Scottish Court of Session Decisions

The Tebrau (Johore) Rubber Syndicate Limited (in liquidation), being dissatisfied with a determination of the Commissioners for the General Purposes of the Income Tax Acts, and for executing the Acts relating to the Inhabited-House Duties for the county of Edinburgh, at a meeting held by them at Edinburgh on 10th June 1909 required the Commissioners to state a Case for the opinion of the Court of Session as the Court of Exchequer in Scotland.

The Case stated—“The Tebrau (Johore) Rubber Syndicate, Limited, now in liquidation (hereinafter referred to as the company) appealed against an assessment for the year ending 5th April 1909 on the sum of £9000 (duty £450) made upon it under the Income Tax Acts in respect of the profits derived by it from sale of rubber estates.

“The assessment was made under 5 and 6 Vict. c. 35, sec. 100, Schedule D, First Case; 16 and 17 Vict. c. 34, sec. 2, Schedule D; and 8 Edw. VII, c. 16, sec. 7.

The following facts were admitted or provedThe company was incorporated on 26th September 1907 under the Companies Acts as a company limited by shares. The capital of the company was £30,000 divided into 30,000 shares of £1 each. Under its memorandum of association the capital might be increased or reduced from time to time. The registered office of the company was at 5 St Andrew Square, Edinburg.

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The objects of the company as set forth in the third article of its memorandum of association were, inter alia, as follows:— (1) To acquire and develop the estate of Tebrau, in the state of Johore in the Malay Peninsula.… (2) To acquire by purchase, lease, or otherwise, estates in the Malay Peninsula, or elsewhere in any part of the world, on which rubber trees have been planted, or which are regarded as suitable for the cultivation of rubber; and to carry on in any part of the world the business of planting and cultivating rubber trees, of trading in rubber, and of manufacturing rubber of every description and products from rubber, and of disposing thereof either wholesale or retail, and any other businesses or operations incidental thereto. (3) To pick, collect, gather, and crush the seed of the rubber trees, to prepare the same for market, and to sell and deal in the same and in the oil and other products manufactured therefrom. (4) To carry on any other business in any part of the world which in the opinion of the directors may advantageously be carried on by the company either in conjunction with the rubber business or independently.… (5) To purchase, take upon lease, or otherwise acquire in any part of the world any lands, buildings, machinery, plant, or other property, heritable or moveable, … and to sell, lease, mortgage, dispose of, or otherwise deal with and turn to account the property of the company. (6) To acquire by purchase or otherwise forest rights, timber, and wood of all kinds, and to cut, mill, and prepare for market, sell, and deal in timber and wood of all kinds and the products thereof. (7) To purchase, lease, or otherwise acquire any mines, mining rights, and metalliferous land in the Malay Peninsula, or elsewhere, or any interest therein, and explore, work, exercise, develop, and turn to account the same, … and generally to carry on any metallurgical operations which the directors may consider likely to prove advantageous to the company.… (12) To sell or otherwise dispose of, as a going concern or otherwise, the whole or any part of the business undertaking and property of the company, for such consideration as the company shall think fit, and in particular for the shares or obligations of any company or intended company in any part of the world having objects similar or in part similar to those of the company, and either on the terms that such shares or obligations shall he distributed in specie among the members or otherwise.… (15) To borrow and raise money for the purposes of the company, to receive money on deposit, to issue at par, at a premium or discount, debentures, debenture stock (perpetual or otherwise), personal bonds, and other obligations of the company, either charged upon all or any of the property, heritable and moveable, present and future, and unpaid capital of the company, or otherwise to vest all or any of the said property and unpaid capital in the name of, or in the names of trustees for behoof of, any creditor or class or classes of creditors, and to redeem and repurchase such obligations.… (18) To promote or concur in promoting any company intended to be formed in any part of the world for the purpose of acquiring the whole or any part of the business, undertaking, and property of the company, or for any other purpose; and to pay all or any part of the expenses of and preliminary and incidental to the formation, establishment, and registration of such company, and all brokerage, commission, and other expenses that may from to time be deemed expedient for placing and guaranteeing the subscription of all or any of such company's shares and debentures, debenture stock, or other obligations.

In pursuance of its business the company acquired two rubber estates at Tebrau, respectively known as ‘Lama’ and ‘Bahru.’

On 3rd October 1907 the company acquired, as from 1st May 1907, the estate of Lama at the price of £14,500, which was paid as to £12,500 in cash and as to £2000 in fully-paid shares of £1 each of the company. The estate consisted of 1501 acres, of which 627 acres were then planted with rubber.

The company feeling that the original area of 1501 acres did not provide a sufficient reserve for future development, immediately endeavoured to acquire an additional block of desirable land. The company at first opened negotiations for the purchase of a small adjoining estate of about 600 acres, but did not succeed in effecting a purchase. Thereafter in November 1907 the company took advantage of an opportunity to acquire the Bahru estate of 2500 acres lying contiguous to the Lama estate at the price of 2000 fully-paid shares of £1 each of the company. By December 1908 the company had planted an additional area of 154 acres on Lama and 739 acres on Bahru with rubber plants. In ordinary course the estates would begin to yield a substantial quantity of rubber in the year 1911.

The company's balance-sheet as at 30th April 1909 shows:—

(1) The paid-up capital to be . £29,897

(2) The expenditure, as from 1st May 1907, to be … 29,133 and

(3) The cash due to the company to be 1,030

This balance-sheet does not include certain expenses abroad unascertained at 30th April 1909, but for the purposes of this case it is agreed that the total amount of the expenditure of the company in the purchase and development of the estates of Lama and Bahru and in home expenses shall be taken at £29,500, the amount of the assessment being open to adjustment, if necessary, when the exact amount of deductible expenses shall have been ascertained.

As the original capital (£30,000) of the company was quite inadequate to develop 4001 acres, and as the company did not consider it desirable to increase its capital or to raise money by borrowing, the company decided on 9th January 1909 to sell, as from 1st January 1909, its whole undertaking to a.

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newcompany to be registered under the Companies Acts, with sufficient capital to purchase and fully develop both of the estates. The new company formed in March 1909 was incorporated under the name of the Tebrau Rubber Estates (1909), Limited (hereinafter referred to as the new company), with a capital of £150,000, divided into 150,000 shares of £1 each, and having its registered office at 5 St Andrew Square, Edinburgh.

The company sold its whole undertaking to the new company at the price of £38,500, payable as to 2500 in cash, and as to £36,000 by the allotment to the company or its nominees of 30,000 shares of £1 each fully paid of the capital of the new company. The arrangement as regards the allotment of the 36,000 fully-paid shares was that the shareholders of the company should receive six shares of the new company for every five shares held by them in the company, all fractional parts being satisfied in cash; and any cash balance remaining after payment of the obligations of the company and expenses to be distributed among the shareholders. Of the 150,000 shares of the new company 36,000 fully-paid shares were allotted as aforesaid; 61,560 shares have been issued and 7s. 6d. per share paid thereon; and 49,440 remain unissued.

No rubber was produced or sold by the company, as the plantations had not reached the producing stage.

The company contended—(1) That the company had earned no income. (2) That the company was formed for the purpose of acquiring, developing, and cultivating a rubber estate, and had sufficient capital for so doing, and that it was not formed for the purpose of re-selling, although power to sell was inserted in its memorandum of association, as is usual in the memoranda of almost all companies incorporated of recent years under the Companies Acts. (3) That additional capital became necessary owing to the company having acquired a large adjoining estate. That but for the purchase of the additional estate the original estate could have been fully developed and cultivated with the capital of the company until the company was in a position to earn profits and pay dividends. The company not having been formed for the purchase and sale of property, the transaction in question was merely a realisation of investment. (4) The transaction was in substance a mere increase of capital by issuing new shares at a premium. It in truth involved no earning of profits by the company and no division of profits among its shareholders.

The Surveyor of Taxes (Mr Richard Farmer) maintained—(1) That as the company was formed for the purpose, inter alia, of acquiring and re-selling rubber estates, any profits made on the re-sale of such estates, whether received in cash or in the shares of another company, were liable to income tax— Scottish Investment Trust, Limited v. Inland Revenue, 1893, 21 R. 262, 3 T.C. 231; Californian Copper Syndicate, Limited and Reduced v. Inland Revenue, 1904, 6 F. 894, 5 T.C. 159. (2) That from the evidence furnished by the prospectus, report, and balance-sheets of the company it is clear that the estates purchased by the company were acquired with the object of being re-sold at a profit. (3) That the transaction in question was a sale in the line of the company's business resulting in a profit liable to income tax, and not a mere increase of the company's capital or change in the mode of its investment; and (4) that although the company might have increased its capital for the purpose of developing and cultivating the estates, it did not do so, the capital being provided by and spent at the risk of the new company—which was in law a company separate and distinct from the company.

The Commissioners, on consideration of the facts and arguments submitted to them, refused the appeal, and confirmed the assessment of £9000, representing the difference between the price (£38,500) received for the estates sold and the estimated cost price (£29,500).”

Argued for the appellants—The company was not an investment company to make profit by buying and selling investments. Accordingly the case was quite different from such cases as the Scottish Investment Trust Company, Limited v. Inland Revenue, December 12, 1893, 21 R. 262, 31 S.L.R. 219, 3 Tax Cas. 231. They admitted that the Californian Copper Syndicate, Limited and Reduced, July 1, 1904, 6 F. 894, 41 S.L.R. 691, 5 Tax Cas 159, to some extent resembled the present, but that was a very narrow case, and was decided on the ground that the Court were satisfied that the company was formed solely for the purpose of buying certain mineral lands and re-selling them at a profit (especially Lord Trayner's opinion). Here, it was true, the company had power to sell, and had in fact sold, its property, but it had cultivated it to some extent, and might have continued to cultivate it. Accordingly it could not be said that its sole purpose was to sell itself. They also referred to Stevens v. The Hudson Bay Company, 1909, 25 T.L.R. 709. [ Lord Salvesen — That appears to be on the lines of the Assets Company, Limited v. Inland Revenue, February 23, 1897, 24 R. 578, 34 S.L.R. 486.]

Argued for the respondent—The company contemplated either cultivating, or selling itself at a profit (articles 2, 5, and 12). In fact it chose the latter alternative. They submitted that was an operation of business in carrying out a scheme for profitmaking,” the test applied by the Lord Justice-Clerk in Californian Copper Syndicate, Limited and Reduced, cit. sup. That case ruled the present. They also referred to Scottish Investment Trust Company, Limited v. Inland Revenue ( cit. sup.); Northern Assurance Company, Limited v. Inland Revenue, reported along with Scottish Union and National Insurance Company v. Inland Revenue, February 8, 1889, 16 R. 461, at p. 473, 26 S.L.R. 330, 2 Tax. Cas. 571.

At advising—

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