United Kingdom House of Lords Decisions

The House took time for consideration.

July 9.

EARL LOREBURN

My Lords, I have felt great difficulty in this case, and if any point of law had been involved I should myself have desired a re-argument. But the law has been already laid down in two cases decided by this House, and the only question is whether or not this case comes within the principle. My own view is, on the whole, in accordance with that of Lord Parmoor, which I have had the advantage of reading in print, and I have nothing to add. It is a question of fact, and I think it is very near the line.

LORD PARKER OF WADDINGTON .⁽⁵⁾My Lords, the effect of the decision of this House in Colquhoun v. Brooks⁽¹⁾ may be stated as follows: Where a person resident in the United Kingdom is interested in a trade or business wholly carried on abroad, such trade or business for the purposes of the Income Tax Acts falls

(1)     14 App. Cas. 493.
(5)     Read by Lord Sumner.


under the head of "Possessions in any part of Her Majesty's Dominions out of Great Britain or Foreign Possessions," within the meaning of case 5 of Sched. D, and accordingly no part of the profits or gains of such trade or business is assessable to tax under Sched. D unless and until it be transmitted to and received in the United Kingdom. Where, however, the trade or business is carried on wholly or in part within the United Kingdom, the profits and gains thereof are assessable to tax under case 1 of the schedule. It is to be observed that in Colquhoun v. Brooks⁽¹⁾ the person alleged to be chargeable under case 1, though resident in England, was a partner in a trade or business carried on in Australia. He is called a sleeping partner, but this term is obviously used not in the sense of a partner who by the terms of the partnership contract had no power to interfere with or take part in the trade or business in Australia, but in the sense of a partner who, from one reason or another, had not interfered or taken part in such trade or business. In fact, though asleep for all the purposes of the trade or business during the whole period for which the profits and gains of the trade or business were said to be assessable under case 1, he might at any moment have shaken off his slumbers and joined with his Australian partners in the active management of the partnership affairs. The important point, therefore, was not whether he had power to interfere with the trade or business, but whether he had so in fact interfered during the period for which the Crown alleged that he was assessable under case 1.

My Lords, in considering whether the principle of Colquhoun v. Brooks⁽¹⁾ applies to any particular circumstances, it is also necessary to bear in mind your Lordships' decision in the case of Sau Paulo (Brazilian) Ry. Co. v. Carter⁽²⁾, to the effect that a trade or business cannot be said to be wholly carried on abroad if it be under the control and management of persons resident in the United Kingdom, although such persons act wholly through agents and managers resident abroad. Where the brain which controls the operations from which the profits and gains arise is in this country the trade or business is, at any rate partly, carried on in this country.

(1)     14 App. Cas. 493.
(2)     [1896] A C 31.


I will now invite your Lordships' attention to the facts in this case. Since August 28, 1908, the affairs of the company have been regulated by the articles as altered by the special resolutions confirmed on August 27, 1908. According to these articles all the company's affairs and business whatsoever in Egypt and the Soudan are under the control of a local board, to the exclusion of the board of directors of the company, and of all general meetings of the company not held in Egypt. The local board holds its meetings in Egypt and not elsewhere. It is found by the special case that the business carried on by the company during the year of assessment was the carrying on of two hotels in Egypt, these hotels being under the direct management of servants of the company under the orders of the local board, and the profits of the company being derived wholly from such hotels. All the members of the local board reside in Egypt. Since August 27, 1908, the board of directors of the company have met once only. At this meeting a day was fixed for the annual meeting of shareholders, it was decided to recommend a dividend of 5 per cent., a draft of the directors' report and the accounts for the year ending April 30, 1909, was submitted and approved, and the secretary was authorized to obtain a loan from the company's bankers to enable the dividend to be paid. The annual meeting of the shareholders was held on June 29, 1909, when the directors' report and the accounts for the year ending April 30, 1909, were adopted and the dividend recommended by the directors declared.

Under these circumstances it appears to me indisputable that no single act has been done in or directed from this country by way of participation in or furtherance of the trade or business of the company from which the profits or gains said to be chargeable to income tax since August 28, 1908, have arisen. It was argued that a company can only have one business and that such business necessarily includes the passing of annual accounts, the declaration of a dividend if circumstances admit, and the financial arrangements necessary to enable such dividend to be paid. I cannot accept this argument. The trade or business we have to consider is a trade or business from which profits or gains can arise and not the business of disposing of and dividing such profits and gains when they have arisen, and I can see no reason why a corporation any less than an individual should not be engaged in more than one trade or business at the same time.

The Attorney-General further insisted on the various powers which, even under the altered articles, are still retained by the board of directors of the company. He pointed out that the board of directors of the company have power to determine the remuneration of the members of the local board, to decide when the Egyptian profit and loss account is to be made out, what is to be done with the available cash in Egypt, how cash is to be provided for the Egyptian business if none be available, and generally to determine all questions of finance. It may well be possible that the board of directors of the company still retain powers by virtue of which they could, if occasion arises, so interfere with the company's business in Egypt that such business would cease to be carried on wholly outside this country, but, as I have already pointed out, it is not what they have power to do, but what they have actually done, which is of importance for determining the question which now arises for decision. In the absence of any act done or directed by any person resident here in participation or furtherance of the business operations in Egypt from which the profits and gains in question arose, I think your Lordships are bound to come to the conclusion that this trade or business was carried on wholly outside the United Kingdom, and, therefore, is within case 5 rather than case 1. If this be so the decision of the Court of Appeal must be confirmed and the appeal dismissed with costs.

LORD SUMNER .My Lords, where a resident in the United Kingdom is proprietor of a profit-earning business wholly situate and carried on abroad he is chargeable to income tax under case 5 of Sched. D if he takes no part in earning those profits, and, if he takes any part, is chargeable under case 1. This is true whether the proprietor is a natural or an incorporated person; whether he takes part in earning the profits in his own person or only by agent or servants. The question is whether the profits are wholly or partly earned from a business wholly or partly carried on in the United Kingdom. If he takes a part at home in earning the profits, its importance relatively to that taken by his agents abroad does not matter, nor does the liability to be charged under case 1 depend on active interference. Control exercised here over business operations abroad, though they are far greater in volume or magnitude, will suffice for case 1: San Paulo (Brazilian) Ry. Co. v. Carter.⁽¹⁾ So, too, will mere oversight regularly exercised, even though actual intervention never becomes necessary, everything abroad going smoothly without it: Ogilvie v. Kitton.⁽²⁾ Some actual participation in carrying on the trade is necessary, though it may not go beyond passive oversight and tacit control. It is not enough that the proprietor merely has the legal right to intervene; otherwise Colquhoun v. Brooks⁽³⁾ would have been otherwise decided; for there the respondent was entitled to intervene at any time, though in fact he never did so, but took his share of the profits just as they happened to be earned by those in control abroad.

In the present case I think that the Commissioners have intended to state all the facts which they found to be proved and material. Their express findings are exhaustive, and they do not intend to involve any unexpressed findings in the general terms of their conclusion in paragraph 14 in favour of the Inland Revenue.

It is important to note that the dispute turns upon the narrow question whether the profits attributable to a definite period, namely, that commencing August 27, 1908, fall under case 1 or case 5. It is found that "during the year of assessment the company's profits were derived from the said hotels" (namely, hotels in Egypt), "and no other source." On August 27, 1908, certain alterations in the articles, bona fide and properly made, came into operation, the object of which was to secure that the said profit-earning business should thenceforward be wholly carried on abroad and not at all in the United Kingdom, where the company is admittedly resident. The question is whether this object was attained.

After the date above mentioned the board of directors met

(1)     [1896] A C 31.
(2)     10 F. 1003; 5 Tax Cases, 338.
(3)     14 App. Cas, 493.


only once during the year of assessment. At this meeting they authorized the assistant secretary to borrow 10,750 l. from a bank in this country. The case finds that the local board in Egypt "reported the financial trading results to the board of directors for the purpose of being incorporated in the company's accounts and balance-sheets, and acted upon for the declaration of dividends," and, therefore, as I read it, impliedly finds, and certainly nowhere finds the contrary, that such results were adopted by the board of directors. This must have included adopting the remuneration payable to the local board, which the accounts showing these results must, if properly kept, have debited to the Egyptian trading. Under the amended article it was for the board of directors to fix the remuneration of the local board in Egypt, but, on the facts found in the case, in my opinion they did not exercise their powers. Rightly or wrongly, they allowed the remuneration to be fixed in Egypt. Again, the money was borrowed not for any purpose connected with earning the profits in question, but apparently for the purpose of raising funds with which to pay a 5 per cent. dividend on the ordinary shares, which could not be paid otherwise without depleting the working capital in Egypt. It is clear that this borrowed sum was not intended to feed the Egyptian business with further capital, still less had it played any part in earning the profits in question. Again, the board's power of deciding when a balance of profit or loss should be struck, so as to lead to the declaration of a dividend, does not seem to have been exercised. Accounts were made up in Egypt to the end of the usual financial year in time to be ready for the annual general meeting of the company, independently of any special exercise of its powers by the board of directors.

I am of opinion that what the board of directors actually did fell short of taking any part in or exercising any control over the carrying on of the business in Egypt, and that where the directors forbore to exercise their powers, the bare possession of those powers was not equivalent to taking part in or controlling the trading. Upon the facts found, as I understand them, I think that the profits in question arise from foreign possessions and that the decision of the Court of Appeal was right.

Reference was made to Liverpool and London and Globe Insurance Co. v. Bennett⁽¹⁾, but there the matter in debate was the effect of making investments abroad under the direction of the company in this country, which it was part of the company's business to make in order to enhance the total volume of its profits. I do not think that case germane to the present appeal. The differences there pointed out between the trade of a natural person and his other private activities on the one hand, and the totality of the activities of a trading company in carrying on its trade in all branches on the other, are not material to the present question. The mere declaration and payment of a dividend here out of profits earned in a business otherwise wholly carried on abroad does not prevent the business in which the profits have already been earned from having been wholly carried on abroad. To say that part of a company's business is to pay dividends, if it has earned them, seems to me to be a play upon words. I think that the appeal fails.

LORD PARMOOR .⁽²⁾My Lords, the point for the decision in this appeal is whether the respondents, whose registered office is situate in England, are liable to pay income tax under case 1 of Sched. D upon the whole of their profits, or under case 5 upon a sum not less than the full amount of actual sums remitted to Great Britain. The Commissioners for the General Purposes of Income Tax for the city of London held that, on the facts, the assessment was duly and properly made under case 1. This decision was upheld by Horridge J., but reversed in the Court of Appeal.

My Lords, in my opinion the principles to be applied in the decision of this appeal have been settled in this House in the two cases of Colquhoun v. Brooks⁽³⁾ and of San Paulo (Brazilian) Ry. Co. v. Carter.⁽⁴⁾ In the latter case Lord Watson (at p. 40) states succinctly the ambit of the decision in Colquhoun v. Brooks⁽³⁾: "In my opinion, the decision in Colquhoun v. Brooks⁽³⁾ directly affirms the rule that every interest in the

(1)     [1911] 2 K B 577; [1912] 2 K B 41; [1913] A C 610.
(2)     Read by Lord Sumner.
(3)     14 App. Cas. 493.
(4)     [1896] A C 31.


profits of trade, belonging to a person who is, within the meaning of the Act, resident in the United Kingdom, must be charged under the first case of Sched. D if the trade is carried on, either wholly or partly, within Great Britain or Ireland, and is chargeable under the fifth case, if the trade is exclusively carried on in any of Her Majesty's dominions out of the United Kingdom."

The question, therefore, to be determined in this appeal is whether the trade, of which the profits are sought to be charged, is carried on either wholly or partly within the United Kingdom, or exclusively carried on outside the United Kingdom. This is a question of fact to be determined by the Commissioners, if there is evidence before them from which their finding might, in reason, be drawn, or unless they have gone wrong on a point of law. I think that there was such evidence before them in the present case, and that their decision does not contravene any legal principle.

At an extraordinary meeting of the company held in London on August 10, 1908, certain special resolutions were passed and subsequently confirmed at a confirmatory meeting held in London on August 27, 1908. These special resolutions are set out in the case stated by the Commissioners. Their general effect is that the Egyptian business of the respondents should be carried on and managed by a local board, to the exclusion of the board of directors of the company, and that such local board should be wholly independent of any other directors and board of the company and of general meetings of the company (not being general meetings held in Egypt), and in no way under the control thereof.

The Egyptian business of the company includes all the company's affairs and business whatsoever in Egypt and the Soudan, including the business of carrying on the company's hotels in Egypt and the Soudan, and everything connected therewith, including the incurring of debts and liabilities, buying, selling, and supplying goods, the hiring, using, and supplying labour, paying of debts, and the doing of all things necessary or in any way incidental to such business. The profits of the company on which the income tax is sought to be charged are derived wholly from the Egyptian business. In the year of assessment the dividend was declared in June.

Mr. Peat, a director of the respondents, gave evidence that the special resolutions which became operative on August 27, 1908, had been strictly observed and acted upon, and that the local management of the hotels was carried on exclusively by the local board in Egypt, who reported the financial trading results to the board of directors of the company in England for the purpose of being incorporated in the company's accounts and balance-sheets and acted upon for the declaration of dividends. The Egyptian accounts were made up and audited in Egypt and subsequently forwarded to the respondents' office in London and submitted to the general meetings of the respondents in London. The balance-sheets and the profit and loss accounts of the company were made out in London, and all the accounts of the respondents, except so far as rendered unnecessary by the local audit in Egypt, were audited in England. As an instance of the extent to which the control of finance was exercised in England, the assistant secretary was authorized at a meeting of the respondents held in England on June 29, 1909, to obtain a loan of 10,750 l. from the Anglo-Egyptian Bank, and to transfer 2692 l. 6 s. 4 d. to debenture interest account, and 10,925 l. to dividend No. 5 account in Cairo and London, to meet the financial requirements as at June 30, 1909. Before and after August 27, 1908, all the meetings of the directors of the respondents have been held from time to time in England and not elsewhere.

In addition to parol evidence the Commissioners had in evidence before them the memorandum and articles of association of the respondents. The respondents are an English company having its registered office in England, and, subject to the special provisions affecting the Egyptian business, the general management of the affairs of the company is, in the ordinary way, entrusted to the directors. The control of the share capital of the company was left with the directors, including the question of its increase or reduction. It was within the power of the directors to say when the profit and loss account of the Egyptian business should be made out and in what manner the available assets should be allocated. The directors decided how much the Egyptian managers should be paid, and if the Egyptian business should be carried on at a loss in any particular year, the responsibility rested with them of making any necessary financial arrangements. On this evidence the Commissioners found that before and after August 27, 1908, the directors of the respondents were empowered to, and did, deal with the general affairs of the company, including all general financial arrangements of the company.

In my opinion there was evidence before the Commissioners on which within reason they could come to the above finding. It was open to the Commissioners to find that a business is not exclusively carried on outside the United Kingdom when all the general financial arrangements are dealt with and controlled at meetings held from time to time at the offices of the company in England. The Commissioners further found that the head and seat and controlling power of the company remained in England with the board of directors of the company. How far, in any particular case, the power over finance gives controlling power is a question for the Commissioners, but I find it difficult to appreciate how any trade or business can be exclusively carried on outside the United Kingdom by a company which has its offices in England and whose directors are empowered to and do deal with all the general financial arrangements of the company. I agree with Horridge J., that it is not possible to sever the business of the respondents in such a way as to hold that there is a cleaving line between general questions of finance and the local management in Egypt.

It was said in argument that although the directors in England had general controlling powers in matters of finance, there was no evidence that they exercised this power in relation to the Egyptian business. For the reasons already stated, I think that there was evidence on which the Commissioners could find that the directors of the respondents had not only the power to deal with all general financial arrangements of the company, but also exercised this power. It becomes, therefore, unnecessary to decide how far the reservation of a power of control, which has not been exercised, is in itself sufficient to negative a claim to be treated under case 5, but I do not desire to be understood as throwing any doubt on the decision in Ogilvie v. Kitton.⁽¹⁾

My Lords, in my view the appeal should be allowed.

(1)     5 Tax Cases, 338.


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