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A. and J. Kucklow Ld. (In Liquidation) Vs. Inland Revenue Commissioners. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1955]28ITR850(Cal)
AppellantA. and J. Kucklow Ld. (In Liquidation)
Respondentinland Revenue Commissioners.
Cases ReferredYoung v. Bristol Aeroplane Co. Ld.
Excerpt:
- per evershed m. r. - where the question involved is the question of fact whether a reasonable part of the companys income has been distributed it is plainly wrong that the question should not be investigated till years after the event. it is further essential that the commissioners findings of fact should be expressed in clear and unambiguous language and that in particular it should not be left in doubt whether or to what extent evidence is accepted.decision of harman j. affirmed.appeal from harman j.this was an appeal from a judgment of harman j. dated november 17, 1953, affirming a decision of the special commissioners, which upheld a direction made against the appellant company, a. & j. mucklow ld. (in liquidation), under section 21 of the finance act, 1922, and section 31 of the.....
Judgment:
Per EVERSHED M. R. - Where the question involved is the question of fact whether a reasonable part of the companys income has been distributed it is plainly wrong that the question should not be investigated till years after the event. It is further essential that the commissioners findings of fact should be expressed in clear and unambiguous language and that in particular it should not be left in doubt whether or to what extent evidence is accepted.

Decision of HARMAN J. affirmed.

APPEAL from Harman J.

This was an appeal from a judgment of Harman J. dated November 17, 1953, affirming a decision of the special commissioners, which upheld a direction made against the appellant company, A. & J. Mucklow Ld. (in liquidation), under section 21 of the Finance Act, 1922, and section 31 of the Finance Act, 1927, to the effect that the actual income of the company from all sources, for the period from the close of the last complete financial year of the company on April 30, 1943, to the commencement on December 9, 1943, of the voluntary winding up of the company, should be deemed to be the income of its members, and consequently be apportioned among such members for the purposes of their assessment to surtax, the only members of the company being two brothers named respectively Albert and Jothan Mucklow.

The facts are fully stated in the judgment of Jenkins L. J.

Millard Tucker Q. C. and G. B. Graham for the company. Section 21 of the Finance Act, 1922, was directed against the avoidance of super-tax; the present case is not within the mischief of the section for the commissioners found that the reconstruction scheme was not a devise to avoid tax.

Under section 21 the special commissioners may make a direction on the whole of the undistributed income if the company has unreasonably failed to distribute any part of it, however small that part. The power of direction is not limited to the part which ought reasonably to have been distributed. That is why in Thomas Fattorini (Lancashire) Ld. v. Inland Revenue Commissioners Lord Atkin described section 21 as being of a 'highly penal nature,' Fattorinis case shows that, to prove that the company acted unreasonably in withholding income from distribution, the Crown must show not only that there was a balance of income in hand for that period, but also that a reasonable part was not distributed. In reaching that conclusion they must consider the liabilities of the company. The income which is unreasonably withheld must be, in the words of the preamble to section 21, 'income which would otherwise be 'distributed.' That makes it clear, as Harman J. said, that the circumstances mentioned in the proviso to section 21 of the Act of 1922 do not provide the exclusive test of what is reasonable for this purpose. For example, it may be that a company has past accumulated losses which would make it unreasonable to declare a dividend in a year when the company happens to have made a profit. The proviso specifies certain matters which the commissioners have to take into account, but they have also to consider any other commercial matters which would be present to the minds of the directors sitting in the board room of the company. Contrary to the view which Harman J. expressed, account could and should be taken of the needs of the new company, for there was continuity of the companys business here.

Under section 21 it was open to the company to say that, because of liquidation, income which would otherwise have been available for distribution, was no longer available. Section 31 of the Act of 1927, provides for the position after liquidation has intervened, and provides that income for the broken period is to be deemed available, although in fact it could only be distributed after the period if the company had declared a dividend before going into liquidation, which became payable after liquidation commenced, and such a dividend would only be payable then provided payment would not be in competition with the creditors of the company. Section 31 provides, in other words, that the income of the broken period is to be deemed to be capable of being distributed, notwithstanding the practical difficulties. But section 31 is still subject to the preamble to section 21 of the Act of 1922, and the income must be 'income which would otherwise be distributed'. It is inadmissible to start with the assumption that if section 31(4) applies, direction is automatic unless and until the company shows good reason why the income was not distributed. H. Collier & Sons Ltd. v. Inland Revenue Commissioners is not a binding authority to that effect. It is submitted that the judgments of the majority do not go to that length, or if they do, they are to that extent obiter, for the question was not before the court. The judgment of Romer L. J. clearly does not support the view that direction under section 31(4) is automatic.

The contention on behalf of the company is that the original finding by the commissioners on the facts (which was not withdrawn by them on their further finding), was correct. 'Reasonable' must be given its ordinary meaning; it is not limited by the statutory provisions. There is no affirmative evidence here that the company acted unreasonably, and the commissioners found that the reconstruction was not a device to avoid tax. To carry out the reconstruction the concurrence of the shareholders of the old company had to be obtained. They wanted the scheme to go through. The money would be available for the purposes of the new company, and unless it was available the reconstruction could not be carried out. This is a perfectly proper transaction and a reasonable thing for the company to do. With regard to the penultimate period it was held that it was reasonable not to declare a dividend, and in normal circumstances it would not have occurred to anyone to declare a dividend for the broken period. The company does not contend that they could not notionally have made a distribution, but that it would not be unreasonable not to do so.

[EVERSHED M.R. Would a company be in a worse position if it distributed a part of its income but not a reasonable part, than if it had distributed nothing at all ?]

That might be so. A distribution might in some cases cause the onus of proof to shift to the detriment of the company, but that is not the present case.

Heywood Talbot Q. C. and Sir Reginald Hills for the Crown. By section 21 of the Finance Act, 1922, the commissioners are empowered to direct if they are of opinion that a company has not distributed a reasonable part of its income. In reaching their conclusion they are to have regard to the requirements referred to in the proviso. Section 21 does not refer to 'income available for distribution.' That expression was introduced by section 31 of the Finance Act, 1927, and it is used in sub-sections (1) and (4) of section 31 as a convenient formula for the income which does not fall within the proviso to the original section. The statutory scheme is, therefore, to divide the companys income into two groups, first that which is within the proviso to section 21 of the Act of 1922, as amended by section 31(1) of the Act of 1927 : this income can reasonably be withheld from distribution. The second group is the remainder of the income, together with income excluded from the proviso to the original section by sub-section (1) of section 31 of the Act of 1927. Prima facie it is not reasonable to withhold the second group from distribution; this income ought to be distributed. The legislature had not in mind a tertium quid, and the proviso as amended covers the whole field of income which can reasonably be withheld. Consequently, if it be shown that there is income for the broken period which has not be distributed, and which is not required for the purposes specified in the proviso to section 21, direction under section 31 is automatic, and it is for the company to show, if it can, why it is unreasonable to say that the income should not be distributed. Theoretically, there may be some reason why it would be imprudent to distribute income which is not required for current or future needs within the proviso, but as the income with which the section is concerned represents what is available after, for example, any accumulated past losses have been allowed for, such cases would necessarily be rare.

In the present case the income for the broken period has not become notionally available for distribution by virtue of sub-section (1) of section 31 of the Act of 1927; it was never within the scope of the proviso to the original section 21.

Reliance has been placed by the company on wording in later enactments where imperative directions are given in clear terms. It may be that the technique of drafting has improved with time, and it is admitted that section 31 is not, perhaps, happily expressed. These are, however, irrelevant considerations, and the later enactments cannot be invoked to construe the earlier provision.

Colliers case is a binding authority and supports this interpretation of section 31 of the Act of 1927. The company has sought to show that the point was not argued before the court in that case, and it is, of course, conceded that the Crown was not called upon to argue it, but the decision is not the less authoritative because the court took the view that the point was too clear to require argument. The opposite interpretation was, indeed, argued by Mr. Burrow Q. C. It was also argued in the court below before Finlay J. It is, therefore, incorrect to say that the point was not before the Court of Appeal. But even if the point had not been argued and was not before the court, it is submitted that the opinions of Lord Hanworth M. R. and Slesser L. J. would have great persuasive weight and that this court would be slow to reject them, particularly as Colliers case has been acted on for many years. It is submitted that both Lord Hanworth M. R. and Slesser L. J. regarded section 31(4) as peremptory, and Romer L. J. said nothing which indicated that he took an opposite view, though he disposed of the case on other grounds.

If, however, it is held that section 31(4) is not mandatory, and that the commissioners have a discretion to decide whether, on the facts, the company have, or have not acted reasonably in not distributing income for the broken period, the proviso to section 21 of the Act of 1922 must be again invoked to decide what is reasonable. 'Reasonable' cannot in this provision be defined by commercial standards divorced from the statutory context. The discretion must be exercised by reference to a standard which is intelligible, having regard to the statutory scheme. The proviso to section 21 gives an indication that though it is reasonable to withhold from distribution income which is required for present or future needs, it is unreasonable not to distribute income which is not so required. On the basis of the proviso the commissioners found that this company had no requirements which made it reasonable to retain income because the requirements for which funds may be retained within the proviso are those of the companys business, and that business ceased when it was sold to another company. The requirements of the new company cannot be regarded as requirements of the 'companys business' within the proviso, and the requirements of the new company as such are, of course, wholly irrelevant. See Montague Burton Ld. v. Inland Revenue Commissioners.

The commissioners have made a finding of fact on this point which, as Harman J. held, is conclusive in favour of the Crown. They were rightly directed in reaching that conclusion and they observed the direction.

The revenue authorities have shown that there is income of the broken period which was available for distribution, and they have then considered what reason, if any, there could be for withholding income from distribution which was in any way comparable with the reasons which the statute indicates would be regarded as being reasonable. They were unable in the case of a company in liquidation to find any such reason. They have, therefore, established a prima facie case against the company, and the onus of proof which, as Fattorinis case shows, was first on the Crown, has not shifted to the company, to show, if they can, that, contrary to all expectation there was some commitment which made it unreasonable to declare a dividend. This statute has been described as of 'a penal nature,' but this is not a criminal case and the Crown has done all that could be reasonably required to shift the onus.

Millard Tucker Q. C. in reply. It is not correct to say that the commissioners original finding of fact that retention was not unreasonable was divorced from the statutory scheme. All that they were saying was that, if they could look at the question without regarding the proviso as furnishing the exclusive test of what was reasonable (and it is not the exclusive test : see Montague Burton Ld. v. Commissioners of Inland Revenue), and if they were not bound by the assumption that direction under section 31(4) was automatic, then they would have held that it was not automatic.

The phrase 'income available for distribution' was introduced to deal with the position where a company has gone into liquidation with the result that a dividend could not normally be declared or paid. In spite of practical difficulties, income of the broken period and the penultimate period was to be deemed available for distribution without any 'reasonable' period of grace. It is inconceivable that the legislature would have imposed an automatic liability irrespective of any test of reasonableness. This would have mean that the directors would have had to estimate exactly the income for the broken period before it had concluded, for it would be too late to do anything about it after liquidation had once commenced, and they would have had to declare a dividend which exactly absorbed the surplus income for if they had made any mistake they would be liable to a direction.

If it had been intended that direction under section 31(4) was to be automatic it would have been simple to have said so in appropriate clear terms : cf., section 14 of the Finance Act, 1939, which can be contrasted with section 14 of the Act of 1937 where 'available for distribution' clearly has its primary meaning of 'capable of being distributed.' The provisions in the First Schedule to the Act of 1922, as amended by section 31(7) of the Act of 1927, would be inappropriate if liability was automatic. Further section 18 of the Act of 1928 (amending the procedure of section 21 of the Act of 1922) contains nothing appropriate to automatic liability. Where automatic liability is expressly stated it is significant that these procedures are expressly excluded.

In Colliers case it was not contended that direction under section 31(4) was automatic. The point was first taken by Slesser L. J. intervening in the argument, and though Mr. Burrows Q. C. sought to challenge it, he probably did not do so as fully as he would have done if it had been fully argued. In his judgment Slesser L. J. was clearly of opinion that direction under section 31(4) was automatic but, in reaching that conclusion, he proceeded on the footing that under the original section 21 the power of direction applied only to the part of the income which ought reasonably to have been distributed; whereas in Colville Estate Ld. v. Inland Revenue Commissioners, a decision which was approved by the House of Lords in Fattorinis case but which was not cited to the court in Colliers case, it was decided that the power of direction applied to the whole of the undistributed income. Having regard to section 31(5) it is submitted that that error went to the root of the judgment of Slesser L. J. and vitiates it. See also David Carlaw & Sons Ld. v. Commissioners of Inland Revenue. Romer L. J. in Colliers case did not commit himself on this point : the judgment of Lord Hanworth M. R. is not clear; he nowhere said in terms that direction unders section 31(4) was automatic, but if he was taking the same view as Slesser L. J. then his judgment is vitiated by the same fundamental error. In that case, the judgment of the majority is subject to review on the principle of Young v. Bristol Aeroplane Co. Ld. If, on the other hand, it is incorrect to attribute this view to Lord Hanworth M. R., then the judgment of Slesser L. J. stands alone.

Cur. adv. vult.

June 3, 1954. EVERSHED M. R. (reading his judgment) read section 21(1) of the Finance Act, 1922, and continued : That section as amended by section 31 of the Finance Act, 1927. [His Lordship read section 31(4), and continued :] It is not in doubt that the company, A. & J. Mucklow Ld., was at all relevant dates a company to which section 21 of the Act of 1922 applied. The company went into voluntary liquidation on December 9, 1943. Directions were made as contemplated by the section (a) in respect of the companys last full financial year which ended on April 30, 1943, and (b) in respect of what has been called the 'broken period' from May 1 to December 9, 1943. The company appealed against both these directions to the special commissioners, who discharged the first direction (relating to the year ended April 30, 1943) and the Crown have not challenged the propriety of the discharge. As regards the broken period, the commissioners confirmed the direction but, at the companys request, stated their conclusion in the form of a case stated.

Harman J., before whom the case came, was uncertain whether or so what extent the commissioners had based their conclusion on the view that, in the case of a broken period up to a companys liquidation, a direction, once given, operated necessarily and automatically to the full extent of the income treated as available, or on the further view that H. Collier & Sons Ltd. v. Inland Revenue Commissioners, in this court so decided. Harman J., being of opinion (for which he stated his reasons) that section 21 (as amended) did not make a direction relating to a broken period so inescapable or 'automatic' and that Colliers case was not a binding authority to that effect, referred the matter back to the commissioners. They, after a further review of a number of relevant matters and considerations, reported to the judge in paragraph 7 of their report of finding : 'After carefully considering the hole of the facts we are unable to find any circumstances or combination of circumstances making it reasonable for the company to refrain from making a distribution. We therefore conclude that the company acted unreasonably in so refraining, and we find that it did not distribute a reasonable part of its actual income for the period in question.' In the opinion of Harman J. this was a finding of fact justified by evidence and not disqualified by any misdirection in law. He therefore dismissed the companys appeal.

It will have been noticed that the period with which we are concerned is that from May 1 to December 9, 1943, a period beginning more than 11 yeas ago. It is indeed nearly four years since the validity of the two directions came before the special commissioners. I am not criticizing anyone concerned at any stage; for I have no grounds on which to base any criticism, other than the mere fact of the passage of the years. Both Mr. Millard Tucker and Mr. Heyworth Talbot regretted the delay. Where the question involved is (as I assume it for the moment to be) the question of fact, aye or no has a 'reasonable' part of the companyss income been distributed, it is so plainly wrong (and not less wrong though both parties were content) that such a question should not be investigated till years after the event - when some of the witnesses might indeed be no longer available - that I have felt bound to draw attention to so remarkable a lapse of time.

I have also been somewhat disturbed by the form of the case and the later report of finding. In those documents the commissioners touched upon a number of matters and considerations, and I am not satisfied that all of them were pertinent to the question to be determined. In any case Harman J. was, at the first hearing before him, left sufficiently uncertain of the commissioners intention on matters of fact for him to refer the case back to them; and on the second hearing, both the company and the Crown were able to contend that the commissioners findings were in their own favour. I hope I shall in the circumstances be forgiven if I emphasize, in cases of this character, the advantage and desirability of clear expression by the commissioners of their findings of fact; and I venture to add that if the method is adopted of reciting the effect of a witnesss evidence, the conclusion on the commissioners part that the evidence is accepted 'with a grain of salt,' though lively as a form of expression, leaves an appellate court uncertain whether or to what extent the evidence should be treated as having been rejected. In the present case the costs of two hearings before the commissioners, two hearings before the judge, and one hearing of several days in the Court of Appeal, have eventually to be borne by one party or the other.

I have said that the case stated touched upon many matters of fact. To my mind, the essential facts are these. During the short life of about four and a half years, during which the companys activities were, inevitably, restricted by the war, its resources, nevertheless, greatly increased. No dividends were ever declared and on April 30, 1943, the accumulated balance to the credit of the companys profit and loss account was over Pound 145,000. It has been decided that the uncertainties and possible requirements of the future justified the two brothers, who were the sole directors and shareholders, in their decision to make no distribution for the year then ended. During the period from May 1 to December 9, 1943, a further sum of profit was earned of over Pounds 14,500, which amount must (it is conceded) be treated as having been, within the terms of section 31(4) of the Finance Act, 1927, 'available for distribution to the members' in respect of that broken period. The bulk of the companys assets were then sold to a new company (A. & J. Mucklow & Co. Ltd.) having somewhat wider objects than those of the selling company. The whole of the consideration for the assets sold was distributed to the two shareholders and used by them in taking up shares in the new company; but there was excluded from the sale cash (or its equivalent) amounting to Pounds 35,000, and this sum was also paid by the liquidator to the two shareholders who 'put it on deposit to guarantee an overdraft of the new company.' We were informed that the whole sum still remains so deposited; but it always was, and is, the property of the two brothers, and there is not any evidence that it was any part of the terms of the sale that that sum, or any sum, should be provided to secure the new companys banking account.

If, therefore, the commissioners found and intended to find as a fact that, of the Pounds 14,500 income of the broken period available for distribution, the company did not distribute a reasonable part there was plainly, in my judgment, evidence to support such a finding; and I agree with Harman J. that the commissioners did so find and intended so to find. Nor do I think that there was any material misdirection on their part. The commissioners had found in the companys favour as regards the financial year ended April 30, 1943. They also acquitted the company and its directors of having deliberately sought to avoid surtax, but rightly regarded that fact, notwithstanding the terms of the preamble to the section, as not being conclusive. On the other hand, it is clear from their report of finding that they had in mind, as regards onus of proof, the speech of Lord Atkin in Thomas Fattorini (Lancashire) Ltd. v. Inland Revenue Commissioners. They followed the directions given to them by Harman J. in his first judgment that the circumstances mentioned in the proviso to section 21(1) of the Act of 1922 were not intended to be exhaustive, that the 'direction' was not inescapable or mandatory, and that Colliers case did not require them so to regard it; and finally, they took the view (as Harman J., in my opinion rightly, had intimated to them) that a mere desire on the part of the two director-shareholders to support or to be able to support the needs of the new company - if and so far as it was present to their minds - was an extraneous and irrelevant consideration. In these circumstances I cannot regard the final paragraph of their report (which I have already cited) as otherwise than a clear and also a justifiable, and therefore conclusive, finding of fact adverse to the company within the meaning of section 21 of the Act of 1922, as amended.

I have had the advantage of reading the judgment about to be delivered by Jenkins L. J., who has set out more fully the relevant facts. I respectfully adopt my brothers reasons for dismissing the present appeal on this short ground, and I do not desire further to elaborate my own.

The result is sufficient to dispose of the appeal. The further point, however, was taken by the Crown and fully argued before us (to which some reference has already appeared), namely, that in the case of the broken period ending with the liquidation of a company within section 21 of the Finance Act, 1922, the effect of the amending sub-section (4) of section 31 of the Finance Act, 1927, is to render a direction once given inescapable, or (to use the words used during the argument) 'mandatory' and 'automatic.' It was, that is to say, argued by the Crown that the provisions of the original section, expressed to create liability for taxation only when the company was shown not to have distributed a reasonable part of its income, were inapplicable in the case of a direction relating to a broken period - such direction ipso facto creating liability to taxation in respect of the whole income. It was, moreover, contended by the Crown that we were in any case bound so to hold by the judgments of the majority of this court in Colliers case. As both these contentions have raised matters of general importance I have thought it desirable to give my reasons, in agreement with Harman J., for rejecting both of them.

The first contention rests upon the view that the phrase 'deemed to be income...available for distribution to the members' means in its context 'income which ought to have been distributed.' I have (with all respect to two of the judgments in Colliers case, and to the arguments of counsel for the Crown) been wholly unable to accept this argument. The relevant amendments introduced into section 21 of the Act of 1922 by section 31 of the Act of 1927 were clearly designed to prevent avoidance of the impact of the former section by the expedient of liquidation. The conception of the income earned up to the date of liquidation being 'deemed to be available for distribution' is no doubt artificial : for unless the company and its directors resolve before actual liquidation to make a distribution by way of dividend, it will be too late afterwards. And as a practical matter it will (in many cases at least) not be easy to see on what grounds of the kind contemplated by the original section a company on the eve of liquidation will reasonably have declined to make any distribution. Nevertheless, I confess that I have been unable to see any ground in the context for construing the formula used in section 31(4) of the Act of 1927 - a formula commonly used and well understood in relation to company matters - in other than its ordinary sense, that is, income which the company can in fact, and properly, pay out by way of dividend to its members.

The formula is twice introduced by the amending section 31. By sub-section (1) (which I quote more fully hereafter) it is provided, by way of qualification to the proviso in sub-section (1) of the original section, that income applied or applicable for certain specified purposes (which might otherwise be regarded as bringing the income within the scope of the proviso) should be deemed to be available for distribution, so that its non-distribution in fact cannot be justified as falling within the proviso. In this instance I can see a somewhat more forceful argument for suggestion that the formula is being used otherwise than strictly in its ordinary meaning, but the argument is not, in my judgment, strong enought; certainly not strong enough to give to the phrase an unusual and special meaning in sub-section (4).

If Parliament had intended by the amendment to create an 'automatic' liability for tax, it would surely have sought - and found without difficulty, for example by reference to the preamble to the original section itself -appropriately clear language. Our attention was drawn to more than one instance in later statutes in which such an intention has been clearly expressed. Thus by section 14 of the Finance Act, 1939, concerning 'investment companies,' it is provided in unambiguous terms that 'the whole.....income.....shall....be deemed for the purposes of assessment........to be the income of the members of the company.' Mr. Heyworth Talbot attributed these instances of clear language to mere improvement in drafting technique; and I am not seeking to construe the language of an Act of 1927 by invoking the terms of later enactments. But to the somewhat cynical argument of the Crown one answer appears to me to be that, in an enactment described by Lord Atkin in Fattorinis case as penal in its effect, clear language is required to impose liability : and I should be loth to derive obliquely from language which, ordinarily understood, could not have so far-reaching an effect, a result which I venture to think would occur to no one on a first reading, and which would have the somewhat capricious consequent that those against whose companies a direction had been made would have no answer or effective means of challenge, while others would escape liability for no better reason than that, in their cases, not direction had in fact been made.

Mr. Tucker sought further to meet the Crowns argument by a close analysis of the 'mechanics' contained in the First Schedule to the Act of 1922 as amended, contending that those provisions were wholly inconsistent with the view that a 'direction' once made as regards a broken period was 'automatically' effective and left no room for challenge on the part of the taxpayer. In the circumstances, I have not found it necessary to pursue the matter into these legislative by-ways. I therefore express no view upon them save to say that, as at present advised, I doubt whether these 'mechanical' provisions carry the matter further one way or another, for I am not satisfied that the 'other periods' mentioned (which, according to Mr. Tucker, referred to, or at least included, 'broken periods' of the kind under consideration) do more than include periods, not being yearly periods, in respect of which companies carrying on as going concerns may make up their accounts. I therefore reject Mr. Hyworth Talbots argument based on the construction of the relevant sections - if I am free so to do.

That leaves the further question - and, in my opinion, the much more difficult question - what precisely was decided by Colliers case, and whether, having regard to the principles stated by this court in Young v. Bristol Aeroplane Co. Ld., that decision is now binding on this court. Colliers case was like the present in that, before Finlay J. at first instance and the Court of Appeal, only the income of the 'broken period' was in question. That 'broken period' was from immediately after the end of the companys last financial year on September 1, 1928, until the date of the companys going into liquidation on December 20, 1928. There was however, one special feature in the case around which the whole of the argument of the appellant company (for the Crown were not called upon to argue) turned in the Court of Appeal, namely, that on November 16, 1928, the company had agreed to sell its assets and undertaking to the purchasing company, and it was part of that contract (by clause 8) that the company should from the close of business on August 31, 1928, be deemed to have been and to be carrying on the business on behalf of the purchasing company. The Crown made no claim in respect of the companys income from and after the date of the contract (November 16). The contest was confined to the period from September 1 to November 15 inclusive.

The appeal of the company against the 'direction' made upon the company had, pursuant to the First Schedule to the Finance Act, 1922, gone for hearing before the board of referees, and from the board (which confirmed the direction) upon a case stated to Finlay J. The terms of the case stated are fully set out in the reports. The contentions of the company and the Crown were set out in the case and I shall later return to them.

Finlay J. decided the case adversely to the company on the simple ground that whether the company had 'not.....distributed......a reasonable part' of its actual income was a question of fact which the board had decided on evidence and had, therefore, conclusively decided against the company. It seems to me manifest that Finlay J. did not regard a direction in respect of a broken period as per se conclusive, though he did not decide the case on that ground. I am content to repeat the citation taken by Harman J. from the report in Tax Cases : Your get the winding-up resolution on December 20, and thereupon the section says that the income of the company for the period from the end of the last year shall, for the purposes of the section, be deemed to be income available for distribution to the members of the company. That does not, of course, mean that you are, without any more examination, to say that it has become obnoxious to the section. What it means is that it is income which you are entitled to treat as income examination, to say that it has become obnoxious to the section. What it means is that it is income which you are entitled to treat as income of the company and, therefore, as income which, if the other conditions of the section are fulfilled, that is to say, if there has been what I may call the unreasonable withholding of it, is income as to which the appropriate machinery may be brought into operation.'

The report in the Law Reports sets out the argument of counsel for the appellant company, which fell into two parts. The first part was to this effect : that the question under section 21 of the Act of 1922 (as amended) fell to be determined at the end of the broken period, namely, on December 20, 1928; and that on that day there was not income capable of being subject to a valid direction, for the company had, one the previous November 16, parted wholly with it from September 1 onwards. At that point in the argument Slesser L. J. is reported as interjecting the question (in effect) : 'Do not the terms of section 31(4) of the amending Act require the conclusion that the income of the period is to be deemed income available for distribution ?' Counsel then passed to the second part of his argument - namely that accepting Slesser L. J.s inference from the terms of the section, still, having regard to the contract, it could not at the end of the period have been reasonable to distribute any part of such income.

I have already observed that the court dismissed the appeal without calling upon the Crown to argue. The court consisted of Lord Hanworth M.R., Slesser and Romer L. JJ., of whom the last named clearly, as I think, rested his conclusion on the same ground as had Finlay J. After observing that in his opinion the words of section 31(4) of the Act of 1927 were too strong for the appellant companys counsel, he said : '.....All we have to consider is whether it was open to the Board of References to come to the conclusion that a reasonable part of that income had not been distributed to the members. As the income is to be deemed to be income available for distribution to the members, and on that hypothesis there was no conceivable reason why the income should not have been distributed amongst the members, it is clear that the Commissioners could find, as they did in fact find, that it was unreasonable not to have so distributed it : in other words, that a reasonable part of that income had not in fact been distributed amongst the members.'

Respectfully agreeing, as I do, with the view of the construction of the relevant parts of section 21 of the Act of 1922 and section 31 of the Act of 1927 which underlies the conclusion of Romer L.J., I add only that his reasoning appears no less applicable to the present case. There is no hint or trace of acceptance by Romer L.J., of the argument that, in the case of a broken period, a direction is 'automatic' or inescapable. But did Lord Hanworth M. R. and Slesser L.J., on the contrary, so hold ?

With every respect to Lord Hanworths judgment, I am bound to say that I find it, as did Harman J., somewhat obscure; and if he took the view attributed to him, at least he nowhere said so in terms. On the other hand, I think that it is impossible to avoid the conclusion that Slesser L.J. did deliberately so conclude.

It seems to me clear that Slesser L.J. regarded the formula 'income available for distribution' as meaning, according to its ordinary usage, or at least in the context of section 31 of the Finance Act, 1927, not only available, that is 'capable of being properly distributed,' but also which ought to have been distributed. Thus, in the second paragraph of his judgment he said that if the phrase was to be read in its ordinary meaning 'the direction is clear' - which, I think, must mean 'the commissioners direction is mandatory.' So at the end of his judgment, after considering the possible case in which any distribution would be 'unlawful' (upon which he expressed no view) he concluded : 'He' (that is, Finlay J.) 'seemed to be of opinion that the commissioners must still consider what was a reasonable part of the income for distribution under the Act of 1927, and decided the case, as I understand him, as a question of fact. Because I have arrived at a different view of the law on that matter, and agree with the Master of the Rolls in thinking that the words of sub-section (4) are to be read in the sense which I have indicated, I have thought it right in courtesy to the learned judge to give full expression to my opinion.'

By the passage last cited, Slesser L.J. is rejecting altogether the necessity of applying in the case of a broken period, any test of reasonableness. He is, however, also attributing to Finlay J. the view that the commissioners had the positive duty of discovering what was the reasonable part of the income which the company ought to have distributed - an attribution which shows, as later appears, that the Lord Justice had fallen into an error, and an error which I think went to the root of his judgment.

I have already given my reasons for thinking that the phrase 'income available for distribution' means no more and no less than what it says, and, with all respect to Slesser L. J., I have been unable to see how its 'natural or ordinary' meaning can be other than I have stated. But has it a special meaning in its context in these enactments It is, I think, here that the clue to the judgment of Slesser L. J. can be found : and to understand it, it is necessary to cite from section 31(1) of the Act of 1927 which Slesser L. J., himself quoted : 'Sub-section (1) of section 21 of the Finance Act, 1922, shall have effect as if at the end thereof there were added as a new paragraph the following : For the purpose of this sub-section any such sum as is hereinafter described shall be regarded as income available for distribution among the members of the company and not as having been applied or being applicable to the current requirements of the companys business or to such other requirements as may be necessary or advisable for the maintenance and development of that business........' There follows a list of certain 'applications' which are by the effect of the sub-section taken out of the benefit of the proviso to the original sub-section and declared, even though they may have been in fact expended, still to be 'available for distribution' among the members.

Now Slesser L. J. had observed that under the original sub-section [of the Act of 1922] it was the commissioners duty to arrive at the 'notional' figure which ought to have been distributed - that being, as he thought, the limit of liability for taxation - arrived at, in the light of the proviso, by reference to the test of reasonableness. '....The members do not occur in the Act of 1922 for the reason, as I think, that the legislature was then dealing only with that part of the income which was deemed to be a reasonable art ascertained as in that section provided.'

There follows in the judgment the reference to section 31(1) of the Act of 1927, and the conclusion is stated in the following passage : 'That points to a complete and exhaustive antithesis between the income being available for distribution among members of the company on the one hand, and money applied to the requirements of the companys business or requirements for maintenance and development of the business on the other hand. If that be a right view, and it is consistent with and supports the other views which the Master of the Rolls has expressed, it follows that, when the statute of 1927 speaks of income available for distribution to the members of the company, it is an express provision that the ascertained income shall be deemed to be available for distribution, regardless of whether it is a reasonable part within the meaning of the earlier Act.'

From the passages which I have quoted from the judgment of Slesser L. J., I have for my part come to the conclusion that his acceptance of the conception of the 'mandatory' character of a direction in the case of a broken period depended on the view which he took of the meaning of the phrase 'income available for distribution'; and that the latter view in turn depended on his opinion that the phrase was introduced so as to be applicable only in those cases in which he assumed duty of the commissioners to ascertain the 'notional' or reasonable amount which ought to have been distributed was excluded.

It is conceded that Slesser L. J. fell into error in supposing that in cases falling under the original Act the commissioners had a duty to ascertain any 'reasonable' figure which fixed the limits of tax liability. Colville Estate Ld. v. Inland Revenue Commissioners was not cited to the Court of Appeal in Colliers case. In Colvilles case it had been clearly held that if in such a case as I am supposing, that is, one falling under the terms of the original Act of 1922, a company had not distributed a reasonable part of its actual income, then the members were liable to be taxed in respect of the whole of that income and not a reasonable part only of it; and that view of the section was later approved in the House of Lords in Fattorinis case, per Lord Atkin., per Lord Macmillan, and per Lord Wright.

It was argued that the error into which Slesser L. J. fell was nevertheless not essential to the ratio of his decision of the case. As a matter of strict logic, it may be that the conclusion was independent of the false premise. The question is, however, not whether, as a matter of logic, the conclusion depended on the premise, but whether Slesser L. J. thought that his conclusion followed from the antithesis which he had earlier stated; and I am very far from satisfied that, if it had not been for his view of the effect of the original section and of the contrast which he consequently discerned from the introduction of the formula 'available for distribution, etc.,' he would ever have formed the view which he did of the meaning of that formula. For my part, therefore, I should be prepared to hold that the judgment of Slesser L. J., if it would otherwise be authoritative, can be reviewed in this court (within the principle of Young v. Bristol Aeroplane Co. Ld.) on the ground that it was delivered, in this essential respect, per incuriam, or that a material part of the reasoning on which the conclusion rests is inconsistent with later pronouncements (in Fattorinis case) of the House of Lords.

I return to the judgment of Lord Hanworth M. R. I have already ventured respectfully to make the criticism that the judgment is somewhat obscure and to observe that certainly if the Master of the Rolls did accept the argument for the 'automatic' effect of a direction in respect of a 'broken period' he nowhere so stated in clear terms. Without multiplying citations I take one passage which seems to come most near to the language of Slesser L. J. : 'I have come to the conclusion that, in the case where there has been a winding up order or resolution, we are bound by the direct and simple words of section 31(4). In such a case the income of the company is to be deemed to be income of that period available for distribution to the members of the company, and the section explicitly eliminates in such a case the words within a reasonable time. The effect of taking out these words is that you get a hard and fat terminus ad quem, to which regard is to be had. You are not to allow a period during which there can be a determination whether the company shall or shall not divide a reasonable part of its actual income. I think the elasticity originally given by section 21(1) in regard to the part of the profits which was reasonably distributable, has also been eliminated.'

I was at one time inclined to think that Lord Hanworth had been disposed to base his conclusion rather upon the view that by December 20, 1928, it had become too late in any event for the company to justify, or determine upon, non-distribution; and if Lord Hanworths ration differed from that of Slesser L. J. then the latter would stand alone and would not, I apprehend, be binding on this court. But clearly Slesser L. J. had no doubt of the unanmity on this essential point between himself and Lord Hanworth; and I think that that view must be accepted. But I think also that the disabling quality in the judgment of Slesser L. J. must, as a consequence, equally affect that of Lord Hanworth M. R.

There remain two further points. First, a conclusion on this point was not essential to the result of this case. Second, as I have earlier stated, the 'mandatory' argument found no place among the Crowns contentions before the board of referees. The case of the Crown was that the company had not distributed a reasonable part of its income for either the last of the companys financial years or for the broken period - not materially distinguishing between the two. In my judgment these circumstances, together with the circumstance that the Crown was not called upon to argue in the Court of Appeal, support the view which I have formed that the judgments of the majority of the Court of Appeal may fairly be regarded as having, in the material respect, been given per incuriam. But my conclusions on these matters do not affect the result of this appeal which, for reasons earlier given, must in my judgment be dismissed.

JENKINS L. J. stated the nature of the appeal, read section 21(1) of the Finance Act, 1922, and section 31(4) and (5) of the Finance Act, 1927, and continued : The matter had previously come before Harman J. on November 26, 1952, when, not being satisfied with the finding of the special commissioners in the stated case on the question whether income had been unreasonably withheld from distribution, he remitted it to them for a further finding on that question, with directions as to the principles by which they should be guided in reaching their conclusion. The judgment under appeal thus proceeded upon the case as originally stated, together with the further finding for which the judge had called and which again upheld the direction. Mr. Tucker, on behalf of the appellant company, submits that the special commissioners misdirected themselves on the first occasion and were misdirected by the Judge on the second occasion, and that the direction should be discharged.

The appeal to the special commissioners related to a direction in respect of the financial year ended on April 30, 1943, as well as the direction in respect of the broken period from May 1, 1943, to the beginning of the voluntary winding up of the company on December 9, 1943, which is the subject of the present appeal. The special commissioners discharged the former direction, and there has been no appeal by the Crown from that part of their decision. The former direction is, therefore, no longer material save in so far as the special commissioners finding to the effect that there was no unreasonable withholding of profits from distribution as regards the year ended on April 30, 1943, can be said to afford an argument in support of the view that a similar conclusion should have been reached as regards the final period.

The history of the company is fully narrated in the case stated from which I extract the following :- 'The company was incorporated as a private company on April 12, 1939, to acquire the partnership business of builders and contractors previously carried on by A. & J. Mucklow. The authorized capital of the company was Pound 100,000. The issued capital was Pound 60,002 which was taken up equally by the brothers Albert and Jothan Mucklow, who were the sole directors. No increase was ever made in the amount of the issued capital.....By an agreement dated April 14, 1939 the company purchased the aforesaid partnership business for Pounds 93,924, satisfied as to Pounds 60,002 by the issue of shares as aforesaid the balance of Pounds 33,922 remaining as a loan from the partners. The company repaid this loan by making successive sums available between July, 1939, and April, 1941, for meeting tax liabilities of the partners. Cash amounting to Pounds 51,194 net was excluded from the sale and was retained by the partners. The company continued to trade from April 14, 1939, until December 9, 1943, when Jothan Mucklow was appointed liquidator in a voluntary winding-up. The business was sold by the liquidator on December 23, 1943, to a new company A. & J. Mucklow & Co. Ltd. formed for the purpose. At no time did the appellant company pay any dividends.'

The case goes on to comment on the companys trading activities and accounts from its incorporation down to December 9, 1943. It appears that when the outbreak of war made it impossible to continue the development of building estates which had at first been the companys main activity, the company turned to the hiring-out of machinery, such as tractors and bulldozers, with highly profitable results. The period to April 30, 1940, showed a loss of Pounds 12,394 explained as due to the writing-down of land on which development had to be suspended owing to war conditions. Thereafter profits were consistently made, amounting to Pounds 57,002 for the year to April 30, 1941, Pounds 55,496 for the year to April 30, 1942, and Pounds 44,987 for the year to April 30, 1943.

The case continues :- 'It appears from the above trading results that the balance on profits and loss account had accumulated by April 30, 1943, to Pounds 145,092. There was a further profit in the period up to the date of liquidation, December 8, 1943, of Pounds 14,534, bringing the total accumulation up to Pounds 159,626. These figures were subject to taxation liabilities.' ..... A bank overdraft was incurred by the company during initial trading period, and appears at Pounds 42,667 at April 30, 1940, Pounds 80,232 at April 30, 1941, and Pounds 32,650 at April 30, 1942, this last amount having been cleared by April 30, 1943, by which date there was a credit cash balance of Pounds 14,366. This credit cash balance had increased to Pounds 41,117 by December 8, 1943. A copy of an Analysis of balance-sheets as at April 30, 1943, and December 8, 1943, is annexed....This analysis shows the assets etc., Not immediately realizable, totalling Pound 136,066 and Pounds 127,824 at the respective dates, those realizable, totaling Pounds 30,266 and Pounds 18,035 and those liquid, totalling Pounds 40,107 and Pounds 75,117. A footnote states that taxation liabilities at December 8, 1943, paid subsequently but not provided for above have amounted to Pounds 49,748.'

After referring to the minutes of a number of meetings of the directors and of the company, the case continues :-'At the aforesaid directors meeting of October 18, 1943, it appears that after very careful consideration the directors recommended that the total of Pounds 145,091 to the credit of profit and loss account should be carried forward; it was so resolved at the ordinary general meeting of November 8, 1943. At the aforesaid directors meeting of December 4, 1943, it appears that the chairman explained that it was proposed to wind up the company; a special resolution to that effect, appointing Jothan Mucklow liquidator, was passed at the extraordinary general meeting of December 9, 1943. A new company, A. & J. Mucklow & Co. Ld., hereinafter called the new company was incorporated on December 23, 1943......The authorized capital of the new company was Pounds 250,000 and the issued capital Pounds 130,000. As in the case of the appellant company this was taken up equally by the brothers Mucklow who were the sole directors. The amount of the issued capital has not been increased. On the same day as that of the incorporation of the new company, December 23, 1943, the liquidator of the appellant company sold its business to the new company, the consideration for the sale being Pounds 131,682..... The capital assets of the appellant company at the date of liquidation amounted to some Pounds 220,000 reduced by taxation to about Pound 170,000. Of this latter sum about Pounds 35,000 net was excluded from the sale, paid by the liquidator to and retained in the hands of the brothers Mucklow, who put it on deposit to guarantee an overdraft of the new company.'

Evidence was given by both the brothers Mucklow. I extract the following from that of Mr. Jothan Mucklow as set out in the case :- '....The question of paying a dividend on the last day of the old companys existence, December 9, 1943, never occurred to him because there were no accounts, and it never occurred to him to consider a fresh lot of accounts. Everything he did was done by rush tactics, the whole purpose of which was that the companys expenditure policy should not change. He did not think there was any better reason for paying a dividend on December 9, 1943, then at the annual meeting on November 9, 1943, or that there could have been unless they had been making tremendous profits since the last accounts. The new company was still the same business, as far as he was concerned. When the new company was formed, he and his brother as shareholders of the old company retained Pounds 55,000 cash, but they had to repay to the liquidator Pounds 20,000 to meet the taxation liability of the old company which left them with about Pounds 35,000 but he did not regard that as effectively lessening the capital of the new company. The money was not retained for their personal use but was put on deposit for the new companys use. They had not drawn any of it, and it was still there. It had not been necessary to increase the issued capital of Pounds 130,000 but it would have been necessary, if they had been able to get going with the building.'

The decision of the special commissioners is thus stated in the case :- '27......We had been requested to express our opinion on the broad question of what was reasonable. Were it possible to view this question apart from the proviso to section 21(1) of the Finance Act, 1922, and section 31(4) of the Finance Act, 1927, with the relevant authorities, we should have formed the opinion that it was not unreasonable for the appellant company to pay no dividend in respect of the broken period up to the date of liquidation. But the matter was not so at large, and we had to determine it by reference first to section 31(4) of the 1927 Act, under which the income of the appellant company for the period in question must be deemed available for distribution, and secondly, to the proviso to section 21(1) of the 1922 Act, under which the test of what was reasonable had to be interpreted by reference to the current and future requirements of the appellant companys business. The evidence as to such requirements of the business at October, 1943, before liquidation was contemplated had much impressed us, and we had accepted it in discharging the first direction. But current and future requirements meant nothing in the case of a company which was being wound up, and the companys appeal must fail. Moreover, the case was, in our opinion, clearly covered by H. Collier & Sons Ltd. v. Commissioners of Inland Revenue, by the authority of which we are bound. We accordingly confirmed the direction.'

In his judgment of November 26, 1952, on the case as originally stated, Harman J. considered at some length the question whether (as the Crown submitted and the special commissioners had thought) Colliers case in this court was binding authority for the proposition that the words 'shall.....be deemed to be income of that period available for distribution to the members of the company' in section 31(4) of the Act of 1927 have the effect of making the income of a company for the period ending with the commencement of its winding-up-automatically liable to a direction under section 21 of the Act of 1922 on the ground that 'deemed to be income..available for distribution' means 'deemed to be income which there is no reason not to distribute,' or, in other words, income which if not distributed (as it never in fact could be in such a case) is withheld from distribution without reason, and, therefore, unreasonably withheld. Harman J. held that though a majority of this court (Lord Hanworth M. R. and Slesser L. J.) placed this construction on section 31(4), the case should not be regarded as a binding authority on this point, mainly, I think, on the ground that the view expressed upon it by the majority, which was the opposite of the view taken by Finlay J. below, was not necessary to the decision, inasmuch as the special commissioners had found on the facts that it was unreasonable not to have distributed the income in question, or in other words, that a reasonable part of that income had not been distributed; and the case could, therefore, be disposed of simply by holding, as did Romer L. J., that there was evidence upon which the special commissioners could so find. Harman J. therefore regarded himself as free to decide in accordance with his own views the question whether the language of section 31(4) imported automatically a notional failure to distribute a reasonable part of the companys income for the final period and consequent liability to direction, and for reasons which seem to me wholly convincing unless Colliers case forbids their consideration, he came to the conclusion that it did not.

On the question of onus of proof, Harman J. referred to Fattorinis case and in particular to this important passage from the speech of Lord Atkin : 'It seems clear that the discussion must proceed ab initio on the footing that the action of the directors must be judged by considering what their conduct would reasonably be if no question of surtax influenced their decision. Withholding of distribution for the purpose of avoidance of the payment of surtax by shareholders would, if found, obviously negative the reasonableness of any part so withheld. The other general point to be observed is that, as it seems to me, what has to be found is that the company acted unreasonably in withholding some part of its income from distribution. It is not enought to show that a part could reasonably be distributed, if at the same time it could be said, as it well might, that it was equally reasonable to withhold distribution. The section is highly penal, and I feel no doubt that the onus is originally and remains on the revenue to show that the company acted unreasonably in withholding part of its income from distribution. What is reasonable has consistently been held to depend upon the actual conditions known at the time for decision. In the application of this section it is what these directors recommend and these shareholders decide in those conditions of that company. There is no abstract conception of reasonableness, and the conclusion is not to be reached on a priori reasoning.'

In expressing his conclusion that the case should be remitted to the special commissioners for a further finding Harman J. said :- 'I conclude, therefore, that the commissioners misdirected themselves in holding that section 31(4) and Colliers case bound them to hold that the direction was mandatory and followed automatically in the circumstances. It may well be that it will usually follow, because it is hard to see what circumstances can make it reasonable to refrain when the company is on the point of expiring, having regard to the injunction to treat the profit as available for distribution and considering that the factors mentioned in the proviso to section 21 can have little weight. None the less, in my judgment, it is the duty of the commissioners to consider the matters as Finlay J. indicates in Colliers case. Have they done this I am unable to say. I cannot find from their statement about reasonableness in paragraph 27 of the case what factors they have considered in expressing this hypothetical view. They describe it as a broad question, and it looks as though they have considered reasonableness as divorced from the circumstances. There are two limiting considerations imported : first, that the income must be considered available and so forth, and, secondly, that the proviso to section 21 indicated two of the factors to be taken into account. Moreover, I think that the needs of the new company for financial support must be irrelevant. With these guides, the commissioners must seat themselves in the board room and consider the whole situation facing the directors at the relevant time, remembering Lord Atkins warning about onus. Unless they conclude that the directors have acted unreasonably, they must discharge the direction. I cannot feel sure that they have gone through this process, and I must say I feel great sympathy with them, for it is a hard one. It would be much simpler if the Crown were right and the result automatic, but I feel constrained to hold that it is not. Therefore, I must remit the case for a new finding, hoping, though without much confidence, that what I have tried to indicate may help them to find a way through this dark legislative jungle.'

In the report of their further finding, submitted in accordance with the directions of the judge, the special commissioners, after some preliminary observations in the course of which they remarked that they bore in mind that in every case the onus was on the Crown to establish that in the circumstances it was unreasonable of the company concerned not to make a distribution, or a larger distribution as the case might be; that the requirements mentioned in the proviso to section 21 could have little or no force in the case of a company going into liquidation; but that the proviso while directing a special attention to those matters did not exclude other circumstances which might bear on the question of reasonableness, continued :- 'The appellant company went into liquidation on December 9, 1943. It did not make any distribution out of the income deemed to be available for the purpose. In view of the financial situation of the company, to which reference is made in paragraph 6 below, we have no difficulty in finding that it could reasonably have made a substantial distribution by way of dividend. But we have to ask whether, in all the circumstances existing at December 9, 1943, it was also reasonable to make no distribution, or whether this was unreasonable. The brothers Mucklow, who were both the directors and the shareholders of the company, inevitably had in mind the purposes of the liquidation, which were to facilitate the expansion of the business through the formation of a new company. But, so far as the companys income was retained with that end in view, we cannot find that the brothers, when they refrained as directors from recommending the distribution, were actuated by any reason distinct or severable from the desire to support the financial needs of the new company. such support was the form which their concern for the business took. With the guidance given us by the judgment we cannot regard such a desire or purpose as any relevant or valid consideration in the companys favour.

On the other hand, the brothers as director had to consider any commitments of the appellant company existing at December 9, 1943, for which provision was required to be made. There was in fact one substantial commitment in regard to outsanding tax liabilities, which were of unascertainable amount. We recognize that this was a definite and valid consideration, but we ask ourselves whether, allowing it full weight, we can regard it as sufficient by itself to make it reasonable for the company to withhold the whole of the income deemed to be available to it for distribution. On reviewing all the figures and evidence before us, particularly having regard to the strong position of the company on profit and loss account, and to the fact that liquid resources amounted at December 8, 1943, to some Pounds 75,000 (on both of which matters the Crown relied) we feel bound to answer the question in the negative.

After carefully considering the whole of the facts we are unable to find any circumstances or combination of circumstances making it reasonable for the company to refrain from making a distribution. We therefore conclude that the company acted unreasonably in so refraining and we find that it did not distribute a reasonable part of its actual income for the period in question.'

After hearing further argument on the special commissioners report of their further finding, Harman J. in his judgment said that so far as he could tell from their report the special commissioners had faithfully followed the lines which he had indicated (as I think they clearly had), and he held (in effect) that the conclusion adverse to the appellant company expressed in paragraph 7 of their report was a finding of fact reached, without misdirection or the application of any wrong principle, on evidence sufficing to justify it, with which he ought not to interfere, and with which, indeed, he agreed. He, therefore, dismissed the companys appeal, and the present appeal has at long last resulted, coming as it does before this court more than 10 years after the end of the period to which the dispute relates, a delay which, after making every allowance for war-time difficulties in revenue administration, seems to to me to be wholly inordinate.

It is not possible to assess the merits of the arguments presented in support of this appeal without forming some view as to the statutory conception of reasonableness underlying the essential condition of liability under section 21(1), namely, that the company should not have 'distributed to its members.......a reasonable part of its actual income' for the period in question. These words have to be construed in the light of the proviso to the sub-section, which says that 'in determining whether a company has or not distributed a reasonable part of its income' regard is to be had 'not only to the current requirements of the companys business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business.' It should be noted, however, that, as recognized by the special commissioners and by Harman J., the matters mentioned in the proviso are merely matters to which regard is to be had, and that it by no means necessarily follows that they are the only matters to be taken into account. The question in cash case must be, 'Having regard to all the relevant circumstances, including the matters mentioned in the proviso, has their company distributed a reasonable part of its income for the period in question ?' and as appears from the passage quoted above from the speech of Lord Atkin in the Fattorini case, the question which must be answered affirmatively in order to justify a direction under section 21 is not 'Cound this company reasonably have made some distribution or some larger distribution ?' but 'Was it unreasonable for this company not to make any distribution, or not to make some larger distribution ?' On the other hand, I think it is clear that for the purposes of the section it is to be considered unreasonable not to distribute income when there is no reason, or no sufficient reason, relevant to the needs, present or future, certain or contingent, of the companys business which makes its retention necessary or expedient in the interests of the companys business.

In applying section 21 to liquidation cases, such as the present, a feat of imagination has to be performed, for it has to be assumed that the company could, notwithstanding its winding-up, distribute as dividend (as distinct from return of assets) profits earned during the period from the end of its last complete financial year down to the beginning of the winding-up, and (accepting for the moment the rejection by Harman J., notwithstanding Colliers case, of the theory of automatic direction) it must further be assumed that it may be unreasonable not to distribute that income or some part of it as dividend notwithstanding that the shareholders will, in and by virtue of the winding up, in any case receive the whole of the surplus of assets over liabilities in the ordinary course of liquidation. It follows that such a company cannot meet a claim under section 31(4) by saying, 'True, no part of the income for the final period was distributed, but there was nothing unreasonable in that, for in view of the winding up it was coming to the shareholders anyhow in the form of surplus assets.' The necessary feat of imagination having been performed, the test by which the reasonableness or unreasonableness of the supposed withholding of the hypothetically possible distribution must be judged is the same as it would be in relation to any other period. It must, however, be borne in mind that the fact of the winding up and consequent cesser of the companys business necessarily eliminates most of the grounds which might in relation to any other period suffice to prevent a withholding from distribution from being unreasonable.

In his argument for the appellant company Mr. Tucker was obviously concerned to support Harman J.s view that, notwithstanding Colliers case, the theory of automatic direction and liability in respect of any income of the final period should be rejected. This was logically his first point, though he properly reserved his observations upon it for his reply, as the judge had decided it in his favour. On the assumption that Colliers case and the automatic theory were out of the way Mr. Tucker contended that Harman J. had misdirected the special commissioners, who consequently in their further finding had misdirected themselves in treating the needs of the new company in relation to the maintenance and development of the business transferred to it by the old company as irrelevant. He submitted that the winding up of the old company merely for purposes of reconstruction, and the consequent transfer of the business to the new company merely by way of reconstruction, should be ignored, with the result that the same considerations as led the special commissioners to discharge the direction in respect of the year to April 30, 1943, should have led them to discharge the assessment under appeal. He further contended that the special commissioners and Harman J. had failed to apply the principles regarding the onus of proof stated by Lord Atkin in the Fattorini case, and that it followed from a proper application of those principles that the Crown had failed to discharge the burden of providing that the company had unreasonably withheld this income from distribution.

As to the first of these contentions, I agree with Harman J. that the needs of the new company are not for this purpose a relevant consideration. I think that we are bound to hold them irrelevant in view of the observations regarding the effect of such a transfer by Romer L. J., and in the Hosue of Lords by Lord Hailsham (with whom the other Lords concurred), in Montague Burton Ld. v. Inland Revenue Commissioners; Romer L. J. said : 'The company had no business whose requirements had to be considered; the business had been sold to a new company. There were no business requirements that the directors could take into consideration, or that the commissioners would have to take into consideration.' Lord Hailsham said : There is also in the present case a point which is very well put, if I may say so, in the judgment delivered by Romer L. J. in the Court of Appeal. At the end of the year ended March 31, 1929, the position was that the company had sold its whole business to the new company; it required no sums for the maintenance or development of the business which it had so transferred.......'

If I am wrong in this, I think that Mr. Tuckers argument fails on the facts. I appreciate that if the needs of the new company could be regarded as relevant it might be said that it was not unreasonable to make no distribution because the whole of the old companys resources had to be transferred to the new company to enable it to maintain and develop its business. But in this case the whole of the old companys resources were not so transferred. No less than Pounds 35,000 excepted from the sale was distributed to the brothers Mucklow in the winding up. It is true that they placed this sum on deposit to guarantee the new companys overdraft; but they could equally well have done that if the Pounds 35,000 or some part thereof had come to them as dividend, the fact that it would then have been diminished by surtax being, of course, wholly irrelevant for the present purpose. I fail to see, therefore, how on the facts of this case the needs of the new company, even if proper to be included in the matters to which regard should be had, could provide any ground for holding that it was not unreasonable to withhold from distribution the income of the final period which under section 31(4) has to be treated as capable of being distributed as dividend.

As to Mr. Tuckers contention regarding the onus of proof, it is, I think, important to bear in mind what has to be proved and the nature of the proof of which it is capable. The thing to be proved is an unreasonable withholding from distribution. But given a withholding, the reasonableness or unreasonableness of it is not susceptible of direct proof short of, so to speak, a plea of guilty by the company. It is an inference of fact to be made from the primary facts, comprising the nature of the companys business, its financial position, the needs of its business, present or future, certain or contingent, the amount of the income in question, the extent, if any, to which it has been distributed, and any reasons deducible from the foregoing facts or otherwise shown for not distributing it or, as the case may be, not distributing more of it. If, on consideration of the whole of the facts as proved or admitted in the course of the hearing, the special commissioners find that there was income which could have been but was not distributed, and that on the facts as proved or admitted there was no reason, or no sufficient reason, for not distributing it, then they can and ought to conclude that the company has acted unreasonably in withholding it from distributing. The onus is on the Crown in the sense that the direction must be discharged unless the facts proved or admitted are such as to justify that conclusion. I do not think that Lord Atkins observations in the Fattorini case should be taken as meaning anything more than this.

As to Colliers case, I confess to feeling considerable difficulty. In that case a company sold its business to a new company for shares, and went into liquidation on December 20, 1928. Its financial year ran from September 1 to August 31. The sale was effected under a sale agreement dated November 16, 1928, which provided that the profits as from September 1, 1928, should be included in the sale. A direction was made on the company under section 21 and section 31(4) for the period from September 1 to December 20, 1928. The case came before Finlay J. and the theory of automatic direction and liability which I assume to have been contended for on behalf of the Crown, although there is no report of the argument, was considered and rejected by him. The main contest was on the question whether, if the direction was otherwise warranted, the income from September 1, 1928, to November 15, 1928, could properly be included in the direction in view of the fact that it had been retrospectively sold to the new company. The Crown admitted that the claim in respect of income for the period subsequent to the date of the sale agreement could not be supported since this had never been income of the company. Finlay J. held that the sale did not affect the position with regard to the profits for the period from September 1, 1928, to November 15, 1928, and dismised the companys appeal on the ground that the facts warranted the finding that there had been an unreasonable withholding of income from distribution. The company appealed to this court, and in the course of Mr. Roland Burrows argument in support of the appeal Slesser L. J. raised against him the point as to the automatic effect of section 31(4) on which Finlay J. had decided in the companys favour. The company was thus, in effect, called upon to justify a decision in its favour which, according to the usual practice, should have been accepted until attacked by the Crown. In these circumstances Mr. Roland Burrows did argue the point, though it may well be less fully and effectively than he would have been able to do in reply if the more usual course had been taken. In the result, the Crown was not called upon to argue, and as appears from what I have said earlier in this judgment, Lord Hanworth M. R. and Slesser L. J. both gave judgments against the company in which they clearly, as I think, adopted the 'automatic' construction of section 31(4), while Romer L. J. confined himself to dismissing the appeal on the facts, though in language which certainly suggests that he did not agree with the construction placed by the other members of the court on section 31(4), as to which, however, he expressed no opinion. It has been pointed out that Slesser L. J. seems to have been under the impression that the surtax liability attracted by a direction under section 21 was confined to the income which might reasonably have been distributed, instead of extending, as it undoubtedly does, to the whole of the income of which a reasonable part has not been distributed. It is said that the misapprehension may have affected his view by giving rise to a false antithesis between income which could have been distributed (or, in other words, 'available for distribution') on the one hand, and income required by the company for purposes such as those mentioned in the proviso to section 21(1) and which, therefore, could not reasonably have been distributed (or, in other words, income not 'available for distribution') on the other hand, which led him in effect to conclude that income deemed to be available for distribution is deemed to be income which would reasonably have been distributed, whether it is in fact such or not. I feel the force of this criticism, but it does not alter the fact that Slesser L. J. did quite clearly express his concurrence with Lord Hanworth M. R. There is, however, the further point noted by Harman J. that, having regard to the conclusion reached by the board of referees on the facts, the views of the majority of the court as to the automatic effect of section 31(4) were not necessary to the decision.

For the reasons I have stated, I cannot regard the circumstances in which the majority judgments in Colliers case were delivered as wholly satisfactory, and having regard to those circumstances, to the probability that the court was consequently denied the assistance of anything comparable to the very full argument addressed to us in the present case, and to the fact that it was unnecessary for the purpose of deciding the case then before the court to express any opinion on this aspect of the construction of section 31(4), I think that those are substantial grounds for the view that we would be justified in holding that it should not be considered as a binding authority for the proposition that section 31(4) is automatic in its effect.

If so justified, I would have little hesitation in adopting the conclusion reached by Harman J. The phrase 'available for distribution' means in itself no more than 'capable of being distributed,' and I would require a very strong context to convince me that in a taxing Act, and to the detriment of the taxpayer, it should be construed as equivalent to 'which ought in reason to be distributed.' I admit that some colour is lent to this view by the addition made by section 31 of the Act of 1927 to the proviso to section 21 of the Act of 1922, as the addition provides that the various sums therein mentioned 'shall be regarded as income available for distribution..... and not as having been applied or being applicable to the current requirements of the companys business or to such other requiremnts as may be necessary or desirable for the maintenance and development of that business.' But even here, having regard to the primary meaning of 'available for distribution' I think it is possible to hold that recognition of other grounds for considering the withholding of the income in question not to be unreasonable is not excluded. In section 31(4) itself the words 'deemed to be...... available for distribution' are clearly appropriate in their primary meaning of 'capable of being distributed.' Mr. Tucker referred us to the regulations contained in the First Schedule to the Finance Act, 1922, and to the amendments of those regulations contained in section 31(7) of the Act of 1927 and observed with force that there was nothing in those amendments to make the regulations in the least appropriate to the automatic liability alleged to have been introduced by sub-section (4) of the very same section. Again, as Mr. Tucker pointed out, section 18 of the Act of 1928, which amends the procedure in section 21 of the Act of 1922, contains nothing appropriate to automatic liability. He also referred us to section 14 of the Act of 1937, where 'available for distribution' clearly ahs its primary meaning of 'capable of being distributed.' By contrast he referred us to section 14 of the Finance Act, 1939, for the very different language used by the legislature for the purpose of providing for automatic liability as regards investment companies.

These reasons suffice to satisfy me that, apart from Colliers case, it would be right to hold that section 31(4) of the Act of 1927 does not impose automatic liability, but leaves open to the question whether there was any unreasonable withholding of income from distribution on the hypothesis that the income concerned was 'available for distribution,' that is to say, 'capable of being distributed' as income, notwithstanding the winding up.

So far as the present case is concerned, I am content to assume, without deciding, that Colliers case is not binding, and that I am free to follow my own opinion to the effect indicated above. I say this because my assumption that I am free to do so cannot, in my judgment, alter the result, for I think that quite apart from the decision in Colliers case, the special commissioners conclusion here was well warranted by the facts. I see no reason whatever for disturbing their conclusion, with which I entirely agree, and I hold, accordingly, that this appeal fails and should be dismissed.

HODSON L. J. For the reasons which have been given in the judgments already delivered I am of opinion that the special commissioners were not misdirected, nor did they misdirect themselves, in arriving at the conclusion of fact in favour of the Crown that they were unable to find any circumstances or combination of circumstances making it reasonable for the company to refrain from making a distribution. Their conclusion, therefore, that it acted unreasonably in so refraining, and that it did not distribute a reasonable part of its actual income for the period in question, namely, the broken period from April 30, 1943, the end of the companys financial year to December 9, 1943, the date of the voluntary winding up of the company, cannot be disturbed.

This court is thus in the same position as the court found itself in Colliers case, in that it is unnecessary to decide the point now taken on behalf of the Crown, but not so clearly taken in Colliers case, that the direction in respect of the broken period should have been automatic having regard to the terms of section 31(4) of the Finance Act, 1927.

I have come to the conclusion that two of the three members of the court, namely, Lord Hanworth M. R. and Slesser L. J., did base their decision on the automatic effect of the last section, and regarded as unnecessary and finding of fact whether or not the company had distributed a reasonable part of its income.

Slesser L. J. admittedly misapprehended the penal effect of section 21 of the Finance Act, 1922, which has been recognized as having such effect by the Hosue of Lords in Fattorinis case. This misapprehension would be expected to have affected his conclusion as to the automatic effect of the later section, and, if this is so, his opinion on the construction of the section in so far as it was based on a ground held by the House of Lords in Fattorinis case to be wrong would enable this court to express its own view, in accordance with the principles laid down in Young v. Bristol Aeroplane Co. Ld.

The point now having been fully argued on both sides, I am of opinion for the reasons already given that the effect of section 31(4) of the Finance Act, 1927, having regard to its context, is not automatic, but that it is open to a company in liquidation, if it can, to resist a direction on the facts and to insist on the Crown proving its case in accordance with the directions given in Fattorinis case. To put the matter shortly, I think that the words 'available for distribution' bear their ordinary meaning and are not equivalent to 'which ought to be distributed.'

Appeal dismissed.


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