LORD DENNING M.R. I will ask Donovan L.J. to give the first judgment.
DONOVAN L.J. I need not repeat the complicated facts of this case. They are set out in the case stated itself and summarised in the judgment of Plowman J. The crucial question is whether, on the assumption that the appellant company is a company within the scope of section 245 of the Act of 1952, could more than half the income of the period April 1, 1956, to January 31, 1957, be apportioned to the appellants Mr. Garside and Mr. Spence If so, this will in the first place justify the direction, for the company will then not be a 'subsidiary company.' This question of apportionment depends chiefly on the effect of the decision of the House of Lords in Fendoch Investment Trust Co. Ltd. v. Commissioners of Inland Revenue.
It is conceded for the appellants, and I think necessarily so, that the individual shareholders, Mr. Garside and Mr. Spencer must, by virtue of the decision in the Fendoch case, be regarded as members of the company for present purposes, notwithstanding that a few days before the end of the trading period with which the case deals, namely, the period ending on January 31, 1957, they sold all their shares in the company. But it is argued that nevertheless, when the Special Commissioners come to make the apportionment of the income among the members 'in accordance with their respective interests,' to quote the language of section 248, they (that is the Special Commissioners) must apportion to the shareholders no more than a sum equivalent to the dividend on their preference shares - a mere Pounds 1,000, which is only a small fraction of the whole income of the period.
I think that the ratio of the decision in the Fendoch case compels us to negative this contention and to say that the Special Commissioners were within their statutory rights in making the much larger apportionment to these two individual shareholders which they did.
It this be so, then two questions are decide : one, the validity of the direction; and, two, the competence of the apportionment. As regards the direction, it so happens in this case, as I say, that the competence of the apportionment means that the appellant company is not a 'subsidiary' company within the meaning of section 256 of the Act, and therefore a direction becomes possibl : see in particular on this point section 256(4) and the proviso thereto.
I confess that I have struggled against this conclusion, but in vain. The courageous argument of Mr. Monroe has, I think, much to commend it. Parliament was, at least in my opinion, intending to counteract the non-distribution of profit and to levy surtax on those persons who would have got the income had it in fact been distributed. This legislation was so understood and administered for more than 30 years, with this exception that one treated the members who would have got the dividend as being the members on the last day of the accounting period in question. But once it has been decided that 'members' include those persons who may have sold their shares during the relevant period, then I think it is very difficult successfully to contend that in apportioning the income among all the members 'in accordance with their respective interests' the Special Commissioners cannot take account of the fact that some members were members for the whole period less three days and load the apportionment accordingly, as has been done in this case.
The question whether the dividend was declared within a reasonable time is a question of fact. Here the company indicated in February, 1957, that it was going to declare no more dividend out of the profits of this period. But after the commissioners began the proceedings under section 245, the company declared in December of 1957 a much larger dividend, one in fact that absorbed more than the trading profit of the period. The Special Commissioners have held that by then a reasonable time had elapsed. This finding, in my opinion, is not vitiated by any mistake of law and is one with which we cannot interfere. I think, therefore, that we are constrained to disallow this appeal.
PEARSON L.J. I agree, and have nothing to add.
LORD DENNING M.R. I agree. In dealing with the complicated sections of the Income Tax Acts I always find it helpful to take a simple illustration of how they work. Mr.Heyworth Talbot has provided us with one. He took the case of a company which makes up its accounts to the end of December in every year. It makes large profits which it does not distribute. A shareholder, A, owns the whole of the issued capital. Three days before the end of December, A sells all his shares to B. The accounting period comes to an end. Seven days later, B sells all his shares to a third person, C. The company has made large profits but distributes no dividend within a reasonable time. Thereafter, but not within a reasonable time, the company pays a substantial dividend to C. The commissioners, make a direction under section 245 whereby the income of the company for the year is deemed to be the income of the members. And under section 248 the income is to be apportioned in accordance with the respective interests of the members.
Who are 'the members' for this purpos For many years it was thought that an apportionment could only be made against those persons who were members on the last day of the accounting period. But the decision of the House of Lords in the Fendoch case showed that view to be wrong. The House was clearly influenced by the provisions of paragraph 4 of the First Schedule of the Finance Act, 1922 (now reproduced in section 250 of the Income Tax Act, 1952), which enables the Special Commissioners to require the company to furnish a statement for any year or other period for which the companys accounts have been made up of the names and addresses and particulars of the respective interests of all members of the company. In view of those provisions the House held that the members against whom an apportionment can be made comprise all those persons who have been members of the company during the accounting period. So in the instance I have put, A and B would both be members, but not C.
It becomes, therefore, the duty of the commissioners under section 248 to apportion the income between A and B 'in accordance with the respective interests of the members.' In making this apportionment, the commissioners are not bound to ask themselves, who would have received the dividend if it had been distributed. They may deal with the matter more broadly and consider the whole position of the members under the companys constitutio : see F. P. H. Finance Trust Ltd. v. Inland Revenue Commissioners (No. 2).
Since the commissioners are entitled to consider the matter thus broadly it seems, in the instance put, that it would be unfair to charge B with the whole of the income, seeing that he received none of it. It is impossible to charge it to C, who has received it, because he was not a member during the accounting period. It would seem only right to charge most of it to A, because he probably knew of the large profits that had been made and got a higher price from B on that account. It would be absurd to suppose that A could get rid of his potential liability by transferring the whole of his shares a few days before the end of the accounting period. The only fair way of charging the members is to apportion the income between A and B according to the time for which they held the shares during the accounting period. That is what the commissioners did in this case, and I see nothing wrong with it.
On the point of reasonable time, I agree this is a question of fact for the commissioners and they have made no error in point of law.
I agree that this appeal should be dismissed.
The three appeals dismissed with costs.
Leave to appeal to the House of Lords.