J SAINSBURY PLC Vs. OCONNAR (INSPECTOR OF TAXES)

JUDGEMENT

(1.) The question in this case is whether the taxpayer company, J. Sainsbury Pic., can claim group relief under section 258 of the income and Corporation Taxes Act, 1970, in respect of trading losses of its subsidiary, Homebase Ltd., during the period 12 January, 1981 to 9 August, 1985.

(2.) In October, 1978, the taxpayer company enterer into negotiations with a Belgaum company, G.G.I.N.N.O.B.M. ("G.B.") for setting up a joint venture company in the United Kingdom. The purpose was to develop c chain of home-improvement stores, with or without associated ragden centres. The initial intention was that the shares should be held in the proportion 70 per cent. the raxpayer company and 30 per cent. G.B. But in August, 1979, it was relaised - it is perhaps surprising that it was not realised before - that the taxpayer company would not be able to take advantage of the group relief provisions unless the new company were a 75 per cent. subsidiary. So the solution which the parties reached was as follows. By a principal agreement dated 4 cOctober, 1979, ("the joint vanture agreement") the taxpayer company agreed to subscribe 75 per cent. of the share capital in the joint company, and G.B. 25 per cent. By a seprate optiopn agreement of the same date, the taxpayer company granted G.B., an option to purchase 5 per cent. of the share capital, ("the call option"), and G.B. granted the taxpayer company an option to require G.B. to purchase 5 per cent. of the share capital ("the put option").These options were not to be exercised within five years of the incorporation of the new company. In the event neither option was exercised, and the option agreement was cancelled by deed dated 9 August, 1985. It is not suggested that the agreement were a sham. By a principal agree

(3.) Two questions arise. The first is whether the taxpayer company was "the beneficial owner" of the whole of its 75 per cent. holding, for the purpose of section 258 of the act of 1970, notwithstanding G.B.s option to purchase five per cent. of the share capital after five years. The second question is whether, if the taxpayer company would otherwise have been entitled to claim the benefit of group relief, the option agreement was an "arrangement" within the meaning of paragraph 5(3) of Schedule 12 to the Finance Act, 1973. If so, the taxpayer company would lose the benefit of group relief by virtue of section 28 of the Act of 1973. The special commissioner answered the first question in favour of the taxpayer company, and the second question in favour of the Crown. On appeal, by way of case stated, Millet J., answered both questions in favour of the taxpayer company.