Inland Revenue Commissioners v Burmah Oil Co Ltd FIRST DIVISION OF THE INNER HOUSE OF THE COURT OF SESSION AS THE COURT OF EXCHEQUER IN SCOTLAND [1980] STC 731, 54 Tax Cas 200 HEARING-DATES: 30, 31 OCTOBER, 13 NOVEMBER 1980 13 NOVEMBER 1980 SUBSEQUENT HISTORY:  nland Revenue Commissioners v Burmah Oil Co Ltd, House of Lords, 3 Dec. 1982, [1982] STC 30, [1981] TR 535, 54 Tax Cas 200, ([1984] Conv 296) CATCHWORDS: Capital gains tax — Disposal of assets — Cost of acquisition of assets — Tax avoidance scheme involving reorganisation of share capital of wholly-owned subsidiary — Rights issue of shares at a predetermined price per share — New holding in subsidiary representing original shares — Disposal of new holding by liquidation of subsidiary — Whether consideration for new holding deductible in computing chargeable gains arising on disposal of new holding ascertainable by reference to market value of rights issue shares — Finance Act 1965, s 22(4), Sch 7, para 4(1)(2)(3). HEADNOTE: The taxpayer company was the parent company of a group of companies which, at all material times, included H Ltd, MORH and BOTL. Prior to 6th March 1969, H Ltd was dormant and its issued share capital was represented by a debt of £700,001 owing to it by the taxpayer company. On 6th March 1969 the taxpayer company sold and transferred to H Ltd £50,000,000 stock in BP for £380,625,000. The purchase price was left outstanding as a result of which the net amount owed by H Ltd to the taxpayer company (ie £379,924,999) was placed to a loan account ('the Loan Account') in H Ltd's books. On 23rd April 1971, H Ltd sold and transferred to the taxpayer company the £50,000,000 stock in BP for £220,625,000, thereby reducing the balance outstanding on the Loan Account to £159,299,999. To offset the loss arising as a result of those transactions, the taxpayer company embarked on a tax avoidance scheme designed to create for corporation tax purposes an allowable capital loss. On 12th December 1972, 700,000 shares in H Ltd were registered in the name of the taxpayer company and one share was registered in the name of BOTL as nominee for the taxpayer company. On the same day H Ltd resolved to obtain a loan of £159,299,999 from MORH and, on such loan becoming available, to repay to the taxpayer company the balance on the Loan Account of £159,299,999. H Ltd then applied to MORH for the loan. On receipt of the application MORH raised a loan of the amount in question from the taxpayer company and advanced it to H Ltd which H Ltd used to repay the balance of £159,299,999 owing to the taxpayer company on the Loan Account. On 18th December the capital of H Ltd was increased from £700,001 to £1,400,002 by the creation of 700,001 new ordinary shares of £1 each and a rights issue of those new shares was made to the existing members in proportion to their existing holdings at £228 per share. In the result 700,000 new ordinary shares were issued to the taxpayer company and one new ordinary share to BOTL. As consideration for those shares, the taxpayer company paid £159,600,000 to H Ltd and BOTL paid £228 to H Ltd. H Ltd then repaid the loan of £159,299,999 which it had obtained from MORH. H Ltd was subsequently wound up and in the course of such winding up the only asset of H Ltd, namely cash in the sum of £296,728, was distributed to the taxpayer company and BOTL. The Crown claimed that in computing the chargeable gains or allowable loss arising to the taxpayer company on the disposal of its shares in H Ltd (on the liquidation of H Ltd) the taxpayer company was not entitled to deduct the sum which it had paid for the new shares. The taxpayer company appealed contending that the transactions which took place on 18th December 1972 constituted reorganisation of H Ltd's share capital within Sch 7, para 4(1); that accordingly by virtue of para 4(2) a and (3) of Sch 7, such reorganisation was to be treated as involving no disposition and no acquisition of shares in H Ltd; that by virtue of para 4(3) the cash paid by the taxpayer company and BOTL for the new shares in H Ltd fell to be treated as having been given as consideration for the original shares and that such consideration was deductible in computing an allowable loss on the disposal of the taxpayer company's entire shareholding in H Ltd. The Special Commissioners upheld the taxpayer company's claim. The Crown appealed contending that at the date of the reorganisation of the share capital of H Ltd, the taxpayer company and H Ltd were not transacting at arm's length and, accordingly, s 22(4) b of the Finance Act 1965 came into play; that on a proper construction of paras 4(2) and (3) of Sch 7, read together with s 22(4), the relevant consideration in computing the chargeable gains or allowable loss accruing to the taxpayer company, which was deductible on the disposal of its new holding in H Ltd (ie shares in H Ltd, which as the result of the reorganisation, represented the original shares in H Ltd within Sch 7, para 4(1)) by liquidation of H Ltd, was not the cash paid, but the market value (if any) of the rights issue shares at the time of the reorganisation. a Paragraph 4, so far as material, is set out at p 740 j to p 741 b, post b Section 22(4), so far as material is set out at p 741 c, post Held - The word 'acquisition' in s 22(4) referred only to an acquisition for capital gains tax purposes. In determining whether on the proper construction of Sch 7, paras 4(2) and (3), the provisions of para 4(3) were concerned at all with such an acquisition, the correct approach was to look at para 4(2) first, bearing in mind that it had to be read subject to para 4(3). Under para 4(2) reorganisation of a company's share capital did not involve any such acquisition as respects the company's 'new holding' within para 4(1) and para 4(3) was concerned only with the treatment of consideration actually given for something which because of para 4(2) was not to be regarded as an acquisition of an asset for capital gains tax purposes. Accordingly, in computing the chargeable gains or allowable loss accruing to the taxpayer company on the disposal of its new holding in H Ltd, there was nothing in the language of paras 4(2) and (3) which entitled one to apply market value under s 22(4) of the Act to the rights issue shares in H Ltd, acquired by the taxpayer company on the reorganisation of H Ltd, in ascertaining the consideration, attributable to those shares, deductible in computing the chargeable gains or allowable loss accruing to the taxpayer company on the disposal of its new holding in H Ltd. The appeal would, therefore, be dismissed (see p 741 j to p 742 f, post). NOTES: For the reorganisation of share capital, see Simon's Taxes C6.409, 410, 411. For the Finance Act 1965, Sch 7, para 4, see ibid Part H 1. Paragraph 4(2), (3), (4) was replaced by the Capital Gains Tax Act 1979, ss 78, 79(1)(2). INTRODUCTION: Case stated. I At a meeting of the Commissioners for the Special Purposes of the Income Taxes Acts held on 25th October 1978 the Burmah Oil Co Ltd ('Burmah') appealed against an assessment to corporation tax for its accounting period ended 31st December 1972 in the sum of £3,278,700. II Shortly stated the question for decision was whether on the disposal (on liquidation) of its shareholding in one of its wholly owned subsidiary companies there accrued to Burmah for corporation tax purposes an allowable capital loss within the meaning of s 23 of the Finance Act 1965. III Mr William Ramage Gage gave evidence before the commissioners. IV Two bundles of documents were proved or admitted before the commissioners. V The commissioners set out in their decision (para VIII below) the facts which they found admitted or proved together with a summary of the contentions of the parties. [Paragraph VI listed the cases n1 referred to before the commissioners.] n1 Bishop (Inspector of Taxes) v Finsbury Securities Ltd [1966] 3 All ER 105, [1966] 1 WLR 1402, 43 Tax Cas 591, HL; Black Nominees Ltd v Nicol (Inspector of Taxes) [1975] STC 372, 50 Tax Cas 229; Eilbeck (Inspector of Taxes) v Rawling [1979] STC 16; FA & AB Ltd v Lupton (Inspector of Taxes) [1971] 3 All ER 948, [1972] AC 34, 47 Tax Cas 580, HL; Harrison (Inspector of Taxes) v Nairn Williamson Ltd [1978] 1 All ER 608, [1978] 1 WLR 145, [1978] STC 67, CA; Inland Revenue Comrs v Duke of Westminster [1936] AC 1, [1935] All ER Rep 259, 19 Tax Cas 490, HL; Salomon v Salomon & Co Ltd [1897] AC 92, [1895-9] All ER Rep 33, HL. VII The commissioners who heard the appeal gave their decision in writing on 3rd January 1979 as follows: '1. Put shortly, the question before us is whether on the disposal (on liquidation) of its shareholding in OMDR Holdings Ltd ("Holdings"), one of its wholly owned subsidiary companies, there acrrued to the appellant company ("Burmah") for corporation tax purposes an allowable capital loss within the meaning of section 23 Finance Act 1965. The background to the matter is broadly as follows. Assets which Burmah, in order to obtain a fiscal advantage, had sold to Holdings, leaving the purchase money outstanding on loan account, had declined in value with the result that Burmah had suffered a commercial loss by the reduction in value of the debt owing to it by Holdings. This debt was not a "debt on a security" and by reason of paragraph 11, 7th Schedule and section 23(1), Finance Act 1965 no allowable loss would have accrued to Burmah on its disposal. Burmah therefore took advice on how it might arrange its affairs so as to obtain tax relief for the commercial loss equivalent to the relief that it could have obtained if its investment in Holdings had been in the form of shares or debentures instead of an unsecured debt. Burmah followed the advice which it received and we have to decide whether the steps taken achieve its object. '2. Mr W R Gage gave evidence before us. Mr Gage was finance director of Burmah from July 1968 until his retirement in 1975. In December 1972 he was also a director of the following companies: Holdings, Manchester Oil Refinery Holdings Ltd. ('MORH'), Burmah Oil Trading Ltd. ('BOTL'). Mr Gage was concerned in all the events described in para 3(1) to (7) below. '3. We find the following facts admitted or proved: (1) Burmah is the parent Company of a group of Companies that at all material times included Holdings (formerly called at various times the BOC British Petroleum Share Trust Limited, Burmah Investments Limited and Burmah Holdings Limited), MORH and BOTL. At all material times until the liquidation of Holdings Burmah was the beneficial owner of the entire issued share capital of that company. Prior to 1969 the capital consisted of 700,000 ordinary shares and one voting share but on 6 March 1969 the voting share was converted into an ordinary share. (2) Both on 6 April 1965 and immediately prior to the events described in (3) below, Holdings was dormant and its issued share capital was represented by a debt of £700,001 owing to it by Burmah. (3) On 6 March 1969, Burmah sold and transferred to Holdings (then called the BOC British Petroleum Share Trust Limited) £50,000,000 Stock in The British Petroleum Company Limited ("BP") for £380,625,000. The reason for the sale was to enable Burmah (by using Holdings as a regulatory company, storing up dividends received from BP) to limit its receipt of dividends and thereby to limit its own dividend payments and at the same time to obtain maximum overspill relief under section 84 Finance Act 1965. The purchase price was left outstanding as a result of which the net amount owed by Holdings to Burmah of £379,924,999, (namely £380,625,000 less £700,001) was placed to a loan account ("the Loan Account") in Holdings' books. On 23 April 1971, the £50,000,000 Stock in BP was sold and transferred by Holdings (then called Burmah Investments Limited) to Burmah for £220,625,000, reducing the balance outstanding on the Loan Account to £159,299,999. By this time overspill relief was no longer a problem and the sale was for good commercial reasons. Also in 1971, Burmah explored with Counsel the possibility of obtaining for corporation tax purposes an allowable capital loss by the exploitation of the situation which had thus arisen. The events described in subparas. (5) to (10) consisted of a prearranged scheme (approved by a meeting of Burmah's Directors held on 20 July 1972) designed to achieve that end. At the material times there was to a very great extent a common membership between the boards of Burmah, Holdings, MORH and BOTL. (4) On 12 December 1972, 700,000 shares in Holdings (then called OMDR Holdings Limited) were registered in the name of and beneficially owned by Burmah and 1 was registered in the name of BOTL as nominee for Burmah, its beneficial owner. Holdings never traded and the purchase and sale described in sub para. (3) above were the only functions it ever carried out. (5) On Tuesday 12 December 1972, the following events took place in the following order (the timetable, draft minutes and draft letters having been prepared in advance): -- (i) The Directors of Holdings resolved to obtain loan facilities from MORH and, upon such facilities becoming available, to repay to Burmah the balance on the Loan Account of £159,299,999. (ii) Holdings applied to MORH for a loan facility of this amount repayable on demand. (iii) On receipt of such application, the Directors of MORH authorised their Chairman to arrange a loan of the amount in question from Burmah in order to enable the loan facility requested to be granted to Holdings. Application was duly made by MORH to Burmah for such a loan which was made, pursuant to a resolution of the Directors of Burmah. (iv) The Directors of MORH resolved that the loan facility requested by Holdings be granted and the sum of £159,299,999 was duly advanced by MORH to Holdings, repayable on demand. (v) Upon this loan being made available, the said balance of £159,299,999 owing to Burmah on the Loan Account was repaid, pursuant to a resolution of the Directors of Holdings. (6) On Monday 18 December 1972, the following events took place in the following order (the timetable, draft minutes and draft letters having been prepared in advance): -- (i) The Directors of Holdings resolved to convene an Extraordinary General Meeting for the purpose of considering a Resolution to increase the capital of Holdings from £700,001 to £1,400,002 by the creation of an additional 700,001 Ordinary Shares of £1 each. (ii) An Extraordinary General Meeting of Holdings was duly convened and held at which a Resolution to effect such an increase of capital was passed as an Ordinary Resolution. (iii) The Directors of Holdings resolved that Holdings make a rights issue to existing Members of 700,001 unissued Ordinary Shares of £1 each at a price of £228 per share. (iv) Such shares were offered to the existing Members of Holdings in proportion to their existing holdings (namely one for one). (v) Pursuant to a resolution of the Directors of Burmah an application was submitted to Holdings in respect of 700,000 shares accompanied by payment of the subscription price. Pursuant to a resolution of the Directors of BOTL an application was submitted to Holdings in respect of 1 share accompanied by payment of the subscription price. The directors of Holdings resolved to accept such applications and accordingly 700,000 new Ordinary Shares were issued to Burmah and 1 new Ordinary Share to BOTL. As consideration for the 700,000 new shares allotted to Burmah, Burmah paid to Holdings £159,600,000 and as consideration for the new share allotted to BOTL Burmah through its nominee paid to Holdings £228. (vi) Pursuant to a resolution of the Directors of Holdings the loan of £159,299,999 from MORH was repaid. (7) On 19 December 1972, the Directors of Holdings resolved that a Declaration of Solvency be sworn by a minority of the Directors and lodged with the Registrar of Companies and that an Extraordinary General Meeting of Holdings be convened for the purpose of considering a resolution for winding up Holdings. On the date the Declaration of Solvency was duly sworn, notice of an Extraordinary General Meeting to be held on 21 December 1972 circulated, and the members of Holdings consented to the said meeting being held at short notice. (8) At an Extraordinary General Meeting of Holdings duly convened and held on 21 December 1972 a Special Resolution that Holdings be wound up voluntarily as a members' voluntary winding up and that Thomas Norman Ritchie be appointed Liquidator and an Extraordinary Resolution that the Liquidator be authorised to divide among the members in specie all or part of the assets of Holdings were passed. (9) The winding up of Holdings was conducted by the Liquidator and in the course of such winding up the only asset of Holdings, namely cash in the sum of £296,728.50 was distributed to its Members on 29 December 1972. Holdings was subsequently dissolved. (10) On 24 September 1974 Burmah elected, pursuant to the provisions of paragraph 25(1), 6th Schedule, Finance Act 1965, that the chargeable gains in relation to the disposal of the shareholding in Holdings in the beneficial ownership of Burmah be calculated by reference to the market value of the holding on 6 April 1965. (11) The calendar year 1972 constituted an accounting period of Burmah for the purposes of corporation tax. Apart from the facts hereinbefore set out, Burmah had net chargeable gains in that period amounting to £3,397,724. '4. It was common ground between the parties that the transactions with which these proceedings are concerned were carried out correctly as planned and were genuine transactions. '5. In the following paragraphs references to sections and Schedules are references to sections and Schedules of the Finance Act 1965. '6. It was contended on behalf of Burmah: (i) that the transactions described in para 3(6) above constituted a reorganization of Holdings' share capital within the meaning of the first 2 lines of para. 4(1) Schedule 7 or, alternatively; (ii) that new shares in Holdings were issued to Burmah and BOTL "in respect of and in proportion to... their holdings of shares in" Holdings and constituted a reorganization of Holdings' share capital by virtue of para. 4(1)(a)(i); (iii) that, in either case, sub paras. (2) and (3) of para. 4 Schedule 7 apply; (iv) that accordingly by virtue of para. 4(2) Schedule 7, such reorganization was to be treated as involving no disposition and no acquisition of shares in Holdings; (v) that by virtue of para. 4(3) Schedule 7, the cash paid by Burmah and BOTL for the new shares in Holdings falls to be treated as having been given as consideration for the original shares; (vi) that such consideration is deductible in computing an allowable loss on the disposal of Burmah's entire shareholding in Holdings either: -- (a) on the grounds that, under section 22(9), provisions in Schedule 7 override the "wholly and exclusively" test in para. 4(1)(a), Schedule 6 or (b) as having been given wholly and exclusively for the acquisition of shares, and (vii) that in computing the chargeable gain or loss arising to Burmah on the disposal (by liquidation) of its and BOTL's shares in Holdings, Burmah is entitled to deduct in addition to the costs of acquiring its original shares the sum of £159,600,228 paid for the new shares. [Counsel for Burmah] also formally submitted that Harrison v Nairn Williamson Ltd n1 was wrongly decided so that, even if there were in the present case no reorganization under para. 4, Schedule 7, the actual cost of the new shares in Holdings was deductible in computing Burmah's allowable loss -- section 22(4) having no application. n1 [1978] 1 All ER 608, [1978] 1 WLR 145, [1978] STC 67 '7. It was contended by Mr E O Jackson on behalf of the Inland Revenue: (i) that everything that happened must be construed in its context -- a series of pre-planned transactions for the exclusive advantage of Burmah, carried out by its wholly owned subsidiaries either as nominees or as agents and as "fettered" as were the transactions in Black Nominees v Nicol n2, so that their joint legal effect was the only legal effect; (ii) that the circular cash payments between Burmah and its subsidiaries effected nothing. The true consideration given by Burmah for the allotted 700,001 shares in Holdings was the waiver of a valueless loan; (iii) that properly construed, there had been no reorganization of Holdings' share capital within the meaning of the first 2 lines of para. 4(1), Schedule 7: there was merely a wholly artificial device (remote from any reorganization) to secure a tax advantage; (iv) that properly construed, Burmah and BOTL were allotted new shares in Holdings not "in respect of... their holdings of shares in the company" but in respect of and calculated by reference to the size of the worthless loan which OMDR owed to Burmah; (v) that the effect of section 22(9) was not that Schedule 7 overrode para. 4 of Schedule 6 but that the Schedules must be read together and each may in appropriate circumstances apply; (vi) that, even assuming that he was wrong in his contention (ii) above, the consideration given by Burmah "wholly and exclusively for the acquisition of the asset" (within the meaning of para. 4(1)(a), Schedule 6) was, on the authority of Slade J's decision in Eilbeck v Rawling n1, nil. Burmah did not want more shares in its insolvent subsidiary: it simply wanted its loss on the money lent to it transmogrified into an allowable loss and (vii) that in computing the chargeable gain or loss arising to Burmah on the disposal (by liquidation) of its and BOTL's shares in Holdings, Burmah is not entitled to deduct the sum which it paid for the new shares. n2 [1975] STC 372, 50 Tax Cas 229 n1 [1979] STC 16 '8. (1) We have considered the carefully reasoned submissions of [Counsel for Burmah] and Mr Jackson. We find that the relevant transactions were preplanned and would, having regard to Burmah's status as parent of Holdings, MORH and BOTL and the composition of the boards of directors of those companies, have almost inevitably been carried out precisely according to plan. We do not accept, however, that the roles played by Burmah's subsidiaries were those of nominees or agents. Although directors of the subsidiaries, in their capacity as Burmah's directors, approved the scheme and in their capacity as directors of the subsidiaries endorsed it for Burmah's benefit, we feel unable to disregard the effect of the individual transactions which compairsed the scheme as a whole. We think that this approach is consistent with authority. For example, Slade J, when faced with a somewhat similar problem in Eilbeck v Rawling n1, rejected the Crown's contentions that a series of transactions designed to create an artificial allowable loss should be regarded as part of a single transaction and that payments which, as part of the scheme, passed in a circle, were ineffective because at the end of the day nothing in truth passed from anyone to anyone. (2) By parity of reasoning we accept [Counsel's] contention [for Burmah] that what took place was a reorganization of Holdings' share capital within the meaning of the first 2 lines of para. 4(1) Schedule 7. What was done -- an allotment to existing shareholders in return for cash of one share in Holdings for each share they already held -- appears to us, in the ordinary meaning of the word, to be a reorganization of capital. We do not think that this is any the less so because the word "reorganization" in those first 2 lines (but not, be it noted, in the preceding cross-heading) is associated with "reduction". Viewed commercially and leaving aside fiscal motives, it may seem to be a nonsensical transaction but whether as commercial sense or commercial nonsense it appears to us to be a "reorganization". (3) We consider whether (if we are wrong in our view that it was a reorganization in the ordinary sense of the word) it comes within the extended meaning of the word given in para. 4(1)(a), Schedule 7. It being common ground that the new shares were allotted to Burmah and BOTL "in proportion to... their holdings", this question depends only on whether the allotment to the shareholders was "in respect of" their previous holdings. The offer to existing shareholders was, in the very nature of the scheme, made to and accepted by them in their capacity as shareholders and we would say therefore that the consequent allotment had "reference to" or "regard or relation to" or "connexion with" (all phrases used in the Shorter Oxford English Dictionary to exemplify the use of the word "respect" in a context such as the present). In our view there was a reorganization within the meaning of para. 4(1)(a). (4) On this basis, sub paras. (2) and (3) of para. 4, Schedule 7 apply with the effect, first that the reorganization is to be treated as involving no disposition and no acquisition of shares in Holdings and, second, that the cash paid for the new shares in Holdings falls to be treated as having been given as consideration for the original shares. We come then to consider how such consideration is to be treated in computing any chargeable gain or allowable loss on the disposal of Burmah's entire shareholding in Holdings. As we interpret section 22(9), it requires chargeable gains (and therefore allowable losses) on the disposal of assets to be computed under Schedule 6 with such modifications as Schedules 7 and 8 may require. We would find it surprising if the intention of sub paras. (2) and (3) of para. 4, Schedule 7, in requiring certain things to be treated otherwise than they in reality be, was to make consideration that is in reality given for new shares alloted on a reorganization deductible in the computation irrespective of whether it is, within the meaning of para. 4(1) Schedule 6, given "wholly and exclusively for the acquisition of the asset". In applying para. 4(1), Schedule 6 we think that references to the "asset" disposed of must be taken to be references to the new holding (including by definition the original shares) and that references to "the consideration" must be taken to be references to the total of the consideration actually given for the original shares and the consideration actually given for the new shares. We see no reason why the "wholly and exclusively" test should not apply to each element in the total by reference to the actual facts and we so hold. (5)[Counsel for Burmah] contends in the alternative, however, that the consideration actually given for the newly allotted shares (which we have held to be the cash subscribed) was indeed given "wholly and exclusively" for their acquisition. It is common ground between the parties that the test to be applied here is objective and not subjective. In Rawlings n1 case n1, Slade J held that a sum of money which was paid on the taxpayer's behalf for the purchase of a reversionary interest was also paid in part for the fulfilment by a third party of its contractual obligation to procure the implementation of an "off-the-peg" tax avoidance scheme intended for the taxpayer's benefit. The situation there was thus different from that in Burmah's case. When we ask what did Burmah pay for other than shares we find nothing in the way of assets or rights such as those [as] there were in Rawlings' case n1 in addition to the reversionary interest. It is true that Burmah's motive in procuring the allotment to itself and BOTL of shares was, as Mr Jackson says, to transmogrify a bad debt into an allowable loss. But in our view that, taken alone, is irrelevant. We therefore accept [Burmah's] contention in this respect. n1 [1979] STC 16 n1 [1979] STC 16 '9. The appeal succeeds in principle and we determine it as follows: the corporation tax assessment on Burmah for the accounting period ended 31 December 1972 is increased to £3,776,493 after allowing group relief (BOTL) of £1,989,361 with an allowable capital loss carried forward at 31 December 1972 of £156,605,777.' VIII The Crown immediately after the determination of the appeal declared dissatisfaction therewith as being erroneous in point of law and on 15th January 1979 required the commissioners to state a case for the opinion of the Court of Session as the Court of Exchequer in Scotland. IX The question of law for the opinion of the court was whether the commissioners' decision was correct. COUNSEL: The Lord Advocate (Lord Mackay of Clashfern QC) and A C Hamilton for the Crown. W D Prosser QC J E Drummond Young for Burmah. JUDGMENT-READ: The court made avizandum. 13th November. PANEL: THE LORD PRESIDENT (EMSLIE), LORD CAMERON AND LORD STOTT JUDGMENT-1: THE COURT delivered the following opinion. There was, in the accounting period which ended on 31st December 1972, a disposal by the taxpayer company ('Burmah'), of its shareholding in a wholly owned subsidiary company, OMDR Holdings Ltd ('Holdings') when Holdings went into liquidation. Burmah claimed that in consequence of that disposal there accrued to them, for corporation tax purposes, an allowable capital loss within the meaning of a 23 of the Finance Act 1965. This was the claim which formed the subject matter of their appeal to the Special Commissioners against an assessment to corporation tax which had been made on them for the accounting period in question. In the result the Special Commissioners upheld the appeal and the Crown have now appealed against that decision to this court. In order to focus the point taken by the Crown before us it is, we think, necessary to set out in some detail the history of the events which led to the making of Burmah's claim. It has been admirably explained by the Special Commissioners in findings which cannot readily be compressed and we begin with their general description of the background against which the findings in fact fall to be read. It is as follows: 'Assets which Burmah, in order to obtain a fiscal advantage, had sold to Holdings, leaving the purchase money outstanding on loan account, had declined in value with the result that Burmah had suffered a commercial loss by the reduction in value of the debt owing to it by Holdings. This debt was not a "debt on a security" and by reason of paragraph 11, 7th Schedule and section 23(1), Finance Act 1965 no allowable loss would have accrued to Burmah on its disposal. Burmah therefore took advice on how it might arrange its affairs so as to obtain tax relief for the commercial loss equivalent to the relief that it could have obtained if its investment in Holdings had been in the form of shares or debentures instead of an unsecured debt.Burmah followed the advice which it received and we have to decide whether the steps taken achieve its object.' The findings in fact are in these terms: '(1) Burmah is the parent Company of a group of Companies that at all material times included Holdings (formerly called at various times the BOC British Petroleum Share Trust Limited, Burmah Investments Limited and Burmah Holdings Limited), MORH and BOTL. At all material times until the liquidation of Holdings Burmah was the beneficial owner of the entire issued share capital of that company. Prior to 1969 the capital consisted of 700,000 ordinary shares and one voting share but on 6 March 1969 the voting share was converted into an ordinary share. (2) Both on 6 April 1965 and immediately prior to the events described in (3) below, Holdings was dormant and its issued share capital was represented by a debt of £700,001 owing to it by Burmah. (3) On 6 March 1969, Burmah sold and transferred to holdings (then called the BOC Btitish Petroleum Share Trust Limited) £50,000,000 Stock in The British Petroleum Company Limited ('BP') for £380,625,000. The reason for the sale was to enable Burmah (by using Holdings as a regulatory company, storing up dividends received from BP) to limit its receipt of dividends and thereby to limit its own dividend payments and at the same time to obtain maximum overspill relief under section 84 Finance Act 1965. The purchase price was left outstanding as a result of which the net amount owed by Holdings to Burmah of £379,924,999 (namely £380,625,000 less £700,001) was placed to a loan account ('the Loan Account') in Holdings' books. On 23 April 1971, the £50,000,000 Stock in BP was sold and transferred by Holdings (then called Burmah Investments Limited) to Burmah for £220,625,000, reducing the balance outstanding on the Loan Account to £159,299,999. By this time overspill relief was no longer a problem and the sale was for good commercial reasons. Also in 1971, Burmah explored with Counsel the possibility of obtaining for corporation tax purposes an allowable capital loss by the exploitation of the situation which had thus arisen. The events described in sub-paras. (5) to (10) consisted of a prearranged scheme (approved by a meeting of Burmah's Directors held on 20 July 1972) designed to achieve that end. At the material times there was to a very great extent a common membership between the boards of Burmah, Holdings, MORH and BOTL. (4) On 12 December 1972, 700,000 shares in Holdings (then called OMDR Holdings Limited) were registered in the name of and beneficially owned by Burmah and 1 was registered in the name of BOTL as nominee for Burmah, its beneficial owner. Holdings never traded and the purchase and sale described in sub para. (6) above were the only functions it ever carried out. (5) On Tuesday 12 December 1972, the following events took place in the following order (the timetable, draft minutes and draft letters having been prepared in advance): -- (i) The Directors of Holdings resolved to obtain loan facilities from MORH and, upon such facilities becoming available, to repay to Burmah the balance on the Loan Account of £159,299,999. (ii) Holdings applied to MORH for a loan facility of this amount repayable on demand. (iii) On receipt of such application, the Directors of MORH authorised their Chairman to arrange a loan of the amount in question from Burmah in order to enable the loan facility requested to be granted to Holdings. Application was duly made by MORH to Burmah for such a loan which was made, pursuant to a resolution of the Directors of Burmah. (iv) The Directors of MORH resolved that the loan facility requested by Holdings be granted and the sum of £159,299,999 was duly advanced by MORH to Holdings, repayable on demand. (v) Upon this loan being made available, the said balance of £159,299,999 owing to Burmah on the Loan Account was repaid, pursuant to a resolution of the Directors of Holdings. (6) On Monday 18 December 1972, the following events took place in the following order (the timetable, draft minutes and draft letters having been prepared in advance): -- (i) The Directors of Holdings resolved to convene an Extraordinary General Meeting for the purpose of considering a Resolution to increase the capital of Holdings from £700,001 to £1,400,002 by the creation of an additional 700,001 Ordinary Shares of £1 each. (ii) An Extraordinary General Meeting of Holdings was duly convened and held at which a Resolution to effect such an increase of capital was passed as an Ordinary Resolution. (iii) The Directors of Holdings resolved that Holdings make a rights issue to the existing Members of 700,001 unissued Ordinary Shares of £1 each at a price of £228 per share. (iv) Such shares were offered to the existing Members of Holdings in proportion to their existing holdings (namely one for one). (v) Pursuant to a resolution of the Directors of Burmah an application was submitted to Holdings in respect of 700,000 shares accompanied by payment of the subscription price. Pursuant to a resolution of the Directors of BOTL an application was submitted to Holdings in respect of 1 share accompanied by payment of the subscription price. The Directors of Holdings resolved to accept such applications and accordingly 700,000 new Ordinary Shares were issued to Burmah and 1 new Ordinary Share to BOTL. As consideration for the 700,000 new shares allotted to Burmah, Burmah paid to Holdings £159,600,000 and as consideration for the new share allotted to BOTL Burmah through its nominee paid to Holdings £228. (vi) Pursuant to a resolution of the Directors of Holdings the loan of £159,299,999 from MORH was repaid. (7) On 19 December 1972, the Directors of Holdings resolved that a Declaration of Solvency be sworn by a majority of the Directors and lodged with the Registrar of Companies and that an Extraordinary General Meeting of Holdings be convened for the purpose of considering a resolution for winding up Holdings. On that date the Declaration of Solvency was duly sworn, notice of an Extraordinary General Meeting to be held on 21 December 1972 circulated, and the members of Holdings consented to the said meeting being held at short notice. (8) At an Extraordinary General Meeting of Holdings duly convened and held on 21 December 1972 a Special Resolution that Holdings be wound up voluntarily as a members' voluntary winding up and that Thomas Norman Ritchie be appointed Liquidator and an Extraordinary Resolution that the Liquidator be authorised to divide among the members in specie all or part of the asset of Holdings were passed. (9) The winding up of Holdings was conducted by the Liquidator and in the course of such winding up the only asset of Holdings, namely cash in the sum of £296,728.50 was distributed to its Members on 29 December 1972. Holdings was subsequently dissolved. (10) On 24 September 1974 Burmah elected, pursuant to the provisions of paragraph 25(1), 6th Schedule, Finance Act 1965, that the chargeable gains in relation to the disposal of the shareholding in Holdings in the beneficial ownership of Burmah be calculated by reference to the market value of the holding on 6 April 1965. (11) The calendar year 1972 constituted an accounting period of Burmah for the purposes of corporation tax. Apart from the facts hereinbefore set out, Burmah had net chargeable gains in that period amounting to £3,397,724.' The Special Commissioners then go on to tell us that it was common ground between the parties that the transactions described in the findings in fact were carried out correctly as planned and were genuine transactions. In these circumstances the particular contention of Burmah which the Special Commissioners upheld was (i) that the transactions set out in finding (6) constituted a reorganisation of the share capital of Holdings within the meaning of para 4(i) of Sch 7 to the Finance Act 1965; (ii) that, accordingly, by virtue of the provisions of para 4(2) of that schedule, it fell to be deemed that there had been, inter alia, no acquisition by the taxpayer company (for capital gains tax purposes) of the shares allotted to them by virtue of the rights issue, and that their original shareholding, together with the shares so allotted to them, became a 'new holding' -- a single asset -- and fell to be treated 'as the same asset acquired as the original shares were acquired'; (iii) that by virtue of para 4(3) of the same schedule the cash actually paid for the rights issue of Holdings' shares fell to be treated as having been given as consideration for the original shares; and (iv) that that consideration was deductible, in terms of para 4(1)(a) of Sch 6 to the Act, in computing the allowable loss on the disposal of Burmah's entire 'new holding' on the liquidation of Holdings. Before us counsel renewed none of the arguments which had been advanced on the Crown's behalf before the Special Commissioners, and, on an entirely new ground, submitted that the Special Commissioners had erred in law in holding, on the facts in this case, that the cash actually paid by Burmah for the rights issue shares allotted to it, in the reorganisation of Holdings' share capital, fell to be treated as 'consideration' for the original shares. The starting point of the submission was the proposition, which counsel for Burmah did not dispute, that at the date of the reorganisation Burmah and Holdings did not transact at arm's length. Accordingly, so ran the argument in broad terms, s 22(4)(a) came into play, and, on a proper construction of paras 4(2) and (3) of Sch 7 read together with s 22(4), the relevant consideration which was deductible on the disposal of the entire new holding was not the cash paid but the market value (if any) of the rights issue shares at the time of the reorganisation. Before considering this submission further, however, it will, we think, be convenient to set out the statutory provisions on which it depended. Paragraph 4 of Sch 7 is concerned with, inter alia, reorganisation of share capital, and in para 4(1)(b) 'original shares' are defined and the expression 'new holding' is declared to mean, in relation to 'original shares', the shares of the company which, as the result of the reorganisation represent the 'original shares'. Paragraph 4(2) provides: 'Subject to the following sub-paragraphs, a reorganisation of a company's share capital shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.' Paragraph 4(3) provides, so far as is relevant: 'Where, on a reorganisation... of a company's share capital, a person gives or becomes liable to give any consideration for his new holding or any part of it, that consideration shall in relation to any disposal of the new holding or any part of it be treated as having been given for the original shares, and if the new holding or part of it is disposed of with a liability attaching to it in respect of that consideration, the consideration given for the disposal shall be adjusted accordingly...' Section 22(4) is, for the purposes of this case, in these terms: 'Subject to the provisions of this Part of this Act, a person's acquisition of an asset and the disposal of it to him shall for the purposes of this Part of this Act be deemed to be for a consideration equal to the market value of the asset -- (a) where he acquires the asset otherwise than by way of a bargain made at arm's length...' Against this statutory background the submission for the Crown which we have already introduced briefly can be summarised as follows. The question is how Sch 7, para 4 applies to the particular transaction which left the taxpayer company with a 'new holding'. Because of the opening words of para 4(2) -- 'Subject to the following subparagraphs' -- one must begin by looking at para 4(3). Although para 4(3) does not say so expressly it is concerned with consideration for the acquisition of a person's new holding or any part of it, on a reorganisation of a company's share capital. For the purposes of para 4(3), accordingly, it must be recognised that Burmah, at the time of the reorganisation of Holdings' share capital, acquired an asset consisting of the 'new holding' including the rights issue shares. That asset so acquired was acquired by Burmah otherwise than by way of a bargain made at arm's length. Section 22(4) must therefore be taken into account with the result that where para 4(3) speaks of consideration it speaks in this case of the consideration prescribed by s 22(4), i e a sum equal to the market value of the additional shares allotted. It is only when the matters dealt with in para 4(3) have been resolved that one can go back to para 4(2) and it is only at that stage, when it has been discovered what consideration for the acquisition of the additional shares falls to be treated as having been given for the 'original shares' when the 'new holding' is disposed of, that one returns to para 4(2) to find that the reorganisation of capital itself is to be treated as not having involved any disposal of original shares' or any acquisition of the 'new holding' or any part of it, and that the 'original shares' and the 'new holding' are to be treated as a single asset. One can readily understand the feeling of the Crown that Burmah should not, in the circumstances, 'get away' with a huge allowable loss based on the cash paid for the shares issued by Holdings on their reorganisation of share capital. We cannot, however, decide this appeal merely on the basis of such a feeling, however much we might share it, and we have reached the conclusion without hesitation that the new argument presented for the first time on behalf of the Crown is ingenious but unsound. There appear to us to be very great practical difficulties in applying s 22(4) to a reorganisation of capital and to a rights issue in which consideration has usually little relation to value. A much more complicated provision than s 22(4) would be required for this situation to deal with the revaluation of original shares to reflect the dilution of their value as the result of the reorganisation of capital. Whether or not these observations are sound, however, the question for us is one of construction of the relevant statutory provisions and when one begins with s 22(4) in which the opening words are 'subject to the provisions of this Part of this Act' (which includes those of Sch 7) one sees at once that it applies where there has been an 'acquisition of an asset'. The word 'acquisition' there used means, and can only mean, 'acquisition' in the statutory sense, namely an acquisition for capital gains purposes. The question accordingly comes to be whether on any proper construction of paras 4(2) and (3) of Sch 7 the provisions of para 4(3) are concerned at all with such an acquisition. The correct approach is to look at para 4(2) first, always bearing in mind that it must be read subject to, inter alia, para 4(3). It appears first, we think, for obvious reasons, and it proceeds on the view that you cannot look on the acquisition of rights issue shares on their own. No doubt there is, in ordinary parlance an acquisition of such shares in a reorganisation of share capital but what para 4(2) rells us quite clearly is that the reorganisation is not to be treated -- and this must mean for capital gains tax purposes -- as involving any acquisition of 'the new holding or any part of it'. It then provides that the original shares and the new holding are to be treated as the same asset 'acquired as the original shares were acquired'. That then is the only statutory acquisition. What para 4(2) does not tell us, however, is what is to be done about the consideration given for extra shares which, by virtue of that subparagraph, are to be treated as not having been acquired in any statutory acquisition.The purpose of para 4(3) is to give the answer to that question which, of course, arises in consequence of what has been provided in para 4(2). In view of para 4(2) it would have been surprising if para 4(3) had mentioned the word 'acquisition' at all. It does not do so and the absence of that word is clearly by design. In effect para 4(3) properly construed is prescribing how to treat the consideration actually given (for that is what para 4(3) says) for something which, because of para 4(2), is not to be regarded as an acquisition of an asset for capital gains tax purposes. The construction for which the Crown contended and on which the attempted application of a 22(4) depended, involves reading into para 4(3) words which are not there, and which, on our construction of para 4, appear to have been deliberately omitted.If indeed there was, at the time of the reorganisation, an acquisition for capital gains tax purposes, there would be no need to treat the consideration therefor as having been given for the 'original shares'. In short there is nothing in the language of paras 4(2) and (3) read together in the logical order of their appearance to entitle one to apply s 22(4) to the events which happened at the time of the reorganisation of capital. The only relevant statutory acquisition is the acquisition of the original shares, and to the deemed acquisition of the 'new holding' 22(4) cannot, on the findings in this case, be applied at all. On the whole matter, the Special Commissioners were in our judgment entitled to hold that the cash paid for the additional shares in Holdings fell to be treated, on the disposal of the 'new holding', as having been given as consideration for the original shares. The question in the case is not happily expressed and, in refusing the appeal, we shall answer it in the affirmative as if it had read: 'Whether we were entitled to determine the assessment as set out in Stat. VII 9 of the case.' DISPOSITION: Appeal dismissed. SOLICITORS: Solicitor of Inland Revenue; Laing & Motherwell, W S (for Burmah).