PER EVERSHED M.R.J. - (1.) WHERE the question involved is the question of fact whether a reasonable part of the companys income has been distributed it is plainly wrong that the question should not be investigated till years after the event. It is further essential that the commissioners findings of fact should be expressed in clear and unambiguous language and that in particular it should not be left in doubt whether or to what extent evidence is accepted. Decision of HARMAN J. affirmed. APPEAL from Harman J.
(2.) THIS was an appeal from a judgment of Harman J. dated November 17, 1953, affirming a decision of the special commissioners, which upheld a direction made against the appellant company, A. and J. Mucklow Ld. (in liquidation), under section 21 of the Finance Act, 1922, and section 31 of the Finance Act, 1927, to the effect that the actual income of the company from all sources, for the period from the close of the last complete financial year of the company on April 30, 1943, to the commencement on December 9, 1943, of the voluntary winding up of the company, should be deemed to be the income of its members, and consequently be apportioned among such members for the purposes of their assessment to surtax, the only members of the company being two brothers named respectively Albert and Jothan Mucklow. The facts are fully stated in the judgment of Jenkins L. J. Millard Tucker Q. C. and G. B. Graham for the company. Section 21 of the Finance Act, 1922, was directed against the avoidance of super -tax; the present case is not within the mischief of the section for the commissioners found that the reconstruction scheme was not a devise to avoid tax.
(3.) UNDER section 21 the special commissioners may make a direction on the whole of the undistributed income if the company has unreasonably failed to distribute any part of it, however small that part. The power of direction is not limited to the part which ought reasonably to have been distributed. That is why in Thomas Fattorini (Lancashire) Ld. v. Inland Revenue Commissioners Lord Atkin described section 21 as being of a 'highly penal nature,' Fattorinis case shows that, to prove that the company acted unreasonably in withholding income from distribution, the Crown must show not only that there was a balance of income in hand for that period, but also that a reasonable part was not distributed. In reaching that conclusion they must consider the liabilities of the company. The income which is unreasonably withheld must be, in the words of the preamble to section 21, 'income which would otherwise be 'distributed.' That makes it clear, as Harman J. said, that the circumstances mentioned in the proviso to section 21 of the Act of 1922 do not provide the exclusive test of what is reasonable for this purpose. For example, it may be that a company has past accumulated losses which would make it unreasonable to declare a dividend in a year when the company happens to have made a profit. The proviso specifies certain matters which the commissioners have to take into account, but they have also to consider any other commercial matters which would be present to the minds of the directors sitting in the board room of the company. Contrary to the view which Harman J. expressed, account could and should be taken of the needs of the new company, for there was continuity of the companys business here. Under section 21 it was open to the company to say that, because of liquidation, income which would otherwise have been available for distribution, was no longer available. Section 31 of the Act of 1927, provides for the position after liquidation has intervened, and provides that income for the broken period is to be deemed available, although in fact it could only be distributed after the period if the company had declared a dividend before going into liquidation, which became payable after liquidation commenced, and such a dividend would only be payable then provided payment would not be in competition with the creditors of the company. Section 31 provides, in other words, that the income of the broken period is to be deemed to be capable of being distributed, notwithstanding the practical difficulties. But section 31 is still subject to the preamble to section 21 of the Act of 1922, and the income must be 'income which would otherwise be distributed'. It is inadmissible to start with the assumption that if section 31(4) applies, direction is automatic unless and until the company shows good reason why the income was not distributed. H. Collier & Sons Ltd. v. Inland Revenue Commissioners is not a binding authority to that effect. It is submitted that the judgments of the majority do not go to that length, or if they do, they are to that extent obiter, for the question was not before the court. The judgment of Romer L. J. clearly does not support the view that direction under section 31(4) is automatic. The contention on behalf of the company is that the original finding by the commissioners on the facts (which was not withdrawn by them on their further finding), was correct. 'Reasonable' must be given its ordinary meaning; it is not limited by the statutory provisions. There is no affirmative evidence here that the company acted unreasonably, and the commissioners found that the reconstruction was not a device to avoid tax. To carry out the reconstruction the concurrence of the shareholders of the old company had to be obtained. They wanted the scheme to go through. The money would be available for the purposes of the new company, and unless it was available the reconstruction could not be carried out. This is a perfectly proper transaction and a reasonable thing for the company to do. With regard to the penultimate period it was held that it was reasonable not to declare a dividend, and in normal circumstances it would not have occurred to anyone to declare a dividend for the broken period. The company does not contend that they could not notionally have made a distribution, but that it would not be unreasonable not to do so. [EVERSHED M.R. Would a company be in a worse position if it distributed a part of its income but not a reasonable part, than if it had distributed nothing at all ?];