[CHANCERY DIVISION]

BULMER v. INLAND REVENUE COMMISSIONERS

SAME v. SAME

KENNEDY v. SAME

OATES v. SAME

OATES AND OTHERS v. SAME

MACAULAY v. SAME

Revenue - Income tax - Transaction to avoid take-over bid - Bona fide commercial transaction - Whether an "arrangement" - Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), ss. 404 (2), 405 (1), 409 (1) (2) (5), 411 (2).

Revenue - Surtax - Transaction to avoid take-over bid - Bona fide commercial transaction - Whether an "arrangement" - Income Tax Act, 1952, ss. 404 (2), 405 (1), 409 (1) (2) (5).

Statute - Construction - General words - Power of court to imply restriction.

Statute - Construction - Chapter heading - Aid to construction of general words.

The taxpayers, a group of shareholders in B. & L. Ltd., fearing a takeover bid, entered into an agreement with S. Ltd. S. Ltd. formed a subsidiary company, Y. Ltd. The taxpayers sold their shares in B. & L. Ltd. to Y. Ltd. at a price well under market value, the price being left as an interest-free loan. S. Ltd. lent £250,000 to Y. Ltd. at five per cent. the loan being used by Y. Ltd. to buy B. & L. Ltd. shares on the market. The taxpayers had the option, once the loan from S. Ltd. had been repaid by Y. Ltd., to repurchase the original shares together with any shares bought subsequently by Y. Ltd. in consideration of the cancellation of their loan to Y. Ltd. The dividends on the shares held by Y. Ltd. were meanwhile to be used in paying the interest on the loan from S. Ltd., and repaying the loan from S. Ltd. The special commissioners held that the transactions constituted an "arrangement" and thus a "settlement" within section 411 (2) of the Income Tax Act, 1952, and that the dividends fell to be assessed as the taxpayers' income under ss. 404 (2), 405 (1), 409 (1) (2) and (5) and 415 (1) (d) and (e).¹ The taxpayers appealed.

[Reported by THEODORE WALLACE, ESQ., Barrister-at-Law.]

1 Income Tax Act, 1952, s. 404: "(2) If and so long as the terms of any settlement are such that - (a) any person has or may have power, whether immediately or in the future, and whether with or without the consent of any other person, to revoke or otherwise determine the settlement or any provision thereof; and (b) in the event of the exercise of the power, the settlor or the wife or husband of the settlor will or may become beneficially entitled to the whole or any part of the property then comprised in the settlement or of the income arising from the whole or any part of the property so comprised, any income arising under the settlement from the property comprised in the

Held, (1) that the transaction between the taxpayers and S. Ltd. was a bona fide commercial transaction in which there was no element of bounty; that section 411 (2) applied only to a transaction which was not a bona fide commercial transaction; and that therefore, the transaction was not an arrangement within the meaning of section 411 (2) (post, pp. 164C-D, 165C, G - 166D).

Copeman v. Coleman [1939] 2 K.B. 484; [1939] 3 All E.R. 224; 22 T.C. 594; Inland Revenue Commissioners v. Leiner (1964) 41 T.C. 589 applied.

Thomas v. Marshall [1953] A.C. 543; [1953] 2 W.L.R. 944; [1953] 1 All E.R. 1102; 34 T.C. 178, H.L., distinguished.

settlement in any year of assessment or from a corresponding part of that property, or a corresponding part of any such income, as the case may be, shall be treated for all the purposes of this Act as the income of the settlor for that year and not as the income of any person: Provided that, where such power as aforesaid cannot be exercised within six years from the time when any particular property first becomes comprised in the settlement, this subsection shall not apply to income arising under the settlement from that property, or from property representing that property, so long as the power cannot be exercised."

S. 405: "(1) If and so long as the settlor has an interest in any income arising under or property comprised in a settlement, any income so arising during the life of the settlor in any years of assessment shall, to the extent to which it is not distributed, be treated for all the purposes of this Act as the income of the settlor for that year and not as the income of any other person."

S. 409: "(1) In the case of any settlement where there is more than one settlor, this Chapter shall, subject to the provisions of this section, have effect in relation to each settlor as if he were the only settlor. (2) References in this Chapter to the property comprised in a settlement include in relation to any settlor, only property originating from that settlor and references in this Chapter to income arising under the settlement include, in relation to any settlor, only income originating from that settlor. ... (5) References in this section to property originating from a settlor are references to - (a) property which that settlor has provided directly or indirectly for the purposes of the settlement; and (b) property representing that property; and (c) so much of any property which represents both property provided as aforesaid and other property as, on a just apportionment, represents the property so provided."

S. 411: "(2) In this Chapter, 'settlement' includes any disposition, trust, covenant, agreement or arrangement, and 'settlor,' in relation to a settlement, means any person by whom the settlement was made; and a person shall be deemed for the purposes of this Chapter to have made a settlement if he has made or entered into the settlement directly or indirectly, and in particular (but without prejudice to the generality of the preceding words) if he 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."

S. 415: "(1) Where, during the life of the settlor, income arising under a settlement made on or after the tenth day of April, 1946, is, under the settlement and in the events that occur, payable to or applicable for the benefit of any person other than the settlor, then, unless under the settlement and in the said events, the income either - ... (d) is income from property of which the settlor has divested himself absolutely by the settlement; or (e) is income which, by virtue of some provision of this Act not contained in this Chapter, is to be treated for the purposes of this Act as income of the settlor the income shall be treated for the purposes of surtax as the income of the settlor and not as the income of any other person."

Per curiam: Where the context so requires, the court may imply some restriction upon the scope of general words in a statute. Chapter headings are admissible in the construction of a statute (post, p. 165D-E).

CASES STATED by the Commissioners for the Special Purposes of the Income Tax Acts.

At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on July 16-20, 1962, inclusive, December 12 and 13, 1962, and February 20, 1964, William P. Bulmer, hereinafter called "the appellant," appealed against the following assessments to surtax:

         Year of Assessment        Amount of Assessment
 
         1954-55 (Additional)              £1,577 
         1955-56                           £6,500 
         1956-57 (Additional)             £11,846 
         1957-58 (Additional)             £13,410 
         1958-59 (Additional)             £13,285 
         1959-60                          £18,073 

Together with the appellant's appeal the commissioners heard appeals against assessments to surtax by Lady Florence Bulmer, Robert J. Kennedy, Philip H. Oates, John H. Oates, deceased, and Donald A. R. Macaulay. The facts relating to those appeals were so closely connected with those of the appellant's appeal that they were not set out in the cases, which were purely formal and are not reproduced.

The issue between the parties was whether the dividends arising from certain shares in a company called Bulmer & Lumb (Holdings) Ltd. (hereinafter referred to as "Bulmer") were to be treated as income of the above-named appellants for the purposes of assessment to surtax. The first question was whether certain transactions constituted a settlement within the meaning of section 411 (2) of the Income Tax Act, 1952. The commissioners held that they did, and the second question was, therefore, whether this settlement was caught by any of the provisions of sections 404 (2), 405, or 415 of the said Act. As a result of the decision on this second question, the third question was who were the settlors and, finally, what income should be deemed to be income of the settlors.

A preliminary point was taken on behalf of the Crown: that the equitable interest in the said Bulmer shares had never been transferred by the appellant to a company called Yorkshire Investment Co. Ltd. ("Yorkshire"), or to Yorkshire's nominee, and that

accordingly the dividends from those shares were income of the appellant apart from the provisions of the said sections 404 (2), 405 and 415. That point was not pursued by the Crown upon appeal to the High Court.

The relevant facts found by the commissioners were summarised in the judgment as follows: Bulmer is a public company which holds the shares in a group of woollen companies. In the autumn of 1954, the appellants, together with relatives and associates, held about 30 per cent. of the shares in Bulmer. Some of them were directors. At that time the board of Bulmer observed indications of a threatened take-over bid and ascertained that the attempt was being made by a company known as Illingworth, Morris & Co. Ltd. The appellants, after an unsuccessful counterattack, devised, in connection with another public company known as Sanderson, Murray & Elder (Holdings) Ltd. (to which I will refer as "Sanderson"), a scheme with a view to obtaining for themselves sufficient additional shares in Bulmer to make a take-over impossible. Sanderson was not an associated company but had friendly business relations with Bulmer and was anxious to assist in defeating a take-over. The basic terms of the scheme were as follows. Sanderson should incorporate a small subsidiary company described as the finance company. Sanderson required the scheme to be operated through a subsidiary company because it did not wish it to be known that it was buying shares in Bulmer. Sanderson should make a loan to the finance company with a limit of £400,000 (afterwards reduced to £250,000) at a commercial rate of interest, later fixed at five per cent. With this loan the finance company should buy up shares in Bulmer in the market. The appellants should sell their shares in Bulmer to the finance company for a purchase price which was to be left outstanding as an interest-free loan. The finance company should apply the dividends from these shares (to which I will refer as the "original shares") and also from the shares to be purchased in the market (to which I will refer as the "acquired shares") in servicing the loan from Sanderson, i.e., first by way of payment of interest and second by repayment of principal. When the loan had been repaid the appellants should have an option to purchase back the original shares and also to purchase the acquired shares from the finance company, the total purchase price to be a sum equal to the loan representing the price payable by the finance company to the appellants for the original shares. The appellants also would then buy from Sanderson the shares in the finance company at par. There were to be certain further options and certain restrictions on

dealings by the finance company in shares in Bulmer. On December 21, 1954, a company now known as Yorkshire Investment Co. Ltd. (to which I will refer as "Yorkshire") was incorporated as the finance company for the purposes of the scheme. Yorkshire had an issued capital of £2 held by nominees of Sanderson. The scheme was effectuated by heads of agreement dated January 12, 1955, which were superseded by a more formal agreement (not in identical terms) dated March 29, 1955. There were also three amending agreements.

In anticipation of the heads of agreement, the appellants caused to be transferred to Yorkshire a total of 552,262 shares in Bulmer at a price of 5s. per share, i.e., £138,065 10s. in all. This price was below the current market price, then 11s. per share. The low price was fixed upon the request of Sanderson, which wished to show creditors at as low a price as possible in the balance sheet of Yorkshire. The figure was of little practical importance to the appellants, since the price was to remain outstanding without interest and would cancel out against the price at which they would ultimately buy back the original and acquired shares.

Over the period from December, 1954, to June, 1961, Yorkshire purchased in the market shares in Bulmer at a total price of £210,888, which sum was advanced to Yorkshire by Sanderson. These shares were not, in fact, sufficient to procure the desired control of Bulmer. That company from time to time paid dividends which were applied by Yorkshire in servicing the loan from Sanderson. There were two bonus issues of shares in Bulmer which affected both the original and the acquired shares. The figures will be found in the case stated and the annexed documents.

It was contended for the appellant (contention (A) being concerned with the preliminary point): (B) (1) That the transactions described above did not constitute a settlement within the meaning of section 411 (2) of the Inbome Tax Act, 1952; this was a commercial transaction without any element of bounty; the scheduled parties sold their shares for a price and such a sale was not a settlement within the meaning of the said subsection. (2) (a) That if there was such a settlement, it was not within the terms of section 404 (2) of the said Act, in that no person had, within the meaning of that subsection, any power to revoke or otherwise determine the settlement or any provision thereof. (b) If the option provided for in clause 6 of the heads of agreement and in clause 5 of the formal agreement was a power to revoke, within the meaning of section 404 (2), the proviso to this subsection applied, in that on the facts the said option could not be exercised within six years of the dates

of either of the above-mentioned agreements. (3) That if there was such a settlement, it was not within the terms of section 405, in that no party to the settlement had any interest in any income arising under or in any property comprised in the settlement. (4) That if there was such a settlement, it was not within the terms of section 415 (which applies only to surtax), in that any income which arose under the settlement was income from property of which the settlors had divested themselves absolutely, within the meaning of subsection (1) (d) of the said section. (5) As alternatives, (a) that if any income accrued to the scheduled parties from the settlement, it accrued only to January 12, 1955, the date of the heads of agreement, or (b) only to March 29, 1956, the date of the formal agreement, or (c) only to December 31, 1956, the date of the first supplemental agreement, in that this agreement provided by clause 1 that the whole of the net income of Yorkshire should be applied to the servicing and repayment of the Sanderson loan.

(C) (1) If there was here a settlement within the meaning of section 411 (2) of the Income Tax Act, 1952, then Sanderson was itself a settlor in relation to that settlement. (2) By virtue of the combined effect of sections 411 (2) and 409 of the Income Tax Act, 1952, the shares in Bulmer purchased with the Sanderson loan ("the accretions," paragraph 9 (3) hereof) constituted property originating from Sanderson and not from the individual settlors. (3) Accordingly, income arising under the settlement from the accretions was not to be treated under sections 404, 405 or 415 of the Income Tax Act, 1952, as income of the appellant or of any of the appellants in the five associated appeals.

It was contended on behalf of the revenue (contention (A) being concerned with the preliminary point): (B) (1) That there was a settlement within the meaning of section 411 (2) of the Income Tax Act, 1952, consisting of the formation of Yorkshire, the heads of agreement of January 12, 1955, and the formal agreement of March 29, 1956; that the property comprised in the settlement was either the original Bulmer shares and the accretions or, if the contentions at (A) above were correct, only the accretions; and that the settlors were the scheduled parties. (2) (a) That that settlement was within the terms of section 404 (2), in that the scheduled parties had power to revoke or determine the settlement. That power was contained in clauses 6, 7 and 10 of the heads of agreement of January 12, 1955, and by clauses 5 and 9 of the formal agreement of March 29, 1956. In the event of the exercise of that power to revoke or determine the settlement, the scheduled parties would become beneficially entitled to the whole of the

property comprised in the settlement. (b) That it was not impossible for the power to be exercised within six years, and accordingly, the proviso to subsection (2) did not apply. (3) That that settlement was within the terms of section 405, in that, for the reasons mentioned in subparagraph (2) above, the scheduled parties had an interest in the income arising under, and in the property comprised in, the settlement. (4) That the settlement was within the terms of section 415, in that, for the reasons mentioned in sub-paragraph 2 (a) above, income arising under the settlement and payable to Yorkshire was not income from property of which the settlors had divested themselves absolutely by the settlement. (5) That accordingly the dividends from the original Bulmer shares settled by each scheduled party and from a rateable appropriate proportion of the accretions fell to be treated as the income of that scheduled party for tax purposes.

The commissioners decided as follows:

"All these appeals were heard together: the question arises whether the appellants were all settlors under one settlement, and it is not practicable to give a separate decision in respect of each appellant.

Preliminary Point

[The commissioners decided this point in favour of the appellant.]

Section 411 (2): 'Settlement'

The question whether there is any settlement within the meaning of section 411 (2) arises in connection with all the other sections involved in this case.

We hold that there was an arrangement within the meaning of the above-mentioned section, and, therefore, a settlement for the purposes of all the sections we have to consider (for convenience we refer to this settlement as 'the arrangement').

We further hold that each of the appellants is a 'settlor' in relation to the arrangement.

It follows that we reject the appellants' contention that the fact that the original Bulmer shares were sold to Yorkshire takes the arrangement out of section 411 (2).

The arrangement consisted of all the matters set out or referred to in the heads of agreement, and in the subsequent main agreement.

Section 404 (2): 'Power to revoke'

For the purpose of this section we have to consider whether under the terms of the arrangement 'any person has or may have power, whether immediately or in the future, and whether with or without the consent of any other person, to revoke or

otherwise determine' the arrangement or any provision thereof.

The provisions of the heads of agreement differ from those of the main agreement, in that clause 7 of the heads of agreement does not appear in the main agreement. In our view a power to revoke the arrangement, within the meaning of the above-mentioned section, is contained in clauses 6, 7 and 10 of the heads of agreement. Under clause 6 the appellants on exercising their option will receive not only their original Bulmer shares, but also any further Bulmer shares which may have been purchased under the arrangement ('accretions'). There is nothing in the terms of the arrangement to prevent the repayment of the Sanderson loan out of sources other than the dividends on the Bulmer shares. The exercise of this option will bring the whole arrangement to an end. Under clause 7 the appellants can purchase their original Bulmer shares together with any accretions at a price which will not be related to the market price of these shares, and again the whole arrangement will come to an end. Under clause 10, as soon as the Sanderson loan has been repaid, Sanderson must - not may - sell the two £1 issued shares in Yorkshire at par, thus giving the appellants an interest in their original Bulmer shares and in the accretions. Again, this transaction will bring the whole arrangement to an end; and again, there is nothing in the terms of the arrangement to prevent the repayment of the Sanderson loan out of sources other than the dividends on the Bulmer shares.

As regards the proviso to section 404 (2), we think that the impossibility of exercising the power of revocation must be provided for by the terms of the arrangement. The amount of the dividends which Bulmer may pay is not, in our opinion, any term of the arrangement; and in any event, as we have already said, the repayment of the Sanderson loan need not depend on these dividends, nor is it provided in the arrangement that it must so depend.

Our views on the power of revocation contained in clauses 6 and 10 of the heads of agreement apply to clauses 5 and 9 of the main agreement. Our views on the 'six-year' point are the same for both agreements.

Section 405

For the purposes of this section we have to consider whether each of the appellants has an interest in any income arising under or property comprised in the arrangement. (We leave the question of the extent of the 'income arising' and 'property comprised,' in relation to each of the appellants, till later.) To decide this question, we have to determine whether, under subsection (2), any income or property which may at any time arise under or be comprised in the arrangement will or may become payable to or applicable for the benefit of each of the appellants in any circumstances whatsoever. Our views

on this section are covered by what we have said on section 404 (2), in that on the exercise of the power of revocation property comprised in the arrangement will be payable to or applicable for the benefit of the appellants. We reject the appellants' contention that the provisos (a) (i) or (ii) to section 405 (2) apply.

Section 415

This section imposes surtax liability only, and in this case it will apply to the appellants unless under (d), the income arising under the arrangement is income from property of which they had divested themselves absolutely.

We deal later with the question of the extent of the 'income arising' in relation to each appellant. Such income is, we hold, not income from property of which the appellants had divested themselves absolutely; the property in question is the Bulmer shares, and under the terms of the arrangement all of these shares could become applicable for the benefit of the appellants in one or other of the events we have described.

Property comprised in, and income arising under, the

arrangement in relation to each appellant - Section 409

It follows from the views we have expressed that the original Bulmer shares were property that each of the appellants provided directly, within the meaning of section 409 (5) (a).

We think that the accretions represent property indirectly provided by the appellants, within the meaning of section 409 (5) (a). When we look at the arrangement which the appellants made, we find that they had arranged for money to be borrowed at a commercial rate of interest for the purpose of buying the accretions, and for the repayment of that money; they were only able to make these arrangements by parting temporarily with the beneficial interest (which, of course, carried the dividends) in their original Bulmer shares.

The appeals fail, and we leave the figures to be agreed."

The parties were not able to agree figures without a further hearing, which further hearing took place on February 20, 1964.

On behalf of the appellant it was pointed out that in the course of the argument at the previous hearings the point had been taken on behalf of the appellant that if there was a settlement within the meaning of section 411 (2), Sanderson should be considered to be a settlor. That point had been taken not only by way of illustration of the strange results of a decision that there was such a settlement, but also as having some bearing on the question of the quantum of the assessments on the parties, which we had left open: the inclusion of Sanderson among the number of settlors would affect the quantum of the assessments on the scheduled parties.

It was admitted on behalf of the appellant that on the supposition that there was a section 411 (2) settlement the question whether

Sanderson should be considered to be a settlor and the implications involved in that question had been extensively canvassed during the previous hearings. It was also admitted that the last paragraph of the commissioners' decision was capable of the construction that they had decided this question of Sanderson's position against the appellant.

(a) On behalf of the appellant the commissioners were asked whether they would be prepared to hear further argument on this question; if not, whether they would be minded to make some addition to their decision. (b) On behalf of the Revenue it was contended that by the terms of their decision they had decided that question, and they were asked not to hear any further argument on it.

The commissioners gave their decision in writing on April 20, 1964, as follows:

"In our decision of April 10, 1963, we held that 'the original Bulmer shares' together with the 'accretions' constituted the property comprised in the settlement, and that each of the appellants was a settlor. We also held that the appellants had directly provided the original Bulmer shares and had indirectly provided the accretions.

For the purposes of section 409 there has to be discovered what property originated from the appellants - i.e., the settlors. Subsection 5 (a) of that section provides that property originating from a settlor is property which he has provided directly or indirectly.

We have clearly decided that question, and in our view that decision means that the income from all the Bulmer shares is the income of the appellants. We think that to entertain further argument on this question would be to reopen a matter which was fully argued before us at the original hearing, and we are not prepared to do this.

We determine the appeals as follows:

1954-55 additional assessment reduced to £88.

1955-56 assessment increased to £12,586.

1956-57 additional assessment reduced to £8,973.

1957-58 additional assessment reduced to £10,860.

1958-59 additional assessment reduced to £11,227.

1959-60 assessment reduced to £16,417."

The commissioners dismissed the appeals and the taxpayers appealed.

Raymond Walton, Q.C., and Roderick Watson for the appellants. The question is whether there is a settlement within the Income Tax Act, 1952, s. 411 (2); if so, who are the settlors and what is the

property? Despite the width of the words of section 411 (2), transactions which are wholly commercial with no element of bounty are not covered. If the words are taken literally almost nothing would escape. If a property is sold with an option for the vendor to repurchase, there would be a revocable settlement within section 404, with the result that the income would be treated as the income of the vendor throughout. Some limitation is inevitable. This part of the Income Tax Acts has no application where a transaction is commercial from start to finish. Running through all the authorities is an implication of bounty. Lord Moncrieff in Inland Revenue Commissioners v. Morton² interpreted a settlement as charging property in favour of someone. He clearly contemplated the conferring of a benefit. Lord Macmillan in Chamberlain v. Inland Revenue Commissioners³ agreed with Lord Moncrieff and implied that a sale for money or money's worth would not be a settlement. Lord Simonds in Lord Vestey's Executors v. Commissioners of Inland Revenue⁴ said that the property comprised in the settlement is that property alone in which some beneficial interest is created: see also per Lord Normand,⁵ Lord Morton⁶ and Lord Reid.⁷

In section 409 (5) (a), "provided" indicates an element of bounty. Where a person has given full value for property, or has given property for full value, he has not provided. In the Finance Act, 1894, s. 2 (1) (d), "provided" is restricted in this way: see Lethbridge v. Attorney-General⁸ and per Lord Loreburn.⁹ Another analogous case is Ward v. Commissioners of Inland Revenue.¹⁰

Two cases have been fought on the issue of commerciality. Copeman v. Coleman¹¹ was concerned with the predecessor of section 403. The Crown argued¹² that there had been no commercial purchase of the shares. Lawrence, J.¹³ during argument suggested that the section did not apply to a bona fide commercial transaction. From start to finish the case was fought on the issue of whether the transaction was a bona fide commercial transaction, on any other view three quarters of the argument would have been unnecessary. Commissioners of Inland Revenue v. Leiner¹⁴ was

2 (1941) 24 T.C. 259.

3 (1943) 59 T.L.R. 343, 346; [1943] 2 All E.R. 200; 25 T.C. 317, H.L.

4 (1949) 31 T.C. 1, 82; [1949] 1 All E.R. 1108, H.L.

5 (1949) 31 T.C. 1, 88.

6 Ibid. 107.

7 Ibid. 120.

8 [1907] A.C. 19; 23 T.L.R. 123, H.L.

9 [1907] A.C. 19, 23.

10 [1956] A.C. 391; [1956] 2 W.L.R. 578; [1956] 1 All E.R. 571, P.C.

11 [1939] 2 K.B. 484; [1939] 3 All E.R. 224; 22 T.C. 594.

12 [1939] 2 K.B. 484, 488.

13 Ibid. 490.

14 (1964) 41 T.C. 589.

concerned with section 401; in that case the requirement of some element of bounty was again assumed.¹⁵

Here there was no element of bounty to any of the parties. Yorkshire got nothing out of it; its expenses were paid, but at the end of the day it was left with the Sanderson loan paid off and an option for the scheduled parties to purchase back all the assets; Yorkshire was but a piece of machinery. Sanderson made the loans, but were paid a proper rate of interest; there was a possible obligation to buy the schedule parties' shares but by relation to the market value. The scheduled parties sold their shares at under value, but they had an option to repurchase at the same price at the end of the day. There was an urgent need to defeat the take-over. One of the elements was a security arrangement in that Yorkshire bought the shares at under value so that it would have a reserve to cover the Sanderson loan.

If it is held that Part XVIII of the Act of 1952 does apply to such a transaction, the next questions are: who are the settlors and what is the property? All parties to the 1956 agreement must be settlors within section 411 (2). Anyone from whom property comprised in the settlement originates must be a settlor under section 409. Sandersons provided the loan used to buy the acquired shares; Sandersons were a party to the arrangement, therefore Sandersons must be a settlor.

[PENNYCUICK J. What if Yorkshire had borrowed from the bank?]

The bank would have been a settlor if it was a party to the arrangement.

[PENNYCUICK J. Do the words "or undertaken to provide" in section 411 (2) make any difference?]

The arrangement might not have gone well. Sandersons risked losing cash; it is possible that the shares would have had to be bought at a very high price. The scheduled parties risked their shares.

[PENNYCUICK J. As it turned out the scheduled parties have got a very valuable asset from the income of the shares.]

That is why the test of commerciality is so important. If aimed at a tax advantage it would not have been a bona fide commercial transaction.

It is said that the provisions of clause 5 of the agreement are caught by section 404 (2). But the concept of revocation makes

15 (1964) 41 T.C. 589, 596.

no sense where it is a question of exercising a contractual right where there is no element of bounty. In Vestey's Case, Lord Simonds¹⁶ protested against the idea of the determination of a lease being treated as revocation. There is no income payable to or applicable to the benefit of any of the scheduled parties within the meaning of sections 405 and 415 because it is purchased for full value.

Roderick Watson, following. If a wide view of section 411 is taken Sandersons must be a settlor within section 409. Section 409 (1) lays down that the position of Sandersons must be examined as if they were the only settlors. The acquired shares were bought with money loaned by Sanderson and thus must originate from Sandersons.

E. J. Goulding Q.C., J. Raymond Phillips and J. P. Warnerfor the Crown. Treating Yorkshire as part of the machinery, it is not suggested that there is any element of bounty between the parties. The legal position of Yorkshire was that of a trustee. The arrangement had two elements: as between Sanderson and the scheduled parties it was really a mortgage under which the mortgagee had the possession and income of the mortgaged property which was to be applied in reducing the principal of the loan; secondly, there was a pooling arrangement between the scheduled parties in the hope that the ultimate value of their shares would improve and their position would be safeguarded.

Does an absence of bounty preclude the application of Part XVIII of the Act of 1952? Most dispositions give rise to no tax consequences under that Part even if they are "settlements." If a disposition is caught by one of the sections, is it to be taken out by reading in the words "containing some element of bounty" which are not contained in the Act? If a number of individuals agree to transfer their holdings to a pool and allow the pool to plough back the income for 10 years and then distribute the assets, there would be no element of bounty. It would be surprising indeed if the income was not subject to surtax, even supposing the right of the individuals to share in the proceeds to be subject to some contingency, e.g. surviving for the 10 years. The proper course is to take the definition literally and then see if any of the sections bite: see per Lord Reid in Vestey's Case.¹⁷ Here it could be said that the property was charged with rights in favour of the other scheduled parties.

16 (1949) 31 T.C. 1, 82.

17 Ibid. 120.

In testing hypothetical examples section 409 must be kept in mind. If a sale is a settlement, both the property sold and the price paid are property comprised in the settlement. The vendor provides the property but gets the price, which represents the property in his hands under subsection (5) (b); alternatively there is a reciprocal arrangement under section (7) (a). The result is that no income will be deemed to be the income of either party to an ordinary sale with an option of re-purchase (the example put for the appellant) unless it is his already.

The meaning of settlement in the predecessor of sections 397 and 403 was considered in Thomas v. Marshall¹⁸: see in particular Donovan J.'s¹⁹ consideration of Lord Macmillan's judgment in Chamberlain's Case.²⁰ The section might be initially wide but the ultimate operation of the statute was not so wide. [Reference was made to the judgment of Evershed M.R.²¹] Everything said by Lord Morton²² about "transfer of assets" in section 403 applies to "arrangement" in section 411.

[PENNYCUICK J. This case was not directed to the question of bounty or commerciality.]

The argument was addressed to the correct way of construing a section such as this. It was directed at avoiding reading in the words of the definition wherever the word "settlement" appears.

In Leiner's Case²³ Plowman J. was not asked to decide whether a bona fide commercial transaction could be a settlement; the judge merely applied the construction presented by the parties as common ground between them: otherwise he would have had to consider Chamberlain's Case²⁴ and Thomas v. Marshall.²⁵ Plowman J.'s remarks should be treated as obiter. Leiner's Case²⁶ was directed to the meaning of "provided" rather than "settlement".

The taxpayer's next point was concerned with what property, if any, the taxpayer had provided. This is devoid of any real authority although Leiner's Case²⁶ touched on it. If no qualification is read into "settlement" it is hard to see why any should be read into "provided". The estate duty authorities are not analogous. Under the Finance Act, 1894, section 3 duty is not payable if the property passes by reason of a bona fide purchase for full consideration.

18 [1953] A.C. 543; [1953] 2 W.L.R. 944; [1953] 1 All E.R. 1102; 34 T.C. 178, H.L.

19 34 T.C. 178, 186.

20 59 T.L.R. 343, 345.

21 34 T.C. 178, 186.

22 [1953] A.C. 543, 554.

23 41 T.C. 589.

24 59 T.L.R. 343.

25 [1953] A.C. 543.

26 41 T.C. 589.

Sandersons provided the £2 subscription for the shares in Yorkshire - that was de minimis. They also provided the loan; the income originating from that provision was the interest. It would be strange to regard the shares purchased by means of the loan as originating from the loan; what was the position when the loan was paid back? The shares purchased both with the loan and the dividends were indirectly provided by the scheduled parties.

They brought about the purchase by putting into the arrangement their original shares and directing the dividends on those shares to the servicing and repayment of the loan used to buy the further shares. The additional shares were provided at the cost of the accumulated income on the shares provided by the scheduled parties.

On section 404 (2) it was suggested that fulfilment of the terms of an arrangement could not be a determination of it; but see Jamieson v. Inland Revenue Commissioners, per Lord Reid.²⁷ Under clause 5 of the formal agreement each of the scheduled parties could determine the settlement, as far as concerned him, once the Sanderson loan was repaid. The stipulated payment by him was only a cancellation of the debt due to him.

Sections 405 and 415 only operate if there is the necessary nonexclusion of the settlor. The words in the two sections are closely similar. It is suggested that section 415 (1) (d) is not satisfied; the shares are recoverable eventually; this is so even if the Crown's contention on section 404 (2) fails. The effect of the agreement was to constitute Yorkshire a trustee of the property it held from time to time, to carry out the agreed terms for the benefit of Sandersons and the scheduled parties.

[PENNYCUICK J. It is not open to the Crown to raise the point now that Yorkshire was a trustee. On the documents there was a sale, that was not challenged before the commissioners.]

Once the facts are found it is a question of law whether there is a trust.

[PENNYCUICK J. Is a lease of a house at a rack rent an arrangement?]

Yes. The property is on the one hand the house and on the other hand the right to the periodic rent. If the tenant sublets there is a new arrangement, but the original arrangement still exists. The house is still the property comprised in the first arrangement. The term of years is the property in the new arrangement.

27 [1964] A.C. 1445, 1460; [1963] 3 W.L.R. 156; [1963] 2 All E.R. 1030; 41 T.C. 43, H.L.

Warner, following. The argument that the acquired shares were "provided by" Sandersons ignores two factors: (i) the terms of the arrangement as to the destination of the income and (ii) the terms of the arrangement as to the eventual return of capital. As to (i): the income from the cash put in by Sanderson, is the interest on Sandersons' loan, was paid to them, whereas the dividends on the scheduled parties' shares were left in. As to (ii): Sandersons could at any time require Yorkshire to sell sufficient shares to repay the loan. In contrast the contribution of the scheduled parties was irrecoverable until the arrangement was brought to an end.

"Provided directly or indirectly" should be construed according to its ordinary meaning. The meaning of the phrase in the Finance Act, 1938, s. 50, was considered in Curzon Offices Ltd. v. Inland Revenue Commissioners,²⁸ per Macnaghton J.²⁹ There is a parallel between the position of Regis Property Co. there and the scheduled parties here. It is too unsophisticated to stop at the original provider of the money particularly in view of section 409 (5) (a).

Walton, in reply. Copeman's Case³⁰ where the commerciality point was introduced was before the whole fasciculus of sections was re-enacted by Parliament in 1943.

July 20. PENNYCUICK J. These are appeals by a small group of taxpayers against a decision of the special commissioners in relation to certain transactions in the 4s. shares of Bulmer & Lumb (Holdings) Ltd. (to which I will refer as "Bulmer"), which took place in 1955. The Revenue claimed surtax under the provisions contained in Part XVIII, Chapter III, of the Income Tax Act, 1952, in respect of the income arising from these shares for the years 1954-55 to 1959-60 inclusive. The appeals were first heard by the special commissioners in July, 1962, but there were a number of adjournments and further hearings.

The special commissioners have found the facts and set out their conclusions in a carefully prepared case stated. This is a lengthy document and it will be convenient at this stage to summarise shortly the history of the matter. This summary is not intended as a complete statement, for which it is necessary to look at the case stated and the annexed documents.

28 [1944] 1 All E.R. 163, 606, C.A.

29 [1944] 1 All E.R. 163.

30 [1939] 2 K.B. 484.

[His Lordship summarised the facts as set out above and continued:] The revenue claim surtax on the dividends paid by Bulmer on the original and acquired shares for the five years under appeal. Part XVIII of the Income Tax Act, 1952, is headed "Special Provisions for Taxation of Settlors, etc., in respect of settled or transferred income." Chapter III of Part XVIII is headed "Revocable Settlements. Settlements where settlor retains an interest," etc. [His Lordship read sections 404 (2), 409 (1), (2) and (5), 411 (2), and 405 (1) and, from Chapter V, section 415 (1) (d) and (e) and continued:]

The revenue claim that the dividends on the Bulmer shares are caught by section 404 (2) and also by section 405 and section 415, these sections being read in conjunction with the explanatory provisions in section 409 and the definition in section 411.

[His Lordship read the contentions of the parties as advanced before the special commissioners together with the commissioners' decision, which are set out above, and continued:]

The revenue at no time raised before the special commissioners the contention that the true nature of the transaction between the parties is not to be found in the documents which they executed, nor have they given notice of any new point. It follows that in order to determine the taxable character of the dividends on the Bulmer shares one must look at the legal effect of the documents and ascertain the rights and liabilities created by them: see Inland Revenue Commissioners v. Westminster (Duke).¹

Mr. Goulding for the revenue contended before me that on the true view of the position Yorkshire was no more than a trustee holding the original and acquired shares in a fiduciary capacity for the appellants and Sanderson as its cestuis que trust according to their respective interests under the agreements. I do not doubt that the ultimate reality of the transaction was that Sanderson lent money to the appellants on the terms that the loan should be applied in the acquisition of additional shares in Bulmer and should be secured upon and serviced out of the dividends arising from the original and acquired shares. It would have been open to the Revenue if so advised to raise before the special commissioners a contention that the documents were a cloak or sham designed to cover a mortgage by the appellants in favour of Sanderson carried out through the medium of Yorkshire as trustee. If they had raised and established such a contention different results might have flowed as regards taxation. The Revenue raised no such contention

1 [1936] A.C. 1; 51 T.L.R. 467; 19 T.C. 490, H.L.

and it seems to me that it is not open to them to do so now. Apart from mere procedural objections, such a contention would have involved issues of fact to be determined upon evidence before the special commissioners. I am bound to treat the parties as having entered into contracts in the terms of the documents. Under those terms the relation of the appellants and Yorkshire is that of vendor and purchaser with an option to re-purchase in certain events and on certain terms. That relation is fundamentally different from that of trustee and cestui que trust. I must apply the provisions of Chapter III of Part XVIII accordingly.

I have mentioned this point by way of preface to the next point which I have now to consider. The basis of the claim on the part of the Revenue is that the transaction constituted an arrangement between the appellants and Sanderson within the meaning of Part XVIII, Chapter III (Yorkshire was admittedly introduced into the arrangement merely as part of the machinery for carrying it out and it does not appear to matter whether or not Yorkshire is described as a party to the arrangement). The appellants contended before the special commissioners, as appears from the case stated, and now contend, that this was a commercial transaction without any element of bounty and as such falls outside Part XVIII, Chapter III. Counsel who appeared for the appellants before the special commissioners did not, I am told, refer them to Copeman v. Coleman² nor, of course, could he have referred them to Inland Revenue Commissioners v. Leiner,³ which was not decided until 1964. The special commissioners cannot, therefore, be criticised in any way if they failed to see the significance of this contention on behalf of the appellants and they made no finding of fact upon it, except perhaps very indirectly. In the event it has turned out to be an issue of prime importance in the case.

Copeman v. Coleman⁴ was decided under section 21 of the Finance Act, 1936. That section was the predecessor of section 397 of the Income Tax Act, 1952, and contains a definition of settlement as including any disposition, trust, covenant, agreement, arrangement or transfer of assets: cf. the definition in section 403 of the Act of 1952, which is the same as that in section 411 with the addition of the words "transfer of assets." The headnote to the Coleman⁵ case sets out the terms of a complicated transaction by way of a voluntary disposition. In the argument for the Inspector of Taxes, the Attorney-General says⁶: "There was

2 [1939] 2 K.B. 484; [1939] 3 All E.R. 224; 22 T.C. 594.

3 (1964) 41 T.C. 589.

4 [1939] 2 K.B. 484.

5 Ibid.

6 Ibid. 488.

no commercial purchase of the shares." Then during the argument of counsel for the taxpayer Lawrence J. intervened with the words⁷: "Is not the limitation to be read into those words - 'not being a bona fide commercial transaction'?"

The judge says⁸:

"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 subsection (9)."

Then⁹ "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 definiton in subsection (9), or an 'arrangement' in the nature of a 'disposition' within the meaning of that subsection. 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."

The last paragraph of the judgment would not today be put quite as the judge puts it, having regard to the decision in Thomas v. Marshall,¹⁰ to which I will refer, but there is no doubt that the judgment proceeded from the premise that the section before him only applied to a transaction which is not a bona fide commercial transaction.

In Inland Revenue Commissioners v. Leiner,¹¹ the revenue based their claim on Chapter II and also Chapter III, Part XVIII. The facts, which are complicated, are summarised in the headnote and set out in full in the judgment.

Plowman J. says¹²:

"it is common ground that it is implicit in the fasciculus of sections of which section 401 forms a part that some element of bounty is necessary to make the sections apply and

7 [1939] 2 K.B. 484, 490.

8 Ibid. 492.

9 Ibid. 494.

10 [1953] A.C. 543; [1953] 2 W.L.R. 944; [1953] 1 All E.R. 1102; 34 T.C. 178, H.L.

11 41 T.C. 589.

12 Ibid.

that a bona fide commercial transaction would be excluded from their operation: see Copeman v. Coleman."¹³

Then lower down the same page¹⁴:

"The arrangement in my view must be looked at as a whole, and looked at in this way, I find it impossible to say that the respondent did not provide the trustees with an income of £2,040 a year in the sense in which the word 'provided' is used in section 401 of the Act; that is to say, as importing an element of bounty. The transaction, taken as a whole, was not, in my judgment, one which, from the point of view of the respondent, can be described as a commercial arrangement because he was liable to pay £2,040 per annum without any compensating advantage to him."

So in that case Plowman J., following the Coleman case,¹⁵ proceeded on the premise that the sections before him applied only to a transaction which is not a bona fide commercial transaction. It seems to me that I ought to adopt the premise on which the two decisions which I have cited proceed and treat the section as inapplicable to a bona fide commercial transaction. It is true that in each case this premise was accepted by the Revenue without argument. Again the premise was not strictly necessary to the decision, i.e., the court could have proceeded on the basis that whatever might be the position in the case of a bona fide commercial transaction, the particular transaction before it was not a transaction of that nature. Nevertheless, the earlier decision has stood for nearly 30 years and in each case the judge accepted, and indeed insisted, on the premise.

Mr. Goulding, for the Revenue, placed great reliance on the decision of the House of Lords in Thomas v. Marshall¹⁶ as negativing what was said in the Coleman case¹⁷ and afterwards in the Leiner case.¹⁸ The Thomas case¹⁹ was concerned with an outright gift. The House of Lords rejected the contention that the definition of a settlement in the provisions corresponding to section 402 of the Income Tax Act, 1952, must be restricted to a disposition having an effect comparable to that of a settlement and held that it embraced an outright gift. See in particular per Lord Morton of Henryton²⁰:

"My Lords, in the words used by Lord Greene M.R., in Hood-Barrs v. Inland Revenue Commissioners,²¹ this is a

13 [1939] 2 K.B. 484.

14 41 T.C. 589, 596.

15 [1939] 2 K.B. 484.

16 [1953] A.C. 543.

17 [1939] 2 K.B. 484.

18 41 T.C. 589.

19 [1953] A.C. 543.

20 Ibid. 555.

21 [1946] 2 All E.R. 768; 27 T.C. 385, 402, C.A.

'subversive suggestion' as to the meaning and operation of such an interpretation clause as subsection (9) (b) and I cannot accept it. The object of the subsection is, surely, to make it plain that in section 21 the word 'settlement' is to be enlarged to include other transactions which would not be regarded as 'settlements' within the meaning which that word ordinarily bears. Its effect is that wherever the word 'settlement' occurs in section 21 one must read it as 'settlement, disposition, trust, covenant, agreement, arrangement or transfer of assets,' and if 'by virtue or in consequence of' any of these transactions or deeds income is paid to or for the benefit of a child of the settlor, section 21 comes into operation."

That decision is, of course, conclusive as to the proper construction of the definition. On the other hand, the House of Lords were not concerned with dispositions other than by way of bounty, and I do not think their decision can fairly be treated as negativing the entirely different kind of implied restriction upon the definition of "settlement" which was adopted in the Coleman case.²² That case does not appear even to have been cited in the Thomas case.²³

I would only add on this point that there is no doubt that, where the context so requires, the court may imply some restriction upon the scope of general words in a statute: see Halsbury's Laws of England, vol. 36, (1961), p. 396. In the case of this definition, i.e., the definition of settlement, it must, I think, be at any rate legitimate to hold that a sufficient context exists for a restriction in the scope of the definition. Indeed, unless one implies some restriction, the definition, standing where it does in this Part of the Act, represents as odd a provision as one would anywhere find in a taxing statute. Chapter headings, unlike marginal notes, are admissible upon the construction of a statute.

I think that in all the circumstances my proper course is to follow what was said in the Coleman²⁴ and Leiner cases²⁵ without expressing any independent conclusion of my own.

It remains to be considered whether the scheme adopted by the Bulmer shareholders and Sanderson in the present case represented a bona fide commercial transaction. The special commissioners, naturally enough upon the course which the case took before them, did not make a finding upon this point. In order to avoid a remission, with further delay and expense, I accepted the invitation of both counsel to make the necessary finding based upon the primary facts as found by the special commissioners. It seems to me abundantly clear that the transaction between the

22 [1939] 2 K.B. 484.

23 [1953] A.C. 543.

24 [1939] 2 K.B. 484.

25 41 T.C. 589.

appellants and Sanderson was indeed a bona fide commercial transaction. Again, in case that imports in any respect a different test, it is clear that there was no element of bounty as between the appellants and Sanderson. Indeed, Mr. Goulding so concedes. To avoid misunderstanding, in the extraordinarily wide field covered by such words as "agreement" and "arrangement," one may well find a commercial transaction between A and B and then built into that, so to speak, a transaction by way of bounty between A and C, but there is nothing of that kind here. The only conceivable element of undervalue in the case, to which Mr. Goulding rightly did not attach weight, was the low price paid by Yorkshire for the original shares, but this element loses almost all significance when one remembers, first, that the price was fixed so low at the instigation of Sanderson and, second, that the resulting debt was interest free and fell to be set off against the price payable by the appellants when their oqtion to re-purchase came to be exercised. Clearly the appellants did not intend to confer a bounty either on Yorkshire or on Sanderson. It may be that the transaction has been framed - largely, it appears, on the instigation of Sanderson - in such a way as to procure tax advantages to the appellants, but that circumstance does not of itself prevent it from being a bona fide commercial transaction or import any element of bounty.

I propose to allow the appeal on this short ground. It would not be useful for me to express obiter whatever views I may have formed as to how the provisions in Part XVIII, Chapter III, if they apply at all, could be made to fit (1) the original shares and (2) the acquired shares. The difficulties in respect of the acquired shares are formidable.

Solicitors: Cameron, Kemm, Nordon & Co.; Solicitor of Inland Revenue.