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Inland Revenue Commissioners v Levy CHANCERY DIVISION [1982] STC 442, 56 Tax Cas 68 HEARING-DATES: 15, 16, 17 FEBRUARY, 6 APRIL 1982 6 APRIL 1982 CATCHWORDS: Income tax - Settlement - Element of bounty - Bona fide commercial transactions - Interest-free loan by taxpayer to company wholly owned by him - Company investing money loaned - Whether transaction involving element of bounty - Whether a 'settlement' - Income and Corporation Taxes Act 1970, s 454(3). HEADNOTE: The taxpayer held 99% of the entire share capital of P Ltd, a company which dealt in stocks and shares. From the commencement of the company's trade, the taxpayer and his wife jointly funded the company by way of various loans on terms that the loan would be interest-free and repayable on demand. On 30 April 1973 the amount outstanding to the taxpayer amounted to £ 108,392 and the taxpayer was advised that the company could not be considered solvent unless he consented to being treated as a deferred creditor by the company. That the taxpayer did. On 30 May 1973 the taxpayer made a further loan of £ 3.33m to the company. The loan was interest-free and repayable on demand. The Revenue claimed that the income which the company derived from the investment of the £ 3.33m was income of a settlement of which the taxpayer was the settlor within s 454(3) a of the Income and Corporation Taxes Act 1970, and made two alternative assessments to income tax on the taxpayer in respect of that income for the year 1973-74, one under s 446 and the other under s 457 of the Act. The taxpayer appealed contending that the loan was a transaction inspired by ordinary business considerations and lacked the necessary element of bounty for it to be regarded as a 'settlement' within s 454(3) of the Act. The Crown contended that the company benefited from the loan without assuming any correlative obligations and accordingly the transaction was a disposition or arrangement involving an element of bounty and qualified as a settlement within s 454(3) of the Act. The Special Commissioners found as a fact that whether viewed objectively or subjectively the taxpayer provided no bounty by his loan and therefore there was no settlement as defined in s 454(3) of the Act. The Crown appealed. a Section 454(3), so far as material is set out at p 456 d, post. Held - A disposition, trust, covenant, agreement or arrangement could not be a settlement within s 454(3) of the 1970 Act unless it contained an element of bounty. Thus a commercial transaction devoid of any element of bounty was not a settlement within s 454(3). In the instant case the commissioners had found that the loan in question did not involve any element of bounty on the part of the taxpayer. It followed therefore that the loan was not a settlement within s 454(3) of the Act and accordingly the appeal would be dismissed (see p 457 b to e, post). Inland Revenue Comrs v Plummer [1979] STC 793 applied. CASES-REF-TO: Chinn v Collins (Inspector of Taxes), Chinn v Hochstrasser (Inspector of Taxes) [1981] STC 1, [1981] 1 All ER 189, [1981] AC 533, [1981] 2 WLR 14, HL; rvsg [1979] STC 332, [1979] 2 All ER 529, [1979] Ch 447, [1979] 2 WLR 411, CA. Inland Revenue Comrs v Plummer [1979] STC 793, [1979] 3 All ER 775, [1980] AC 896, [1979] 3 WLR 689, HL. CASES-CITED: Bulmer v Inland Revenue Comrs [1966] 3 All ER 801, [1967] Ch 145, [1966] 3 WLR 672,44 TC 1. Chamberlain v Inland Revenue Comrs [1943] 2 All ER 200, 25 TC 317, HL. Herbert v Inland Revenue Comrs (1925) 9 TC 593. Inland Revenue Comrs v Leiner (1964) 41 TC 589. Inland Revenue Comrs v Mills [1974] STC 130, [1974] 1 All ER 722, [1975] AC 38, HL. Inland Revenue Comrs v Wachtel [1971] 1 All ER 271, [1971] Ch 571, 46 TC 543. Thomas v Marshall (Inspector of Taxes) [1953] 1 All ER 1102, [1953] AC 543, 34 TC 178. Ward v Inland Revenue Comr [1956] 1 All ER 571, [1956] AC 391, PC. INTRODUCTION: Case stated. 1. On 18 and 19 February 1980 the Commissioners for the Special Purposes of the Income Tax Acts heard the appeal of Ralph Levy against two alternative assessments to income tax for the year of assessment 1973-74 both in the sum of £ 142,796, one made under s 446 of the Income and Corporation Taxes Act 1970 and the other under s 457 of that Act. 2. At the conclusion of the hearing the commissioners reserved their decision and gave it in writing on 18 August 1980. 3. The questions which the commissioners had to determine were summarised in para 2 of the decision. 4.The documents which were proved or admitted before the commissioners were listed in para 3 of the decision. 5. Certain of the facts were common ground between the parties; those agreed facts were set out in para 4 of the decision. The findings on issues of fact (other than those covered by the statement of agreed facts) were set out in paras 11 to 21 of the decision. 6. The contentions of the parties were set out in paras 5 and 6 of the decision. 7. Paragraphs 7 to 10 of the decision contained the commissioners' decision on questions of law, paras 11 to 21 their findings of the fact and para 22 their conclusion that the appeal be allowed and the assessments discharged. 8. The crown immediately after the determination of the appeal declared dissatisfaction therewith as being erroneous in point of law and on 1 September 1980 required the commissioners to state a case for the opinion of the High Court pursuant to s 56 of the Taxes Management Act 1970. 9. The question of law for the opinion of the court was whether the commissioners' decision was correct in law. DECISION 1. This case concerns an appeal by Mr Ralph Levy (Mr Levy) against assessments to income tax for year 1973-74 under Part XVI of the Income and Corporation Taxes Act 1970. Counsel appeared for Mr. Levy; the case for the Crown was presented by Mr J G H Bates of the office of Solicitor of Inland Revenue. 2. The following is an outline of the issues which arise in this case. Mr Levy has, at all material times, been the sole beneficial shareholder and registered holder of 99% of the shares in Parkspa Securities Ltd (Parkspa). Since 1960 Parkspa has carried on the trade of dealing in stocks and shares. Its business has been financed by large borrowings, partly from banks, partly from Mr Levy, and to a lesser extent from Mrs Levy. The loans made to Parkspa by Mr and Mrs Levy were all interest-free. Borrowings fluctuated, as did the company's fortunes. On 30 April 1973 Parkspa's auditors considered it to be insolvent; but on Mr Levy agreeing to rank as a deferred creditor in respect of the £ 108.392 owing to him, the auditors gave an unqualified report. On 30 May 1973 Mr Levy made a payment of the sum of £ 3.33 m to Parkspa. The use which Parkspa made of that money is explained in the agreed facts, (see para 4 below), but, for the purposes of this summary, it is sufficient to say that it is common ground that Parkspa derived income from the use of those funds. The Crown contended that the income which Parkspa derived from the £ 3.33 m is the income of Mr Levy for income tax purposes and that he is assessable accordingly. On 29 and 30 October 1973 Parkspa made two payments to Mr Levy of amounts which total £ 3.44 m.The sections in Part XVI of the 1970 Act on which the Crown relies in this case are all sections dealing with 'settlements'. 'Settlement' is defined for the purposes of those sections as including 'any disposition, trust, covenant, agreement or arrangment', (see s 454(3)); we shall use the expression 'statutory settlement' to denote anything which is a settlement within that wide definition. The case for Mr Levy in outline is this: (a) The payment of £ 3.33 m was simply another interest-free loan made by Mr Levy to Parkspa for purely business reasons and the payment of the £ 3.44 m by Parkspa to Mr Levy in October 1973 constituted repayment of the £ 3.33 million plus a further reduction in Parkspa's borrowing from Mr Levy. (b) The £ 3.33 m paid to Parkspa was not subject to any trust of any kind. (c) There can be no statutory settlement unless there is an element of bounty. Here there was no element of bounty involved in the making of that interest-free loan, because it was made for purely business reasons and what Mr Levy lost in his capacity as lender of the £ 3.33 m he gained in his capacity as shareholder. (d) Even if there were a statutory settlement made by Mr Levy, the assessment on him cannot stand for various other detailed reasons. The case for the Crown in outline is as follows: (a) Parkspa held the £ 3.33 m as nominee for Mr Levy, and, therefore, he is taxable on the income derived from that money. (b) Alternatively, if the payment of the £ 3.33 m was a loan, it was not a simple loan, but a loan coupled with a trust as in Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651, [1970] AC 567, with the result that it constituted a statutory settlement. (c) Even if the £ 3.33 m were simply an interest-free loan, it constituted a statutory settlement, because, on the particular facts of this case, there was an element of bounty on Mr Levy's part. Mr Levy was the 'settlor' (in the statutory sense) because he provided funds for the purposes of the statutory settlement. Accordingly, by virtue of one or other of ss 446, 447, 448, 451 or 457 the income which Parkspa derived from the £ 3.33 m is deemed to be the income of Mr Levy for income tax purposes. Evidence and documents 3. (a) Certain of the facts in this case are admitted and they were put before us in the form of a statement of agreed facts; the other questions of fact which arise in this case were in dispute. The text of the statement of agreed facts is set out in para 4 below; our findings on the remaining issues of fact are set out in paras 11 to 22 below. [(b) listed the documents put before the commissioners and (c) identified the witnesses who gave evidence before them.] Agreed facts 4. (1) Parkspa was incorporated in England on the 28 August 1959 with a share capital of £ 100 divided into 100 ordinary shares of £ 1 each; the incorporation was made by company formation agents. (2) At some time after Parkspa was incorporated Mr Levy who lives at The Dingle, Southdowns Road, Hale, Cheshire and who is and at all material times has been domiciled, resident and ordinarily resident in he United Kingdom, acquired the issued share capital in Parkspa. Mr Levy is, and has at all material times since, been the sole beneficial shareholder and registered holder of 99% of the shares. Mr Levy and Mr Dean are and have been at all times material to this appeal and sole director and secretary respectively of Parkspa. (3) Parkspa is resident in the United Kingdom and at all material times has been a close company for the purposes of Chapter III, Part XI of the Income and Corporation Taxes Act 1970. (4) The primary object for which Parkspa was incorporated was to carry on the business or businesses of stock and share dealers including the lending or investment of money as set out in full in cl 3(a) of the memorandum of association. It commenced to carry on the business or businesses of stock and share dealers on 1 January 1960 and made up its accounts to 10 April 1961, and on the same day in each subsequent year until 1965 and thereafter to 30 April in each year. (5) Parkspa lodged tax returns with the inspector of taxes at London City 19 District for the accounting period to 10 April 1961 on the basis that the company was carrying on the trade of dealing in stocks and shares for tax purposes. It was accepted by the inspector of taxes that Parkspa was then carrying on and has since carried on the trade of dealing in stocks and shares. The corporation tax liability of Parkspa in relation to the accounting period ended 30 April 1974 has not been settled pending the outcome of this appeal. (6) From the commencement of Parkspa's trade, Mr Levy or his wife Mrs Colette Levy or Mr Levy and his wife jointly, funded Parkspa by way of various loans on terms that the loans would be interest-free repayable on demand, although the period before demand varied considerably. The amounts outstanding at the end of each accounting period from 1969-70 to 1972/73 are as follows:
(7) Parkspa has carried on its trade at aprofit or loss in the accounting periods ended30 April 1970 to 30 April 1973 as set outbelow; details of the turnover in stocks andshares, and the net profit or loss beforecorporation tax are also set out below. Parkspa also paid dividends of £ 7,350and £ 27,612 net of tax in the accountingperiods ended 1964-65 and 1965-66 respectively.
(8) Parkspa is, and at all material times has been subject to the restriction contained in s 285 of the Income and Corporation Taxes Act 1970 whereby deductibility for interest paid by a close company to, or to an associate of, a person who is a director of that company or who has a material interest in the company (as defined in s 285(6) is limited. In effect the limitation would have permitted Parkspa to deduct interest at the rate specified in s 285(4) on the nominal amount of its share capital, that is £ 100; interest would therefore be limited to £ 8 any excess being treated as a distribution. (9) Parkspa was, at 30 April 1973, considered to be insolvent by its auditors Messrs Spicer and Pegler of St Mary Axe House, 56-60 St Mary Axe, London EC3A 8BJ and Mr Levy agreed that he should be treated as a deferred creditor in respect of his outstanding loans (at that date amounting to a credit balance of £ 108,392). On this understanding the auditors were prepared to issue an unqualified report. On 30 May 1973 Mr Levy made a payment of the sum of £ 3,330,000 to Parkspa. (10) On receipt of the £ 3.330,000 Parkspa placed that sum temporarily, with Williams & Glyn's Bank Ltd on deposit for the period until 29 June 1973 pending the acquisition of securities. The sum received by that bank was not invested in a separate deposit account but instead was invested by the bank with other banks by way of bid deposit. On or about 20 June to 25 June 1973 Parkspa made a bid for shares being issued on the public flotation of Bejam Ltd in the sum of £ 3,280,680; the bid was largely unsuccessful only £ 32,400 worth of shares being allotted, and a sum of £ 3,248,280 was returned. The bid deposit made by Williams & Glyn's Bank Ltd was refunded on 29 June 1973 with interest of £ 25,317; the sum of £ 3,350,000 was then placed on bid deposit account with that bank repayable on seven days notice. On 16, 20 and 23 July 1973 applications were made for shares in J Sainsbury Ltd and Wearwell Ltd that were being offered to the public in the sums of £ 739,500 and £ 324.000 respectively although the applications were only successful to the extent of £ 14,790 and £ 5,842 respectively. The applications for shares in Bejam Ltd and J Sainsbury Ltd were made by Parkspa on behalf of Mr Levy; the shares in Wearwell Ltd were applied for by Parkspa for its own account. Subsequently Parkspa bought, on 30 August 1973, sterling certificates of deposit at a cost of £ 3,380,000; those certificates of deposit were sold on 5 September 1973 for £ 3,390,753.22 thus realising a profit of £ 10,753.22. From 17 September 1973 onward Parkspa made frequent overnight deposits with various merchant and other banks until 24 September when a sum of £ 2,000,000 was deposited with Morgan Grenfell Ltd for a period of approximately three weeks until 17 October 1973. Again that sum was deposited overnight or on short term deposits with various merchant and other banks until 26 October 1973. Deposits totalling £ 1,481,000 remained with Williams & Glyn's Bank Ltd maturing on 30 October 1973. Mr Levy was paid the sum of £ 2,300,000 on 29 October and a further sum of £ 1,140,000 on 30 October 1973, leaving £ 45,645.61 standing to the credit of his current account with Parkspa. Contentions 5. Counsel's contentions on behalf of Mr Levy were as follows: (1) There cannot be a statutory settlement unless there is a bounty, (see Inland Revenue Comrs v Plummer [1979] STC 793, [1979] 3 All ER 775, [1980] AC 896.The evidence in this case shows clearly that there was no bounty; ordinary business considerations inspired the transactions. This is the first fundamental objection to these assessments. Although Mr Levy, in his capacity as individual/lender, has given up income, Mr Levy, in his capacity as individual/shareholder, obtained a corresponding benefit. It is common ground that an interest-free loan can confer bounty; it is a question of fact whether bounty has been conferred. The facts here show that Mr Levy was not making the loan of £ 3.33 million as an act of bounty; he was doing it in order to be better off. He was funding Parkspa to the extent he thought necessary to enable it to function on the market.The wider implications of the Crown's contention seem astonishing. The evidence of Mr Langdon, a partner in Messrs Spicer & Pegler, shows that it is very common for private companies to be financed by interest-free loans from their shareholders. Are all thse loans statutory settlements and all the lenders 'settlors'? That is an astonishing and wholly novel proposition. (2) The second fundamental objection is this: Parkspa is a company resident in the United Kingdom, and s 238(2)(a) provides that the profits of such a company are liable to corporation tax and cannot be subjected to income tax; the provisions dealing with statutory settlements cannot therefore, apply to the income of a company resident in United Kingdom. That is not a surprising result, because there are ample provisions in the tax code for dealing with cases where people abuse the separate taxation of companies and their shareholders. Section 446 does not prevail over s 238, because s 446 deems the income arising under the settlement to be the income of the settlor for the purposes of 'the Income Tax Acts'. That expression does not include the corporation tax legislation of which s 238 is part, (see s 526(1)(b)).(3) In addition to those fundamental objections, there are the following detailed arguments against the Crown's contentions that ss 446 or 457 apply to this case: (a) Section 446 requires there to be 'property comprised in the settlement'. What is the property comprised in the settlement? The answer given in correspondence is: the cash lent. Presumably, 'the income arising under the settlement' is the income from the investment of that cash. The taxpayer's answer is that the cash once lent belongs to Parkspa as do the assets acquired with it. Mr Levy had no interest in, or hope of recovering, the cash lent, let alone any assets acquired with it.What he had was a debt -- a right to repayment -- but that debt produced no income and cannot be identified with any cash or particular asset of Parkspa. There is no authority directly in point, but the decision in Chamberlain v Inland Revenue Comrs [1943] 2 All ER 204 at 206, 25 TC 317 at 331, 333 (observations of Lord Macmillan) provide some support for that submission. In that case the company purchased the assets concerned with the help of an interest-free loan from the appellant, but the suggestion that those assets were property comprised in a settlement made by the appellant was firmly rejected. (b) Sections 446 and 457 required there to be 'income arising under a settlement'. The closing words of s 454(1) and the Chapter as a whole show that it means income which, but for the statutory settlement, would have been the 'settlor's' income. That cannot apply to income which forms part of the profits of Parkspa's trade. There was no hiving-off of income produced by Mr Levy's loan from the other income of Parkspa. The Crown's argument here depends on imposing on the loans a segregation which did not in fact exist. The £ 3.33 m was indistinguishably mixed with other amounts as soon as it was put into the company. It was mixed with other bank borrowings. No deposit ties in with £ 3.33 m.How are Parkspa's expenses to be divided between the statutory settlement and the rest of the company's business? The Crown says that the assessments should be on pure income with no expenses deductible. Here the sums of interest were earned in the course of Parkspa's trade and are plainly trading receipts. Although the word 'includes' is used in the definition of income arising under a settlement in s 454(1), the context, particularly the proviso, shows that the word 'includes' is used in the sense of 'means'. Where, as in s 454(1), 'income arising' is defined as including A and B, but not C, it is clear that the definition is intended to be exhaustive. Furthermore there is no category of income which could be added which is not already specifically dealt with in the subsection. Since 'the income arising under the settlement' cannot be identified, ss 446 and 457 do not apply. (c) Section 457 cannot apply because there must be 'property comprised in the settlement'. The Crown says that the property is £ 3.3 m. That cash ceased to be Mr Levy's property and he ceased to have any interest in it or any assets into which that cash was transmuted by Parkspa. Also Mr Levy divested himself absolutely of the property concerned, viz the cash lent. Mr Bates contends that Mr Levy had not divested himself of the cash 'absolutely', within the meaning of s 457(1)(d); he relies on s 457(6) and contends that Mr Levy did not divest himself absolutely (in the statutory sense) because the income which Parkspa received from £ 3.33 m could be used for the purpose of repaying the loans. It is accepted on behalf of Mr Levy that repayment of an interest-free loan can be a benefit to the lender, but it is submitted that here it is not; it was simply another commercial transaction. If a person buys a good pair of socks from Marks & Spenders for a fair price, that is a benefit to him and to Marks & Spencers. It is submitted, however, that such commercial benefit is not a 'benefit' within the meaning of s 457(6). the observations of Plowman J in Inland Revenue Comrs v Leiner (1964) 41 TC 589 at 596 provide some support for this. In this case, when Mr Levy gave up the use of the £ 3.33 m, that gave him a corresponding advantage as great, if not greater. (4) The Crown contends that there is a statutory settlement here because these transactions diminished the value of Mr Levy's estate. The following example shows that to be much too narrow a test. Suppose ten individuals combine together to form a private company with an issued share capital of 10,000 £ 1 ordinary shares and the arrangement is that each individual will take 1,000 £ 1 ordinary shares for a subscription of £ 1,000. Since each individual has only a 10% minority shareholding, each shareholding will be worth less than £ 1,000 and the estate of each individual will have been diminished. Is it to be said that each is a 'settlor' who has made a statutory settlement? Surely one has to take a broader view of the commercial reasons for floating that company.Here Mr Levy took the view, rightly, that the loan would help Parkspa to be more profitable. (5) In reply to the Crown's contention that the incorporation of Parkspa was part of an 'arrangement', constituting a statutory settlement, counsel for Mr Levy submitted that the evidence in this case clearly establishes that there was no connection between the incorporation of Parkspa and the loan of £ 3.33 m. In the absence of a link between incorporation and loan the Crown's submission on that point must fail. (6) The issue whether the £ 3.33 m was subject to a trust (whether a bare trust, or a trust of the Quistclose type) is one of fact. Coundel for Mr Levy submitted that it is quite clear, on the evidence in this case, that the £ 3.33 m was not subject to any trust of any kind. It was simply an interest-free loan to Parkspa to use for the purposes of its business. Not only is there clear evidence against there being any trust imposed on Parkspa to use the money for any specific purpose, but it would be surprising if there were one. In the Quisclose case there was a conflict of interest between two lots of creditors; here Mr Levy was both loan creditor and shareholder and there was no such conflict. (7) Mr Levy treated his loan accounts with Parkspa as current accounts (8) Whether a gift by a shareholder to a company is a statutory settlement will depend on why the gift was made. 6. The crown's contentions were as follows: (1) The payment of £ 3.33 m to Parkspa by Mr Levy on 31 May 1973 was not, in the circumstances, a simple interest-free loan to fund Parkspa's business. The evidence shows that there was no investment of £ 3.33 m in Financial Times Share Index; the only share purchase was the Wearwell new issue. It is clear on the evidence that the placing of the funds on deposit at interest was envisaged and approved by Mr Levy. (2) The loan or payment of £ 3.33 m interest free to Parkspa coupled with its placing on deposit at interest was an 'arrangement' constituting a statutory settlement within the meaning of s 454(3) and Mr Levy must be deemed to be the 'settlor' in relation thereto because he provided the funds. (3) There was bounty at the time of loan or payment (which is the relevant time) because: (i) Parkspa is a legal person distinct from Mr Levy under the ordinary law and must be so regarded for purposes of the application of the settlement provisions, in the absence of provision therein to the contrary; (ii) Parkspa was given the use of money interest free, which it could otherwise clearly only have obtained at interest; (iii) the value of Mr Levy's estate was lessened, because a sum payable on demand is not as valuable as cash in hand, and the value of Mr Levy's shares in Parkspa was not immediately increased because of the existence of the debt to Mr Levy; (iv) Mr Levy said that he would not have made a payment of £ 3.33 m to a stranger on the terms he made it to Parkspa; (v) the question of bounty should be tested objectively rather than subjectively; (vi) it is only if it is found that Parkspa was acting as nominee for Mr Levy in relation to the £ 3.33 m that it can be said that this was, in fact, a transfer from one pocket of Mr Levy to another, consequently involving no bounty; (vii) if the argument on behalf of the taxpayer that there is no bounty is right, it means that, even if a gift was made by the sole beneficial owner of shares in a company to that company, there would be no bounty; in other words the taxpayer's argument proves too much. Mr Bates said that (i) was a matter of law and (ii) to (iv) are matters on which evidence was heard. Turning to (v), the submission for the Crown is that the issue whether there is bounty should be tested objectively. It could be said that this means that a bad bargain can be a statutory settlement; but you would still have to find a bounteous arrangement to which the statutory settlement provisions would apply. Inland Revenue Comrs v Leiner (1964) 41 TC 589 at 595, 596 (observations of Plowman J) shows that one does approach the matter objectively. Even if the test is subjective, there was amply evidence going to the credibility of the claim that no bounty was intended. The evidence shows that Mr Levy was intending to benefit the company at his own expense. Although that it is true of any interest-free loan, here there is the extra element that the lender controlled the way in which the money was used by the company. (4) If the payment of £ 3.33 m was a loan, the money became the company's. The loan plus the placing of those funds on deposit by Parkspa constitute an 'arrangement' and therefore a statutory settlement. 'The property comprised in the settlement' was the sum of £ 3.33 m. The power to demand repayment was a 'power to diminish the funds comprised in the settlement' and, therefore, constituted a power to 'revoke' the settlement (see s 446(1)(a) and (2)(a)). The income which accrued to Parkspa from the deposit of the money is the 'income arising under the settlement'. Accordingly s 446 applies. (5) Sections 448 and 457 also apply to this case. The statutory settlement for the purposes of those sections could take either of the following forms: (i) As with s 446, there was an (arrangement' consisting of the loan coupled with the placing of the moneys. (ii) Alternatively, the incorporation of Parkspa as a stock and share dealer and money lender was an 'arrangement' constituting a statutory settlement within the meaning of s 454(3) and, by subsequently making an interest-free loan Mr Levy provided funds for the purposes of the arrangement and so is deemed to be a 'settlor'. The Crown conceded that the incorporation of Parkspa was not a transaction involving bounty and that the 1973 transactions were not in contemplation when Parkspa was incorporated in 1959, but submitted that a non-bounteous arrangement can become an 'arrangement', and therefore a statutory settlement, at the point of time when funds are put in by way of bounty. Section 448 does not require there to be 'property comprised in the settlement', only 'income arising under the settlement'. Here s 448 applies because the arrangements were such that Mr Levy had the means to secure the application for his benefit of the income arising under the statutory settlement. Counsel for Mr Levy submitted that s 457 does not apply because there was no 'property comprised in the settlement'. Section 457 does not require there to be 'property comprised in the settlement'. Here there was income arising under the statutory settlement and that income was applicable for the benefit of Parkspa. Counsel for Mr Levy contends that s 457(1)(d) applies on the grounds that Mr Levy had divested himself of the cash absolutely. That, however, is immaterial, because of the terms of s 457(6). If this was a loan, it is quite clear, because of the power to recall it, that income derived from the loan moneys could become applicable for the benefit of the 'settlor', Mr Levy, and it is equally clear that the loan could be applied for the benefit of the 'settlor'. The following three cases were cited in support of that: Jenkins v Inland Revenue Comrs [1944] 2 All ER 491 at 492-494, 26 TC 265 at 278-280, per Lord Greene MR; Muir v Inland Revenue Comrs [1966] 1 All ER 295 at 305, 43 TC 367 at 381, per Pennycuick J., and Inland Revenue Comrs v Wachtel [1970] 1 All ER 271 at 278-289, 46 TC 543 at 554-556, per Goff J. In the Plummer case Lord Macmillan's observations in the Chamberlain case were quoted with approval, but that was in relation to bounty and not in relation to property comprised in the settlement. Property comprised in the settlement cannot have been relevant in Plummer. (6) Sections 447 and 451 are also applicable. Those sections required there to be a trust, and it is at this juncture that Barclays Bank Ltd v Quistclose Investments Ltd becomes relevant. It is clear in this case that however the evidence is viewed, the payment of £ 3.33 m was not for the purpose of paying an existing debt to Parkspa, and it is a reasonable inference from the facts and evidence that it was intended that the £ 3.33 m might be used for the purposes of the purchase of the Bejam shares on behalf of Mr Levy. There is a factual similarity between this case and the Quistclose case because here the money was credited to a separate loan account in the books of Parkspa. Mr Levy had the equitable right to have the money applied in the purchase of the Bejam shares on Mr Levy's account; Parkspa must have been a trustee. In the Quistclose case Lord Wilberforce referred to an equitable right to have the money applied to the specified purpose and said that the secondary trust would be a matter of express or implied agreement. We do not know whether there was a secondary purpose here, but it would be consistent with the primary trust that the equitable right of Mr Levy continued by implication in relation to the moneys which were returned to Parkspa after its largely unsuccessful bid for Bejam shares. The trust attaching to those returned moneys would be what was referred to in Quistclose as a constructive trust. The terms of that constructive trust were that Mr Levy continued to have the equitable right to have the moneys applied as he wished. A loan coupled with such a trust would bring Mr Levy within the scope of ss 447 and 451. (7) Alternatively, it may be that the payment was not a loan at all and Parkspa held the £ 3.33 m on a bare trust for Mr Levy. In that case, assessments on Mr Levy under the sections dealing with statutory settlements would not be the proper ones, and there would have to be assessments on Mr Levy just as if he had earned the income from the £ 3.33 m himself. (8) Counsel for Mr Levy submitted that ss 446 to 457 are not apt to catch trading profits. The Crown does not accept that the interest which Parkspa obtained by putting the £ 3.33 m on deposit constitutes trading receipts.Interest cannot be trading receipts because it is pure income. Income tax source principles have to be applied for the purposes of corporation tax computations (see s 251). The Crown does not accept that the profit or gain on the dealing with the sterling certificates of deposit was a trading profit, especially having regard to the fact that the detailed profit and loss account, although treating it as income, does not treat it as ordinary income from trading in securities. (9) Counsel for Mr Levy also submits that ss 446 to 457 cannot apply to the income of companies; he relies on s 238.In the Crown's submission that provision is plainly dealing with the problem that a company might otherwise be taxed to income tax as well as corporation tax. Section 238(2) says that the provisions of the Income Tax Acts relating to the charge of income tax other than surtax shall not apply to the income of a company. The only surtax provisions which could apply are the apportionment provisions under the close company legislation and apportionments are specifically dealt with by a 454(1)(b). The words of s 454(1) are not apt to include income of companies but the word 'includes' in s 454(1) shows that this is not an exhaustive definition. If counsel for Mr Levy is going to establish that 'includes' means 'means' a heavy burden rests on him; he must show an appropriate context, (see Dilworth v Comr of Stamps [1899] AC 99 at 105-106 particularly per Lord Watson). The context of s 454 is not such as to establish that the definition of 'income arising under a settlement' in s 454(1) is exhaustive. Section 454(1) was originally s 41(4)(a) of the Finance Act 1938. The wording of the definition was amended in 1965 when the close company legislation was introduced, and s 454(1) was amended in 1972 when the close company legislation was altered. It is clear from that, in the Crown's submission, that Parliament, having considered whether any amendment was necessary to deal with the change-over to corporation tax, evidently decided that it was not. It would be astonishing if Parliament had intended income to fall outside the scope of the charge under the statutory settlement provisions which would previously have been within it. (10) Counsel for Mr Levy contended that this would be a revolutionary charge to income tax. The submission for the Crown is that this case depends on its own particular facts. Decision on questions of Law 7. Although the assessments raised on Mr Levy in this case refer only to ss 446 and 457, it is common ground between the parties to this appeal that, by virtue of s 114 of the Taxes Management Act 1970, these assessments could be used to found a claim for tax under ss 447 to 451 as well as 446 and 457. We were informed by Counsel of Mr Levy at the hearing that those instructing him had been made aware in correspondence of the various bases on which the Crown seek to justify taxing Mr Levy on the income which Parkspa derived from the £ 3.33 m and the arguments on them have been fully canvassed before us. We shall therefore deal in this decision with all the different bases on which it is sought to tax Mr Levy in respect of that income. 8. It is clear, and is common ground, that Inland Revenue Comrs v Plummer, and the earlier decisions which were followed by the House of Lords in that case, are authority for the proposition that there cannot be a statutory settlement unless there is an element of bounty; but the test to be applied in determining whether there is bounty is a matter which is in dispute between the parties to this appeal. The Crown contends that the question whether there is bounty should be tested objectively rather than subjectively and that where there is a diminution in the estate of the alleged 'settlor' there is bounty. Mr. Bates cited Inland Revenue Comrs v Leiner in support of his submission that bounty must be objectively tested. We do not accept the submission that the test should be objective. In our view, the decision in Inland Revenue Comrs v Lenier does not support that submission for two reasons: first, it was conceded on behalf of Mr Leiner in the High Court that the transactions concerned amounted to an 'arrangement' within the meaning of the statutory settlement provisions, and that Mr Leiner was a 'settlor'; the sole issue was whether certain income was 'provided' by him within the meaning of those provisions. Secondly, in any event, the question whether bounty should be subjectively or objectively measured appears not to have been canvassed in the case and is not expressly mentioned in the judgment. It seems to us also that there are strong arguments in principle against applying an objective test. In our view the notion of bounty does not include unintentionally bestowing an advantage on another in a transaction where the propositus' intention was to make himself better off as a result of the transactions concerned, or at least to leave himself no worse off. In our opinion a bad bargain is not bounty. The cases show that a statutory settlement can take the form of a taxpayer with a substantial earning capacity agreeing to work for a company in which he or his family are interested for a rate of remuneration which is substantially less than the rate which he can command on the market. Suppose the following occurs: X enters into a service contract with a private company the majority of the shares in which are held on discretionary trusts created by X's father in favour of X's wife and children; suppose further that, although X genuinely believed his salary to be fair remuneration for the services involved, in fact it is below the market rate. If the Crown's contention were correct, X would be taxable under the statutory settlement provisions on the extra profits made by the company as a result of paying him less than the market rate of remuneration. In our view, that is an astonishing and unreasonable result. It is possible to envisage many different examples of people unintentionally bestowing advantages on others. In our judgment, Parliament cannot have intended a bad bargain to be a statutory settlement. Accordingly, we hold that the test for determining whether there is bounty is subjective. That conclusion does not open the door to abuse, because the onus will lie on the taxpayer to establish, as a matter of fact, that no bounty was intended. A person is presumed to intend the natural consequences of the acts, and, where a taxpayer gives up something in circumstances where it is patently disadvantageous to him, he will, to say the least, have an uphill task if he seeks to convince this tribunal that no bounty was in fact intended. In case this appeal should proceed further and our decision is held to be wrong on this point, we have included in paras 11 to 20 below findings of fact covering either alternative. Likewise, we are of the opinion that the test is not whether there is, immediately after the initial steps in the arrangements, a diminution in the alleged 'settlor's' estate. There will be many instances of perfectly sensible business or personal investment transactions which produce, in the short term, a technical diminution in the taxpayer's estate, but which are intended to, and do, produce compensating advantages to the taxpayer in the future. The example of the ten individuals combining together to form a private trading company and each contributing £ 1,000 for 10% of the issued shares is one such instance. Each of them suffers, in the short term, a diminution in his estate. Beforehand each had £ 1,000; after forming the company each has a shareholding which is worth less than £ 1,000. If it is their intention to make money out of that company, it would, in our view, be absurd to suppose that Parliament intended that transaction and transactions like it to be statutory settlements. 9. In our opinion, the speeches of the majority of their Lordships in Inland Revenue Comrs v Plummer are authority for determining what constitutes a statutory settlement by reference to what Parliament can reasonably be supposed to have intended. In our view, the sensible and normal meaning of bounty is intentionally making oneself worse off in order to make someone better off. We also take the view that in determining whether there is bounty we should look at the transaction as a whole and from the alleged 'settlor's point of view. Thus, in this case, if looking at the transactions as a whole, from Mr Levy's point of view he gave up something, but in circumstances where he anticipated and intended to secure from those transactions a compensating advantage to himself, there would be no bounty and the transactions would not constitute a statutory settlement. Furthermore, that conclusion would not be affected by the fact that Parkspa also obtained advantages. Alternatively, event if, contrary to the conclusion we have reached above, it is held that an objective test has to be applied, we still consider that the transactions should be looked at as a whole from the alleged 'settlor's point of view, but in that event we would have to compare what he gave up with what compensating advantages he actually obtained. Inland Revenue Comrs v Plummer is also authority for the proposition that arrangements which otherwise fall outside the definition of a statutory settlement, as construed by the courts, do not become a statutory settlement merely because the arrangements produce fiscal advantages. 10. As part of his submission (5) Mr Bates for the Crown contended that, although the incorporation of Parkspa did not involve any bounty on the part of Mr Levy and the 1973 transactions were not in contemplation when Parkspa was incorporated, nevertheless the incorporation of Parkspa as a dealer in stocks and shares was an 'arrangement' and therefore a statutory settlement because Mr Levy provided bounty in 1973 when he made the payment of £ 3.33 m. He further contended that the £ 3.33 m constituted the providing of funds by Mr Levy for the purposes of the arrangement, with the result that he is treated as a 'settlor'. In our judgment, that submission is wrong in law. We hold that the word 'arrangement' connotes transactions forming part of a plan, and therefore unconnected transactions, the later of which were not contemplated when the earlier were carried out, cannot be added together to form one 'arrangement'. Since it is conceded on behalf of the Crown that, when Parkspa was incorporated there was no bounty; it follows that the incorporation of Parkspa cannot by itself constitute a statutory settlement. It is also conceded on behalf of the Crown that the 1973 transactions were not in contemplation in 1959 or 1960. Applying the construction of the word 'arrangement' which we have adopted, it follows that the 1973 transactions and the 1959 transactions cannot constitute single 'arrangement'. In our view, it is impossible to regard the incorporation of Parkspa as a stock and share dealer as a statutory settlement. We are therefore left with one question: Did the payment by Mr Levy of the £ 3.33 m to Parkspa in 1973 constitute a statutory settlement? In view of our findings of fact below, it is unnecessary for us to express any view on any of the other points of law canvassed in argument. Findings of fact 11. The ensuing paragraphs contain our findings on issues of fact which are not covered by the agreed statement of facts. 12. The incorporation of Parkspa and the acquisition by Mr Levy of his shares in Parkspa did not involve any bounty on the part of Mr Levy. The transactions which took place in 1973 were not in contemplation either in 1959 when Parkspa was incorporated or in 1960 when it commenced business. 13. Parkspa has carried on a trade, within the meaning of Sch D Case I, ever since 1960. That trade comprises dealing in stocks, shares and other securities, placing money on deposit and generally turning its funds to profitable account. The placing of the £ 3.33 m on deposit until 29 June 1973, the other deposits made by the company, the purchase and sale of the sterling certificates of deposit, and the acquisition and disposal of the Wearwell shares were all transactions carried out in the normal course of Parkspa's trade and accordingly the amounts which the company received as a result of those transactions form part of the gross receipts of Parkspa's trade. 14. The terms on which the £ 3.33 m was paid by Mr Levy to Parkspa were not recorded in any document; the arrangements were made orally between Mr Levy and Mr Dean. We find that the £ 3.33 m was not subject to any trust of any kind or any equitable obligation whatsoever to use the money in any particular way. The £ 3.33 m was a straightforward interest-free loan to Parkspa by Mr Levy.The money was not lent for the specific purpose of subscribing for the Bejam shares; it was lent to Parkspa to use for the general purposes of its business. The terms were that the £ 3.33 m should be repayable on demand, but subject to the proviso that if, when repayment was demanded, the funds were invested in a form which prevented the company from making immediate repayment, repayment to Mr Levy should be deferred for up to six months. In that respect it differed from the other interest-free loans which Mr Levy had made to Parkspa. For that reason Mr Dean, who kept the company's books, recorded the loan of £ 3.33 m in a separate loan account, (see para 16 below). The particular business venture which Parkspa had in mind was investing the £ 3.33 m on the company's account in the Financial Times Share Index. The money was put on deposit in the meantime while the company's officers waited for what they considered to be the right moment to make that investment. In the event that was never done because the financial situation in the country generally caused the market to deteriorate and, as a result, the company's officers abandoned the idea of investing in the Financial Times Share Index. The figures show that their decision was wise. On 6 June 1973 the Index stood at 447.2, by 30 October it had fallen to 433.3, and by 4 December it had fallen to 354.6. Investing in the Index would therefore have been disastrous for the company. In his capacity as sole director and 99% shareholder Mr Levy controlled the way in which Parkspa's business was carried on; Mr Dean acted on his instructions. 15. Once the £ 108,392 owing to Mr Levy was deferred, the company's debts to outside creditors were covered by its other assets; that was the position both at 30 April 1973 and 30 April 1974. It follows, and we so find, that there was no likelihood of Parkspa having to use any of the £ 3.33 m to meet liabilities to outside creditors. We also find that Mr Levy's position and standing were such that he could not, and would not, let any of his companies go into insolvent liquidation. 16. The extracts from Parkspa's books showing the state of the Ralph Levy loan accounts over the relevant period were not agreed documents, but they were duly proved before us at the hearing by Mr Dean. The entries appearing in the period from 30 April 1972 to 30 April 1973 in the account headed 'Ralph Levy -- Loan Account' show the amounts which Mr Levy had outstanding on ordinary interest-free loans to the company during the period. (We shall refer to that as the 'no. 1 loan account".) The £ 3.33 m loan to Parkspa is recorded in the account headed 'Ralph Levy -- Loan Account No. 2' (the no 2 loan account). Mr Dean considered it right to open a separate loan account in respect of the £ 3.33 m because the terms on which it was lent to Parkspa were different from those applicable to the other interest-free loans. 17. The mechanism by which the bids for the Bejam shares were made was this. Parkspa and quite a number of other persons all made bids for Bejam shares as nominees for Mr Levy. Cheques drawn on Parkspa were used to fund those bids; the other nominees were not called on to provide their own cheques. It was considered that there would be a heavy over-subscription for the Bejam shares, and the system of using numerous nominees was employed on order to enhance Mr Levy's chances of securing a larger allocation. The sums which accompanied the bids totalled £ 3,280,680 and the no 1 loan account was debited accordingly. That put the no 1 loan account heavily into deficit, but the no 2 loan account was £ 3.33 m in credit and that exceeded the deficit on the no 1 loan account. When the sum of £ 3,248,280 was returned by the issuing house that was credited to the no 1 loan account. The same system was adopted in the case of the Sainsbury shares. We find that the £ 3,280,680 which was provided by Parkspa in connection with the Bejam bid constituted a repayment by the company to Mr Levy of part of the sums owing to him, and that the £ 3,248,280 returned by the issuing house (after the bid had been successful only to the extent of £ 32,400 worth of shares) was a further interest-free loan by Mr Levy back to Parkspa on the same terms as those applicable to the £ 3.33 m. Likewise we find that the £ 739,000 provided by Parkspa in connection with the Sainsbury bid was a repayment by the company to Mr Levy and that the £ 724,710 returned by the issuing house was lent back by Mr Levy to Parkspa on the same terms. We are not entirely clear why those repayments and loans back were recorded in the no 1 loan account, rather than in the no 2 loan account, but we have no doubt that they were repayments and loans back. That conclusion is not affected by the fact that, in the company's books, those transactions were recorded by putting the no 1 loan account into deficit with a credit in the no 2 loan account to cover it, rather than debiting the no 2 account itself. 18. We find that the sums paid by Parkspa to Mr Levy on 29 and 30 October 1973, totalling £ 3.44 m constituted repayment to him by Parkspa of the loan of £ 3.33 m and repayment of part of Parkspa's remaining indebtedness to Mr Levy (ie a reduction of £ 110,000 in the no 1 loan account). 19.We find that Mr Levy's purpose in lending the £ 3.33 m to Parkspa was to make himself better off. In other words, his intention was to secure for himself advantages from making that loan which would more than outweigh the net of tax income which he could have secured by investing those funds himself. Parkspa could secure a much larger net return from the £ 3.33 m than Mr Levy, because companies pay tax at a lower rate than individuals, and furthermore Parkspa had losses. He thought, if he made the loan, his shares and the deferred debt of £ 108,392 would be worth more. As he put it, 'The company owed me £ 108,000 odd and I was trying to get it back". His objective was to benefit himself and that he achieved. Looking at the transactions as a whole and applying a subjective test, we find that the interest-free loan of £ 3.33 m which Mr Levy made to Parkspa did not involve any bounty. 20. In case we are wrong and it is held that an objective test must be applied in determining whether there is bounty, we set out the following further findings of fact. If we are to apply an objective test, we have to compare what Mr Levy gave up by entering into the 'arrangement' with the advantages he secured from that 'arrangement'. The Crown contends that the loan £ 3.33 m to Parkspa plus the placing of that money by Parkspa constitutes an 'arrangement' (within the meaning of the statutory settlement provisions). We thus have to compare what Mr Levy obtained as a result of lending the money to Parkspa interest free and Parkspa placing those funds, with what his position would have been if the arrangement had not been carried out. Adopting the phraseology of Plowman J in Inland Revenue Comrs v Leiner, we must view the arrangement as a whole, determine the extent to which Mr Levy was worse off as a result of the arrangement, and ascertain the extent of any compensating advantages to him. As 99% shareholder and sole director Mr Levy was able to control the way in which Parkspa used the money in the course of its business. Parkspa's liabilities to its outside creditors were covered by its existing assets. Mr Levy gave up the opportunity to obtain income by investing the £ 3.33 m in his own name for the five months from the beginning of June to the end of October 1973. Any such income would have been taxed in Mr Levy's hands at very high rates, most if not all of it at 98%. The rate of tax on companies was much lower, and furthermore Parkspa had loss relief available. The profits (net of tax) which Parkspa made by using the £ 3.33 m were considerably in excess of any income return (net of tax) which Mr Levy would have obtained if he had invested the money himself. Those profits of Parkspa inured for Mr Levy's benefit in two ways. First, the no 1 loan account (which was a deferred liability) was substantially reduced, in addition to repayment of the £ 3.33 m. Secondly, Parkspa's position was changed from being loss making to being profitable. In the period which began on 1 May 1973 and ended on 30 April 1974 Parkspa made a profit (after taxation) of £ 54,104; that cleared off the deficit brought forward of £ 43,701 and lfet a balance carried to the balance sheet of £ 10,313. That benefited Mr Levy in his capacity as 99% shareholder and loan creditor in respect of the balance still owing to him on the no 1 loan account. We find that what Mr Levy lost in his capacity as the lender of the £ 3.33 m interest free he more than gained in his other capacities. Accordingly, we find that, even if an objective test is to be applied, there was no bounty involved in the loan of the £ 3.33 m by Mr Levy to Parkspa. 21. On the basis of the expert evidence of Mr Langdon we find that the making of interest-free loans by shareholders in private companies to their own companies is very common and normal. Mr Langdon's view was that in most cases their reason for doing so was to promote their own interests by supporting the company; they did it to confer a benefit on themselves. Conclusion 22. The findings of fact set out above lead us to the conclusion that there was no statutory settlement made by Mr Levy in this case. It follows that the appeal succeeds and we discharge the assessments. COUNSEL: Andrew Morritt QC and John Mummery for the Crown. Michael Nolan QC and Andrew Thornhill for Mr Levy. JUDGMENT-READ: 6 April 1982. PANEL: NOURSE J JUDGMENTBY-1: NOURSE J JUDGMENT-1: NOURSE J read the following judgment: In this case the Crown claims that an interest-free loan made by an individual to a company, wholly owned by him and engaged in the trade of dealing in stocks and shares, was a settlement for the purposes of the Income Tax Acts, and that the income derived by the company on the investment of the loan is accordingly to be treated for those purposes as the income of the individual and not of the company. On the face of it that is an extraordinary claim for the Crown to have made. An interet-free loan to a company in which the lender is the sole or a substantial shareholder is an everyday transaction in the commercial world. As such it would invariably be regarded as one made for good commercial reasons divorced from altruism or charity. How then can it be thought that legislation whose purposes is to tax a donor on income given away as if he had retained it has anything to do with a transaction of that nature? The answer, submits the Crown, is to be found in the wide definition of 'settlement' contained in s 454(3) of the Income and Corporation Taxes Act 1970 as expounded by the House of Lords in the recent cases of Inland Revenue Comrs v Plummer [1979] STC 793, [1979] 3 All ER 775, [1980] AC 896 and Chinn v Collins (Inspector of Taxes) [1981] STC 1, [1981] 1 All ER 189, [1981] AC 533. I think it clear that those cases support the opposite conclusion. The Special Commissioners rejected the Crown's claim, and I agree witn them. I propose to deal with the matter as shortly as I reasonably can. The lender was Mr Ralph Levy. At the material time in 1973 he was, and had for many years been, the sole beneficial shareholder in a company called Parkspa Securities Ltd, which was resident in the United Kingdom and carried on the trade of dealing in stocks and shares. It had for many years been the practice of Mr and Mrs Levy, either individually or jointly, to fund Parkspa by way of various loans on terms that they would be interest-free and repayable on demand. On 30 May 1973 Mr Levy made a loan to Parkspa of £ 3.33 m. It was argued before the Special Commissioners that the money so lent was not at Parkspa's free disposition, but that suggestion was clearly unsustainable and the commissioners found against it. The money was lent to Parkspa to use for the general purposes of its business. It was to be repayable on demand, but subject to the proviso that if, when repayment was demanded, the funds were invested in a form which prevented Parkspa from making immediate repayment, then it should be deferred for up to six months. The commissioners found that the transaction whether viewed subjectively or objectively, did not involve any bounty on the part of Mr Levy. Repayment of the loan was made by 30 October 1973. It is common ground that Parkspa derived income from the use of the £ 3.33 m between 30 May and 30 October 1973, and it is in respect of that income that the Crown has raised alternative assessments for 1973-74 under s 446 and 457 of the 1970 Act. It is common ground that by virtue of s 114 of the Taxes Management Act 1970 those assessments could be used to found a claim for tax under ss 447 to 451 as well as under ss 446 or 457. It is also common ground that in whatever way the claim is put it will fail unless the Crown can first establish that the loan of £ 3.33 m was a settlement within s 454(3) of the 1970 Act. That subsection opens with these words: 'In this Chapter, "settlement" includes any disposition, trust, covenant, agreement or arrangement...' The Crown contends that the loan was a disposition or perhaps an agreement. It was certainly a disposition, but was it one within the definition? It has long been recognised that Parliament cannot have intended the definition of 'settlement' to extend as widely as a literal reading of it might suggest. The law was settled in Inland Revenue Comrs v Plummer, where it was held that a transaction can only be within the definition if it is one which contains an element of bounty. But as Lord Wilberforce and Lord Roskill pointed out in Chinn v Collins (Inspector of Taxes) [1981] STC 1 at 7, 12, [1981] 1 All ER 189 at 195, 200, [1981] AC 583 at 549, 555, that is a conception not without its difficulty, and the word 'bounty' is not one of definition but a judicial gloss descriptive of those classes of cases which are caught by the definition in contrast to those which are not. Accordingly, there are from time to time bound to be difficulties in applying the test to the facts of particular cases. Thus in Chinn v Collins (Inspector of Taxes) itself the Court of Appeal had taken the traditional view that an appointment by the trustees of a settlement under a special power did not contain an element of bounty since they were merely the agents of the settlor whose bounty had been exhausted on the creation of the settlement. The House of Lords disagreed, and it is now the law that it may be enough for the transaction to contain an element of derivative bounty of the kind conferred by the exercise of a special power of appointment. That said, the decision in that case affirmed the test established in Inland Revenue Comrs v Plummer. It certainly gives no ground for imagining difficulties in cases where they do not exist. However, Lord Roskill said this [1981] STC 1 at 12, [1981] 1 All ER 189 at 200, [1981] AC 533 at 555: 'What the cases have sought to do is to distinguish between those cases where the recipient has in return for that benefit which he has received accepted some obligation which he has to perform, either before receiving the benefit or at some stated time thereafter, and those cases where the recipient benefits without any assumption by him of any correlative obligation. In Plummer's case the transaction in question was for consideration. Under this scheme there was an appointment without consideration.' Fastening onto that passage, the Crown submits that Parkspa benefited from the loan without any assumption by it of any correlative obligation for the payment of interest or otherwise, the obligation to repay not counting for that purpose. Accordingly, it is said, there was an element of bounty in this case. To that there is an obvious answer. What Lord Roskill was seeking to do was to summarise the effect of previous cases. That is an exercise which cannot be conclusive in regard to one which is far removed from them and has never before been thought of. Moreover, his Lordship had earlier said that on the authorities as they stood it seemed clear that if the particular transaction was a commercial transaction devoid of any element of bounty it was not within the definition. It is obvious that Lord Roskill was not saying that something which would otherwise be a commercial transaction devoid of any element of bounty ceases to be one merely because he who is at the receiving end of it does not assume any correlative obligation. The law can therefore be summarised as follows. Before a disposition, trust, covenant, agreement or arrangement can be a settlement within s 454(3) of the 1970 Act it must contain an element of bounty. For that purpose a derivative bounty of the kind conferred by the exercise of a special power of appointment may be enough. On the other hand, a commercial transaction devoid of any element of bounty is not within the definition. The absence of any correlation obligation on the part of him who is at the receiving end of the transaction may be material, but is not conclusive, in determining whether it contains an element of bounty or not. If those principles are applied to the facts of the present case, in particular to the commissioners' finding that the transaction did not involve any bounty on the part of Mr Levy, it is clear that there was no disposition, agreement, or other transaction within s 454(3) of the 1970 Act. It was the simple case of a commercial transaction devoid of any element of bounty, and immaterial that Parkspa did not assume any correlative obligation for the payment of interest or otherwise. It is just conceivable that the Inland Revenue, thicketed about with legislation and case law, might think that these provisions of the Income Tax Acts had some concern for a transaction of that nature, but that is hardly a view which could be shared by anyone who got out and looked at the wood as a whole. It is just conceivable that the Crown had an arguable case before the commissioners since it was possible, in theory at any rate, that they would find that the transaction did involve some element of bounty on the part of Mr Levy. But once the contrary finding had been made the Crown's claim was bound to fail. The commissioners thought that the question was to be determined subjectively and not objectively. I very much doubt whether that view is correct, although in an objective determination the motives of the lender must be an important factor. The commissioners made findings on the two alternative bases. While they may in the process have attempted a too rigid segregation of the facts, I think it clear on the whole of the material before them that they could have come to no other conclusion. In my view this appeal, although very well argued by counsel for the Crown, is a hopeless one. The Crown having failed to establish that the loan of £ 3.33 m was a settlement within s 454(3) of the 1970 Act, it is unnecessary for me to decide any of the other questions which were argued on this appeal. The second and third proceeded on the assumption that there was a settlement in the first place and were directed to ascertaining what was the property comprised in it and what was the income arising under it. As to those questions, i will only observe that it must be very difficult to say that there is any such property or income in a case where the subject matter of the disposition is a loan made to a company to use for the general purposes of its business, and thus applicable in any manner which its constitution allows; a consideration which only serves to emphasise the unreality of the Crown's claim in this case. The fourth and final question depended upon the effect of s 238(2)(a) of the 1970 Act, which is, submitted counsel for Mr Levy, to preclude any charge to income tax (as distinct from corporation tax) on the income of a company resident in the United Kingdom. Counsel for Mr Levy said that that means that s 446 and its related sections have no application to this case. The answer of counsel for the Crown was to rely on s 250 of the 1970 Act. That is a question on which I prefer to express no view at all. The appeal is dismissed. DISPOSITION: Appeal dismissed with costs. SOLICITORS: Solicitors of Inland Revenue; Linklaters & Paines (for Mr Levy). |