Scottish Court of Session Decisions

This was a case stated by the Commissioners for the General Purposes of the Income-Tax Acts for the county of Edinburgh, on the requisition of the Assets Company, Limited, who objected to an additional assessment, under Schedule (D) of the Income-Tax Acts, upon them for the year 1894–95 of £9000, subsequently restricted to £7166, in respect of profits not included in a first assessment of £1673 for that year.

The additional assessment was in respect of profits on sales of assets of the company on the average of three years to the 31st day of December 1893. The Assets Company, Limited (hereinafter called “the company ”) was registered in May 1882 in terms of an agreement, dated 11th May 1882, between the City of Glasgow Bank and the liquidators thereof of the first part, and James L. Boyd and John Wilson for and on behalf of a company to be formed under the Companies Acts, and to be styled “The Assets Company, Limited” of the second part. The company was formed in order to enable the liquidation of the bank to be finally closed so as to prevent accumulation of interest on the amount of claims unpaid, and the possibility of any further call on the remaining partners of the bank, and in order to preserve the outstanding assets of the bank for more advantageous realisation than could be effected in the ordinary course of liquidation. Accordingly, one of the objects of the company was, on behalf of the solvent contributories, to acquire from the liquidators of the bank the whole assets summarised in the appendix to the agreement, together with all other assets or rights of the bank, for a payment sufficient to enable the liquidators to pay and discharge the liabilities of the bank, and in addition a sum to be held and applied by the liquidators in meeting the expenses of the liquidation so far as not already paid, the company also giving a general undertaking to pay all debts of whatever kind of the bank. The company was promoted by the committee of contributories who had been appointed to advise with the liquidators in regard to any question arising in the liquidation.

The appendix to the agreement referred to above was a state of the affairs of the City of Glasgow Bank (in liquidation) at 22nd October 1881, which showed liabilities amounting to £1,338,116, 6s. 9d., and assets estimated to be worth £1,508,698, 12s. 1d. consisting of—

1. Cash due by bankers and cash on hand	£168,968	7	4
2. Bills current taken by the liquidators from contributories and others, less rebate	53,688	18	7
3. Bonds, Debentures, Stocks, &c	37,094	8	1
4. Estates of large debtors estimated at	243,000	0	0
5. Heritable properties in Scotland, valued at	72,857	18	1
6. Balances on credit accounts and overdrafts valued at	36,829	13	7
7. Bills current at stoppage of bank considered good	3,350	0	0
8. Past-due bills valued at	12,681	17	0
9. New Zealand and Australian Land Company's stock	802,112	16	10
10. Amount estimated as recoverable from contributories	78,114	12	7

The state of affairs thus showed an estimated surplus of £170,582, 5s. 4d.

The shares were to be offered (1) to the solvent contributories, (2) to the surrendering contributories, and (3) to the public. The whole capital of the company was subscribed by the solvent contributories of the bank. An Act of Parliament entitled the City of Glasgow Bank (Liquidation) Act 1882 (45 and 46 Vict. cap. clii.) was obtained, which confirmed the agreement and empowered the liquidators to

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give effect to it. It enacted, inter alia, as follows—“Section 17. Where any shares or debentures in the company which shall be applied for and taken in pursuance of the powers in this Act shall be held for several persons or purposes in succession, such sums as the directors of the company shall declare to be dividends on the shares, and the interest on such debentures shall be and be deemed to be annual income, and applicable as such for the benefit of the persons or purposes for the time being entitled to the income of such shares, and all other sums, whether payable at intervals or not, shall be deemed to be capital, and applicable as such for the benefit of the persons or purposes for the time being entitled to the capital of such shares.”

The objects of the company as set forth in article 3 of the memorandum of association were, inter alia, ( a) to adopt and carry out, with or without modification, the said agreement; ( b) to purchase or otherwise acquire, improve, and cultivate lands and hereditaments acquired under the agreement, or necessary or advantageous for the due development or improvement of the same, or for the advantageous disposal thereof, or for the conduct of the business of the company, whether freehold, leasehold, or of any other tenure in the United Kingdom, the Colonies, or other countries; to develop the resources of the same by building upon, clearing, draining, and otherwise improving and farming the same; to stock and farm the same; to sell, feu, lease, exchange, mortgage, pledge, or otherwise deal with all or any of the real and personal property of the company; ( c) to pay for any purchases, in whole or in part, in cash, or by ordinary shares, preference, guaranteed, or deferred shares in the company in either case fully paid up or partly paid up, or by the debentures of the company; ( d) to hold stocks, shares, debentures, or other securities of other companies, and to dispose of the same; ( g) from time to time, by special resolution, to modify the conditions contained in the memorandum of association, so as to increase the capital of the company, or to consolidate, divide, or reduce the capital; and ( h) to invest the moneys of the company upon such securities in the United Kingdom, the Colonies, or elsewhere, as may from time to time be determined.

The articles of association provided, inter alia—“44. The company may by a special resolution, but not otherwise, … at any time, or from time to time, sell and dispose of the whole or any part of the business and assets representing the capital stock of the company to any other company or society, and may also dissolve the company and wind up its business.” “69. The directors may declare and pay out of the profits of the company, but not otherwise, a dividend on the amount paid up on account of the respective shares of the company, and they may also, at the end of any half-year, declare and pay an interim dividend or other payment by way of bonus or otherwise, at such rate as they may deem expedient.”

In 1893, in terms of a special resolution, duly confirmed by the Court, a sum of £15,000 was paid to the shareholders out of the sums credited to suspense account. This was treated by the interlocutor of the Court, and was entered in the company's accounts as “repayment of surplus capital.” The assets and investments of the company consisted of various real and other properties and securities, and of sums expected to be recovered from estates of contributors of the bank. Its income stated in its published revenue accounts consisted of the returns from these assets and investments. From time to time the company had sold portions of its assets or investments at prices exceeding the values at which they were estimated in the books of the liquidators. These values did not affect the amount paid to the liquidators, which would have been the same if the book values had been increased or diminished to any extent. The surpluses arising from sales as before mentioned had not entered into the revenue accounts, but had been credited to capital under the head of “suspense account for surplus assets.” Surpluses from such sales and from recoveries from debtors of the bank had arisen prior to and during the three years of average. In the first year of the company's existence the surplus was £189,830, 7s., being the excess of the liquidator's or book values over the sum paid by the company. The sums at the credit of suspense account during each year subsequent to 1882 were as follows:—

As at 31st	December	1883	£206,163	16	6
Do.	do.	1884	217,709	7	5
Do.	do.	1885	117,442	1	9
Do.	do.	1886	122,106	17	4
Do.	do.	1887	55,260	16	2
Do.	do.	1888	29,460	1	3
Do.	do.	1889	70,598	6	8
Do.	do.	1890	40,009	9	3
Do.	do.	1891	49,301	8	2
Do.	do.	1892	54,713	6	10
Do.	do.	1893	61,507	19	8
Do.	do.	1894	48,753	17	9

In years which showed an increase in the sum at the credit of the suspense account, that increase was the difference between the sum which was realised by the sale or recovery of assets and the sum at which such assets were valued in the books of the liquidators. In years which showed a decrease the decrease was accounted for by reduction of capital, or sums paid to shareholders as repayment of surplus capital.

As appears from the above table, there was an increase in the sum standing at the credit of suspense account in each of the years 1891, 1892, and 1893, that increase amounting in 1891 to £9291, in 1892 to £5411, and in 1893 to £6794.

For many years there were heavy shrinkages on the book values, as shown above. These were not deducted from revenue, and the appellants were assessed and paid tax on their full revenue without any deduction on account of said shrinkage.

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Income-Tax for 1891–95 was claimed by the Crown on the sum of £7166, being the average increase on the sum at the credit of suspense account taking an average of the three years 1891, 1892, and 1893.

The actual surplus for the year to 5th April 1895 was £2245,

The Assets Company, Limited, appealed against this assessment to the Commissioners for the General Purposes of the Income-Tax Acts for the County of Edinburgh.

The Commissioners refused the appeal, whereupon the appellants expressed dissatisfaction with their decision as being erroneous in point of law, and required that a case should be stated for the opinion of the Court of Exchequer under the Statute 43 and 44 Vict. cap. 19, sec. 59.

A case was stated accordingly, in which, or in the City of Glasgow Bank (Liquidation) Act 1882, and the memorandum and articles of association of the company, which were produced with and were to be referred to as part of the case, the facts above narrated were set forth.

The Property and Income Tax Act 1842 (5 and 6 Vict. cap. 35) enacts, section 100—“And be it enacted, that the duties hereby granted, contained in the schedule marked (D), shall be assessed and charged under the following rules, which rules shall be deemed and construed to be a part of this Act, and to refer to the said last-mentioned duties, as if the same had been inserted under a special enactment. Schedule (D) … Rules for ascertaining the said last-mentioned duties in the particular cases herein mentioned. First Case—Duties to be charged in respect of any trade, manufacture, adventure, or concern in the nature of trade, not contained in any other schedule of this Act. Rules:—First—The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade, manufacture, adventure, or concern, upon a fair and just average of three years, ending on such day of the year immediately preceding the year of assessment on which the accounts of the said trade, manufacture, adventure, or concern, shall have been usually made up, or on the fifth day of April preceding the year of assessment.” . .

On 6th January 1897 the Lord Ordinary in Exchequer Causes ( Stormonth Darling), on the motion of the parties, appointed the case to be heard by the Lords of the Second Division, for which Division it had been marked in terms of the Act of Sederunt of 9th December 1880.

Argued for the appellants—(1) There were no materials here for ascertaining profits. The amount at which the assets acquired by the company were valued in the books of the liquidation was not the price which was paid for them by the company. These valuations were mere book entries, and did not affect in any way the amount of the price, which was (1) a slump sum sufficient to pay the bank's debts then known, and (2) an obligation to pay any other subsequently emerging debts. The profit on that transaction could not be ascertained till all the assets of the company were realised. The profit realised by the sale of particular items or recovery of particular claims could not be ascertained, because the prices paid for particular items, or for rights to particular claims transferred to the company by the liquidators, were not ascertained or indeed ascertainable. (2) The sums which had been carried to suspense account, and from which the average on which tax was claimed had been derived, were not profits within the meaning of the Income Tax Acts, even if they could be taken to represent accurately the difference between the price obtained for an asset and the price paid for it by the company. The company was not entitled to distribute such sums in dividends, but only by way of distribution of surplus capital—City of Glasgow Bank (Liquidation) Act 1882, section 17; articles of association, article 69. These amounts were not profits of any trade, manufacture, adventure, or concern in the nature of trade. The sole function of this company was the realisation of the assets taken over. It was not a trading company, at least it did not trade in these assets. A person who buys something and sells it again at a higher price than he paid for it was not liable for income-tax on the difference, unless he was a dealer in the thing which he had so bought and sold again. The Crown must show that a profit had been realised by the turnover of assets by way of trading in them. That was not the ease here. The powers taken in article 3 of the memorandum of association were all intended to be exercised only for the purpose of realising the assets taken over, and did not entitle the company to trade generally in such kinds of property. Subsection ( b) only gave powers of purchase for the purpose of facilitating an ultimately successful realisation of the properties taken over; sub-section ( d) only applied to stocks taken over from the liquidators; and sub-section ( h) was merely a subsidiary power to be used incidentally for the main purpose of realisation. (3) The case of the Scottish Investment Trust Company, Limited v. Inland Revenue, December 12, 1893, 21 R. 262, was distinguished from the present in respect ( a) that that company was entitled to sell, exchange, or otherwise dispose of, deal with, or turn to account any of its assets, that it did so deal with them, and that the gains so made were entered in revenue account; and ( b) that the prices paid for stocks and securities subsequently sold at a higher price were in that case ascertained.

Argued for the Crown—This was a trading company. It carried on a trade, adventure or concern in the nature of trade, within the meaning of the Property and Income-Tax Act 1842, section 100, Schedule D, first case. The company was referred to as carrying on a “business” in its articles of association, article 44. The assets of the company were its stock-in-trade, in which it was entitled to deal, and did deal, memorandum of association 3, ( b), ( c), ( d), and ( h), and it was liable for income-tax

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in respect of gains made by the sale of its assets. Even where gains could not properly be treated as revenue, or distributed as a profit among the shareholders, by the constitution of a company, or by its Act of Parliament, such “gains” must still be treated as “gains” for the purposes of the Income-Tax Acts— Mersey Docks v. Lucas, 1883, 8 App. Cas. 891, and especially per Lord Herschell at p. 905; Edinburgh Southern Cemetery Company v. Surveyor of Taxes, November 29, 1889, 17 R. 154; Sowerby v. The Harbour Commissioners of King's Lynn, 1887, 3 T.L.R. 516. Moreover, although as in a question of correct bookkeeping or prudent management, part of the gains made in a business were properly regarded, not as revenue, but as capital coming in place of the capital irrecoverably expended in making the gains, still the gross amount of such gains, and not the amount of the true revenue after making such deduction, was the sum on which income-tax was payable— Coltness Iron Company v. Black, January 7, 1881, 8 R. 351, and April 7, 1881, 8 R. (H. of L.) 67; Edinburgh Southern Cemetery Company v. Surveyor of Taxes, cit. A trading company which carried on “a trade, adventure, or concern in the nature of trade,” was liable for tax on “gains” made by it in the process of changing investments of its capita], when such investments were sold for a larger sum than had been paid for them— Northern Assurance Company v. Inland Revenue, February 8, 1889, reported as a branch of Scottish Union and National Insurance Company v. Inland Revenue, 16 R. 461, at p. 473; and Scottish Investment Trust Company, Limited v. Inland Revenue, cit. In view of the rules formulated above, and established by the decisions quoted, this company was liable for income-tax on “gains” resulting from the sale of its investments. The differences between the sums at which assets belonging to it were valued when they were taken over by the company, and the price which they realised when sold, were “profit” or “gain” in the sense of the Income-Tax Acts, and the company were liable for tax on the amount of such differences. That amount clearly appeared from the case stated, and the company was therefore liable for tax on the sum brought out. The total amount paid for the assets was less than the sum of the valuations, and the liability for emerging debts must now be of little moment.

At advising—