CONSOLIDATED AFRICAN SELECTION TRUST Vs. INLAND REVENUE COMMISSIONERS

JUDGEMENT

(1.) The following statement of facts is taken substantially from the judgment of Greene, M.R. : This is an appeal by the Consolidated African Selection Trust, Ltd., from a decision of MACNAGHTEN, J., who reversed the decision of the General Commissioners of the City of London on an appeal in which the company was claiming to have allowed to it for the purpose of its income tax asseddment for the vear ending April 5, 1937, a certain deduction. The company is a prosperous company, and on DEcember 6, 1933, it passed a special resolution increasing its share capital by the creation redeemable preference shares and 400,000 new ordinary shares of 5s. each. By the same resolution it was resolved that 10,000 of such new ordinary shares be reserved for issue to employees of the company at such time and upon such terms and conditions as the directors should determine. The directors determined to issue 6,000 of those ordinary shares to employees of the company upon terms which would give to employees a substantial benefit, and that benefit was to be by way of remuneration for services rendered. Accordingly, on June 5, 1934, a letter was sent to the employees in question offering to give then an allotment of the new ordinary shares at per, that is to say 5s. a share. That offer was accepted. The 5s. was paid and the 6,000 shares, which was the number the directors had determined to allot in this way, were issued to the employees. It is found in the Case that the value of that opportunity to subscribe for the shares at par was Pound 2 3s. 9d. per share, less the 5s. paid; that is to say, each employee received by way of remuneration a benefit eqvivalent in cash value to Pound 1 18s. 9d. The employees were assessed to income tax in that amount, and that assessment was justified by the law as laid down in the case of Weight V/s. Salmon. It is agreed, and the case proceeds upon the footing, that if the company, instead of making the issue in the way it did, had issued those shares to the public, it could have obtained for them Pound 2 3s. share; that is to say, it would have obtained a premium of Pound 1 18s. 9d. Had it done so, the premium so obtained in the hands of the company would have been free money, in the sence that the company could have used it for any purpose that it chose. It could have used it to pay current expenses. It could have carried it to reserve. It could have used it for the purpose of acquiring a capital asste. In other words. so far as the law is concerned, the company could have dealt with the money received in respect of the premium in any way that it pleased, including, of cource, if it had so minded, remuneration of employees. Now the position when the company created those new share was this : when the shares were created the company acquired the power to admit to membership such persons as should subscribe for those shares. That right was one of value to the company, because if the company had exercised that right it could have secured for itself, not merely the par value of the shares which by law it would be bound to obtain, bacause it could not issue shares at a discount, but it would also have been able to obtain a premium. It therefore had a right which was of value to itself, the exercise of which would have brought money into its coffers. That right the company did not exercise. Instead of doing so, it diverted into the pockets of its employees the equivalent of the cash profit which it otherwise would have obtained. It may be said from one point of view that it forbore to make that cash profit and presented its equivalent instead to the employees. In those circumstances the company claims to have allowed as a deduction for the purpose of its assessment the value of that premium which it might have obtained; or, putting it in another way, the amount of the special remuneration which it has given to its employees. The General Commissioners held that the company was entitled to make such deduction. MACNAGHTEN, J., however, reversed the decision of the General Commissioners. The company appealed.

(2.) GREENE, M. R. - [His Lordship stated the facts and continued :] It is incontestable that the company has remunerated its employees; it is incontestable that the remuneration in the hands of the employees is liable to tax. From where did the remuneration come ? It did not come out of nothing. It came from some where. The place where it came from was the company. The company has provided the remuneration, and it has provided it out of a right belonging to itself, namely, the right to issue those shares.

(3.) Now, it is said on behalf of the Crown that although the employees have received remuneration for which they stand to be taxed, the company is not entitled to the dedication of the equivalent amount. It is said that to forebear the making of a profit is not an expense incurred by the company, and it was said that the argument were accepted, would involve affirming the proposition expense. Speaking for myself, I have no intention of affirming any such general proposition, nor did the argument presented on behalf of the company expressly or impliedly affirm any such proposition. The question that we have to decide lies in a very much narrower compass.