LEGAL NOTES

BY EVAN JAMES MACGILLIVRAY, B.A., LL.B. One of His Majesty’s Counsel

AND DAVID HOUSEMAN, A.I.A., (Solicitor)

Trust and Claims Secretary of the London Life Association Ltd.

English & Scottish Joint Co-operative Wholesale Society, Ltd. V. Assam Agricultural Income Tax Commissioner

Income tax-Profits of industrial and provident society-Trading as tea plan- ters-Two co-operative societies the only members-Advances by members to society to finance cost of production-Sale of tea exclusively to members- Market price set off against advances-Interest on share capital–Dividends in proportion to purchases-Mutual insurance associations-Principle of exemption from tax on surplus-Whether principle applicable to trading company

In this case the appellant society claimed exemption PRIVY COUNCIL from income tax on the ground that it earned no profits

but in effect returned to its members in kind contributions 1948. April 27. [1948] 2 All E.R. 395.

to the society’s funds made to it in cash. It was argued on behalf of the society that the principle applicable was the same as that upon which a mutual assurance associa-

tion, which returns to its members any realized surplus of contributions over the sum total of losses paid and the costs of administration, is held not to be earning profits assessable to income tax. The appellant society is incorporated in the United Kingdom under the

Industrial and Provident Societies Act, 1893. It has an unlimited capital divided into shares of £ 5 each. It is non-resident in what at all material times was British India. Its objects as set out in its rules are, inter alia: ‘To carry on the business of planters, growers, producers, merchants and manufacturers of tea.’ The society has only two members, viz., the Co-operative Wholesale Society, Ltd. and the Scottish Co-operative Wholesale Society, Ltd. The society owns the Deckiajuli estate where it grows and manufactures tea. Except for a small portion which is unfit for export and is sold locally, the whole of the society’s output of tea is sold to its two members at market rates and is exported to England and Scotland. Each year the members of the society pay, by way of advances to the society, sums of money to meet the cost of tea to be supplied by the society to the members. The market prices of the tea with which the members are supplied are debited against these advances. Out of the proceeds from the sales the expenses of production and management and the interest on loans are paid or provided. By the rules of the society its net profits are applied in (a) writing down depreciation of land, buildings, live and rolling stock ; (b) payment of interest not exceeding 6 o/o on the share capital ; (c) appropriation to a reserve fund; (d) appropriation to a special fund for making grants as determined in general meeting ; (e) payment of a dividend to members rateably

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Legal Notes

in proportion to the amount of purchases made by them from the society; and (f) the remainder, if any, carried forward into the next account. The question for decision was whether the society was chargeable to income

tax under the Assam Agricultural Income Tax Act, 1939, and, in answer to a question of law submitted to it in a case stated by the Board of Agricultural Income Tax in relation to an assessment of the society for the year 1939-40, the High Court at Fort William in Bengal held that it was so chargeable. Gentle J. in the course of his judgment said:

In the view which I hold the society is a trading concern and carries on business as growers, manufacturers and sellers of tea; out of this business it derives profits; the dividends which it pays to its members are a distribution amongst them of its trading profit; and the payments of these dividends are not a return to the members of balances from the sums which they have subscribed to the society. . ..The circumstance that the society’s produce is sold to its members does not affect the position and would not do so even if the society were restricted to selling to its members alone.

The society appealed to the Privy Council and the appeal was dismissed with costs. The judgment of the Judicial Committee was delivered by Lord Normand. Their Lordships in dealing with the argument that the principle of the mutual assurance cases was applicable to this case said:

In Styles’s case (New York Life Insurance Co. v. Styles [1889] 14 App. Cas. 381) and in the other cases in which the principle established by it was applied the business carried on by the company or society sought to be taxed was mutual insurance. The essence of that kind of business (with the exception of life insurance) is that a ;number of persons form an association which collects from the members contributions to a common fund which the members authorize the association to use for payments in indemnity of the losses assured against, for defraying the expenses of management and for re-payment to themselves of any balance. In life insurance business the association is authorized to use the common fund not for payments in indemnity of losses but for payment of sums payable on the death of a member. But in the nature of things there are no profits to be made out of a mutual arrangement to share losses, and there are no profits to be made out of a mutual arrangement to pay a sum to executors or assignees on the death of an associate. It is also to be observed that in Styles’s case and similar cases the contributors to the common fund and the partici- pators in it are two identical bodies. The role of the association is to collect from the associates the contributions to the common fund and to make the payments from it in accordance with the contributors’ mandate, and this mandate may be and usually is written into the constituent documents of the association which may or may not be a corporation. The association is therefore no more than a convenient agent for carrying out what the associates might more laboriously do for themselves. What kinds of business, other than mutual insurance, may claim exemption from liability to income tax under the principle of Styles’s case need not here be considered but their Lordships are of opinion that the principle cannot apply to an association, society or company which grows produce on its own land or manufactures goods in its own factories using either its own capital or capital borrowed whether from its members or from others and sells its produce or goods to its members exclusively. In the present case the appellant society is not bound by its rules to sell its tea only to its members, but it could make no difference if it were. No matter who the purchasers may be, if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are, subject to the provisions of the taxing act, taxable profits.

The judgment cites the opinion of Lord Macmillan in Municipal Mutual Insurance, Ltd. v. Hills [1932] 147 L.T. 62, in which his Lordship summarizes

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Legal Notes

the conditions which must be satisfied before a mutual insurance company can claim exemption from liability to tax on its surplus for the year of assessment. Lord Macmillan said:

The principle on which the surpluses arising in the conduct of a mutual insurance scheme are not taxable as profits is now well understood. The essence of the matter is that a number of persons who are exposed to some contingency, whether the inevitable contingency of death or such possible contingencies as fire, employees’ claims, marine casualties or the like, associate themselves together as contributors to a common fund on the footing that if the contemplated contingency befalls any contributor he or his representatives shall receive a compensatory payment out of the common fund proportional to his contribution. The scale of contributions or premiums is fixed on experience and estimate. If it is found to yield more than enough to satisfy the claims that emerge the contributors receive the entire benefit in the shape of bonuses, reduction of future contributions or otherwise. As the common fund is composed of sums provided by the contributors out of their own moneys, any surplus arising after satisfying claims obviously remains their own money. Such a surplus resulting merely from miscalculation or unexpected immunity cannot in any sense be regarded as taxable profit. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund : in other words there must be complete identity between the contributors and the participators. If this requirement is satisfied the particular form which the association takes is immaterial.

Gunner v. Gunner and Stirling

Policy of life assurance-Expressed to be effected under Married Women’s Property Act, 1882 for benefit of named wife absolutely-Divorce-Variatiof settlements-Supreme Court of Judicature (Consolidation) Act, 1925, s.192–Whether policy a settlement-Jurisdiction of court to vary

PROBATE, DIVORCE This was an application to vary a settlement after decree AND ADMIRALTY

DIVISION of divorce. The applicant during the subsistence of his marriage to the respondent effected a policy of assurance

WALLINGTON J . on his own life by which in consideration of an annual 1948. May 13. [1948]

L 2 All E.R. 771.

premium the sum of £ 5000 as payable on his death to 64 T. .R. 513. the person or persons entitled under the Married Women’s [I949] P. 77 Property Act, 1882, to receive the policy money. The policy was expressed to be effected under the Married Women’s Property Act, 1882, for,the benefit of the assured’s wife Winifred Agnes Gunner absolutely. Some three years later the assured was granted a decree for the dissolution of the marriage on the ground of his wife’s adultery. When the decree was made absolute he applied to the registrar to vary the policy by extinguishing all interest of respondent therein. The Supreme Court of Judicature (Consolidation) Act, 1925, s. 192, which

re-enacts in effect s. 5 of the Matrimonial Causes Act, 1859, provides that the court may, after pronouncing a decree for divorce or for nullity of marriage, inquire into the existence of ante-nuptial or post-nuptial settlements made on the parties whose marriage is the subject of the decree, and may make such orders as the court thinks fit with reference to the application of the whole or any part of the property settled for the benefit of either the children of the marriage or of the parties to the marriage.

Legal Notes

With the approval of both parties the registrar referred the matter to the judge for the determination of the question whether the policy constituted a settlement within the meaning of s. 192. It was conceded that by reason of s. II of the Married Women’s Property

Act, 1882, there was created at the moment the policy was effected a statutory trust under which the husband became trustee of the policy and the wife as sole cestui que trust became immediately entitled to a vested interest in the policy. It was submitted on behalf of the applicant that as the trust made a matri-

monial provision for the wife and continued down to and beyond the crucial date and would continue until the death of the husband it was a post-nuptial settlement made on the wife as one of the parties to the marriage. Counsel for the wife contended that the legal effect of the policy was an

out and out gift of the whole rights under the policy to the wife which negatived the conception of a settlement. He cited three cases in support of that con- tention. In two of them there was a completed assignment of property by the husband to the wife absolutely. In the third the wife had purchased an annuity which the society granting the annuity covenanted to pay to her husband. In none of these cases was the property subject to a continuing trust and in each case immediately on the completion of the transaction the legal title to the property became vested in the recipient spouse who took it free from any restriction on her or his power to dispose of it. Wallington J. held that the policy was a settlement which the court had

jurisdiction to vary.

Bown v. Bown and Weston

Life Assurance Policy-Divorce-Supreme Court of Judicature (Consolidation) Act, 1925, s. I92-Variation of settlement-Whether policy a post-nuptial settlement

PROBATE, DIVORCE On 21 June 1920 the husband effected at a single AND ADMIRALTY

DIVISION premium with the Canada Life Assurance Company a policy for £ 2082 payable at his death. The beneficiary

WALLINGTON J. [1948]2 AllE.R.778 was described as ‘the wife of the assured, beneficiary 1948. May 14. during her lifetime’. Clause 9 of the privileges of the 64 T.L.R. 516. [19491 P. 91 policy was in the following terms:

If any beneficiary die before the assured the interests of such beneficiary shall vest in the assured. In the event of this policy becoming a claim before the appointment of any beneficiary, the sum assured thereunder shall be payable to the assured’s executors, administrators or assigns. In August 1931 the marriage was dissolved on the ground of the wife’s

adultery and the husband now applied for an order that the interests of the wife in the policy be extinguished as though she were dead. The application was heard immediately after Gunner v. Gunner (supra).

Wallington J. said that the case must be distinguished from Gunner’s case where the policy created a trust under the Married Women’s Property Act, 1882, with the husband as trustee and the wife had an immediate vested interest, while in the present case the effect of the policy was that if the wife survived the husband the policy moneys would be paid to her and if she did not survive him her legal personal representatives would have no rights at all.

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Legal Notes

The learned judge said that he entertained no doubt that the policy was so effected by the husband because he desired to make such provision as he could for his wife as his wife. She was so described in the policy. The present case did not depend on the existence of a trust because the policy was not issued under the Married Women’s Property Act, 1882 ; but the absence of a trust made no difference to the result of the transaction which was to create a settle- ment within the provisions of s. 192. It is respectfully submitted by the authors of these notes that the learned

judge was in error in assuming that because the policy was not ‘issued under the Married Women’s Property Act, 1882' there was therefore no statutory trust. The provisions of s. II of the Married Women’s Property Act, 1882, apply to any policy of assurance effected by a man on his own life and expressed to be for the benefit of his wife. In any such case a statutory trust is created and no specific reference to the Act is necessary to create it. It is sufficient if the wife is stated to be the payee of the policy money and the fact that her interest is contingent on survivorship does not take the policy out of the section. It is not suggested, however, that, on the assumption that the Married Women’s Property Act, 1882, did not apply, the learned judge was in error in holding that the existence of a trust is not essential to the conception of a settlement.

Smith’s Potato Estates, Ltd. v. Bolland (Inspector of Taxes)

Income tax-Computation of profits-Allowable deductions-Expenses incurred in ascertaining profits-Cost of appeal against assessment

HOUSE OF Loans The main question for decision in this case was whether, VISCOUNT SIMON AND in computing a trader’s profits for the purpose of income LORDS PORTER, tax, the legal and accountancy expenses of prosecuting an

SIMONDS, NORMAND appeal (in this instance a successful appeal) to the Board AND OAKSEY of Referees against a decision of the Commissioners of 1948. July 14. Inland Revenue were deductible as a disbursement [1948] A.C. 508

[1948] 2 All E. R. 367. 64 T.L.R.430.

‘wholly and exclusively laid out or expended for the purposes of the trade' within the meaning of r. 3 (a) of

the Rules Applicable to Cases I and II of Schedule D. The expenses had been incurred by the taxpayer with a view to reducing the assessment made on him for excess profits tax. Smith’s Potato Estates, Ltd., was formed to purchase and manage an estate

at Nocton in Lincolnshire on which it was hoped to grow a supply of potatoes sufficient for the requirements of its parent company, Smith’s Potato Crisps (1929) Ltd. The estate before its purchase was managed by a Mr Young and in order to ensure its successful working it was thought essential to continue to employ him for that purpose. After four years’ service Mr Young was dissatisfied with the amount of his remuneration and a new agreement was entered into between him and the company which provided for an increased remuneration for a term of six years certain. The increased remuneration received by Mr Young for 1941 amounted to £ 6486. The Commissioner of Inland Revenue decided that in computing, for the purpose of excess profits tax, the profits of the company’s trade or business for the accounting period ending 3I March 1941 no deduction could be allowed in respect of Mr Young’s remuneration in excess of a sum of £ 3500. From that decision the company appealed to the Board of Referees and that body held that £ 5800 was allowable.

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Legal Notes

In computing its profits for the purpose of income tax payable under Schedule D of the Income Tax Act, 1918, the company sought to deduct the costs of the appeal amounting to £ 622. 10s. 11d. as a disbursement wholly and exclusively laid out for the purposes of the company’s trade. The Special Commissioners disallowed the deduction. Atkinson J. allowed the appeal of the taxpayer, but his decision was reversed by the Court of Appeal. The House of Lords by a majority afffirmed the decision of the Court of Appeal. The contention of the taxpayer was that the deduction should be allowed

because it was essential for the proper carrying on of a trade that the trader should know what portion of his profits in a given year was left to him after the Revenue had taken its share of taxation, and that the expenditure incurred for the purpose of contesting the demand of the Revenue was an expenditure incurred for the purpose of carrying on and earning profits in the trade, inasmuch as a reduction in the amount of tax would increase the fund in the trader’s hands after tax was paid and so promote the carrying on of the trade and the earning of trading profits. In accepting this contention Lord Simon in his dissenting judgment said that the incidental consequence that the trader was not taxed so heavily in respect of his profits from trade did not in his opinion alter the fact that the litigation was wholly and exclusively undertaken for the purposes of trade. Lord Oaksey who also dissented from the majority decision of the House said that in his opinion the real question which had to be decided in every case was whether the expense was one which was incurred in order to earn gain or profit from the trade or was the application of the gain or profit when earned. In his opinion it could not be truly said that the expense of paying accountants or litigating the question of what was the balance of profits and gains for the purposes of taxation was the application of these profits. Profits could not properly be said to be applied or divided until they were ascertained and every expense which was properly incurred for the ascertainment of profits was in his opinion an expense of earning, profits and not of applying them. The majority of their Lordships (Lords Porter, Simonds and Normand)

were of a different opinion and rejected the taxpayer’s arguments. They held that the expenses in question were incurred at least in part if not exclusively for the purpose of reducing the payment which the taxpayer would have to make if he acquiesced in the assessment made upon him. Even if the correction of the assessment was within the purposes of the trade the expenses, and costs of the appeal were nevertheless laid out at least partly for a purpose which was not one of the purposes of the trade. They were accessory to the payment of a tax out of profits and were not deductible because the tax itself was not deductible. In the course of his opinion Lord Porter said:

Regarding the circumstances which your Lordships have to consider. . .I should myself draw a marked distinction between accounts made up on the purely trading basis and those which are prepared for and accepted by the Inland Revenue. If there were no obligation to ascertain and pay these taxes there would be no necessity for making up accounts on income tax principles-it would suffice to make up the ordinary commercial accounts. The preparation of accounts for tax purposes is, therefore, not directly associated with the carrying on of the business. It is an obligation imposed on the company for another and extraneous purpose, i.e. for the purpose of ascertaining the tax to be paid out of profits. It is not, at any rate, directly undertaken for trade purposes, but to satisfy the Revenue authorities. It is true that, as a matter of convenience, the cost of making up accounts for the

[6]

Legal Notes Inland Revenue is allowed by the authorities as a deduction from profits as is the cost of making up the strictly business accounts of the trade, but this is a matter not of principle but of expediency. The two duties overlap and in practice are almost indivisible. Moreover it is of advantage to the Revenue to have the figures required for their purposes carefully and accurately made up. Strictly, however, I think the expenses should be divided and any additional cost of making up Revenue accounts should be disallowed in determining the allowable deduction for income tax purposes, but the advantages of allowing both to be deducted as a practical measure outweigh the disadvantages though the result may not be strictly logical. But no such illogicality has to be faced when the sum which is alleged to be deductible is not the cost of accountants’ work in ascertaining trading profits but the expense of an appeal to the Board of Referees for the purpose of discovering the true measure of profits for tax purposes only. Such expenditure is incurred directly for tax purposes and for nothing else, though it may indirectly affect both the amount available for distribution to the proprietors of the business and that proper to be put to reserve. With all respect to the opposing view, expenditure to ascertain the true amount of

tax to be paid, whether it be income tax or excess profits tax and whether successful or unsuccessful, is in my opinion incurred, at any rate in part, in order to determine the correct amount of income tax or excess profits tax as the case may be and not in order to earn gain even though that phrase be given a broad significance. The same con- clusion might be reached by saying in the words of this statute that such expense is not wholly or exclusively laid out for the purposes of trade. It is in truth partiallyif not wholly, laid out in order to discover what sum is to be paid to the Crown out of the profits or gains which have already been earned and computed.

Duffy (deceased), In re, Lakeman v. Attorney Generally

Estate duty-Valuation of shares in controlled company-Valuation of company’s assets-Deduction of liabilities-Liability for income tax-Finance Act, 1940, ss. 50 (1), 55 (2)

COURT OF APPEAL The question raised in this case related to the proper LORD GREENE M.R., method of valuing for the purposes of estate duty shares SOMERVELL AND in three companies which fall within the special class of EVERSHED L.JJ.

1948. October 13. company for which the Finance Act, 1940, s. 55, makes

[1949] Ch. 28 provision. [1948] 2 Al1 E.R. 756. The said section provides that for the purposes of estate duty the value of the shares or debentures of a company controlled by the deceased at any time during three years ending with his death and in respect of which there have been no dealings on a recognized stock exchange during the year ending with his death and in certain other cases shall be estimated by reference to the net value of the assets of the company ascertainedin accordance with the provisions of sub-s. 55 (2) which provides:

(a) the net value of assets of the company shall be taken to be the principal value thereof estimated in accordance with the said sub-s. (5) [i.e. sub-s. 7 (5) of the Finance Act, 1894], less the like allowance for liabilities of the company as is provided by sub-s. 50 (I) of this Act in relation to the assets of a company passing on a death by virtue of s. 46 of this Act.

The dispute was as to what liabilities might for the purposes of such valua- tion be deducted from the gross value of the assets of the three companies.

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Legal Notes

It is the practice in applying these valuation provisions to begin with a valuation of the assets less liabilities as shown by the accounts of the company in respect of the financial year ending last before the deceased’s death but, the relevant date being the date of the deceased’s death, which took place part of the way through the next financial year of the company, something must be done to bring the valuation up to date. The practice is to take first .a proper pro- portion of the profits of that year referable to the broken period before the deceased’s death and to treat that as an addition to the assets and to deduct any liabilities that have been incurred during that broken period; In the presents case each of the companies made profits in the year in which the deceased died. According to the system which has been mentioned a proportionate part of those profits would fall to be added to the value of the companies’ assets as shown by the previous balance sheets. It was argued on behalf of, the executors that there should be deducted from

the profits which were earned during the year in which the deceased died the liability for income tax in resp the deceased died.

ect of the financial year which would begin after It was said that as the profits earned in the year in which the

deceased died would form the basis of the assessments for income tax in respect of the next year these profits carried, so to speak, in gremio the liabilityfor tax which would afterwards be assessed in respect of them. Counsel for the executors said that income tax was a very special thing. It could not be classed with the sort of apprehended future event which may or may not happen. It was as certain as anything could be. As soon as the profits are earned which are to form the basis of next year’s assessment it could be said with absolute certainty : ‘Those profits will form the basis of next year’s, assessment, and any prudent business man would not regard them as spendable save after making proper provision for that liability which is going to arise in the future.’ The Court of Appeal affirming the judgment of Roxburgh J. held that the

liability for income tax for the following year of assessment was not deductible from the profits earned during the year in which the deceased died. With reference to the argument advanced on behalf of the executors Lord Greene, MR., said:

That is an attractive argument, because to speak of income tax next year as if the question whether it was or was not going to be imposed were a thing at large would be stupid, but, taking the construction of the words used by Parliament in stating its will I find it impossible to give them a meaning extending beyond what is always ascer- tainable without ‘any doubt whatever, namely, an existing legal liability-a liabilitactually existing in law at the relevant date. The words cannot be stretched so as to cover something which in a business sense is morally certain and for which every business man ought to make provision, but which in law does not become a liabilituntil a subsequent date, That appears to me to be the short answer to this appeal which in my opinion ought to be dismissed with costs. � Somervell and Evershed, L. J J. agreed.

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Legal Notes

Lord Howard de Walden v. Inland Revenue Commissioners

Sur-tax-home arising under a settlement-Controlled company-Undistri- buted income-Apportionment of-Sub-apportionment-Foreign Company- Finance Act, 1938, s. 41 (4) (a) (ii)--Finance Act, 1939, s. 13 (3) and (4)

HOUSE OF LORDS Under a settlement‘ made by the appellant, Lord LORDS PORTER, Howard de Walden, in view of his intended marriage,

UTHWATT, DU PARCQ the trustees of the settlement held 15,000 shares in NORMAND AND MORTON

Dufferin Investment Company, Ltd. (hereinafter referred 1948. October 29. to as ' Dufferin ') on trusts under which at all material times [1948] 2 All E.R. 825. the whole of the income arising from such shares was payable to the appellant. Dufferin is a company incorporated in Canada and six other companies which are incorporated either in Canada or Kenya come into the picture. All the share capital of each of these six companies was held beneficially either by others of the same companies or by Dufferin. All the companies were at all material times under the control of the appellant. In these circumstances the question arose whether on the true construction of the Finance Act, 1938, s. 41 (4) (a) (ii), as amended by the Finance Act, 1939, s. 13 (3) and (4), undistributed income of the six companies could be appor- tioned and sub-apportioned to the trustees of the settlement as holders of shares in Dufferin and so become ‘income arising under the settlement’ for the purposes of assessment to tax. Additional assessments to sur-tax were made on the appellant on the footing that such income could be so dealt with. The Special Commissioners discharged the assessments and Atkinson J.

dismissed the appeal from them. The Court of Appeal allowed the appeal from Atkinson J. and held that the additional assessments were in order. The taxpayer appealed to the House of Lords. The Finance Act, 1938, s. 41, provides: (4) For the purposes of this Part of this Act-(a) the expression ‘income arising

under a settlement’ includes. . .(ii) where the amount of the income of any body corporate has been apportioned under the Finance Act, 1922, s. 21, for any year or period, or could have been so apportioned if the body corporate were incorporatedin any part of the United Kingdom, so much of the income of the body corporate for that year or period as is equal to the amount which has been or could have been so apportioned to the trustees of or a beneficiary under the settlement. . . . The Finance Act, 1939, s. 13, provides: (3) Subject to the last preceding sub-section and to any other express provision of

this Act, any reference in any enactment to apportioning income under or for the purposes of the provisions, or any specified provisions, of the said s. 21 or of the said First Schedule shall be construed as a reference not only to apportioning by means of an original apportionment but also to apportioning by means of an original apportion- ment together with one or more sub-apportionments or series of sub-apportionments.. . . (4) In this section the expression ' sub-apportionment ' means such an apportionment of income as is provided for by the Finance Act, 1927, s. 32 (which applies the said s. 21 to interconnected companies) and the expression ‘original apportionment’ has the same meaning as in the said s. 32. Under the Act of 1922 the only income capable of original apportionment is

that of a controlled British company (i.e. a company incorporated in the United Kingdom which is under the control of not more than five persons and the share-s in which are not dealt in on any recognized stock exchange).

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Legal Notes

Under the Act of 1927 it is that income when apportioned which is sub apportionable, but sub-apportionment may be made only as respects income apportioned or sub-apportioned to a controlled British company. Income apportioned or sub-apportioned to a foreign company, in whosoever hands the control of that company may be vested, is not sub-apportionable. A foreign company finds a place in the process but only as a body to whom income may be apportioned or sub-apportioned. Thus for good or bad reason the legislature chose that the flow of apportioned income along any particular channel was to be stopped by the appearance of a foreign corporate body in that channel. It was contended on behalf of the Crown that s. 41 of the Act of 1938, as

amended, on its true construction required it to be assumed that for the purposes of sub-apportionment any foreign company to which income was apportioned or sub-apportioned was incorporated in some part of the United Kingdom. The House of Lords, differing from the Court of Appeal, held that on the plain reading of the words of the section that assumption was not justified. S. 13 of the Act of 1939 effected no alteration in the machinery of sub-apportionment. It brought it into s. 41 of the Act of 1938 sans phrase. No income of any of the six companies had been apportioned to Dufferin but it could have been so apportioned if the companies had been incorporated in the United Kingdom. That fact would have helped the Crown if Dufferin had been incorporated in the United Kingdom because income of any of the six companies could have been apportioned to Dufferin and then (by means of sub-apportionment) to the trustees of the settlement; but as Dufferin was not in fact incorporated in the United Kingdom there could be no sub-apportion- ment of any income apportioned to it. The House was unanimously of opinion that Atkinson J. and the Special

Commissioners had arrived at the right conclusion in discharging the assess- ments. It allowed the appeal from the judgment of the Court of Appeal and directed that the respondents should pay the appellant’s costs in both courts.

Shepherd, In re, Public Trustee v. Henderson and others

Estate duty-Legacy duty-Settled legacy declared free of all duties-Whether confined to duties arising on death of testator-Duties arising on death of tenant for life

CHANCERY DIVISION This was an adjourned summons to determine whether, on the construction of a will, estate duty which HARMAN J. would become payable on the death of the first defendant

1948. November 5 [1949] Ch. 116

who was the life tenant of a settled legacy of £ 20,000 [1948] 2 All E.R. 932. would be payable out of the capital of the settled legacy

or out of the residuary estate of the testator, and whether legacy duty under (a) the Legacy Duty Act, 1796 and (b) the Finance Act, 1947, s. 49, would be payable out of the settled legacy or out of residue. The testator William Shepherd died in 1919. By his will, of which the

plaintiff had become the sole trustee, the testator bequeathed various pecuniary and specific legacies and annuities. By clause 16 he bequeathed to his trustees the sum of £ 20,000 upon trust to invest it and pay the income to his grand- daughter, the first defendant, during her life and after her death, in the event

[10]

Legal Notes

which had happened, to hold the fund upon trust for her daughter the second defendant absolutely. Clause 17 of the will read as follows:

I declare that all the before mentioned legacies and specific and pecuniary bequests whether settled or otherwise and all the said annuities whensoever payable shall be paid free of all legacy and other death duties (if any) and that all such duties shall be paid out of my residuary estate.

With regard to the estate duty which would be payable on the death of the first defendant the question was whether the words conferring freedom from duty were (a) confined to duties arising in consequence of the death of the testator or (b) extended to all duties arising in consequence of the dispositionsmade by his will. The learned judge said that the answer depended on the construction of the particular will under consideration. It was therefore a question of ascertaining the testator’s intention from the words he had used: but at the same time there was by now a presumption that a testator intended to provide for such duties only as would become payable by reason of his own death and to rebut that presumption a clear intention to provide for further duties must be found expressed in the will. After considering those words in the will which might be taken as indicative of such intention the learned judge came to the conclusion that the narrower interpretation was the right one and that the estate duty must be paid out of the settled legacy. With regard to the 1% legacy duty under the Legacy Duty Act, 1796,

which would be exigible on the death of the first defendant, though legacy duty where payable at different rates on a settled legacy is not exigible on the testator’s death except on the value of the first life interest, the whole duty is nevertheless a sum owing to the Crown debitum in praesenti solvendum in futuro. Freedom from this duty was therefore enjoined by the will and the answer was that it must be paid out of residue. With regard to the ‘further legacy duty’ imposed by the Finance Act, 1947,

it was argued that this, not being a duty which arose or was charged at the testator’s death, was a future duty and fell into line with the estate duty under the first question raised. The learned judge rejected that argument and held that the so-called further duty was merely a raising of the rate of the old duty and that the two fell on residue together.

Inland Revenue Commissioners v. Reid’s Trustees

Income arising from possessions out of the United Kingdom-Dividend paid out of capital profits of South African Company-Capital Or Income-Income Tax Act, 1918, Schedule D, Case V

HOUSE OF LORDS This was an appeal by the Crown against the inter-

LORDS SIMONDS, locutor of the First Division of the Court of Session in Scotland which had upheld a determination of the Special

MACDERMOTT AND REID Commissioners of Income Tax. 1949. January 20. The trustees of the will of Joseph Reid, an iron [1949] I All E.R. 354. merchant of Glasgow, held shares in Reid Brothers (South Africa) Ltd. incorporated in the Transvaal which carried on the business of iron and steel merchants. The business of the company did not include dealings in land.

[ 1 1 ]

Legal Notes

In 1943 the company owned certain buildings, used as stores and offices, which were out of date and unsuitable for the purpose. Some of the buildings were sold, and the value of the properties retained was in the opinion of the directors greater than the value shown in the property account.

On 23 October 1943 the board passed the following resolution:

It was resolved that a dividend of 20 % be declared payable from capital profits realized on the sale of properties during the past financial year.

On payment of the dividend no deduction of income tax was made by the paying agent in the United Kingdom and the Crown now claimed income tax under Case V of Schedule D on the sum of £ 6866 as income arising from possessions out of the United Kingdom. The Lord President of the Court of Session had thought that the answer of

the trustees, as accepted by the Special Commissioners, would be that the sum of £ 6866 was not the income of anyone but Lord Simonds said that such a conclusion could be reached only by ignoring that a sum regarded as capital in the hands of the payer may yet be income in the hands of the payee. A dividend paid out of capital profits may in some cases properly be treated

as income as between tenant for life and remainderman but the dividing line between capital and income is not the same for purposes of income tax as it is for the trust administration. It was urged on behalf of the trustees that to hold the dividend taxable

would create a strange anomaly, for if the company had been an English com- pany, no tax would have been payable. In the case of an English company the trustees would have been shielded, for in assessing taxation the Crown would have recognized the basic principle that income tax is not a tax on capital and would have ignored that part of the profits arising from the realization of appreciated capital assets. The result in the case of an English company would therefore have been that income tax would not have been sought of anyone-company, trustees, or beneficiaries. The position of an English company and its shareholders is, however,

wholly different from that of a foreign company and its shareholders, who, if resident here, are taxable in respect of their income from foreign possessions.A shareholder in an English company is not directly assessable in respect of dividends which he receives: but a shareholder in a foreign company is so assessable. The consequences are far reaching. While moreover under r. 20 of the General Rules applicable to Schedule D

a British company may deduct tax from the dividend it pays, the rule has no application to the case of a foreign company, whether or not it has, in fact, paid tax on some part of the profits out of which the dividend is paid; and Lord Simonds called the attention of the House to the observation of Lord Philli- more in Bradbury v. English Sewing Cotton Co. Ltd. [1923] A.C. 770, where he said of income from foreign possessions : ' The officers of the Crown do not know and do not care what is the character of the sources from which the money comes.’ It was obvious that as a general rule the Inland Revenue authorities cannot have facilities for investigating the affairs of a foreign company and for checking its statement that a dividend is paid out of capital profits. It was argued for the Crown that the dividend could not be capital because

the foreign possessions of the trustees, i.e. the shares, remained intact. Money

[12]

Legal Notes

paid by way of reduction of share capital would not have been income, for the shares would not have remained the same ; while if the surplus profits had been used to create bonus shares there would have been no receipt of income, for new capital assets would have been created. The shares in the present case no doubt abated in market value after the payment of the dividend but they nevertheless remained intact. The ripe tree loses weight and worth when it sheds its fruit, but the fruit remains fruit and no more unless in its fall it has taken part of the tree with it. The House accordingly allowed the appeal of the Crown.

[13]

LEGAL NOTES

BY EVAN JAMES MACGILLIVRAY, B.A., LL.B. One of His Majesty’s Counsel

AND

DAVID HOUSEMAN, A.I.A. (Solicitor) Trust and Claims Secretary of the London Life Association Ltd.

Young v. Sealey

Money on deposit account-Shares in building society-Joint names of depositor or purchaser and another-Death of depositor or purchaser-Legal title in survivor-Beneficially entitled-No resulting trust-Testamentary intention -Non-compliance with Wills Act, 1837

CHANCERY DIVISION This was an action brought by the personal representa- tives of Miss Teresa Jarman, who died intestate in 1941,

ROMER J. to determine whether the defendant, Wilfred Jarman Sealey, who was her nephew, was on her death bene-

1948. Dec. 2. ficially entitled to the credit balance on a deposit account with Lloyds Bank Ltd., which account was opened in

1927 by Miss Jarman in the joint names of herself and her nephew, and to certain shares in the Western Counties Permanent Building Society which were purchased by Miss Jarman in 1935 and stood also in their joint names. The personal representatives of the deceased contended that as the money and shares were wholly provided by the deceased and there was no presumption of advancement in the case of a nephew the defendant took the legal title to these moneys and shares subject to a resulting trust in favour of the deceased’s estate. Alternatively, with regard to the deposit account they contended that the intended disposition in Mr Sealey’s favour was testamentary in its character and as such was void by reason of non-compliance with the formali- ties of the Wills Act, 1837. With regard to the Lloyds Bank account Miss Jarman and the defendant

signed a form of authority to the bank to pay any money standing to the credit of the joint account to or to the order of both or either of them or to or to the order of the survivor. In fact, Miss Jarman drew freely on the joint account and made many payments into it, but the defendant at no time made any withdrawal from the account, nor did he pay any money into it. With regard to the shares in the building society Miss Jarman’s name was

entered as first of the joint investors, and as such she received and enjoyed the income during her lifetime. The learned judge, having heard the evidence of the defendant and other

witnesses, found as a fact that Miss Jarman’s intention was that the defendant should inherit at her death the balance standing to the credit of the deposit account and the shares in the building society, but should take no benefit from either during her lifetime, and that her motive for making provision for her

AJ [ 1 5 ] b

Legal Notes

nephew in that way rather than by will was to keep her solicitors from knowing anything about it and (as she erroneously imagined) to avoid payment of death duties. With regard to the deposit account she intended to exercise sole control over it during her lifetime, and that only what was left at her death should go to the defendant who was never expected to pay anything into the joint account and was not, so long as she was alive, to draw anything out for himself. It followed that there was no resulting trust in favour of the deceased’s

estate, and subject to the contention based on the provisions of the Wills Act, 1837, with regard to the deposit account the defendant was entitled on Miss Jarman’s death to retain for his own use as beneficial owner both the credit balance and the shares in the building society. With regard to the credit balance on the deposit account the argument was

that by retaining, as against the defendant, dominion and control over the joint account during her lifetime, and limiting her benefaction to such credit balance only as might be in existence at her death, she was attempting to do that which could only be done by a will executed in conformity with the Wills Act. Counsel for the plaintiffs said that for the defendant to succeed he would have to establish either an immediately effective gift by Miss Jarman during her lifetime or an inter vivoS settlement in his favour subject to a power of revocation by Miss Jarman or a donatio mortis causa, that the evidence showed that Miss Jarman’s bounty was not intended to operate in any of these ways, and that the medium through which it was intended to operate was invalid. The learned judge said that the argument appealed to him, supported as it was by the Irish case of Owens v. Green [1932] I.R. 225, and the Canadian cases which had been cited to him, and that if there had been no English authority relevant to the question he would have felt inclined to apply that reasoning, notwithstanding that by doing so he would have defeated Miss Jarman’s expressed intention. But the cases which had come before the courts of this country in which a depositor has put funds in the joint names of himself and another, intending to retain control over the funds and to withdraw from them if he thought proper but with the further intention that the other party (if surviving) should take beneficially whatever might be left of the fund at the death of the depositor, had all resulted in the surviving beneficiary taking free from any trust. It was true that there was no reported case where the point now raised was presented to the court; but it was impossible to say that there was no case of this type in which the point was taken. In these circumstances and having regard to the disturbing effect which an acceptance of the argument might well have on titles already acquired, the learned judge thought it was better that the change in the current of authority which he was invited to make should be made rather by an appellate court than by a court of first instance, assuming that it was to be made at all. The learned judge held accordingly that the defendant was beneficially

entitled to the credit balance on the deposit account as well as to the shares which were in issue in the action. The action in his judgment failed and was dismissed accordingly.

[16]

Legal Notes

Borthwick deceased, In re

Inheritance (Family Provision) Act, 1938-Reasonable maintenance-Wealthytestator-Widow in straitened circumstances-Unmarried daughter living with her mother

CHANCERY DIVISION This was an application by the widow and daughter of the deceased that reasonable maintenance be provided for

HARMAN J. them under the Inheritance (Family Provision) Act, 1938. 1949. Feb. 10. William Borthwick married his wife in 1909 when they [1949] r Ch. 395 were both 21. He was then a hairdresser’s assistant [1949] I All E.R. 472. earning 26s. a week. Margaret Borthwick, the fourth child of the marriage, was born in 1926. She and her mother were the only two dependants of the deceased. In 1919 the deceased gave up hairdressing and embarked on various

business activities. He became bankrupt in 1925 and sent his wife and children to live at his parent’s house and himself went to live in lodgings. He made his wife an allowance of £ 2 a week and in 1932 he increased it to £ 3 a week. Some time between 1926 and 1939 a vast change came over his fortunes. He set himself up in an expensive establishment at Hatfield where he lived in affluence with his mistress, and when he died in 1946 the net value of his estate was about £ 130,000. He did not during his lifetime make any further provision for his wife or any substantial contribution to the education of his children. By a will made in 1939 the deceased made a provision for his wife of £ 250

a year. At the same time he signed a statement which he was apparently advised to do having regard to the passage in 1938 of the Inheritance (Family Provision) Act, and the apprehension of either himself or his advisers that hiS will might be questioned by his wife on the ground that he had not made reasonable provision for her. The statement was to the effect that in the early part of their married life his wife was extravagant and did not keep within the amount he gave her to pay the housekeeping bills and that he was not happy with her because she d id not fulfil many of the domestic duties which he expected of a wife, and that when he became bankrupt she told him to clear out. The deceased made further wills in 1940, 1942 and finally in 1944, and on the signature of each of these documents he re-signed the statement of 1939. Under the will of 1944 which was proved in January 1947 the deceased

appointed his solicitor and two accountants to be his executors, and bequeathed to them shares in a private company which were of great value and were the main asset of his estate. He bequeathed to his wife an annuity of £ 250, and made a settlement of £ IOOO on his daughter Margaret and her issue. He directed his trustees to apply the ultimate residue of his estate for charitable purposes to be selected by them. The learned judge held on the evidence that the statement signed by the

deceased was a thoroughly dishonest document. The charges made in it against his wife were refuted not only by her, but also by his own brother and sister, who both gave evidence that she was a good wife to him. He, the learned judge, disbelieved the deceased’s statement, and that, he said, left him with this, that the deceased implicitly acknowledged that if there was nothing in what he said he would have made some further provision for his wife. He, the learned judge, said that what is reasonable maintenance for a widow must

[17] b-2

Legal Notes

depend on the circumstances of the case. It certainly depended to some extent on the circumstances of the widow, but it must also depend on the circumstances of the testator, that is to say, whether or no he died a rich man, because the wife of a rich man is entitled to better provision for her main- tenance than the wife of a poor one. Maintenance does not only mean the food a wife puts in her mouth. It also means her clothes, the house in which she lives, and the money which she is to have in her pocket, all of which vary according to the means of her husband, He thought that the wife from whom the deceased had parted through no particular fault on her part and who was living in straitened circumstances was entitled, in view of the ample means of the husband, to a generous scale of living, regard being had to the kind of needs she might be reasonably supposed to have, and he would make her income up to £1000 a year. The daughter was living with her mother and was in employment earning a modest salary of £2. 10s. a week. She would not be in any physical need so long as she and her mother continued to live in amity. She was, nevertheless, reasonably entitled to something, and the deceased should have made a more reasonable provision for her too. While her mother remained a widow and she a spinster he would make provision for her of £100 a year. If her mother remarried or died and she remained still a spinster she must apply again to the Court if she wanted further provision made for her.

Harari’s Settlement Trusts, In re

Settlement—investment clause—Such investments as to the trustees may seem fit—Whether limited to trust investments

CHANCERY DIVISION This was an adjourned summons to determine the trustees’ powers of investment under the investment

JENKINS J. clause in a settlement made by Sir Victor Harari Pasha for the benefit of his daughter Maria for life with various

1949. Feb. 3. [1949] I All E.R. 430. remainders over. The settlor transferred into the names

of the trustees the investments specified in the schedule to the settlement, none of which was an investment authorized by law for the investment of trust funds. The trustees were directed to hold the said invest- ments upon trust, that they might either allow the same to remain in their then state of investment or with the consent of the daughter realize the said investments or any of them and with the like consent invest the moneys produced thereby and also all capital moneys which might be or become subject to the trusts of the settlement ‘in or upon such investments as to them may seem fit '. The question for the Court was whether the trustees’ powers of reinvestment were limited to investments authorized by law for the investment of trust funds. There is some authority for the proposition that a power to trustees to invest in such securities as they may think fit means ‘such securities authorized by law for the investment of trust funds as they may think fit’, but the balance of authority is to the effect that such words give the trustees an unlimited discretion to invest in any such securities as they may honestly think fit. The learned judge, having referred to a number of authorities in which similar words were construed, said that they seemed to leave him free to construe the settlement according to what he considered to be the natural and proper meaning of the words used in their context, and so construing the

[18]

Legal Notes

words ‘in or upon such investments as to them may seem fit’ he saw no justification for implying any restriction. In the course of his judgment he said :

I think the trustees have power under the plain meaning of those words to invest in any investments which, to adopt Kekewich J.'s observation, they ‘honestly think’ are desirable investments for the investment of moneys subject to the trusts of the settle- ment. To hold otherwise would really be to read words into the settlement which are not there. The wide construction which the words themselves are, in my view, sufficientto bear is, I think, to some extent supported by the fact that the investments brought in, in the first place, are non-trustee investments. . . . The real ground, however, for my decision is the plain and ordinary meaning of the words ‘in or upon such investments as to them may seem fit’. Having found nothing in the authorities to constrain me to construe those words otherwise than in accordance with their plain meaning, that is the meaning I propose to place on them.

Watkins deceased, In re

Inheritance (Family Provision) Act, 1938—Testator's daughter by reason of mental disability incapable of maintaining herself-National Health Service Act, 1946—Maintenance by State-Reasonable provision by testator on that. footing

CHANCERY DIVISION This was an application by Mary Eleanor Hayward, a daughter of the deceased. for an order that such reasonable

ROXBOROUGH J. pro&ion as the Court might think fit should be made out of the testator's estate for her maintenance. The deceased

1949. March 3. [1949] I All E.R. 695. died on 25 October 1947 leaving a will made on 14 May

1947, by which he devised and bequeathed to Ada Lucas, the wife of William Haslam Lucas, free of all duties, his freehold residence known as Downside, Roedean Road, Brighton, together with the furniture and other household effects therein and belonging thereto. He bequeathed and devised the residue of his estate to his executors upon trust as to both capital and income for such of his three children, Jean Elizabeth, Mary Eleanor and Ruth, as should be living at his death and attain the age of 21 years, or marry under that age, in equal shares. The testator's wife predeceased him and the three daughters mentioned in his will survived him. Jean and Ruth were married. The plaintiff, Mary Eleanor, had married, but her marriage had been annulled under such circumstances that she was not in a position to obtain any maintenance from her former husband. At the date of the summons she was 38 years of age and was a patient in a private mental hospital. She entered the hospital in 1945, and up to the date of his death the testator had contributed £,250 a year or thereabouts towards the cost of her maintenance there. The plaintiff’s own resources were: (i) £50 per annum from investments,

(ii) a profit rental of about £90 per annum from subletting a flat, (iii) an esti- mated income of £72 per annum from her one-third share of the testator’sresiduary estate. The actual cost of her maintenance at the hospital was £367 for the year ending on 30 June 1948. The legatee, Mrs Lucas, was living apart from her husband, and about 1930

the testator acquired the house Downside as a joint home for himself and her. At that time the testator's wife was in a mental home. Mrs Lucas lived with the testator until his death. On giving his instructions for the preparation of his will the testator told his

[19]

Legal Notes

solicitor that Ada Lucas was the one person whom he desired above all else to benefit from his will, that she had done a great deal for him in recent years, and that she could look to no one but himself to provide for her. He said two of his daughters had husbands to provide for them, and as to the third daughter she was in a mental home and must take her chance. Shortly afterwards he said in effect to his son-in-law, who was one of his executors: ‘My daughter is in St Andrew’s Hospital. It may be taken over by the State or it may not. If it is taken over by the State she will remain in St Andrew’s Hospital at the cost of the State. If it is not taken over by the State St Andrew’s Hospital cannot put a detained person out into the street. They will have to make arrangements for her reception in a home which has been taken over by the State.’ The National Health Service Act, 1946, was passed on 6 November 1946, that

is to say, before the date of the testator's will, so the testator knew that an Act had been passed which provided for the maintenance of his daughter free of charge so long as her disability continued. The testator's net estate was approximately £23,000. The devise of the

house to Mrs Lucas was worth about £400 a year to her. The learned judge said that in his opinion it was reasonable for the testator,

if he were so minded, to make provision for his daughter on the footing that she could and should take advantage of the provisions of the National Health Service Act, 1946. On that footing the provision which he made was in the opinion of the learned judge entirely reasonable having regard to her existing needs. There was apparently no hope for her recovery, and what she had plus a third of the residue, which might well, in the case of a lady situated as this lady was, be applied in the purchase of an annuity, was sufficient for her. In these circumstances it seemed impossible to hold that the will did not make reasonable provision for the plaintiff’s maintenance.

Middleton (Earl) v. Cottesloe and others

Estate duty-Settled land in Eire—Proceeds of sale-Invested in English securities-Whether considered as land in Eire for tax purposes--Settled Land Act 1882, s. 22 (5)—Settled Land Act 1925

HOUSE OF LORDS This appeal concerned the right of the Crown to levy LORDS SIMOUNDS, DU estate duty on English investments which represented the PURCQ, NORMAND, proceeds of sale of land situate in Eire and settled under MORTON AND REID an Irish settlement. This right was affirmed by Rox- 1949. April 8. burgh J. and the Court of Appeal and was challenged in [1949] I All E.R. 841. this appeal. The respondents are the present trustees of the settlement for the purposes of the Settled Land Acts, 1882-90. They issued this originating summons in the Chancery Division, to which the Attorney-General and the appellant, the present earl, were defendants, to have the said question of estate duty determined. The Settled Land Act, 1882, s. 22 (5), is in these terms:

Capital money arising under this Act while remaining uninvested or unapplied and securities on which an investment of any such capital money is made, shall, for all purposes of disposition, transmission and devolution, be considered as land, and the same shall be held for and go to the same persons successively, in the same manner and

[20]

Legal Notes

for and on the same estates, interests, and trusts, as the land wherefrom the money arises would, if not disposed of, have been held and have gone under the settlement.

The Settled Land Act, 1882, was repealed in toto by the Settled Land Act, 1925, which extends only to England and Wales, and the earlier Act is still in force in Eire. The argument for the appellant was that as the investments constituted the

proceeds of sale of settled land they were to be considered as land situate in Eire and therefore not subject to United Kingdom tax. To succeed in his claim the appellant had to establish two propositions:

(a) that the provisions of s. 22 (5) of the Settled Land Act are still operative as an Act of the Imperial Parliament in regard to English investments representing the proceeds of sale of Irish land, and (b) that being so operative they have the effect for fiscal purposes of converting such proceeds from securities situated in the United Kingdom to land situated in Ireland. Their Lordships were of opinion that the appellant failed to establish the

second of these propositions, and it was therefore unnecessary to determine the first of them. Lord Simonds, referring to the first point, said that he would say no more than that grave, if not overwhelming, difficulties appeared to him to lie in the way of the contention that at any time since the Irish Free State Constitution Act, 1922, came into force any Act which by art. 73 of the Constituent Act thereafter remained in force in Eire could have any extra- territorial operation so as to affect English investments. On the second point their Lordships came to the conclusion that the

incidence of death duties is not one of the ‘purposes of disposition, transmis- sion and devolution’ with which s. 22 (5) of the Settled Land Act, 1882, is concerned. The subsection carefully limits the purposes for which capital money and investments are to be considered as land. Their Lordships saw no reason why a fourth purpose should be read into the section by adding the words ‘including fiscal purposes’. The relevant words mean just what they say and no more, and there was no justification for implying other words which more than most words demand explicit expression. The words of the section taken by themselves do not naturally include a purpose which only arises under a taxing Act. Estate duty was correctly levied on the English investments and the appeal

was dismissed with costs.

Inland Revenue Commissioners V. Wolfson

Income tax-Surtax-Deduction of covenanted payments-Finance Act, 1938, S. 38 (1)(a)—Power to determine settlement or any provision thereof— Power independent of settlement to frustrate covenant to pay

HOUSE OF LORDS This appeal raised a question on s. 38 (I) of the LORDS SIMONDS, DU Finance Act, 1938, which so far as material is as follows : PARCQ, NORMAND, (I) If and so long as the terms of any settlement are such that MORTON AND REID (a) any person has or may have power, whether immediately or 1949. April 8. in the future and whether with or without the consent of any [1949] I All E.R. 865. other nerson. to revoke or otherwise determine the settlementor any provision thereof and in the event of the exercise of the power the settlor or the

[21]

Legal Notes

wife or husband of the settlor will or may cease to be liable to make any annual payments payable by virtue or in consequence of any provision of the settlement. . .any sums payable by the settlor or the wife or husband of the settlor by virtue or in consequence of that provision of the settlement in any year of assessment shall be treated as the income of the settlor for that year and not as the income of any other person.

The respondent, Isaac Wolfson, was at all material times the holder of 700 ordinary shares of £1 each in a private investment company called Leonard Gordon Estates Ltd. The capital of the company was £1000 and the remaining 300 shares were held, as to 100 by his brother Charles Wolfson, as to 100 by his brother Samuel William Wolfson, and as to the remaining 100 by the trustees (of whom the respondent was one) of a settlement known as Solomon Wolfson’s settlement. Being minded to make provision for their sisters, on 26 March 1940 the respondent and his brothers entered into a deed of covenant to which they as ‘the settlors’ were parties of the one part and one Henry Arthur Chetham and the respondent, as trustees, were parties of the other part. By this deed each settlor irrevocably covenanted with the trustees that he would on I April in each year, during the period of seven years from I April 1940, or until his death (whichever period should be the shorter), pay to the trustees such an annual sum as after deduction of tax at the standard rate for the time being in force would leave a sum equal in amount to the net amount of all dividends received by him during the previous twelve months upon the ordinary shares of Leonard Gordon Estates Ltd. held by him as set out in the schedule thereto. The deed contained trusts for the benefit of the settlors’ sisters who were therein described as the beneficiaries, or their children or next of kin. It was contended on behalf of the Crown that the sums received by the

respondent during the relevant year of assessment and accounted for to the trustees of the deed must be treated as his income under s. 38 (I)(a), because the terms of the deed were such that he had power to revoke or otherwise determine the settlement or a provision thereof and thereby would or might cease to be liable to make the annual payment payable under the deed. It was said that the settlor as the holder of seven-tenths of the shares in the company was in a position to determine how much of the profits of the company should be distributed in any one year by way of dividend, and might, if he thought fit, by the exercise of his majority vote prevent any dividend being declared during the whole period for which his covenant was operative. Thus, it was said, he could determine the settlement or a provision thereof. It was further urged that as the holder of seven-tenths of the shares he could, by procuring the co-operation or, indeed, the abstention of another shareholder holding a sufficient number of votes, secure the passing of a special resolution for winding up the company. This, too, it was said, was a power to determine the settle- ment or a provision thereof. The main part of the argument revolved round the simple words ‘If and SO

long as the terms of any settlement are such that.. . . ’ On the one hand, it was said that the power must be found in the setttlement itself, while on the other hand it was contended for the Crown that it was permissible to look outside the terms of the settlement for the ‘power’ and for the ‘person’ who may exercise it and to treat as a revocation or determination of the settlement or of a provision thereof the frustration of the obligation to make the annual payment which would result from the withholding of dividends or the

[22]

Legal Notes

liquidation of the company, the dividends of which are the measure of the sums to be paid. Their Lordships adopted the former of these alternatives. Lord Simonds in

the course of his judgment said: I am chiefly influenced by the consideration that if it had been intended that regard

should be had to powers not to be found in the settlement and exercisable by persons not parties to or named in the settlement nothing could have been easier than to say so. . . . It was urged that the construction that I favour leaves an easy loophole through which the evasive taxpayer may escape. That may be so, but I will repeat what has been said before. It is not the function of a court of law to give to words a strained and unnatural meaning, because only thus will a taxing section apply to a transaction which, had the legislature thought of it, would have been covered by appropriate words. It is the duty of the Court to give to the words of this subsection their reasonable meaning, and I must decline on any ground of policy to give to them a meaning which I regard as little short of extravagant.

Lord Morton of Henryton said: In my view no settlement comes within s. 38 (I)(a) of the Finance Act, 1938, unless

the power described in that subsection is found in and conferred by the terms of the settlement. This seems to me to be the natural meaning of the words used. . . . I agree with Somervell L.J. and Atkinson J. that if the respondent were to use his majority shareholding to withhold the payment of a dividend by Leonard Gordon Estates Ltd. in any year, he would not thereby ‘revoke or otherwise determine the settlement or any provision thereof'. Every clause in the settlement would remain in full force, and the only result would be that the annual sum mentioned in clause 2 would be nil in that year.

Owens, deceased, In re

Estate duty-Gifts inter vivos—Date when made-Cheques drawn more than three years but cleared less than three years before testator’s death—Aggre- gation with testator’s free estate

CHANCERY DIVISION On this summons taken out by the trustees of the deceased’s will the question for the Court was whether

ROMER J. certain gifts of money made by the deceased inter vivos were made more than three years before his death.

1949. March 31. The donor died on I June 1944. On 12 March 1941 [1949] I All E.R. 901. he had directed his solicitors to sell certain securities and out of the net proceeds to pay £1000 into his current banking account, £2000 into his deposit account, one-half of the remainder to his sister M. and the balance in equal shares to his niece K. and his nephew T. On 29 March 1941 the securities were sold and the proceeds amounting to some £17,ooo paid into the solicitors’ account. The solicitors drew a cheque for the whole amount in favour of the donor and paid it into a special account at the donor’s bank on 21 May 1941, and the donor signed cheques drawn on the special account in favour of the intended donees. On 4 June M. presented her cheque for pay- ment. On 5 June K. presented hers and on 2 July T. presented his. Counsel for the trustees contended that these gifts were effected and

perfected prior to I June 1941 and were therefore not liable to estate duty or aggregable with the deceased’s free estate for the purposes of ascertainmentof the rate of estate duty chargeable. He said that the effect of the instruction

[23]

Legal Notes

given by the donor to his solicitors was to create a trust under which directly the proceeds of sale were received by them they were to hold them as trustees on trust to distribute the proceeds in the manner indicated to them. He said that if the donor had died at any time after the proceeds of sale had been received by the solicitors, they would have held those proceeds as trustees not for the donor’s estate but for the beneficiaries who were in equity entitled to those proceeds by virtue of the trust. It was not only an arrangement, counsel said, under which equitable interests were created in favour of the beneficiaries to the exclusion of the donor, but one which as from that moment the donor was unable to revoke or interfere with in any way. It followed, therefore, that when the donor signed those cheques and sent them off he did so not as a donor of the property but in pursuance of his obligations as a trustee and to implement the trust which he had brought into being. The learned judge said that he was quite unable to accept that view of the

matter. It appeared to him that this was an ordinary case of a man instructing his solicitors to get into touch with some brokers for the purpose of realizing investments and putting the proceeds at the disposal of the solicitors in order that ultimately he might put them to the use which he had in mind. As counsel for the Crown pointed out, if, in fact, the intention was to create the solicitors trustees, then they committed a breach of trust for which they could have subsequently been rendered liable at the instance of the beneficiaries when they paid over those moneys to the donor’s own account. Alternatively counsel for the trustees said that when the money was paid

into the donor’s special account at his bank the donor gave the bank manager to understand that the money had been made over by him to his relations and that when he signed the cheques which the manager prepared for his signature there was from that moment a complete equitable assignment amounting to an effective transfer of the money in the various proportions, a transfer recogniz- able and enforcible in equity of the sum of money which had been paid into the special account. The learned judge said that the occasions had been innumerable on which

incomplete gifts had been sought to be interpreted in some such way as to achieve the validity which otherwise they would lack. Looking at the facts he could only describe this as another such attempt. The one thing which appeared to him to be plain beyond all doubt was that the donor’s intention was to benefit his relations in a specific and particular manner, namely, by causing some investments to be sold and having the proceeds transferred to a banking account and then drawing cheques on that account in the ordinary way in favour of the donees, so that by using those cheques in the way that cheques are used the participants could get the benefit which the donor intended to confer on them. But it was through the medium of cheques alone that the donor intended to pass the benefit and property. The proper interpretation of the facts in this case was that until the donees had received their cheques and paid them into their own banking accounts and the cheques were cleared and the money came into the banking accounts of the donees, no property was transferred at all, nor was any effectual gift achieved. The learned judge said that he was satisfied that the three gifts referred to in

the summons were made within three years before the testator’s death on I June 1944.

[24]

Legal Notes

In re Press Caps, Ltd.

Company-Transfer of shares into another company-Approved by 90 per cent. of shareholders—Dissentient shareholder-compulsory transfer—Unlesscourt otherwise orders—Onus of showing that scheme is unfair-Companies Act, 1948, s. 209

COURT OF APPEAL By s. 209 of the Companies Act, 1948, which reproduces SOMERVELL AND EVER- with some modifications s. 155 of the Companies Act, SHED L.JJ. AND WYNN- 1929, when a scheme involving the transfer of shares in PARRY J. a company to another company has been approved by. the

holders of not less than nine-tenths in value of the shares 1949. April II. [1949] I Ch. 434. whose transfer is involved the transferee company may [1949] I All E.R. 1013 give notice to any dissenting shareholder that it desires to acquire his shares and shall (unless on an application by summons made by the dissenting shareholder the court thinks fit to order otherwise) be entitled to acquire those shares on the terms on which under the scheme the shares of the approving shareholders are to be transferred to the transferee company. In the present case the Metal Box Co. Ltd. had put forward a scheme for

acquiring the total shareholding of Press Caps Ltd., consisting of 17,232 fully paid preference shares of 5s. each and 500,000 fully paid ordinary shares of 5s. each. The ordinary shares were to be acquired on the terms of an allotment of seven fully paid ordinary shares of £1 each in the undertaking of the Metal Box Co. Ltd. for every hundred fully paid ordinary shares in the undertaking of Press Caps Ltd. The said exchange of shares was based on the market values of the respective holdings. The scheme was approved by the holders of 96.8% in value of the ordinary shares in Press Caps Ltd. This was an application by a dissenting shareholder for an order that his

shares be not acquired compulsorily in terms of the scheme. The broad general principle which was laid down by Maugham J. in In re

Hoare and co. Ltd. (1933) 150 L.T. 374 is that the Court will not make such an order unless it is affirmatively established that notwithstanding the views of a very large majority of shareholders the scheme is unfair. Vaisey J. made the order asked for by the applicant. His main reason for

doing so was that the real value of the freehold property held by Press Caps Ltd., which was admitted to be in the neighbourhood of £90,000, had not been disclosed and was, he said, misrepresented in the balance-sheet of the company as being £29,708. 17s. od., and that such an under-valuation dis- credited the market price of the shares as representing their actual value, and that for that reason the scheme was unfair. The Court of Appeal allowed the appeal of the Metal Box Co. Ltd. and refused

the application of the dissentient shareholder. It was pointed out by the Lords Justices that the entry in the balance-sheet of Press Caps Ltd. did not purport to be a valuation of the freehold property at the date of the proposed scheme. It was in accordance with the usual practice a statement of cost less deprecia- tion. It did not seem that there was anything misleading about it, and that being SO the reason which had led the learned judge to the conclusion which he formed disappeared. In the Court of Appeal counsel for the applicant put forward an alternative

argument. Even if there had been no misrepresentation of value he contended

[25]

Legal Notes

that the market price of the shares was not a fair basis of exchange, in that it neglected the element of control which was attached to the entire shareholding which was to pass under the scheme. With reference to that argument Somer- vell L.J. said that for himself he could not see anything in the section which justified that submission, but it was unnecessary to decide that point because assuming such a construction as possible he was satisfied that having regard to the amount-some 25% or thereabouts-by which the sum offered was above the Stock Exchange relative buying and selling values counsel for the applicant had failed to discharge the onus laid upon him of showing that the offer was unfair.

[26]

INDEX TO LEGAL NOTES

included in Vol. LXXV of the Journal PAGE

APPORTIONMENT Undistributed income of controlled company-apportionment for sur-tax—

sub-apportionment . . . . . . . . . . . . . . . . . . . . . BENEFICIAL INTEREST

Deposit in joint names-how far effective to pass beneficial interest to survivor . . . . . . . . . . . . . . . . . . . . . . . . . . .

COMPANY Compulsory transfer of shares to another company-dissentient share-

holders-onus of showing that scheme is unfair . . . . . . . . .

DIVORCE Variation of policy under Married Women’s Property Act, 1882 as a

settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . ESTATE DUTY

Gifts inter u&s--date when made . . . . . . . , . . . . . . . . . . Incidence-death of tenant for life of settled legacy... . . . . . . . . . Settled land in Eire—proceeds of sale-invested in English securities—

whether considered as land in Eire . . . . . . . . . . . . . . . Valuation of shares in controlled company-liability for income tax—

Finance Act, 1940, ss. 50 and 55 . . . . . . . . . . . . . . . EXPENSES

Incurred in ascertaining profits-not allowable as deductions for income tax

GIFTS INTER VIVOS Date when made-estate duty liability . . . . . . . . . . . . . . .

INCOME TAX Computation of profits-allowable deductions-cost of ascertaining profits-

cost of appeal against assessment.. . . . . . . . . . . . . . . . . Income arising out of the United Kingdom-capital profits-whether

capital or income . . . . . . . . . . . . . . . . . . . . . . . . Income under settlement-power to determine settlement or any provision

thereof-power independent of settlement . . . . . . . . . . . . Mutual insurance associations-principle of exemption from tax on surplus

-how far applicable to trading company . . . . . . . . . . . . Valuation for estate duty of shares in controlled company-how far allowable

as deduction . . . . . . . . . . . . . . . . . . . . . . . . INHERITANCE (FAMILY PROVISION) ACT, 1938

Mental disability of daughter-reasonable provision-effect of National Health Service Act, 1946 . . . . . . . . . . . . . . . . . . . . .

Wealthy testator-reasonable maintenance for widow and unmarried daughter living with her . . . . . . . . . . . . . . . . . . . . .

9

15

3,4

23 IO

20

7

5

23

5

II

21

I

7

19

17

* The pages containing Legal Notes are numbered separately from the remainder of this volume of the journal. The page number is printed in square brackets at the foot of each page.

[27]

Index. to Legal Notes

INVESTMENT Clause in settlement-construction . . . . . . . . . . . . . . . . . .

LEGACY DUTY Incidence-further duty imposed by Finance Act, 1947 . . . . . . . . .

MARRIED WOMEN’S PROPERTY ACT, 1882 Policy under the Act-divorce-variation of settlements . . . . . . . . .

MUTUAL INSURANCE ASSOCIATIONS Income tax-principle of exemption from tax on surplus . . . . . . . . .

POLICY OF INSURANCE Policy under Married Women’s Property Act, 1882—divorce—variation of

settlements . . . . . . . . . . . . . . . . . . . . . . . . . . .

SETTLEMENT Investment clause-construction . . . . . . . . . . . . . . . . . . Policy under Married Women’s Property Act, 1882—how far a settlement—

variation on divorce . . . . . . . . . . . . . . . . . . . . .

SUR-TAX Income under settlement-power to determine settlement or any provision

thereof-power independent of settlement . . . . . . . . . . . . Income under settlement-undistributed income of controlled company-

apportionment and sub-apportionment . . . . . . . . . . . . . . .

TRADING COMPANY Principle of exemption from tax on surplus-how far applicable . . . . . .

VALUATION Compulsory transfer of shares in company-dissentient shareholders—

onus of showing that scheme is unfair . . . . . . . . . . . . . . . Shares in controlled company-valuation for estate duty-income tax liability

WILL Inheritance (Family Provision) Act, 1938—daughter under mental disability

-effect of National Health Service Act, 1946 . . . . . . . . . . . . Inheritance (Family Provision) Act, 1938—wealthy testator—widow in

straitened circumstances-unmarried daughter living with her . . .

WILLS ACT, 1837 Deposit in joint names-title of survivor irrespective of the Act . . . . . .

PAGE

I8

10

3,4

I

3,4

18

3,4

21

9

I

25 7

19

17

15

[28]

TABLE OF CASES NOTED

in the Legal Notes included in Vol. LXXV of the Journal PAGE”

ASSAM AGRICULTURAL INCOME TAX COMMISSIONER, ENGLISH AND SCOTTISH JOINT CO-OPERATIVE WHOLESALE SOCIETY, --- LTD. v. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ATTORNEY GENERAL, DUFFY (deceased). In re, LAKEMAN v. . . .

BOLLAND (INSPECTOR OF TAXES), SMITH’S POTATO ESTATES, LTD., v. . . . . . . . . . . . . . . . . . . . . . . . . . . .

BORTHWICK deceased, In re . . . . . . . . . . . . . . . . . . . . .

BOWN AND WESTON, BOWN a. . . . . . . . . . . . . . . . . . .

BOWN o. BOWN AND WESTON . . . . . . . . . . . . . . . . . .

COTTESLOE AND OTHERS, MIDDLETON (EARL) v. . . . . . .

DUFFY (deceased), In re, LAKEMAN v. ATTORNEY GENERAL . . .

1

7

5

17

4

4

20

7

ENGLISH AND SCOTTISH JOINT CO-OPERATIVE WHOLESALE SOCIETY, LTD. 21. ASSAM AGRICULTURAL INCOME TAX COMMISSIONER . . . . . . . . . . . . . . . . . . . . . . . .

GUNNER AND STIRLING, GUNNER v. ... . . . . . . . . . . . .

GUNNER v. GUNNER AND STIRLING . . . ... . . . . . . ...

HARARI’S SETTLEMENT TRUSTS, In re . . . . . . . . . . . . . . .

HENDERSON AND OTHERS, SHEPHERD, In re, PUBLIC TRUSTEE v.

INLAND REVENUE COMMISSIONERS, LORD HOWARD DE WALDEN v. ... . . . ... . . . . . . . . . ... . . . ...

INLAND REVENUE COMMISSIONERS v. REID’S TRUSTEES . . .

INLAND REVENUE COMMISSIONERS v. WOLFSON . . . . . . . . .

LAKEMAN v. ATTORNEY GENERAL, DUFFY (deceased), In re . . .

LORD HOWARD DE WALDEN v. INLAND REVENUE COMMIS- SIONERS . . . . . . . . . . . . . . . . . . . . . . . . . . .

MIDDLETON (EARL) v. COTTESLOE AND OTHERS ... ... ... ...

OWEN, deceased, In re ........................

PRESS CAPS, LTD., In re .....................

PUBLIC TRUSTEE v. HENDERSON AND OTHERS, SHEPHERD, In re

1

3

3

18

10

9

11

21

7

9

20

23

25

10

* The pages containing Legal Notes are numbered separately from the remainder of this volume of the journal. The page number is printed in square brackets at the foot of each page.

[ 29 ]

. .

.

Table of Cases Noted

REID’S TRUSTEES, INLAND REVENUE COMMISSIONERS v. . . .

SEALEY, YOUNG v. . . . . . . . . . . . . . . . . . . . . . . . .

SHEPHERD, In ye, PUBLIC TRUSTEE v. HENDERSON AND OTHERS

SMITH’S POTATO ESTATES, LTD. v. BOLLAND (INSPECTOR OF TAKES) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

WATKINS deceased, In re... . . . . . . . . . . . . . . . . . . . . .

WOLFSON, INLAND REVENUE COMMISSIONERS v. . . . . . .

YOUNG v. SEALEY ... . . . . . . . . . . . . . . . . . . . . .

PAGE II

15

10

5

19

21

15

END OF VOL. LXXV

[30]