Decided on March 18,1963



SELLERS L.J. - (1.)I have had the advantage of considering the judgment which Donovan L.J. has prepared and is about to deliver, in which he has set out the facts and referred to the authorities relied on in the respective arguments. I agree with his judgment and the conclusion that the appeal should be dismissed. I would only add this briefly.
(2.)F . S. Securities Ltd., in so far as they trade at all, and it must be accepted that they did, traded in stocks and shares and the three securities in questions which they held were the main part of their stock -in -trade (Griffiths v. J. P. Harrison (Watford) Ltd. The company claimed to have made a loss and were regarded by the Inland Revenue so to have done and were paid over 400,000 Pounds as are payment of tax on that basis, but as their trade brought in earning of over 1,600,000 Pounds gross dividends received, the company in fact made a fabulous profit on 100 Pounds subscribed capital. If the facts are to be accepted as establishing a 'trading' or any loss, a more fictions or home -made loss it would be hard to devise in business affairs. As the shares of the three companies which F. S. Securities Ltd. acquired and with which they traded were their stock -in -trade producing trade earnings, the same shares were not a separate source producing an investment income and without that income being established as investment income the respondent company cannot be held to be an investment company, however desirable it would be that such transactions as were carried out by or on behalf of the few members of the company should make their contribution, by means of taxation, to the requirements of the countrys revenue. Enrichment without any service to the community and without taxation is hard to countenance.
(3.)DONOVAN L.J. - This is an appeal by the Commissioners of Inland Revenue from a decision of Ungoed -Thomas given in favour of the tax -payers, F. S. Securities Ltd. Against that company the Special Commissioner of Income Tax had made a direction under the provisions of the Income -tax Acts dealing with the under -distribution of dividends by a limited company, with consequent avoidance of surtax by the shareholders. In 1936 the legislature, stung to action by the continued ingenuity of the taxpayer and his advisers in avoiding surtax by means of the incorporation of a company and the withholding of dividends, passed legislation which in effect divided such companies into two categories - (1) trading companies and (2) companies which Parliament labelled 'investment companies'. The trading company would continue to be liable to surtax on its profits only if it had failed to distribute a reasonable part thereof, having regard to its requirements for the maintenance and development of the business. The 'investment company,' on the other hands, was to be subject to certain limitations in this respect. Then in 1939 it was enacted that an 'investment company' should be liable to surtax on all its profits however much or however little it had distributed by way of dividend. This legislation has now been codified in the Income -tax Act of 1952. (See Chapter III thereof, comprising sections 245 to 264 inclusive.) In this field, therefore, it is advantageous to be a trading company and disadvantageous, as a rule, to be an investment company.
The legislature originally defined an 'investment company' by section 20 of the Finance Act, 1936. The like definition is now contained in section 257(2) of the Act of 1952. I had better quote it in ful : 'In this section, and in the subsequent provisions of this Chapter, investment company means a company the income whereof consists mainly of investment income, and investment income means, in relating to a company, income which, if the company were an individual, would not be earned incom :.... The special commissioners in the present case were dealing with the income of the company for the period September 1, 1954, to March 31, 1955. They took the view that the income of the company consisted during this period mainly of investment income as defined by section 257(2); and they accordingly made a direction upon the company which, if valid, has the effect, when coupled with an apportionment of that income among the companys members, that a large sum of surtax becomes payable to the Crown. The company appealed to the special commissioners against this direction, arguing that it was a trading company and not an investment company. This argument failed before the special commissioners but succeeded before Ungoed -Thomas J. The court is here concerned with a dividend stripping operation. The company was incorporated on August 19, 1954, with a capital of 100 Pounds and 83 per cent. of the capital was held by two persons jointly. The memorandum of association proclaimed that one of the objects of the company was to carry on the business of stock and share dealers. On December 10, 1954, the company purchased the entire share capital of B. & Co., Wool Merchants (Bradford) Ltd. On March 3, 1955, it purchased the entire share capital of Cranwell (Holdings) Ltd. and on March 25, 1955, the entire share holding of N. E. T. Holdings Ltd. These purchases cost altogether 1,317,565 Pounds and one might well ask where this 100 Pounds company not the money from. The answer is that as to 93 per cent. of it, it came from the companys bankers on loan.

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