Scottish Court of Session Decisions

The Californian Copper Syndicate (Limited and Reduced), 188 St Vincent Street, Glasgow

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(hereinafter referred to as the company), appealed to the Commissioners of Income-Tax for the Lower Ward of the County of Lanark against the following assessments made upon them under Schedule D of the Income-Tax Acts, in respect of the profits of the business carried on by them, that is to say, an assessment of £10,000 (duty £625) for the year ending the 5th April 1903, and an assessment of £20,000 (duty £916, 13s. 4d.) for the year ending the 5th April 1904. The Commissioners confirmed the assessment on 10th June 1904. The company obtained a case for the opinion of the Court of Exchequer. The case stated—“The following facts were admitted or proved—1. The company was incorporated on 5th February 1901, under the Companies Acts 1862 to 1900, as a company limited by shares. 2. The objects for which the company was established are set forth in the third article of its memorandum of association, and embrace, inter alia, the following objects, viz.—‘(1) To acquire copper and other mines, mining rights, metalliferous and auriferous land, in California or elsewhere in the United States of America, and any interest therein, and in particular to acquire [certain specified mines] situate in the county of Fresno, state of California, in the United States of America. (2) To carry on mercantile, commercial, trading, and financial businesses of any and every description, either as principals or agents, and to buy, sell, and enter into contracts, either as principals or agents, and to buy, sell, and enter into contracts, either absolute or conditional, in respect of stocks, shares, debentures, debenture stock, bonds, obligations, options, and securities, of every or any description, in any part of the world. (4) To work, win, quarry, convert, manufacture, use, crush, wash, smelt, reduce, refine, or otherwise treat and render marketable, and sell or otherwise dispose of or deal in metalliferous quartz and ore. (10) To establish, form, and subsidise, or otherwise assist in the establishment, promotion, or formation of any other companies having for their objects, or some of them, any of the objects mentioned in this memorandum, or the prosecution of any other undertakings or enterprises of any description having objects which may advance, directly or indirectly, the objects of this company, and to secure by underwriting or otherwise the subscription of all or any part of the share or loan capital of any such company, and to pay or receive any commissions, brokerage, or other remuneration in connection therewith. ( 17) To sell, lease, charter, or otherwise dispose of, absolutely or conditionally, or for any limited interest, the whole or any part of the undertaking, property, rights, concessions, or privileges of the company for such consideration in cash, shares, or otherwise as the company may think fit, and to abandon any part of the business for the time being of the company, and to carry on any of the objects mentioned in this clause to the exclusion of the others. (18) To subscribe for, purchase, or otherwise acquire the shares or stock, whether ordinary, preferred, or deferred, or the debenture bonds, or other securities of any company, and to accept the same in payment for any property sold, or business undertaken, or services rendered by this company, and to hold, sell, or otherwise dispose of the same. (20) To promote any company for the purpose of acquiring all or any part of the undertaking, property, and liabilities of the company, or for carrying on any business, or doing any act or thing which may be deemed conducive to the prosperity of this company. Also to acquire the whole or any part of the undertaking and assets, and undertake the whole or any part of the liabilities of any now existing or future company, and to conduct, liquidate, or wind up the business of any such company. (29) To distribute among the members in specie any property of the company or any proceeds of sale or disposal of any property of the company, but so that no distribution amounting to a reduction of capital be made except with the sanction, if any, for the time being required by law.’ 3. The fifth article of the memorandum of association sets forth that the capital of the company is £30,000, divided into 30,000 shares of £1 each. The company commenced business shortly after the date of its incorporation, and has since continued to carry it on. 4. Of the 30,000 shares into which the capital of the company is divided, 28,332 shares have been issued. The remaining 1668 shares are unissued. Of the 28,332 shares issued 4332 shares representing £4332 of capital were subscribed for in cash, and are fully paid up, and 24,000 shares, representing £24,000 of capital, are held as fully paid. 5. The company acquired copper-bearing land in the county of Fresno aforesaid, extending to 480 acres, at the price of £24,000, and expended the paid-up capital of the company in the purchase and development of the property. The accounts show that the cash capital of £4332 of the company was spent in development, preliminary, and head office expenses. In April 1902 the company sold 80 acres of its property to the Fresno Copper Company, Limited (hereafter referred to as the Fresno Company), at the price of £105,000, payable wholly in fully paid shares of the Fresno Company, and in August 1903 the company sold the remaining 400 acres of its property to the Fresno company at the price of £195,000 payable wholly in fully paid shares of the Fresno Company. The shares of the Fresno Company, representing the prices aforesaid, in all 300,000 £1 shares fully paid have been allotted to the secretary of the company meantime in trust for the company 6. At an extraordinary general meeting of the company, held on 11th December 1903, the following resolution was unanimously passed:—‘That the capital of the Californian Copper Syndicate, Limited, be reduced from £30,000 divided into 30,000 shares of £1 each (of which 28,332 are issued and fully paid, and 1668 are unissued), to £3320, 14s. divided into 28,332 shares of 1s. 2d. each, issued and fully paid, and 1668 shares of £1 each

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unissued, and that such reduction be effected (1) by transferring to the existing holders of the said 28,332 shares of the syndicate rateably 283,320 shares of £1 each fully paid of the Fresno Copper Company, Limited, which latter shares form part of the capital assets of the syndicate, and are presently registered in the name of the secretary thereof in trust for the syndicate; and (2) by reducing the nominal amount of the said 28,332 shares of the syndicate from £1 to 1s. 2d. each.’ This resolution was unanimously confirmed as a special resolution at an extraordinary general meeting of the company held on the 29th December 1903. 7. The Fresno Company was incorporated on 2nd April 1902 under the Companies Acts 1862 to 1900 as a company limited by shares. The capital of the Fresno Company, originally £175,000 divided into 175,000 shares of £1 each, was afterwards increased to £400,000 by the creation of 225,000 new shares of £1 each. Of the 400,000 shares, 300,000 were allotted to the secretary of the company as before mentioned in payment of the prices of the lands acquired by the Fresno Company from the company, 75,000 shares have been subscribed for in cash, and 25,000 remain unissued. The shareholders of the Fresno Company are six times as numerous as those in the company. 8. The company have made no profit assessable to income-tax, unless the nett gain derived by the company from sales of its property, and represented in shares of the Fresno Company, be deemed to be profit in the sense of the Income-Tax Acts.

The contentions of parties were as follows:—9. The company maintained—(1) That the company has had no income, that the sales of the property of the company were truly transactions by which the company substituted for its capital in the form of land a capital in the form of shares, and that any benefit which might result to the company by the sales was a growth of capital and not income; (2) That even supposing a company in the position of the company to be liable for income-tax on any excess they may receive over cost on a sale for cash, the liability does not attach when the price is received in shares of another company—at all events until the shares so received have been realised. (3) That the Inland Revenue will receive income tax on any profits of the Fresno Company effeiring to the shares in the Fresno Company held by the company, and that to charge income tax on the value of their shares would be to charge income tax twice. (4) That if instead of raising capital by means of a new company to work the mines, the capital of the company had been increased, the company would not have been liable to income tax on the increased capital, and that what was done in the present case was a difference in form only. (5) That although the company had power under article 3, sub-section 17, of its memorandum of association, to sell any part of its property, it was not in fact a company for making profit by the purchase and sale of property, and had not done so. The shares held by the company in the Fresno Company were merely the form in which the company now holds the capital formerly held in the form of land. (6) Reference was made to the following cases:— Assets Company Limited v. Inland Revenue, February 23, 1897, 24 R. 578, 34 S.L.R. 486; Northern Assurance Company v. Inland Revenue, reported as branch of Scottish Union and National Insurance Company v. Inland Revenue, February 8, 1889, 16 R. 461, at p. 473, 26 S.L.R. 330; and Scottish Investment Trust Company, Limited v. Inland Revenue, December 12, 1893, 21 R. 262, 31 S.L.R. 219. (10) The Surveyor of Taxes (Mr Edward Harris) maintained:—(1) That as the company was formed for the purpose, inter alia, of acquiring and reselling the property specified in article 3, sub-section 1, of the memorandum of association of the company, any profits made on such re-sales are assessable under section 2, Schedule D, of the Income Tax Act 1853, and section 100, Schedule D, case 1, of the Income Tax Act 1842. (2) That the profits of the company are assessable whether received in cash or in shares of another company. (3) That any profits on the working of the copper field which may hereafter be obtained in respect of the company's holding in the Fresno Company (which is in law a company separate and distinct from the company) will be assessable as profits of the Fresno Company, but that what is assessed at present are the profits which the company have made on the sales of their property to the Fresno Company. (4) That although the company might have increased its capital for the purpose of working the mines, it did not do so, the capital being provided by and spent at the risk of the Fresno Company. (5) The surveyor founded particularly on the opinion of the Lord President in the case of the Scottish Investment Trust Company, Limited v. Inland Revenue, already referred to, and referred also to Mersey Docks Harbour Board v. Lucas (1883), 8 App. Cases, 891. 11. The company and the Surveyor agreed and represented to the Commissioners that in the event of its being decided that the company is liable to be assessed on profits arising from the sales of their property, the assessments are properly made at £10,000 for the year ending the 5th April 1903, and £20,000 for the year ending the 5th April 1904.

The Commissioners, on a consideration of the evidence and arguments submitted to them, and for the reasons stated in the note hereto, find that by the purchase and re-sales of the property acquired by the company they carried on an adventure or concern in the nature of trade in the meaning of the first case of Schedule D of the Income-Tax Act of 1842, and that profits arising from such purchase and re-sales, whether received in cash or in shares of another company, are assessable to income-tax. The Commissioners accordingly confirmed the assessment of £10,000 for the year ending the

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5th April 1903, and the assessment of £20,000 for the year ending the 5th April 1904. Whereupon the company declared their dissatisfaction with the determination of their appeal as being erroneous in point of law, and having duly required the Commissioners to state and sign a case for the opinion of the Court of Session as the Court of Exchequer in Scotland, it is hereby stated and signed accordingly.”

Note.—It seemed clear to the Commissioners, on the evidence furnished by the accounts of the appellant company, that the property purchased by the company was acquired with the object of being resold, and that by the purchase and re-sales of their property the company carried on an adventure or concern in the nature of trade in the meaning of the first case of Schedule D of the Income-Tax Act of 1842. In such cases as the present the profit consists of the difference between the price paid, with the addition of outlays made on and expenses incurred in connection with the subject purchased and the price received, and it appears to the Commissioners immaterial whether the price obtained is received in cash or in shares. In the present case it has not been necessary to inquire into the value of the shares received by the company, as the parties have agreed on the amounts of the assessments if it be held that liability to assessment exists.”

The arguments presented at the hearing are disclosed in parties' contentions supra. In addition to the cases there referred to the following authorities were cited for the appellants— Glasgow Water Commissioners v. Inland Revenue, May 26, 1875, 2 R. 708, 12 S.L.R. 466; for the Surveyor of Taxes—Palmer's Company Precedents, 8th ed., i. 424.

At advising—