[KING'S BENCH DIVISION]

COPEMAN (H.M. INSPECTOR OF TAXES) v. COLEMAN, FOR COLEMAN MINORS.

Revenue - Income tax - Repayment claim - All shares of company held by respondent and his wife - Issue of one 200l. redeemable preference share, 10l. paid, to respondent's child - Dividend 40l. free of tax declared and call of 40l. - Repayment of income tax - Not a bona fide commercial transaction - Settlement - Respondent a "settlor" - Income that of respondent - Finance Act, 1936 (26 Geo. 5 & 1 Edw. 8, c. 34), s. 21, sub-ss. 1, 9.

By the Finance Act, 1936, s. 21, sub-s. 1, where by virtue of a settlement any income is paid to or for the benefit of a child of the settlor, then, if at the commencement of the year of assessment the child was an infant and unmarried, the income is to be treated for all the purposes of the Income Tax Acts as the income of the settlor. By sub-s. 9 (b) the expression "settlement" includes any disposition .... arrangement or transfer of assets and by sub-s. 9 (c) the expression "settlor" in relation to a settlement includes any person who has provided funds directly or indirectly for the purposes of the settlement.

One thousand 1l. shares, all the shares of a company which took over the respondent's business, were held by the respondent and his wife. On March 18, 1937, the capital was increased to 6000l. by the creation of twenty-five redeemable preference shares of 200l. each. These shares conferred (a) the right to a fixed non-cumulative preferential dividend at the rate of 10 per cent. on the nominal amount of the capital for the time being issued; (b) the right to participate with the existing ordinary share capital in all amounts at present available for dividend and subsequently made available in the proportion which the nominal amounts of the respective classes of shares for the time being issued bore to one another at the date of the declaring of any dividend; (c) the right on a poll to have one vote for each fully-paid share in the event only of the fixed preferential dividend's being more than three years in arrear, but not otherwise; and (d) the right in a winding-up to the return of the capital paid up or credited as such, together with all arrears of dividends before any return of capital should be made on any other shares, but without the right to share in any surplus assets. It was also provided that all or any of those rights might at all times be added to, reduced, abrogated or otherwise modified or varied with the consent of the company in general meeting, and that the company should at all times have the right to create any further capital ranking in priority to this preference capital as regards both capital and dividend.

On the same day all these shares were allotted to five relatives of the respondent, two of them being his children, minors, who were allotted one share each on payment of 10l. per share, the

Reported by C. G. MORAN, Esq., Barrister-at-Law.

balance of 190l. being uncalled capital. On March 31, 1937, the company declared a dividend of 40l. per share free of tax and by the same resolution made a call of 40l. per share. The respondent on behalf of each of his children claimed 12l. 9s. 2d. repayment of income tax in respect of each dividend:-

Held, that, on these facts, this was not a bona fide commercial transaction. The resolution of March 18, 1937, and the allotment of a share to each minor constituted a "disposition" or an "arrangement" in the nature of a "disposition" and so a "settlement" within the meaning of sub-s. 9 (b) and the respondent was a "settlor" in relation to the settlement within the meaning of sub-s. 9 (c), as he had provided funds indirectly for the purposes of the settlement through the interposition of the company. Such a transaction did not cease to be such a "settlement" because some slight consideration had been paid for the shares. The two dividends must be treated as the income of the respondent for the purposes of the Income Tax Acts and the claims for repayment disallowed.

APPEAL by way of case stated from a decision of the Commissioners for the General Purposes of the Income Tax acting for the hundred of Hemlingford, Warwick.

On June 29, 1938, a meeting of the General Commissioners was held to consider claims for repayment of income tax preferred by the present respondent, Philip Myer Coleman, on behalf of his two children, June Louise Coleman and John Andrew Coleman, who were minors, and the objections to those claims made by the appellant inspector of taxes. At the meeting the following facts were proved or admitted: June Louise was born on July 28, 1924, and John Andrew on July 29, 1928. The claims related to the year ending April 5, 1937, and were as follows: June Louise, income received from one 200l. redeemable preference share in Millicent (Birmingham), Ld., gross dividend 52l. 9s. 2d., less income tax 12l. 9s. 2d., i.e., 40l. Tax to be repaid, 12l. 9s. 2d. John Andrew's claim was in identical terms, the amount involved being the same.

On October 4, 1935, a company was registered in the name of Millicent (Birmingham), Ld., to take over the business carried on by the respondent, P. M. Coleman, with a capital of 1000l. in 1l. shares, which were held in equal parts by the respondent and his wife, Millicent H. Coleman, who were directors of the company. In January, 1933, each child

purchased War Savings Certificates out of its own moneys which had previously accumulated in the Post Office Savings Bank. On March 18, 1937, at an extraordinary general meeting of the company, duly convened, its capital was increased to 6000l. by the creation of twenty-five preference shares of 200l. each, redeemable at the option of the company on or before January 31, 1957. The preference shares conferred (a) the right to a fixed non-cumulative preferential dividend at the rate of 10 per cent. on the nominal amount of the capital for the time being issued; (b) the right to participate with the existing ordinary share capital in all amounts at present available for dividend and subsequently made available in the proportion which the nominal amounts of the respective classes of shares for the time being issued bore to one another at the date of the declaring of any dividend; (c) the right on a poll to have one vote for each fully-paid share in the event only of the fixed preferential dividend being more than three years in arrear, but not otherwise; and (d) the right in a winding-up to the return of the capital paid up or credited as such, together with all arrears of dividends before any return of capital should be made on any other shares, but without the right to share in any surplus assets. It was also provided that all or any of those rights might at all times be added to, reduced, abrogated or otherwise modified or varied with the consent of the company in general meeting, and that the company should at all times have the right to create any further capital ranking in priority to this preference capital as regards both capital and dividend.

The minute book of the company showed that one redeemable preference share was allotted to each child on payment of 10l., the balance of 190l. being uncalled capital. The remaining redeemable preference shares were issued on the same terms as follows: Mrs. Gertrude Goldstone, the respondent's sister, 10 shares; her son, Samuel Goldstone, five shares; Gladys Fyre, Mrs. Coleman's sister, eight shares.

On March 31, 1937, the company, by resolution, declared a dividend of 20 per cent. free of tax in respect of the

preference shares, i.e., 40l. per share free of tax, and by the same resolution made a call of 40l. per share. It was admitted that the children received the shares from the company and that the company was a distinct entity.

It was contended on behalf of the respondent (1.) that the income in respect of which the repayment of income tax was claimed was in each case the income of the child; (2.) that the company allotted the shares to the children; (3.) that the children purchased the shares by the sale of War Savings Certificates which had been in their possession since 1933; (4.) that the respondent was not the settlor within the meaning of s. 21 of the Finance Act, 1936; and (5.) that the claims ought to be allowed as being in accordance with the provisions of the Income Tax Acts.

It was contended for the appellant, inspector of taxes, (1.) that the resolution of March 18, 1937, and the allotment of the 200l. redeemable preference shares constituted an arrangement of assets; (2.) that that arrangement was a settlement within the meaning of s. 21 of the Finance Act, 1936(1), and (3.) that the respondent and his wife had provided funds directly or indirectly for the purposes of the settlement and were settlors within the meaning of the section notwithstanding that the shares were in fact issued by the company.

(1) Sect. 21 of the Finance Act, 1936, provides: "(1.) Where, by virtue or in consequence of any settlement to which this section applies and during the life of the settlor any income is paid to or for the benefit of a child of the settlor, in any year of assessment, the income shall, if at the commencement of that year the child was an infant and unmarried, be treated for all the purposes of the Income Tax Acts as the income of the settlor for that year and not as the income of any other person. ...."

"(9.) In this section - .... (b) the expression 'settlement' includes any disposition, trust, covenant, agreement, arrangement or transfer of assets; (c) the expression 'settlor,' in relation to a settlement, includes any person by whom the settlement was made or entered into directly or indirectly, and in particular (but without prejudice to the generality of the foregoing words of this definition) includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement."

The Commissioners unanimously allowed the claims and the inspector of taxes now appealed.

Sir Donald Somervell K.C., A.-G., J. H. Stamp and Reginald Hills for the appellant. The resolution of March 18, 1937, creating those preference shares and the allotment of one of these shares to each of the two minors constituted a "disposition" and so a "settlement" and the respondent was a "settlor" in relation to the settlement within the meaning of s. 21 of the Finance Act, 1936.

There was no commercial purchase of the shares. For the 10l. parted with each minor within fourteen days received a gross dividend of 52l. 9s. 2d. The minors could not have been made liable for the uncalled capital on their shares. It cannot be that the issue of these shares was for the purpose of raising capital: the company raised 250l. by the issue of these twenty-five shares and in less than a fortnight distributed 1000l. by way of dividend. A "disposition" of the shares does not cease to be a "disposition" because a few pounds were paid for them. In considering whether there was a "disposition" and so a "settlement" within the meaning of s. 21 one has to look at the effect of the whole transaction. Where 10l. is paid for a 200l. preference share, that is not a real sale and the shares, it is plain, were issued for an inadequate consideration. Their issue was a "disposition" of them, in the first place, by the company.

On the facts found, had the ordinary shareholders been an independent body, the giving of these preference shares to relatives of the directors for this inadequate consideration would have been challenged and stopped forthwith. Whatever a company does is done indirectly by the directors. Mr. and Mrs. Coleman who owned the ordinary shares of this company and were its directors, on March 18, 1937, were in complete control of the company. In effect they remained in control of the preference shares. For it was provided that all or any of the rights of the preference shares might at all times be added to, reduced, abrogated or otherwise modified or varied with the consent of the company in general meeting

and that the company should at all times have the right to create any further capital ranking in priority to the preference capital as regards both capital and dividend. Further the preference shareholders had the right to have one vote for each fully-paid share but only in the event of the fixed preferential dividend being more than three years in arrear. Therefore in this "disposition" of the preference shares by the company in favour of their relatives, Mr. and Mrs. Coleman provided the funds indirectly for the purposes of the settlement within the meaning of sub-s. 9 of s. 21, and Mr. Coleman was the "settlor" in relation to the "settlement."

These minors at the commencement of the year of assessment were unmarried, and the income from the dividend on the preference shares declared on March 31, 1937, having regard to the terms of s. 21 must be treated as the income of the settlor - Mr. Coleman - for all purposes of the Income Tax Acts. The decision of the Commissioners, for which they gave no reasons, it is submitted, is wrong and the claims of the respondent on behalf of the two minors, his children, for repayment of income tax should be disallowed.

Leonard Stein for the respondent. There was no finding of fact by the Commissioners that full consideration had not been given by the minors for their preference shares or that the issue and allotment of the shares was not a bona fide commercial transaction. The minors were not credited with the shares as paid up and indeed within a fortnight there was a call of 40l. per preference share. In the case of the minors the contracts would appear to have been voidable and there was provision in a winding-up for a return of the 200l. paid with arrears of dividend, but without any right to share in surplus assets. There is nothing to show that full consideration was not given for the shares by the minors. No one of the words in sub-s. 9 of s. 21: "disposition, trust, covenant, agreement, arrangement or transfer of assets," can refer to such a transaction; for such a meaning would render the provision in s. 21 absurd. If the allotment had been of bonus shares to the children of the directors that would have been another matter. The company acting through the directors

duly allotted these shares to five individuals, two of whom were the minors, for consideration specified on the issue. One view may well be that, had there not been complete confidence in the directors, it would have been unwise to accept this liability for uncalled capital, having regard to the provision for abrogation and for creating further capital in priority to these shares. It may be difficult to estimate what the minors were getting for their payment of. 10l. and their liability for payment of the balance.

It is clear that some limitation must be put on such wide words as "transfer of assets" in sub-s. 9. The words must mean a transfer of assets by way of settlement.

[LAWRENCE J. Is not the limitation to be read into those words - "not being a bona fide commercial transaction?"]

What is defined by sub-s. 9 is the expression "settlement" in the section, and an allotment of shares cannot be described by that word or by any of the words used in sub-s. 9.

In Inland Revenue Commissioners v. Clarkson-Webb (1) Finlay J. said(2): "There is in sub-s. 5" (of the Finance Act, 1922, s. 20) "a definition of 'disposition' and by that definition it includes 'any trust, covenant, agreement or arrangement.' I agree that it must be a document effecting some sort of disposition. Manifestly, the Legislature by saying that 'disposition' includes 'arrangement' does not make every 'arrangement' a 'disposition.'" Normally the words "transfer of assets" are inapplicable to include the creation of rights as is shown by the definition for the purposes of that section in s. 18, sub-s. 5 (b), of the Finance Act, 1936: "The expression 'assets' includes the property or rights of any kind and the expression 'transfer' in relation to rights includes the creation of those rights." Here there was a creation of rights - of rights of dividend and of rights in a winding-up: there was no transfer of assets.

The words in s. 21, sub-s. 9 (c), are, "the expression 'settlor' in relation to a settlement includes ...." One has first therefore to find if there is a "settlement" within the fair meaning of para. (b), by virtue or in consequence of

(1) [1933] 1 K. B. 507.

(2) Ibid. 512.

which any income is paid to or for the benefit of a child and then to find a settlement in relation to which the parent of the child was the settlor. If there was here a settlement by virtue of which any income was paid to these minors, the settlor was the company. The allotment of shares was made by the directors, but acting on behalf of the company. In the case it was admitted that the children received the shares from the company and that the company was a distinct entity. An individual cannot create shares; they can only be created by a company.

The Attorney-General was not called on to reply.

LAWRENCE J. This is a question which arises under s. 21 of the Finance Act, 1936, and relates to the construction of sub-s. 1 of that section and the definitions in sub-s. 9. Sect. 21 provides: "Where, by virtue or in consequence of any settlement to which this section applies and during the life of the settlor, any income is paid to or for the benefit of a child of the settlor in any year of assessment, the income shall, if at the commencement of that year the child was an infant and unmarried, be treated for all the purposes of the Income Tax Acts as the income of the settlor for that year and not as the income of any other person."

The question in this case is whether, on the facts of the case, by virtue or in consequence of any settlement to which the section applies, income was paid to or for the benefit of the children of the settlor who is the respondent in the case.

The facts are that in 1935 a company was formed by the respondent to take over his business with a capital of 1000l. in 1l. shares which were equally held by the respondent and his wife. On March 18, 1937, at an extraordinary general meeting the capital of the company was increased to 6000l. and it was provided that twenty-five preference shares should be created of 200l. each, entitled to a 10 per cent. preferential dividend and to participate with the ordinary shares equally in the surplus. These preference shares were allotted to the relations of the respondent and his wife, and two of them to their two children in consideration of payment of 10l. each

in cash. By this issue of shares, therefore, the company obtained 250l. capital. On March 31, 1937, a dividend of 20 per cent. was declared, free of tax, and each of the respondent's children received the sum of 40l. At the same time a resolution was passed to call up 40l. per preference share. Claims were then put forward by the respondent for return of the tax on the sum of 40l. for each of the children.

The question is, whether the transaction by which these shares were created and issued, and in consequence of which this income was paid to the children, falls within the provisions of s. 21. The word "settlement" in s. 21 is defined in sub-s. 9, which provides that: "The expression 'settlement' includes any disposition, trust, covenant, agreement, arrangement or transfer of assets."

The Crown contends that, on the facts of this case, only one conclusion can be reached - namely, that this transaction by which these shares were created and allotted to the preference shareholders, including the children, was not a bona fide commercial transaction and was a "settlement" within the definition in sub-s. 9. In the first place, the Attorney-General relies upon the fact that the children could not have been called upon to pay up the unpaid capital of 190l. per share. In the next place, that there can have been no genuine intention to raise capital, as the company only received 250l. and immediately distributed within a fortnight 1000l. He drew my attention also to the resolution creating the shares, which provides that all or any of the rights of the preference shareholders "may at all times be added to, reduced, abrogated or otherwise modified or varied with the consent of the company in general meeting" and "that the company shall at all times have the right to create any further capital ranking in priority to this preference capital both as regards capital and dividend," and to the provision that the preference shareholders had the right to have one vote for each fully-paid share in the event only of the fixed preferential dividend being more than three years in arrear. Those provisions, he submitted, showed that the whole transaction was not a bona fide commercial transaction at

all; and he also submitted that such a transaction does not cease to be a settlement within the meaning of the definition clause because some neglible consideration is paid for it, and that in order to be excluded from the section it must be a bona fide commercial transaction.

The question whether the respondent is a settlor turns upon the definition in sub-s. (c) of sub-s. 9, which provides that: "the expression 'settlor,' in relation to a settlement, includes any person by whom the settlement was made or entered into directly or indirectly, and in particular (but without prejudice to the generality of the foregoing words of this definition) includes any person who has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement." The Attorney-General contends that the respondent was a person by whom the settlement was made or entered into indirectly, and that, in any event, he was a person who provided the funds indirectly for the purpose of the settlement; that is to say, by using the legal framework of a company which he and his wife entirely controlled, he made the settlement in consequence of which his children derived this income, and also he indirectly provided the funds for the purpose of the settlement.

Counsel for the respondent, who has taken every possible point that could be made, submits that such a transaction as this does not fall within the definition of "settlement"; that there is no finding of fact in this case that this was not a bona fide settlement; that there were contracts for the 250l., and that on the winding-up the preference shareholders would only get what they paid up, and the fact that they only paid 10l. tends to show that it was a bona fide commercial transaction, because of the provision as to the possible abrogation of their rights; and he points to the fact that there is no finding that it was not their money which was paid for the minors' shares. As to the meaning of the word "settlor," he contends that the shareholders in the company

who may control the company cannot be regarded as settlors within the meaning of the sub-section in question.

It is true that the Commissioners, who decided in favour of the respondent, have not found as a fact that this transaction was not a bona fide commercial transaction. They have expressed their decision without making any specific finding upon this topic, simply allowing the claims. In my opinion it is impossible to come to any other conclusion but that this was not a bona fide commercial transaction, and it appears to me that there was a "disposition" within the meaning of the definition in sub-s. 9, or "an arrangement" in the nature of a "disposition" within the meaning of that sub-section. I am also of opinion that the respondent was a settlor within the meaning of clause (c). I am unable to see how the word "indirectly" can be limited in the way which is suggested so as to exclude the settlements which are made through the interposition of a company.

For these reasons I allow the appeal, with costs.

Solicitor for the appellant: Solicitor of Inland Revenue.

Solicitors for the respondent: Capel Cure, Glynn Barton & Co.

C. G. M.