of tax and paid it to Oakroyd : and Oakroyd in turn declared a dividend of pounds of 800,000 net of tax and paid it to the dealers (who were, of course, the owners of all the shares in Oakroyd). The dealers did not sell the shares in Oakroyd. They were advised not to do so, lest they fell foul of section 28 of the Finance Act, 1960.

Afterwards the dealers made out their accounts for year 1960-61. They, of course, omitted the dividend they had received because share dealers are allowed by law to omit it. The upshot was :

Cost of Oakroyd shares (March, 1960)


Value of Oakroyd shared (March, 1961)


Loss :


Seeing that the accounts showed a loss of pounds 1,000,000, the dealers prayed, in aid section 341 of the Income Tax Act, 1952. They claimed to recover the tax which had been paid on that sum namely, pounds 400,000. If they were to succeed in getting pounds 400,000 from the revenue, the dealers were to ask the stakeholders to release the pounds 200,000 to the Gill family. If they did not succeed in getting the 400,000 from the revenue, the stakeholder was to return the pounds 200,000 to the dealers. In short, if no part of the pounds 400,000 was recovered, the dealers paid out pounds 1,500,000 to the Gill family for the shares. If all the pounds 400,000 was recovered, they would pay an extra pounds 200,000 to the Gill family and keep pounds 200,000 for themselves.

Such being the transaction, the question for us is whether it was an adventure 'in the nature of trade,' or merely tax-recovery device The dealers say it is adventure 'in the nature of trade,' because it is indistinguishable in essence from J. P. Harrison (Watford) Ltd. v. Griffiths : whereas the Crown say it is a tax-recovery device because it was on a par with the Mantern case in Finsbury Securities Ltd. v. Inland Revenue Commissioners. The dealers point to various distinction in their favour, such as that there was not here (as there was in the Finsbury case) any creation of special shares which carried special rights to dividends. The Crown point to other distinctions in their favour, such as that there was here an agreement to split the tax recovered between the dealers and the shareholders (as there was in the Finsbury case, but not in Harrison).

I do not propose to go into any such distinctions. We should seek for the principle to be derived from the two cases in the House of Lords and not be led away into by-paths. And we should not place too much emphasis on a word here or there in the speeches. I agree with the way Megarry J. Put it in [1968] 1 W. L. R. 1401, 1423. Put shortly, it comes to this : if the transaction is, in truth, a transaction in the nature of trade it does not cease to be so simply because the trader had in mind a tax advantage. But if it is, in truth, a tax-recovery device and nothing else, then it remains a tax-recovery device, notwithstanding that it is clothed in the trappings of a trade. Applying this principle here, and looking at all the five transactions (as we are entitled to do), I am quite satisfied that these dealers - F. A. & A. B. Ltd. -were not, in any of these cases, carrying on a trade, or doing anything in the nature of a trade. Neither in the other four, nor in this one, were they carrying on a trade. They were engaged, as the commissioners found, in dividend-stripping transactions. I decline to elevate dividend-stripping into a trade. It is dividend-stripping and nothing else.

I find myself in agreement with the judgment of Megarry J. and I would dismiss this appeals.

SACHS L. J. - The appellants, who at all material times was genuinely trading as dealers in shares, on March 30, 1960, purchased all the 353,957 issued pounds 1 shares (ordinary, deferred and preferred) - of which 99,702 had been issued and allotted that day - in Oakroyd Investments Ltd. The nature of the business of that company is indicated by its name. The contract under which the purchase was made involved payments to the extent of pounds 1,678,932 including expenses. It was a dividend-stripping transaction in that the price for the shares was largely dependent on the degree of ability to strip the dividends with which the shares were pregnant. After a dividend of pounds 800,000 had been stripped on March 31, 1961, Oakroyd Investments Ltd. was still a going concern and its relevant shares remained in the hands of the taxpayers backed by very substantial assets to the value of almost pounds 700,000 - quite a formidable figure.

The taxpayers had by then incurred a loss on the value of the shares of which pounds 800,000 was attributable to the dividend strip. At the then current 7s. 9d. rate of income tax, the tax recovery on pounds 800,000 would be pounds 310,000. There had also been a further loss on the value of the shares, described in the relevant documents as 'commercial loss,' of pounds 182,980. The tax which could be recovered on this further loss amounted to pounds 70,907.

The taxpayers would then apparently have sold the shares but for debts as to the effect of section 28 of the Finance Act, 1960, which affected transactions after April 5, 1960 - but not those of March 30, six days earlier.

The transaction by which the taxpayers acquired these 353,957 shares was in no way a sham any more than would have been the sale of those shares backed by pounds 700,000 of assets. The issue for this court is whether the loss on the value of the shares as was due to the stripping was a trade loss within the meaning of the relevant words of section 341(1) of the Income Tax Act, 1952. Of that section it is to be noted that subsection (3) reads as follows :

'For the purposes of this section, the amount of a loss sustained in a trade shall be computed in like manner as the profits or gains arising or accruing from the trade are computed under the provisions of this Act applicable to Case I of Schedule D.'

In calculating the loss no account can be taken of pounds 800,000 received by way of dividend : F. S. Securities Ltd. v. Inland Revenue Commissioners.

In Harrisons case the House of Lords, upholding a decision of this court, held that a dividend-stripping transaction of December 4, 1953, resulted in a trade loss within the meaning of the same section. In that case the purchasing company had never before traded in shares; it had, to quote the phrase used by Lord Denning M. R. at pages 17 and 18, 'changed its way of life' by altering its memorandum of association to enable them so to trade; it had then, on the above date, for dividend-stripping purposes purchased for pounds 16,900 all the shares in a company with a nominal capital of pounds 1,000 that had ceased to carry on business, but was pregnant with dividend money to the extent of pounds 15,900 - 'it was simply a company pregnant with dividend.' The dividend was duly stripped on January 26, 1964, and the shares were on June 24, 1964, re-sold for pounds 1,000. That was the Harrisons only purchases of shares in the relevant financial year.

The commissioners had held that the transaction 'was not entered into as part of any trade of dealing in shares and was not an adventure in the nature of trade.' But Lord Morris of Borth y-Gest said, at page 23 :

'It seems to me that a trading transaction does not cease to be such merely because it is entered into in the confident hope that, under an existing state of the law, some fiscal advantage will result.'

And later on, at p. 24 :

'The possibility of tax recovery may be a result made possible by the trading activity but I am unable to accept that if a transaction fairly judged has in reality and not fictitiously the features of an adventure in the nature of trade it must be denied any such description if those taking part in it had their eyes fixed upon some fiscal advantage.

'My Lords, on the facts found in the present case I am driven to the conclusion that the transaction in the shares was entered into as part of a trade of dealing in share or was on adventure in the nature of trade.'

Lord Guest said, at page 27 :

'In my view the transaction in question was an adventure in the nature of trade and the commissioners had no grounds upon which they could hold that it was not.'

As against this decision, the Crown relied on the Finsbury case decided by the House of Lords on June 28, 1966, almost a year after the decision of the commissioners in the instant case. In the Finsbury case the transactions considered related to the purchases of shares from some 15 different vendors by a company which had since its incorporation in 1956 carried on the trade of dealing in shares and securities.

In twelve of these transaction ('the Warshaw type') the company had acquired 100 specially created pounds 16 per cent. Preference shares with highly peculiar special rights. These shares were entitled to all the dividends paid for the next five yeas, absorbing the whole of the profits available for distribution, in addition to their fixed preference dividend. To these shares were attached no voting rights and they were purchased for a sum which was to equal the total dividends to be distributed during those five years. The vendors retained all the ordinary shares and full control of the company.

Substantial dividends were anticipated and paid : in the Warshaw case (entered into on December 29, 1958, and examined in detail in the speech of Lord Morris of Borth-y-Gest) they amounted to pounds 60,000. Money successfully reclaimed from the revenue by virtue of this dividend-stripping transaction was intended to be divided 50-50 as between the vendor and purchaser. At the end the five years the 100 shares reverted to being simple preference shares.

In the end the proceeds of the dividend-stripping having been divided, the preference shares would thus have at most the de minimis value of pounds 100. Over the relevant period during which the stripping took place the purchases did not even the use of the moneys from which the dividends were paid.

On the face of it the transaction consisted only - and I emphasise the word 'only' - of machinery for the recovery of tax and the sharing by purchaser and vendor of such money as were successfully reclaimed from the revenue. In truth was no transaction in the nature of share trading.

As regards the three other cases ('the Mantern type'), there is little about them in the report in [1966] 1 W. L. R. 1402. Mr. Monroe, however, pointed out that the relevant facts were to be found stated in the report in 43 T. C. 591; in particular he referred to page 594, where the case is set out, and to pages 602 and 603, where Buckley J. considers this series. It was pressed on this court that the Mantern type case could be distinguished from the Warshaw type case and showed an affinity with the one at present under consideration.

The essence of the Mantern type case was that the vendor sold to the dealer for pounds 100 all the shares in a company which owned a building lease and assets in the shape of house under construction. In addition to the pounds 100, the dealer contracted to pay to the vendors 85 per cent, of the net profits made in the year ending March 31, 1960, by the sale of the assets of the company whose shares were thus sold. (By net profits was meant the gross profit after deduction of expenses but before deduction of income tax.)

At the end of a relevant period (a year and eight days in the Mantern case itself) any assets not sold were to be repurchased by the original vendors on an agreed basis. The result, of course, of the transaction would be that at the end of the relevant period (March 1, 1960, in the Mantern case) the relevant shares would be, as Mr. Monroe conceded, a worthless shell. Moreover during the relevant period whilst the shares had some assets behind them the Mantern directors were to remain and did remain in control and there was to provision whatsoever for the dealers having any share in that control.

In effect, accordingly, the Mantern transaction was again one in which the parties simply embarked on a transaction which consisted only a machinery for recovering tax from the revenue authorities and dividing the tax recovered amongst themselves and which also was designed to and did result in the shares involved becoming in substance worthless and unsaleable.

In both cases the transaction was thus so devised that the shares transferred initially to the dealers gave the latter in essence no voice in the control of the relevant company : indeed it produced absolutely nothing more - if de minimis items are ignored - than the machinery to which I have already referred. The difference between the Mantern case and the Warshaw case was in substance only in the latter the division was on a 50-50 basis and in the former the dealers were to get 15 parts of the tax recovered whilst the vendors would receive 23.75 parts.

It was in those circumstances that Lord Morris of Borth-y-Gest held that there was no transaction that could be properly described as trading in shares. 'It was a wholly artificial device remote from trade to secure a tax advantage,' he said at page 1418. I will return to his phrase later.

In the course of his speech - with which all the other members of the House concurred - he made it clear that the Harrison case, remained in full force. Thus he said, at page. 1416 :

'It was my view in that case that the transaction was demonstrably a share-dealing transaction. Shares were bought : a dividend on them was received : later the shares were sold. There may be occasion when it is helpful to consider the object of a transaction when deciding as to its nature. In the Harrison case my view was that there could be no room for doubt as to the real and genuine nature of the transaction.'

Then, after stating that the submissions for the company depended mainly upon the argument that the shares were acquired as part of their stock-in-trade, he went on to say at page 1417 :

'For the reasons I have already given, this transaction on the particular fact was not, within the definition of section 526, an adventure or concern in the nature of trade at all. It was wholly artificial device remote from trade to secure a tax advantage.'

Previously he had referred to the element that in Harrisons case the vendors, after selling the shares, had no further concern in what happened, and I will discuss later whether that is of itself an element which without more affects the nature of the transaction.

I turn now to the judgment of Megarry J. as reported in [1968] 1 W. L. R. 1401. There is much in the judgment with which I respectfully agree not least where he says that one must look at the transaction as a whole, and adds at page 1422 : 'So regarded the question for me in whether these five transactions are on the Harrison side of the line or the Finsbury side.' But to my mind he did not adhere to that approach in relation to the instant case and did not sufficiently examine the constituent elements of the transaction when deciding whether, looked at as whole, it fell on one side of that line or the other. In any event, I would dissociate myself from the unnecessary criticism of certain submissions made by counsel for the company (see page 1420). When the fact of an instant case can, as here, be submitted to be so much on one side of a line drawn by the House of Lords as to make it wrong for other courts to say to the contrary, then counsel is, of course, entitled to urge that only the House can take a contrary view. Whether that submission is the instant facts right or wrong is beside the point : as will be seen later, I have found difficulty in rejecting it.

The facts of the Harrison case and of the instant case have perhaps already been sufficiently summarised in this judgment. None the less, it seems appropriate at this stage to compare certain aspects of them. (1) In the Harrison case the purchaser changed its face in order to enter into a single transaction in the relevant year; here the appellants were established share dealers. (2) In the Harrison case the assets other than the dividend pregnancy can only have been worth pounds 1,000 out of pounds 16,900 (i.e., some 6 per cent. of the purchase price) : here the assets other than the dividend pregnancy were at the date of the transaction apparently worth well over pounds 800,000, i.e., more than the dividend later declared. (3) In the Harrison case the purchasing company was left with shares worth only pounds 1,000 - a relatively small unit for share dealing stock-in-trade : in the instant case the purchasing company had, after the dividend was stripped, still in stock some pounds 353,957 pound 1 shares backed by assets of nearly pounds 700,000; that is to say, stock-in-trade of real value. (4) In both cases the purchasing companies obtained complete control of the company whose shares they purchased. (5) In both cases they obtained control of the money later to be paid out in dividends - in Harrisons case pounds 15,900 and the instant case pounds 800,000. (6) In both cases the transactions would not have gave through upon the terms in fact reached but for the existence of the expectation of what Lord Morris described as a 'Fiscal advantage' by way of a tax recovery : but in the Harrison case it might well have been difficult for the above reason to strike a share-dealing bargain at all if there had been no such expectation, whilst in the instant case there would prima facie have been no such difficulty.

So far the comparision of the salient features of the transactions in Harrisons case and the instant case quite clearly show that the latter not merely falls on the right side (from the taxpayers point of view) of the line, but a great deal further on that side than Harrisons case itself. Is it, however, brought over on to the wrong side of that by the provision in clause 5(d) which varies the price of the shares by an amount up to pounds 200,000 according to the degree of success or otherwise of the tax recovery claim? That in essence is the pounds 310,000 (or the pounds 380,000) issue in this case : it is the issue on which the Crown founded its case.

I accept Mr. Monroes contention that this clause gave the vendors in an important sense a substantial interest in the recovery of tax and that it matter not in what form that interest is dressed up. I do not accept that his calculation as to the percentage of that interest (a calculation which seemed based on speculation rather than evidence) was correct : but in the present case (having regard to upper and lower brackets of the percentages under consideration) to my mind the exact percentage does not matter.

It is clear that the clause also provided the purchasers with a considerable safeguard against two obvious risks. The first was that the imminent Finance Bill might retrospectively hit the transaction : the second was the existing doubts as to whether the fiscal effect of such a transaction under the then current legislation might in the courts be resolved adversely from the purchasers point of view - a matter upon which there could be no certainly.

Mr. Monroe readily and rightly conceded that in this, as in many other type of transaction, purchasers are entitled to safeguard themselves against such risks and may do so by provisions which adjust the price to the purchaser by reference to how such risks may eventuate. It is a matter of bargaining as to the percentage of the risk which will be undertaken by purchaser and vendor respectively. Such bargains are nowadays regularly upheld and given effect to in relation to variations of trusts.

If a vendor is paid the full ostensible value of the dividend (i.e., its amount after deduction of income tax) and the dealer is to get 100 per cent. of the tax recovery, the transaction falls on the right side of the line if there is genuine dealing (Harrisons case). If the bargaining results in a firm price by which the dealer only gets in effect 50 per cent. of the tax recovery, does this change the nature of the transaction if the other criteria remain the same To my mind the answer must be no. In what Mr. Monroe described as the 'market in dividend-strippable shares,' no doubt the terms of the trade varied from time to time - and presumably hardened against sellers as Budget Day approached. But so long as the transaction was a real dealing in shares, the Harrison test must to my mind apply to the bargain as reached. The Harrison case recognised the market as a legitimate one.

It the dealer insures himself against the risks recited earlier in this judgment, does that then change he situation There are passages in the speech of Lord Morris in the Finsbury case which refer to the retention by the vendor of an interest, as providing a distinction from the Harrison case and as to that being 'the essence of the arrangements.' But those passages should to my mind be read in the context of the facts of a transaction in which there was no other element than tax-recovery machinery. This seems implicit in the words 'a wholly artificial device' already cited. So if the dealer insures himself against the risks above recited this does not seem to me to affect the answer to the critical question.

Once the shares are shown to be brought by the dealer for resale; are and remain capable of resale at a substantial price; and there is nothing to prevent such a resale at any material time, Harrisons case govern the situation. In the instant case those factors are present : the shares could have been stripped and resold at once-another. though not decisive, distinction from the Finsbury case : see page 1417D; the fact that the dealers were bound to do their best to effect a tax recovery did not preclude a sale - though later fears as to the effect of section 28 of the Finance Act, 1960, resulted in them being retained, a point which Mr. Monroe rightly conceded to be immaterial. The fact that major, or indeed the major, attraction of an acquisition is dividend stripping is shown by Harrisons case to be immaterial providing there is a genuine trading; so is the fact that the transaction without the strip benefits would, on the expectations of the date it was entered into, yield a profit and might result in a loss. A fiscal advantage being a proper object for bargaining in trade deal, its value is for the parties. (Eliminating potential dividend striping benefits, the expectations in the instant case appear prima facie to have been substantially that there would be a break even result - as in the Harrison case.)

Shares backed by pounds 700,000 or pounds 800,000 of assets can be no stretch of imagination be regarded as unsaleable. Moreover, it may perhaps be asked why on March 30, 1960, should 99,702 further shares of pounds 1 each have been issued and allotted unless as a part of or preliminary to a share trading transaction. Prima facie it looks as if some later resale was in mind though some unknown fiscal advantage to shareholders may have been in contemplation.

For the Crown it was contended that on the facts the transaction was a mere tax-recovery device upon which was superimposed a dealing in shares. But again the Harrison case facts block the way. Neither the relative price paid for the dividend pregnancy element in a transaction nor the method of calculating that price (be it firm or variable) can of themselves without more alter the nature of a transaction which is otherwise on the right side of the line by being a genuine and substantial trading in shares. Just as Lord Morris felt himself 'driven' to the conclusion he reached in the Harrison case, so do I fell myself contained by the ratio decidendi in that case to negative the Crowns contentions.

It thus seems to me that the pounds 200,000 clause on which alone reliance was placed by the Crown (all other points were merely ancillary) cannot bring the transaction over on to the wrong side of he line - it remains firmly on the right side a trading transaction in which there is a strong element of potential fiscal advantage, and I would allow the appeal.

I should perhaps add reference to three points. First, that before Megarry J. it was accepted (see [1968] 1 W. L. R. 1401, 1413) by both parties that the question for the court was one of law and it was so argued here Moreover, in Harrisons case the commissioners ostensible findings of fact were reversed, as also happened in the Finsbury case : so I have not examined in detail the findings of the commissioners in the instant case - more especially as they had perforce to be reached without the assistance of the House of Lords decision in the Finsbury case and thus without having in mind the criteria which affected that decision.

Secondly, there is to my mind simply no evidence upon which it can properly be inferred that the pounds 182,980 'commercial loss' was other than it purported to be. It is to be noted that the use over the relevant period of assets totalling over pounds 1,500,000 (i.e., including the pounds 800,000 used for dividends) can well result in a loss or a profit of that order : that would depend on the management of the funds.

Thirdly, it is to noted that from first to last the Crowns case was that the relevant transaction was not a trading transaction at all. At no stage was it suggested that if contrary to that contention it were such a transaction then that part (pounds 310,000) of the years loss could be severed and treated none-the-less as not being a trade loss. I have assumed the Crown had good reason for not making any such admission - stemming no doubt from the ratio decidendi of the Harrison case which Mr. Monroe, of course, unreservedly accepted as good law. Be that as it may, such point not having been taken before the commissioners, Megarry J. or this court, it can hardly now remain open to the Crown.

Whatever may be the correct view of the ethics of dividend-stripping transaction - and they have no attraction for me in the shape with which this court is now concerned - it is clear from Harrisons case that there are many sets of facts which can bring a dividend-stripping transaction within the ambit of section 341 of the Act of 1952. Not only has this been decided in Harrisons case, but it is to be noted that section 4 of the 1955 (No. 2) Act only sought to exclude from the ambit of section 341 a limited category of such transactions, and that that was a category into which the instant transaction does not fall. The absence of reference to forward stripping, for instance, cannot have been unintentional unless one assumes a degree of lock of knowledge and prescience which one cannot rightly attribute to those concerned with such fiscal measure. If the legislature choose to leave a category of dividend-stripping untouched by a Finance Bill, it does not seem to me that it is for courts to interfere.

PHILIMORE L. J. - Megarry J. had to consider five transactions into which F. A. & A. B. Ltd., a company engaged in share dealing had entered in the years 1959-60. He held that each of these five transactions was dividend-stripping, i.e., that in each case the transaction was in no way characteristic of and did not possess the ordinary features of the trade of share dealing, but represented 'a wholly artificial device remote from trade and designed to secure a tax advantage,' to use the words of Lord Morris in Finsbury Securities Ltd. v. Inland Revenue Commissioners. He, therefore, found for the Crown.

The taxpayers do not seek to argue that the decision of Megarry J. was wrong in four out of the five cases, but in the fifth - that involving Oakroyd Investments Ltd. - they have argued the appeal.

Where, as here, the arguments of counsel on both sides are of highest quality, the mind of a judge, inexperienced in a very specialist field tends to waver, but I have finally come to the same conclusion as the Master of the Rolls. I think Megarry J. was clearly right and I would dismiss this appeal.

At the date of this transaction at the end of March, 1960, backward stripping had been stopped by section 4 of he Finance (No. 2) Act, 1955. A few day later, and this deals, which involved forward stripping, would have fallen foul of section 28 of the Finance Act, 1960.

The essence of this transaction was that the taxpayers chances of a substantial profit really depended on recovering pounds 400,000 from the revenue and that they and the vendors were to share the benefit of the pounds 400,000 as and when this sum was obtained. Thus both vendors and purchasers were looking to the tax advantage and the whole deal was geared to this.

Since the issue turns entirely upon the facts, I hope I may be forgiven for restating them in my own way.

The background to this transaction by which the taxpayers bought all the shares in Oakroyd Investments Ltd. from the members of the Gill family who owned them was as follows : Oakroyd Investments Ltd. had three wholly-owned subsidiaries - Spencer of Wakefield Ltd., Spencers Equipment Ltd., and Elm Tree Industrial Finances Co. Ltd. These subsidiaries were of little importance in themselves, but Elm Tree owned all but a very small number of the shares in the Spencer Wire Co. Ltd., a company which was actively trading as a manufacturer processing and smelting copper. It seems clear that it was this company which was the real money-spinner on the group depended.

It looks as if the first step involved the sale by Spencer Wire of its manufacturing capacity for cash and accordingly that company sold its properties and trading assets for pounds 725,206. It was suggested by counsel for the Crown that the probable inference from passages in the agreement is that this sale was in fact to the members of the Gill family; but this albeit not unlikely, must remain speculative. Presumably at about this stage the taxpayers bought the small quantity of shares in Spencer Wire not already owned by Elm Tree.

Everything was now ready for the operation which was carried out at great speed to anticipate the Budget.

By an agreement said to be made on March 25, 1960, but which cannot in fact have been concluded before March 30 (see clause (b)), the members of the Gill family sold all the shares in Oakroyd Investments Ltd. to the taxpayers for pounds 323,946 together with such a sum as would equal the excess of the book debts of Spencer Wire over its liabilities - this proved to be pounds 336,000, so that the total price was pounds 1,659,946.

The transaction was to be completed on the following day, and by clause (d) the vendors warranted that Elm Tree was in a position to declare a net dividend of pounds 800,000 (presumably Spencer Wire had already declared a dividend of this amount); it was also agreed that the taxpayers were to be entitled to recover tax on any reduction in the value of the shares in Oakroyd, and that if they failed to do so, the vendors would pay them by way of liquidated damages the difference, if any, between half the tax recovered and pounds 200,000.

By a parallel agreement to which the Anglo - Israel Bank were also parties, the bank was to hold pounds 200,000 of the money paid by the taxpayers pending the outcome of the anticipated claim by the purchasers to recover tax which was anticipated to produce pounds 400,000 or little less. It that claim succeeded, the vendors got the pounds 200,000 or in effect half the tax recovered. If it failed the pounds 200,000 was to be paid to the taxpayers as liquidated damages - in other words, the purchase price was reducible by that amount.

In the event, after a decent interval of one year, so that the strip should be a forward one. Elm Tree duly declared the dividend of pounds 800,000 net which passed to Oakroyd and thence under the provisions of the agreement to the taxpayers, who proceeded to claim recover pounds 400,000 tax in view of the reduced value of the shares.

What then was the position ?

The taxpayers had paid pounds 659,946 for the shares in Oakroyd of which pounds 200,000 was held by the bank pending the claim to recover tax. They had also paid a few thousand pounds for the shares in Spencer Wire not owned by Elm Tree. In return for what they had paid, the taxpayers had which no doubt were largely derived from the sale by Spencer Wire of its manufacturing capacity. Thus the taxpayers had received pounds 1,495,952, and if their claim to tax failed, they would be repaid the pounds 200,000 held by the bank. If, on the other hand, the claim succeeded, the bank would pay the pounds 200,000 to the vendors who would thus have received the full pounds 1,659,946, and the taxpayers would add the pounds 400,000 recovered from the revenue to the pounds 1,495,952 they had already derived from the sale. In other words, if the tax claim failed, they made a profit of a view thousands at most, but if it succeeded the profit was about pounds 200,000.

Equally the vendors depended on the success of the claim for pounds 200,000 of the agreed price. They had, of course, in addition the inestimable advantage of acquiring tax-free capital in place of dividends on which they would have paid thousand in surtax.

Alas, the Crown refused to pay the claim by the taxpayers to recover the tax, and it is I think clear that the special commissioners would have upheld the Crown but for the decision of the House of Lords in J. P. Harrison (Watford) Ltd. v. Griffiths. At the time the matter was before them Finsbury Securities Ltd. v. Indland Revenue Commissioners, had not been decided.

In truth, the Harrison case was totally different from the facts here. True, the purchaser there bought in order to strip, but there is nothing to suggest that the vendor knew of this intention or stood to derive any benefit from the strip. So far as he was concerned, there was nothing to show that this was not a normal deal in shares.

Here the whole transaction was geared to the strip and the tax claim from which both parties stood to profit equally. The only reason for this deal was fiscal advantage as opposed to normal trade. In my view it is highly improbable that either party would have entered into this transaction on any other basis. In my judgment the case is covered by the decision in Finsbury Securities Ltd. v. Inland Revenue Commissioners and especially in relation to the Mantern transaction - one of those considered in that case, details of which are to be found in 43 T. C. 591.

I would dismiss this appeal.

Appeal dismissed with costs.

Leave to appeal granted.

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