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Abbott Vs. PhilbIn (inspector of Taxes) - Court Judgment

LegalCrystal Citation
CourtHouse of Lords
Decided On
Case NumberNo.
Judge
AppellantAbbott
RespondentPhilbIn (inspector of Taxes)
Excerpt:
viscount simonds my lords, this appeal relates to an assessment to income tax under schedule e of the income tax act, 1952, made upon the appellant for the year of assessment 1955-1956 in respect of the emoluments of his office as secretary of e. s. and a. robinson ltd., which i will call the company. the court of appeal decided the case against him in deference to a decision of the court of session—forbes's testamentary trustees v. commissioners of inland revenue, 1958s.c.177. your lordships will find it necessary to review that case. the facts are not in dispute. at the annual general meeting of the company held on the 28th june, 1954, it was resolved that 250,000 of 290,319 unclassified shares of £1 each in the capital of the company be classified as ordinary shares and that.....
Judgment:

Viscount Simonds

MY LORDS,

This appeal relates to an assessment to income tax under Schedule E of the Income Tax Act, 1952, made upon the Appellant for the year of assessment 1955-1956 in respect of the emoluments of his office as secretary of E. S. and A. Robinson Ltd., which I will call the company. The Court of Appeal decided the case against him in deference to a decision of the Court of Session—Forbes's Testamentary Trustees v. Commissioners of Inland Revenue, 1958S.C.177. Your Lordships will find it necessary to review that case.

The facts are not in dispute. At the Annual General Meeting of the company held on the 28th June, 1954, it was resolved that 250,000 of 290,319 unclassified shares of £1 each in the capital of the company be classified as Ordinary Shares and that the directors be authorised to grant options over such shares or any of them to executives of the company or its subsidiaries at such times and generally on such terms and subject to such conditions as the directors should think proper.

Pursuant to this resolution the directors of the company at a Board Meeting held on 6th October, 1954, resolved that options upon the terms contained in a draft letter then produced to subscribe for Ordinary Shares in the company at 68s. 6d. per share (being the middle price ruling on the Bristol Stock Exchange on that day) be granted to the executives. The Appellant accordingly as secretary of the company sent to each of the executives, including himself, a letter, of which the salient conditions were that he was granted at the price of £1 for every 100 shares an option to purchase a specified number of shares at the price of 68s. 6d. per share, such option to be exercisable at any time within ten years from the date of the grant of the option. The option was expressed to be non-transferable and was to expire upon the death or retirement of the executive (or employee, as I will call him) before the expiration of the ten years. If the employee desired to purchase the option he was required to send in a form of application (which accompanied the letter) together with his cheque for the price of the option, whereupon an option certificate would be issued to him. The Appellant, being included in the list as entitled to a grant of an option in respect of 2,000 shares, applied accordingly on the 7th October, 1954, for such option enclosing his cheque for £20 which was duly cashed. Some delay occurred in the issue of option certificates and he was not given his until the 6th May, 1955, but it bore on its face the statement that the option was granted on the 6th October, 1954. It was endorsed with the conditions as to the nontransferability and expiry to which I have referred.

On the 28th March, 1956, the price of the company's shares having then risen to 82s., the Appellant exercised pro tanto his option by applying to the company for the issue to him of 250 shares at the price of 68s. 6d. per share and sent with his application his cheque for £856 5s. 0d. The shares were duly issued to him. He was subsequently assessed to tax under Schedule E for the year 1955-56 in (inter alia) the sum of £166 which was made up as follows:

                                                                    Â£ s. d.              Â£ s. d.

250 shares taken up on 28th March, 1956,

when the middle market price

was 82s.............                                                                 1,025 0 0

Deduct: Option price 68s. 6d. ...                      856 5 0

Cost of option at £1 per 100 shares ......           2 10 0            858 15 0

                                                                                          £166 5 0

The Special Commissioners upheld the assessment considering the case indistinguishable from Forbes's case to which I have referred, Mr. Justice Roxburgh, if I understand his judgment, thought it possible todistinguish that case and upon Case Stated allowed the present Appellant's appeal. The Court of Appeal, as I have already said, decided in favour of the Crown.

My Lords, once more your Lordships have to consider the words of Rule 1 of the Rules applicable to Schedule E contained in the Ninth Schedule to the Income Tax Act, 1952, which is as follows:

Tax under Schedule E shall be annually charged on every person having or exercising an office or employment mentioned in Schedule E . . . in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment . . ." Summarily the question is: Was the difference betwen (a) the market price on the 28th March, 1956, £1,025, and (b) the option price, £856 5s. 0d., plus a proportionate part of the cost of option, £2 10s. 0d., a perquisite or profit therefrom, that is, from the office of secretary held by him, for the year of assessment?

The curious feature of this case is that the Crown appears to reach the conclusion that the sum of £166 was assessable for the year 1955-56 by first denying that the grant of the option was itself a perquisite or profit of the year 1954-55, and this is, I think, the aspect of the case that must first be examined. For it would not, as I understand the argument of learned counsel for the Crown, be contended that, if the grant of the option was itself a perquisite or profit arising from the office, the subsequent exercise of it would be another perquisite or profit.

My Lords, I cannot entertain any doubt that, when the company granted the option to the Appellant, he acquired something of potential value. I do not think that it matters whether it falls into the category of proprietary or contractual right or into some dim twilight that divides those juristic conceptions. We are concerned with a taxing statute whose language is to be reconciled with the law of England and Scotland alike, and the chosen words perquisite or profit whatsoever " are as wide and general as they well could be. I can concede no relevant limitation of their meaning except in the oft cited words of Lord Watson in Tennant v. Smith [1892] A.C. 150 at p. 159 that they denote something acquired which the acquirer becomes possessed of and can dispose of to his advantage—in other words, money—or that which can be turned to pecuniary account.

How, then, can it be said that an option to take up shares at a certain price is not a valuable or at least a potentially valuable right? Its genesis is in the desire of the company to give a benefit to its employees and at the same time no doubt to enhance their interest in its prosperity. It is something which the employee thinks it worth his while to pay for: not a large sum truly, but £20 deserves a second thought. And it is something which can assuredly be turned to pecuniary account. This was challenged because the option was itself not transferable, but this objection is without substance. There was no bar, express or implied, to a sale of the shares as soon as the option was exercised and there could be no difficulty in the grantee arranging with a third party that he would exercise the option and transfer the shares to him. It was further challenged on the ground (to quote the language of Lord Justice Sellers in the Court of Appeal) that a notional use of the option or a use unintended and undesired by the company, unrealised and unvalued, does not have the quality required by the accepted standard set by Lord Halsbury and Lord Watson in Smith v. Tennant to make it a taxable perquisite, if indeed, it was a perquisite at all at that date. With great respect to the learned Lord Justice and to counsel who put it in the forefront of his argument, I find great difficulty in giving any weight at all to this consideration. It is mere guesswork what use of the option was intended or desired. I would not myself assume that the company intended that the grantee of an option should for ever, or for a day longer than he wished, hold the shares that he took up, or that he should not at once, if he wished, reap the benefit of a rise in price. But, guess right or wrong, there is nothing to prevent him doing so: that is his legal right, and, if he could so deal with the shares when acquired, nothing could prevent him so using his option by arrangement with a third party as to secure for himself a similar advantage. Two other adjectives are used by the Lord Justice, unrealised and unvalued. But the fact that there was no realisation in the sense of actual turning into money is irrelevant. The test is whether it is something which is by its nature capable of being turned into money. Nor is it relevant that it is unvalued. I have little doubt that, if the Revenue authorities had addressed their minds to the proper question, they could have ascertained whether it had any and what value. But again I must say that it is really irrelevant whether a value could be ascribed to it or not If it had no ascertainable value then it was a perquisite of mo value—a conclusion difficult to reach since £20 was paid for it. In my opinion, the Crown cannot succeed in this essential aspect of the case unless it is established as a general proposition that an option to acquire shares at a fixed price in such circumstances as those of the present case is not a perquisite of office. It must be shown that, even if at the date of the option being granted the market price is higher than the option price, the option is not a perquisite which falls within the Schedule. This appears to me an impossible proposition. What distinguishes such a right from that commonly given to a shareholder in a commercial company, when upon an issue of shares he is given in the form of a provisional allotment letter the right to take up new shares at a certain price? He can exercise his right and take up the shares or he can sell his right to do so, or he can do neither and let the offer go by default. But from the moment he has the letter he has a right of more or less value according to the circumstances. So, too, the grantee of such an option as that which we are considering has a right which is of its nature valuable and can be turned to pecuniary account. He has something at once assessable to tax.

My Lords, as I have said, the argument for the Crown appeared to demand for its success that the grantee of the option did not acquire a perquisite at the date of the grant. There could not be one perquisite at the date of the grant and a second perquisite when the shares were taken up. Therefore the Crown's case, in my opinion, fails at the initial step. But there are other grave difficulties in the way of its success. The taxable perquisite must be something arising therefrom, that is, from the office, in the year of assessment. I do not want to embark on the notoriously difficult problem as to the year to which for the purpose of tax a payment should be ascribed, if it is not expressly ascribed to any particular year. But I do not find it easy to say that the increased difference between the option price and the market price in 1956 or, it might be, in 1964 in any sense arises from the office. It will be due to numerous factors which have no relation to the office of the employee, or to his employment in it. The contrast is plain between the realised value, as it has been called, of the option when the shares are taken up (though the realisation falls short of money in hand) and the value of the option when it is granted. For the latter is nothing else than the reward for services rendered or, it may be, an incentive to future services. Unlike the realised value it owes nothing to the adventitious prosperity of the company in later years. On this ground also I should reject the claim of the Crown.

My Lords, as I have said, the Court of Appeal were constrained to decide this case in favour of the Crown in deference to the decision of the Court of Session in Forbes. Iagree that the two cases are not in any material respect distinguishable and think that they took the proper course in following it.

The single fact upon which Mr. Justice Roxburgh appeared to rely, that in that case, unlike this, the grant of the option was gratuitous, cannot in my opinion affect the issue. The reasoning by which the learned Judges in Forbes supported the conclusion to which they came is that which formed the basis of the argument for the Crown on this appeal, and I have already dealt with it. It treats the option as a thing of no value until it has been exercised and places an importance, in my opinion unjustified, on the non-transferability of the option. But, as I have pointed out, though that feature may reduce the value of the option, it cannot alter its character so that it is no longer something which can of its nature be turned to pecuniary account. Nor, even if k be the fact, can I accept the view clearly entertained by the Court of Session that, if in the year of grant the option had no value, it therefore became a taxable perquisite when in later years it was exercised. It was, in my opinion, a perquisite at the date of grant and, if it had no value, there was nothing to tax, and that is the end of the matter.

Reference was also made to Weight v. Salmon, 19 T.C. 174. This case does not assist the respondent. The tax-payer, Salmon, was a managing director of a limited company at a fixed salary. In addition the directors in each year gave him the privilege of applying for certain unissued shares of the company at their par value which was less than the market value. He accordingly applied for shares and they were issued to him. He was assessed to tax on the difference between the par and market values, and the assessment was upheld in the High Court and the Court of Appeal. The taxpayer appealed to this House and his appeal was dismissed. Lord Atkin, with whom the other learned Lords agreed, pointed out that while the Board had expressed their willingness to entertain an application for shares, nobody was bound and no right was given and no profit was received of any kind by the appellant until the application had been accepted and the shares in question had been allotted to him. It is by no means a decision that, if the company had vested in him a right to have the shares allotted to him instead of allotting them forthwith, that right would not have been a taxable perquisite or profit.

The facts in Tait v. Smith, 35 T.C. 79, are somewhat obscure, but the decision of Mr. Justice Wynn-Parry in that case appears, if anything, to be favourable to the Appellant.

In Bridges v. Bearsley, 37 T.C. 289, there are to be found observations of Danckwerts, J. and Jenkins, L.J. which support the contention of the Respondent. But the substantial issue in that case was whether shares which had been issued to the taxpayer were or were not profits of his office. The question whether the profit lay in the right to acquire shares or in the shares when acquired was a subsidiary issue which in the event did not arise. If, as I think they probably were, the relevant facts of that case were indistinguishable from those of the present case. I must with respect decline to follow them.

Upon a consideration of the whole case I am of opinion that this appeal should be allowed with costs here and below.

Lord Reid

MY LORDS,

In 1954 the company of which the Appellant is secretary offered to its executives options to buy a number of its unissued shares at 68s. 6d. which was then the market price. The options were not transferable and were to endure for ten years if the purchaser remained so long in the company's service. The price of the option was £1 per 100 shares, and in October, 1954, the Appellant acquired an option on 2,000 shares for which he paid £20. The market price rose and in March, 1956, when the price was 82s the Appellant exercised his option to the extent of 250 shares and acquired them at 68s. 6d. If he had immediately sold those shares he would have made a profit of £166, and he has been assessed in this sum under Schedule E in the year 1955-56. Rule 1 of Schedule E is as follows:

Ninth Schedule.

Rules applicable to Schedule E.

1. Tax under Schedule E shall be annually charged on every person having or exercising an office or employment of profit mentioned in Schedule E, or to whom any annuity, pension or stipend chargeable under that Schedule is payable, in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment! after deducting the amount of duties or other sums payable or chargeable on the same by virtue of any Act of Parliament, where the same have been really and bona fide paid and borne by the party to be charged.

The parties agree that the Appellant received something which comes within the words perquisites or profits whatsoever. The question in this case is what it was. The Appellant says that the option was the perquisite. and he admits that he was liable to be assessed for the year 1954-5, in respect of the value of the option when it was granted minus the price he paid for it. He maintains that the subsequent appreciation of its value is not taxable. On the other hand, the Respondent maintains that he received no perquisite in 1954, the perquisite being the shares which were allotted to him when he exercised his option: if that is right the shares when allotted were worth £166 more than he paid for them and he has been properly assessed.

The first observation which I would make is that on the Crown's view the granting of the option in 1954 might result in ten different perquisites being received by the Appellant in ten different years if he chose to exercise his option piecemeal. He was entitled to do this and in fact in 1955-56 he only exercised it to the extent of 250 out of 2,000 shares, and the company retained no control over the times at which or the extent to which he might exercise the option. If he did not exercise the last of his option until 1964-65 he would then, in the Crown's view, be receiving a perquisite taxable in that year in consequence of an irrevocable act of grace of the company ten years earlier. If in 1965 he held 2,000 shares which he had acquired in ten different parcels under his option he would have made precisely the same profit on each share—the difference between 68s. 6d., the price under the option, and the then market price. But he would have been taxed very differently in respect of each parcel, the tax depending on the market price at the date when he had acquired it—for it is not suggested that further appreciation after shares have been allotted can be taxed. Moreover, let me suppose that the option had been exactly the same except that it was to last for ten years whether the Appellant remained in the service of the company or not. It could hardly be that that change so completely altered the nature of the option as to change the basis of taxation and make the granting of the option and not the issue of the shares the perquisite. If, then, it was exercised years after the servant had retired what would the position be: would the issue of shares then be the perquisite and for what year of assessment would it be a perquisite? There would be no assessment under Schedule E for the year in which the shares were issued because the servant had retired. I realise that one ought not to be surprised at anything that happens under the Income Tax Acts, but nevertheless all this does seem a little strange.

Both parties rely on Tennant v. Smith [1892] A.C. 150, and in particular on the familiar passage in the speech of Lord Watson: Is it, then, a perquisite or a profit of his office? I do not think it comes within the category of profits, because that word, in its ordinary acceptation, appears to me to denote something acquired which the acquirer becomes possessed of and can dispose of to his advantage—in other words, money—or that which can be turned to pecuniary account." I agree that the question is whether this option was a right of a kind which could be turned to pecuniary account. I do not use these words as a definition, but it is undesirable to invent a new phrase if an old one of high authority fits this case, and the parties agree that it does.

But the test must be the nature of the right and not whether this particular option could readily have been turned to pecuniary account in October, 1954. Whether this option could then have been turned to pecuniary account is a question of fact, and there is no finding about it. It is true that the option was not transferable, but there are other ways of turning such a right to pecuniary account than assigning it or calling for immediate performance of the obligation to allot the shares. Even taking this particular option I find nothing to indicate that there would have been much difficulty in finding some-one who would have paid a substantial sum for an undertaking by the Appellant to apply for the shares when supplied with the purchase money and called upon to exercise the option and thereupon to transfer the shares. It is not an un-reasonable inference from the whole circumstances that both the Appellant and his employers must have thought the option worth a good deal more than £20, and others may have thought the same. No doubt a person who wished to acquire an option on the shares would pay less for an undertaking such as I have indicated than he would pay for an assignable option because of the risks involved, but that only goes to valuation of the right which the Appellant acquired. And if it is asked why buy such an undertaking instead of buying shares on the market the answer is that people often do prefer buying options to buying shares. I am not prepared to assume in the absence of a finding that this option could not have been turned to pecuniary account when it was granted. But if there is any doubt about that let me assume that the option had been to acquire shares at 10s. below the then market price. I cannot doubt that that could have been turned to immediate pecuniary account, and surely it could not be said that an option to buy at 58s. 6d. is itself a perquisite but an option to buy at 68s. 6d. is not. And that was not argued.

The argument for the Crown was not based on any special difficulty in turning the particular option to pecuniary account. It was based on the nature of the right: it was said that a right of option does not have the necessary qualities to make it a perquisite. I must confess that I do not understand that. If in fact this type of option is a kind of right which can be turned to pecuniary account, what more is necessary to make it a perquisite? I have not been able to find any clear answer to that question in the authorities cited or from the argument in this case. It appears to me that if a right can be turned to pecuniary account that in itself is enough to make it a perquisite.

Then it was said that, if the Appellant had attempted in any way to raise money on his option before he exercised it, he would have been acting contrary to the tenor of his agreement with his employers. It was not argued that he would have been acting in breach of his contract with them—plainly he would not—nor was it said that there was any " gentleman's agreement" that he should not do this or even that he would have incurred his employers' displeasure if he had done it. There is no finding to that effect. I am willing to assume that it would not be irrelevant to show that a servant could only exercise his full legal rights at the risk of impairing good relations with his employers, but I do not stop to consider what the position would then be. In this case it was not suggested that his employers would have thought it in any way improper if the Appellant had sold shares immediately they were allotted to him, and I cannot assume that they would have had any objection to his raising money on his option before he exercised it.

Then there appears to me to be another difficulty in the way of the Respondent. Rule 1 taxes a person exercising an office or employment of profit in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment". It does not say salaries or per-quisities received during the year of assessment. It may be difficult to relate a perquisite strictly to a particular year. But if a reward is given in the form of an option and the option is itself the perquisite, it would generally be sufficiently related to the year in which it is given to be properly regarded as a perquisite for that year. If, on the other hand, the option is not the perquisite—if there is no perquisite until the option is exercised and shares are issued, it may be many years later—in what sense would the shares be a perquisite for the year when they were issued? There would be no relation whatever between the service during that year and the giving of the option many years earlier or the exercise of the option during the later year. I do not wish to express any concluded opinion on this point, but it does seem to lend support to the conclusion which I have reached on other grounds.

In the present case the Court of Appeal, though not bound to do so, very properly followed the decision of the Court of Session in Forbes's Trustees, 1958 S.C. 177. I say very properly because it is undesirable that there should be conflicting decisions on revenue matters in Scotland and England. So I must now examine the reasons for that decision. In that case Mr. Forbes, having been appointed manager, was granted by his company an option in 1938 which was repeated in a further agreement in 1944. This option was in all essentials similar to the option in the present case. The only distinction I need note is that the option in the 1944 agreement was to purchase a large number of shares at par, though the market price was then above par; and it was argued that the option gave Mr. Forbes an immediately enforceable right to the shares and that right could have been converted immediately into cash. Mr. Forbes exercised his option in 1946 and he was assessed under Schedule E, as in this case, on the difference between the value of the shares when they were allotted to him and the price which he paid for them. This assessment was upheld toy the First Division.

The Lord President's grounds of judgment appear from two passages which I shall quote from his Opinion:

In my opinion the right which Mr. Forbes obtained on signing the agreement in 1944 was a right merely to apply for the shares: it gave him no right in or to any shares, for this could only emerge when he exercised his right and when he delivered to the company the par value of the shares he demanded.

Moreover-—and this appears to me to be fatal to the Appellant's contention—there was no pecuniary value to the mere right which he got by virtue of the agreement, for it was not a right to any shares and could not be disposed of or sold by him. . . . For the option itself could not be turned to pecuniary account." (P. 183.)

And on the next page:

The argument for the Appellants was that in 1944 a legally enforceable right had vested in Mr. Forbes when he signed the agreement, which has could have converted into cash forthwith by securing an allotment of shares which he could sell in the market. Accordingly it is said his benefit should be assessed for tax as a benefit accruing in the year 1944. But this argument appears to me to involve two fallacies. In the first place, the right which Mr. Forbes got under the agreement was not a right to shares which sounded in money but a mere right to apply for shares which he never exercised that year and which in itself had no market value at all. But in the second place the right which he obtained under the agreement was not an unconditional one. He could not effectively exercise it unless he complied with its conditions, one of which was the payment to the companies of the par value of the shares applied for. These two considerations appear to me to point necessarily to the year 1946 when the right was effectively exercised as the year in which the profit accrued.

The Lord President also derived some assistance from Weight v. Salmon, 19 T.C. 174, and Bridges v. Hewitt. Same v. Bearsley [1957]1 W.L.R. 674: 37 T.C. 289.

The essence of the first passage which I have quoted appears to be that because the option could not be sold or assigned therefore it could not be turned to pecuniary account. I have already given my reasons for not accepting that. The argument that a right could be turned to pecuniary account by raising money on it without assigning it does not appear to have been put forward, no doubt because the argument that it could be turned to pecuniary account by exercising it and taking up shares worth more than the option price may have seemed even stronger. That argument is dealt within the second passage which I have quoted.

In the second passage the Lord President finds two fallacies in the argument for the taxpayer, but I am afraid I have been unable to see the force of his objections. If you get a share it is capable of being turned to pecuniary account because you can immediately sell it. There is generally no difficulty about that, and if there is any difficulty there are other ways of raising money on it though you have to remain on the register. Similarly, if you get an option to buy shares below the market price it seems to me that the option is capable of being turned to pecuniary account by exercising it, acquiring the shares, and immediately selling them. It is true that that involves an extra step, but why should that matter? I can see no difficulty unless it be in financing the transaction. But if the whole operation will yield a substantial profit I would not assume that that would be difficult.

The second fallacy appears to toe a variant on the first. If the condition is one with which the taxpayer can easily and immediately comply, it does not in my opinion, form an obstacle to turning the option to pecuniary account. If the condition is one which cannot immediately be complied with that may make a difference. In Bridges v. Hewitt and Bearsley the taxpayer still had to earn his perquisite by a further four years' service, and it may well be that in such a case an agreement to confer a future benefit gives no immediate perquisite. The case of Weight v. Salmon seems to me to be entirely different. There the servant had no enforceable right at all until he got his shares. He got his shares because the company chose to give him something then, to give him a perquisite when the shares were issued. But in this case the Appellant getting his shares did not flow from any voluntary act of the company when the shares were issued. It flowed from the company's voluntary act in the previous year when they gave him an option by which they were thereafter bound. It would, I think, require some peculiar circumstances to make a mere expectation capable of being turned to pecuniary account.

Lord Carmont regarded the option as an open offer. I would not dispute about words. But if it can be regarded as an offer it was an offer which the company had no power to withdraw and which conferred a valuable contractual right on Mr. Forbes. Lord Carmont then dealt with the restrictions and conditions to which the option was subject and pointed out their material bearing on the value of the option and the difficulty there would be in valuing it. I agree with those observations. But if I am right that the question whether a particular option is in itself a perquisite does not depend on these factors but rather on whether rights of that class are perquisites and capable of being turned to pecuniary account, then I do not think that these observations necessarily lead to his conclusion.

Lord Russell clearly stated his grounds of judgment in the following passage:

In my opinion, whatever may be the rights vested in the holder of an option in the abstract, it is essential to have regard to the nature and the quality of the right created in Mr. Forbes's favour in 1944. As previously stated, that right was personal and unassignable and was qualified by the condition that he must render cash in payment, while still remaining managing director, before being in a position to enforce compliance by the companies with their conditional obligation to allot. It appears to me that the latter contingency coupled with the personal and unassignable nature of the right prevents it from being something which could be ' turned to pecuniary account" ...

I think that I have already dealt with the reasons which he gives, but I can sum up my view by saying that conditions and restrictions attached to or inherent in an option may affect its value but are only relevant on the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account. I am therefore of opinion that Forbes's Trustees was wrongly decided and should be overruled and that this appeal should be allowed.

Lord Radcliffe

My lords.

On 28th March, 1956, the Appellant applied for and received from E. S. and A. Robinson Ltd. 250 of its Ordinary Shares. He paid the company £856 5s. for them, a subscription at the rate of 68s. 6d. per share, although the current market price was then 82s. per share. He was enabled to obtain this advantage because in October, 1954, he and other officials and employees of the company had been offered by it options to take up stated amounts of Ordinary Shares at the market price then ruling, 68s. 6d. per share, and he had thus acquired at the cost of £20, which he then paid for an option on 2,000 shares, the right to make this call at the date which he selected.

The Inland Revenue claim that he is assessable under Schedule E for 1955-56 on the difference between what he paid and the value of what he got on the ground that this calculated amount is a profit or perquisite from his office. I do not think that he is. Oddly enough, however, the argument that took place before us was concentrated almost exclusively on a different point, whether he was assessable under the same Schedule on the value of the option itself in the year when he acquired it, 1954-55, the Revenue maintaining with much persuasive force that he was not, the Appellant conceding that he was, provided always that it could be shown that a monetary value could fairly be placed on the option at the date of its acquisition.

It is a natural enough assumption for the tax gatherer that if a transaction does not attract tax in one year it must in another. I do not myself, however, regard that as a good general principle upon which to found the construction of the Income Tax code. Considering that, at any rate since the decision of this House in Tennant v. Smith 1892 A.C. 150, it has been necessary to put a somewhat restricted meaning upon the words all salaries, fees, wages, perquisites or profits whatsoever" which now appear in the Ninth Schedule of the Income Tax Act, 1952, I should not be surprised to find that neither an option to take up shares at a price, more particularly perhaps if the option is made non-assignable, nor the advantage obtained later from exercising the option comes within the range of those words. On the whole, however, I do not think that that is the situation, because in my opinion the Appellant is right in saying that what taxable receipt there is lies in the acquisition of the option and that if it had a monetary value when received it is that value that represents the profit or perquisite of the office.

The difficulty in dealing with this point lies wholly in relating words used by several Members of the House in Tennant v. Smith, apparently of general import, to circumstances that they were not dealing with. The benefit of a right of occupation of part of bank premises which the occupier could only enjoy for the service of the bank is not very like the benefit of an option to take up freely transferable shares at a fixed price. The basis of the Revenue's claim in Tennant v. Smith was really to tax the bank manager on expenditure which he was saved, not on any money that he got or could get, while tax on the full annual value of the premises was taken from the bank itself. It was not, however, the view of the House that profits or perquisites, to be taxable, could consist only of money paid. It was accepted that they could include objects or things of value received, payments in kind, so long as they were capable of being turned into money (Halsbury L.C.), money, or that which can be turned to pecuniary account (Lord Watson), money payment or payments convertible into money (Lord Macnaghten), that which could be converted into money (Lord Hannen).

I think that it has been generally assumed that this decision does impose a limitation upon the taxability of benefits in kind which are of a personal nature, in that it is not enough to say that they have a value to which there can be assigned a monetary equivalent. If they are by their nature incapable of being turned into money by the recipient they are not taxable, even though they are in any ordinary sense of the word of value to him. It is obvious that this conception raises many attendant uncertainties which are not, so far as I know, cleared up except where some particular class of benefit in kind has offended the eye of the legislature and has been dealt with by special legislation. Must the inconvertibility arise from the nature of the thing itself or can it be imposed merely by contractual stipulation? Does it matter that the circumstances are such that conversion into money is a practical, though not a theoretical, impossibility; or, on the other hand, that conversion, though forbidden, is the most probable assumption?

I do not think that the decision of this case can go very far, if any distance, to clear up such points as these. I think that the Revenue are right in saying that a line has to be drawn somewhere between convertible and non-convertible benefits and that somehow we have to put a general meaning on the not very precise language used in Tennant v. Smith. What I do not think, however, is that a non-assignable option to take up freely assignable shares lies on that side of the line which contains the untaxable benefits in kind. The option, when paid for, was thereafter a contractual right enforceable against the company at any time during the next ten years so long as the holder paid the stipulated price and remained in its service. That right is, in my opinion, analogous for this purpose to any other benefit in the form of land, objects of value or legal rights. It was not incapable of being turned into money or of being turned to pecuniary account within the meaning of these phrases in Tennant v. Smith merely because the option itself was not assignable. What the option did was to enable the holder at any time, at his choice, to obtain shares from the company which would themselves be pieces of property or property rights of value, freely convertible into money. Being in that position he could also at any time, at his choice, sell or raise money on his right to call for the shares, even though he could not put anyone he dealt with actually into his own position as option holder against the company. I think that (the conferring of a right of this kind as an incident of service is a profit or perquisite which is taxable as such in the year of receipt, so long as the right itself can fairly be given a monetary value, and it is no more relevant for this purpose whether the option is exercised or not in that year than it would be if the advantage received were in the form of some tangible form of commercial property.

The claim to tax the advantage obtained in the year 1955-56 is not claimed by the Revenue if the right view is that the option itself was taxable in 1954-55. Even if there were no taxable subject in the earlier years I should regard the 1955-56 claim as failing on its own terms. The advantage which arose by the exercise of the option, say £166, was not a perquisite or profit from the office during the year of assessment: it was an advantage which accrued to the Appellant as the holder of a legal right which he had obtained in an earlier year and which he exercised as option holder against the company. The quantum of the benefit, which is the alleged taxable receipt, is not in such circumstances the profit of the service : it is the profit of his exploitation of a valuable right. Of course, in this case the year of acquiring the option was only the year immediately preceding the year in which, pro tanto, it was exercised. But supposing that he holds the option for, say, nine years before exercise? The current market value of the company's shares may have changed out of all recognition in that time, through retention of profits, expansion of business, changes in the nature of the business, even changes in the market conditions or the current rate of interest or yield. I think that it would be quite wrong to tax whatever advantages the option holder may obtain through the judicious exercise of his option rights in this way as if they were profits or perquisites from his office arising in the year when he calls the shares.

I agree that the appeal must be allowed. As to previous authorities, I am of opinion that for the reasons I have given Forbes's Executors v. Inland Revenue Commissioners, 1958 S.C. 177, was decided in error. I do not regard either the decision of or any observations in Bridges v. Bearsley, 37 T.C. 289, as being of any significance to the point we have to decide.

Lord Keith of Avonholm

MY LORDS,

This case may be presented so as to raise some interesting and possibly fine legal points. I think it does. But I have come to the view that these arise by considering certain aspects of the case in isolation and that this is not the proper approach to the question at issue. The object of the option under consideration was to afford certain selected executives of the company and of its subsidiary companies an opportunity of obtaining an interest in, or increasing an existing interest in, the capital of the company, as stated in the company's letter of 6th October, 1954. There is nothing novel in such an idea and, as the authorities show, the issue of shares to employees of a company may, in certain cases, attract tax, under Schedule E, as being a perquisite or profit from the employment. The simplest case would be a free bonus issue or transfer of fully paid shares, unless this could be related, as in Bridges v. Hewitt and Bearsley, 1957, 37 T.C. 289, to some cause other than remuneration for service in the company.

The specialty in the present case is that the matter started with the grant of an option to subscribe at 68s. 6d. a share of 2,000 Ordinary Shares of £1 each in the capital of the company. For this the Appellant paid the sum of £20, a somewhat illusory price of rather less than 2 1/2d. per share on the number of shares over which the option extended. The option was subject to certain terms and conditions. Among others it was not transferable and, so long as the Appellant was in the company's service, it would last for ten years. As Lord Carmont pointed out in Forbes's Executors v. Commissioners of Inland Revenue (1958 S.C. 177; 38 T.C. 12), in my opinion correctly, such an option is no more than a standing personal offer. An offer open for ten years is certainly something unusual, but in Scots law if expressed in writing, it could not be challenged and would not be revocable. In English law it may be that some element of consideration is required to prevent such an offer being withdrawn, and (this may be the reason for the offer in the present case taking the form of an option for which a nominal payment was made. In my opinion, no element of consideration should make any difference, in applying a taxing statute common to the two countries, to the determination of the nature and effect of the right granted.

The argument for the Appellant is that though the option is not transferable it left it open to him to turn it to account by agreeing with some third party, in return for a payment, to exercise the option and to transfer the shares, or some part of them, obtained as a result of that exercise to the third party. Clearly the same could be done in the case of a simple irrevocable offer of shares made on the same terms and conditions. But, in my opinion, the agument introduces a quite irrelevant consideration. Whatever happens, the Appellant has got to apply for shares before any benefit or transferable right emerges. Whatever value the option has comes only from its exercise and on its exercise the benefit offered to him arises. The option is an offer, to be accepted or not as and when the Appellant pleases, but until it is accepted the transaction is not complete, nor has any profit been realised. The company has no concern with third parties, before the Appellant gets his shares. When he gets his shares it will be seen what profit he has got from his acceptance of the company's offer. Even if he has made some advance arrangement with a third party it is what he has got from the company in shares that, in my opinion, determines the profit to which he is taxable under Schedule E.

It is conceivable, although I should think unusual, that a company should offer its employees shares, in the form of bonus shares fully paid or for payment on favourable terms, which offer was freely transferable or renounceable in favour of third parties before allotment. That would merely emphasise the favourable nature of the offer and would in no way impinge on the principles to which I have referred. No one can be put on the share register of a company without his consent. If an employee failed to take up the shares offered or to renounce them in favour of a third party he could not, in my opinion, be said by virtue of the mere offer to have obtained a profit from his employment. If he renounces his shares in favour of a third party he has accepted, or taken advantage of, an offer made to him by his employer and by selling his rights has in effect secured a benefit equivalent to what he would have received if he had applied for the shares to be registered in his own name. I assume always that the renunciation would be for a genuine and not for a fictitious price. The result, in my opinion, assuming it could be regarded as a profit of the employment, would be in no way different in principle from that of Weight v. Salmon, 1934, 19 T.C. 174. Though that case was presented as a case of a privilege given to the servant of applying for shares, it is clear from Lord Atkin's speech in this House, concurred in by all their other Lordships, that it was only upon the application being granted by the issue of shares that a profit was regarded as having (been received by the servant. Nor is it material, in my opinion, that the offer of shares is at a price which, if accepted, will show an immediate profit, as where the market value of the shares is higher than the offer price. Until accepted, or otherwise dealt with in accordance with the terms of the offer, the offer cannot, for the reason I have given, be regarded as securing for the servant a profit from his employment. It follows, also, that the same option offered to a number of employees at the same time may have different results in the case of individual employees, if it is as here a continuing option, according to the respective dates when it is accepted. That follows from the nature and terms of the offer and the action that the particular servant takes upon it. The result is entirely consistent with a general rule of income tax law that there can be no profit until it is realised, or can be quantified.

I find it unnecessary to speculate on the precise scope or effect of the references by Lord Halsbury and Lord Watson in Tennant v. Smith [1892] A.C. 150 to a benefit received by an employee from his employer capable of being "turned to pecuniary account" in order that it should be assessable to income tax. Their application must be considered in relation to the kind of benefit received in specific cases. They were made in a context which does not make their scope easily definable. They cannot be confined to tangible or corporeal benefits, otherwise a share in a company would not come within their scope. The dicta are not, however, in my opinion, of any help to the Appellant, because the normal and, I think, in a case like this, the only way of turning an option, or offer, to pecuniary account is by exercising or accepting it. If it is exercised, as it was here, the benefit then accrues and if capable of being valued in terms of money is assessable to tax.

Under Schedule E no difficulty arises in the matter of relating a profit to a particular fiscal year. Under Rule 1 of the Ninth Schedule it is the year of assessment in which the profit is received that determines the rate of tax. It is common ground here that there has been a profit of the employment and the only question is whether that profit is to be extracted from the grant of the option per se or from the exercise of the option. Order either view it is impossible to relate the profit to any year other than the year of receipt. The benefit, however it is estimated, was no doubt given irrespect of past services and possibly in the expectation of future services but further than that it is impossible to say.

The situation, as I see it, is shortly summarised by Sellers, L.J., in words which I would adopt. If the option was never exercised, he says, it seems axiomatic that there would be no profit and no accrued benefit. The contractual right given by the company, and it was by the company to the servant, the taxpayer, in this case could not be transferred, and the view I should be inclined to take of the case, which, I think, is in harmony with the Forbes's Executors case, is that that merely set up the machinery for creating a benefit—that was its intention—which benefit ultimately accrued. I would only add that a transferable option, if transferred, might produce corresponding results, for the reasons which I have endeavoured to explain, though it is unnecessary so to decide for the purposes of this appeal.

I would dismiss the appeal.

Lord Denning

MY LORDS,

When I asked Mr. Heyworth Talbot in the course of the argument whether there was any special virtue in the sum of £20 which Mr. Abbott paid for this option, he said there was no particular merit in it. If the sum had been one shilling or one penny, the result would be the same. It was a nominal sum, he said, which was paid so as to provide consideration for the contract and make it legally enforceable. But it soon appeared that it was essential to his argument that there should be some consideration given for the option, even if it was only, what Sir George Jessel once suggested, a tomtit or a canary. For Mr. Heyworth Talbot acknowledged that if no consideration had been given, then, unless the option were granted under seal, it would have been unenforceable at law: with the result that the case would have been governed by Weight v. Salmon (1935) 19 T.C. 174, 61 T.L.R. 333.

Now, in Weight v. Salmon, as your Lordships will recall, the directors of a company passed a resolution that each of the three managing directors be permitted to make application for and to take up at par one thousand ' A' ordinary shares in the capital of the Company ". The managing directors, in pursuance of that resolution, acquired for £1 apiece shares which were worth £3 or £4 each in the market. It was held by this House that, when the directors received those shares, and not before, they received profits in the nature of money's worth as remuneration for their services. The shares, when received, were "profits" on which they were taxable under Schedule E. That case shows decisively that the expectation of receiving a benefit, no matter how well founded, is not itself a perquisite or profit. It must be reduced into possession. A bird in the hand is taxable, but a bird in the bush is not.

So here, if nothing had been paid for the option, the letters that passed would have been nothing more than a standing offer by the company to allot shares to Mr. Abbott at 68s. 6d. a share. That offer could have been withdrawn by the company, at any time before acceptance, with impunity. The offer itself would not be a perquisite or profit: for it conferred only the expectation of profit, not any profit itself. But when it was accepted, and shares worth 82s. apiece were allotted to Mr. Abbott for 68s. 6d., he would then receive profits which would be taxable in his hands. No difficulty would arise about the year of assessment. The profits would accrue to him in the year they were received.

My Lords, I ask myself, what is the difference, for tax purposes, between the case I have just put, where nothing is paid for the option, and the case we have before us, where a nominal sum is paid? The difference is that in the one case he has only an expectation of profit: whereas in the other he has a right to make profits in the future, if the opportunity arises. But in either case, until the option is exercised, he has not the profits themselves. And as I read the Act it is not the expectation to make profits, nor the right to make profits, which is taxable, but only the profits themselves. Just as it is not the expectation to salary nor the right to salary which is taxable, but only the salary itself. A bird in the bush is not taxable, even if you have the right to get it in the future, if it is still there. You must have it in hand before you can be taxed for it.

And when you come to consider what profits the servant receives from his employment by virtue of the option, surely it makes no difference whether he pays a nominal sum or not. In either case the employer grants him the option as a reward or return for his services: and the profits he makes out of it are the same save for this: if he paid nothing, it is all profit; if he paid a peppercorn, it is all profit less the value of a pepper berry; if he paid 1s., less 1s.; if he paid £20, less £20.

There is, moreover, a very compelling reason why no distinction should be drawn according to whether a nominal sum is paid or not: for it would mean that " profits " in the Income Tax Acts would have a different meaning in Scotland from what it has in England. In Scotland, as your Lordships well know, it is unnecessary to have consideration to support a promise. The option would be legally binding in Scotland, even though nothing was paid for it: whereas it would not be binding in England unless some nominal sum was paid for it. It would not be right, I suggest, for the tax payable to depend on the technical requirements of English law as to consideration. The Income Tax Acts apply to England and Scotland alike and there is the highest authority for saying that they must, if possible, be so interpreted as to make the incidence of taxation the same in both countries, see Commissioners for Special Purposes of Income Tax v. John Frederick Pemsol [1891] A.C. 531 at p. 548 by Lord Halsbury, L.C., and at p. 557 by Lord Watson, Commissioners for General Purposes of Income Tax for City of London v. Gibbs and Others (19421 A.C. 402 at p. 414 by Viscount Simon, L.C., p. 419 by Lord Macmillan, p. 430 by Lord Wright.

My Lords, the point which I am now making can be tested by taking an illustration which is suggested by what Lord Atkin said in Weight v. Salmon.

Suppose that a colliery company made an offer to supply a director, who was in the coal trade, with 1,000 tons of coal at a price which was one-third of the market price of the day. No profit of any kind would be made by the director until he gave an order for coal. But as and when he ordered the coal and got it, he would receive a profit in the nature of money's worth. It would be assessed, said Lord Atkin, at the difference between the price he could get for it, and the price he had actually paid. Now take the same illustration but suppose that, instead of the company making an offer to the director, a clause was inserted in his service agreement giving him the right of obtaining coal at a price which was one-third of the market price of the day. Surely his profit would be just the same as before. It would arise as and when he ordered the coal and got it: and it would be assessed at the difference between the price he could get for it and the price he actually paid. It would not be assessed differently simply because in the one case he made the profit as a result of a standing offer and in the other he made it under a service agreement.

It will be noticed that, just as Lord Atkin's illustration corresponded very closely in substance to the facts in Weight v. Salmon, so my illustration of a service agreement corresponds very closely in substance to the facts in Forbes's Testamentary Trustees v. Commissioners of Inland Revenue, 1958 S.C. 177: and it leads me to the conclusion that that case was correctly decided. And it is indistinguishable from the present case, as everyone agrees.

But Mr. Heyworth Talbot took a further point. He likened the grant of this option to the gift of a physical thing, such as a diamond, or a chose in action, such as an issue of shares, to a servant as a reward for his services. The value of it has to be assessed, he said, for tax purposes at the time of the grant and it is immaterial that its value should rise or fall afterwards. But I would point out those are all interests in property and they are very different from purely personal rights such as this option. Take the issue of shares on which Mr. Heyworth Talbot so much relied. It is clearly an interest in property. Parke, B. said that the shareholder acquires, on being registered, a vested interest of a permanent character, in all the profits ... of the Company, and when registered, may be deemed a purchaser in possession of such interest, see The Birkenhead Company v. Pilcher (1850) 5 Ex. at p. 125; and shares are now, by statute, personal estate, see section 73 of the Companies Act, 1948. So also with any other right which is by its nature assignable, such as a bill of exchange or a rights issue of shares. It is in the nature of an interest in property. It can be valued at the time it is given to the servant and assessed accordingly. But a purely personal right stands on a very different footing. The right of a servant to his salary or wages is a purely personal right. So is his right to a bonus or commission. Suppose that a company in a service agreement agrees to pay the servant a bonus of 10 per cent, of the net profits whenever the net profits overtop £10,000. The servant, before he gets the bonus, may be able to turn it to pecuniary account in just the same way as it is suggested that he can turn this option to pecuniary account: for he might get someone to pay him something for it, by means of the simple expedient of undertaking to hand the bonus over to him when he gets it. But nevertheless he is only taxable on the bonus when he receives it. And if this be so, what is the difference. I ask, between giving a servant a right to a share of the profits when profits rise, and giving him a right to take up new shares when shares rise? For, after all, shares rise with profits. I can see no difference in principle at all.

There remains to consider the case of Tennant v. Smith [1892] A.C. 150. That case showed that a right or privilege which cannot be turned to pecuniary account is not taxable at all. It does not prove the converse. It does not prove that a right or privilege which can be turned to pecuniary account is taxable. In any case, I doubt myself whether this option could be turned to pecuniary account, at any rate, at the moment when it was given. There was no evidence that it could be done. The option, as I have said, was purely a personal right. Mr. Abbott could not sell it. But it was suggested that he could agree with a third person that he would exercise it for his benefit on his request: and in return the third person would give him money. I should have thought it very difficult to get a third person to do this. There is, so far as I know, no market in options which are purely personal to the holder. But even if the option could be turned to pecuniary account in such a devious way, I do not think it should be regarded as taxable. It was, as I have said, only a right to make profits in the future, if the opportunity arose. It was not itself a perquisite or profit.

My Lords,in all the cases hitherto when a servant has been granted by his employer a purely personal right to receive in the future a benefit during his service, the Judges have with one accord held that he receives the perquisite or profit when the thing is actually transferred to him and not before. So said Danckwerts, J. in Bridges v. Bearsley [1957] 1 W.L.R. 59 at pp. 68-9, and both Jenkins and Sellers, L.JJ. agreed with him on this point, see [1957] 1 W.L.R. 674 at pp. 689, 703. So said all the Judges in Forbes's Testamentary Trustees v. Commissioners of Inland Revenue, 1958S.C.177. And I must say that I agree with them. It is the same point as I have insisted on throughout. Tax is not payable on the right in the future to receive salaries, fees, wages, perquisites or profits but only on those things when received.

I would therefore dismiss this appeal.


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