- (1.) THIS appeal raises a question concerning a capital gains tax. The question can be stated shortly, if somewhat loosely, as follows. As part of a transaction where by three trading companies in a group were sold for a cash consideration, the ultimate holding company in the group, for a further cash consideration of U. S. $575,000, entered into a covenant with the purchaser that companies in the group would not, for a defined period, engage in the business carried on by the three trading companies being sold. Is capital gains tax payable in respect of that further cash consideration, paid in return for the covenant? Both the special commissioners and Knox J. have said no. The matter came before the commissioners on an appeal by the taxpayer company, Thorn E. M. I. Plc., against an estimated assessment to corporation tax on profits for its accounting period ended 31 March 1978. On that appeal the only issue related to the sterling equivalent ($315,934) of the sum of U. S. $575,000 received by the taxpayer company in that period. The commissioners allowed the appeal, holding that this sum should not be included as a capital gain in the computation of the taxpayer companys profits. They decided that, by entering into the covenant, the taxpayer company did not dispose of any asset within the meaning of the capital gains tax legislation. On 27 February 1986 Knox J. dismissed the Crowns appeal against that decision. The Crown has now appealed to this court. Strictly, the tax in issue in the present case is corporation tax, because the chargeable gains accruing to a company the tax charged is corporation tax and not capital gains tax. But in general, and it is not suggested that any exception is relevant in the present case, the amount of the chargeable gains of a company are to be computed in accordance with the principles applying to capital gains tax: see sections 238 and 265 of the Income and Corporation Taxes Act 1970. Accordingly, it will be convenient henceforth in this judgment for me to refer only to capital gains tax.
(2.) THE facts: The evidential material before the commissioners consisted of an agreed statement of facts and a copy of the share sale agreement. No oral evidence was given. The essential facts are these. The three companies whose shares were sold were Dynamo and Motor Repairs Ltd. (D. M.). Tyne and Wear Electrical Co. Ltd. (T. and W.) and Potters èElectrical Repair Works Ltd. (Potters Ltd.). I shall refer to these three companies as the three companies being sold. Each of these companies carried on the trade of repairing and rewinding electrical motors and generators. Potters Ltd. also carried on the trade of manufacturing and repairing heavy industrial lifting magnets, which were sold under the name of Thorn Electrical Magnets. The taxpayer company had never carried on these trades or any allied repairing or manufacturing trade: it was primarily a holding company, but it also carried on the trade of providing management services to companies within its group.
(3.) THE three companies being sold were members of the Thorn group but they were not direct subsidiaries of the taxpayer company. In 1967 the taxpayer company had acquired the entire issued share capital of Metal Industries Ltd., one of whose wholly owned subsidiaries at that time was D. M. In 1968 and 1970 respectively Potters Ltd. and T. W. became parts of the Thorn group, and in 1970 or 1971 these two companies became wholly -owned subsidiaries of Metal Industries Ltd. By an elaborate agreement dated 9 December 1977 and made between the taxpayer company, Metal Industries Ltd. and a New York corporation called General Electric Metal Company (G. E.) the taxpayer company agreed to procure the sale and Metal Industries Ltd. agreed to sell, and G. E. agreed to buy, all the shares in the three companies being sold together with the benefit of the covenant. The aggregate consideration of $1.73 million was appointed as follows: Convenant 575,000 D. M. 815,000 Potters Ltd. 160,000 T. and W. 180,000 $1,730,000 The consideration for the covenant was payable to the taxpayer company, and the remainder of the consideration was payable to Metal Industries Ltd. The form of the covenant, to be executed by the taxpayer company and handed over on completion, was set out in a schedule to the agreement.;