Commissioner of Inland Revenue v C. Roose (Fiji) Ltd [1962] FJLawRp 46; [1962] 8 FLR 94 (4 May 1962)

(1962) 8 FLR 94

IN THE COURT OF APPEAL OF FIJI

COMMISSIONER OF INLAND REVENUE

V.

C. ROOSE (FIJI) LIMITED

Appellate Jurisdiction

Income tax-capital or income-sale of shares by investment company-whether resulting profits assessable to tax-test to be applied-same test applicable to investment company as to others-Income Tax Ordinance (Cap. 172) s.3.

In 1951 the respondent company began to operate as an investment company and in 1953 passed a resolution that the available funds of the company should be invested by the directors in sound securities. From 1951 to 1960 only two sales of shares by the company took place and the profits from these sales were assessed by the Commissioner of Inland Revenue as part of the income of the company for the year 1960. The Court of Review held that the realisation of the two share investments was not a normal or necessary step in the investment business carried on by the company and that the profits thereon were not assessable to income tax. On appeal from that decision-

Held: 1. The test to be applied in determining whether such profits are capital profits or income is that laid down in Californian Copper Syndiv. Harris, (inf (infra) i.e. whether they arise from the realisation by the owner of an ordinary investment, or from a realisation which is an act done in what is truly the carrying on, orying out, of a business. Ths. This test is applicable to an investment company as well as other persons.

2. In applying the test, the circumstances giving rise to each sale must be considered individually on their merits to ascertain whether it is a normal trading transaction or a genuine change of investment made for a specific purpose other than sale with a view to profit in the normal course of the company's trading transactions.

3. The object clauses of the Memorandum of Association are not decisive of the question and were in any event equivocal.

On the facts of the case the avowed intention of the company in 1953 to become a bare investment company appeared to have been implemented, and there was no reason for the Court to interfere with the decision of the Court of Review that the particular sales were merely realisation of investments.

Cases referred to: Commissioner of Inlandnuevenue v. Scottish Automobile and General Insurance Co. Ltd (1931) T.C. 381; [1932] S.C. 87; Californian Copper Syndicate v. Harris (1904) 5 T.C. 11904) 6F (CtF (Ct. of Sess.) 894; Danmark Propry Ltd. and Forestwood Proprietary Ltd. v. Commissioner of Taxation for the Commonwealth ofth of Australia ) 2 A.I.T.R. 517.

Apfp>Apfrom a decision oion of the Court of Review allowing the appeal of a taxpayer against an asan assessment of the Commissioner of Inlanenue.

A. D. Leys fe appellant.
<
A.A. M. Greenwood for the respond/p>

The fThe facts sufficiently appear from the judgment.

HAMMETT P.J.: [4th May, 1962]

This is an appeal by the Commissioner of Inland ue from the decision of the Court of Review sitting at Suva Suva.

The Respondent is a private limited liability company which was incorporated in Fiji in 1949.

In 1960 it disclosed a net profit of £3,531.13.10 in its Profit & Loss Account upon which it is agreed it is liable to tax. In addition there was a surplus disclosed in its balance sheet of £4,297.10.10 resulting from the sale of shares it held in two companies, namely:

South Pacific Shipping Company ҋ31975.

H

Huddart Parker Ltd. &##60;&<;ɘʔ< ҈&&#1#160& ҈ ټ0;

Total ҈&&; <63;410.10/p>

Before the Court of Review there was no dispute on the facts which were reduced to the form of a statement of agreed facts upon which argument was heard. The decision of the Court of Review which was given in a carefully prepared and very clear judgment allowed the appeal of the taxpayer and set aside the assessment.

The Commissioner of Inland Revenue has now appealed against that decision on the following grounds:

1. That having regard to all the relevant circumstances in relation to the respondent company, and in particular to-

(i) its memorandum of association;

(ii) the findings of fact that the sole business carried on by the company since 23rd May, 1953, was as investors, and that at the time of the sale of the share-holdings in South Pacific Shipping Co. Ltd., and Huddart Parker Ltd., the ordinary business of the company was investment;

the Court of Review erred in holding that talizealization of these two share investments was not a normal nor a necessary step in the investment business carried out by the respondent company.

2. That the Court of Review ern holthat the sale of e of thesethese shares was not an act done in carrying on or carrying out a business.

3. That the net profit on the sale of these two shareholdings was profit or gain derived from the sale of personal property and the business of thpayerpayer comprised dealing in such property, and accordingly such net profit was properly assessed by the Commissioner as of ttal income of the respondent company.

The first object for which the RespoRespondentndent company was incorporated in 1949 is set out in its Memorandum of Association in Clause 3(1) which reads:

"3.(1) To purchase or otherwise acquire the motor vessel 'Rawhiti' (commissioned U.S.S. LST-283) together with all its equipment and stores."

There are however a total of 28 sub-clauses to this clause in which the many and varied objects of the company are set out at the end of which appear the words:

"And it is declared that ... the intention is that the objects specified in each paragraph of this clause shall except where otherwise expressed in such paragraph be in no wise limited or restricted by reference to or inference from the terms of any other paragraph ... and each object shall be and be deemed, an independent object."

Amongst the other 28 sub-clauses in Clause 3 is the following, of which I quote merely the relevant parts:

"3.(2) To purchase ... shares of companies ... interested in ... ships ... and to ... sell any shares as aforesaid."

I would add that it is conceded that both the companies, in respect of whose shares this appeal is concerned, did possess or were interested in ships.

The Respondent company's objects clearly include the purchase and sale of shares as is shown by a reference also to sub-clauses (9), (10) and (24).

The objects clauses of the Memorandum of Association of a company are not, however, decisive. The mere fact that a company is given in its Memorandum power to buy and sell shares is by no means conclusive when considering whether if it exercises those powers it is trading in shares or selling them as part of its trading activity. The question is whether or not the company was in fact buying and selling shares as a part of its normal trading activity. (See the Comoner of Inland Revenuevenue v. The Scottish Automobile & General Insurance Co. Ltd. 16 Tses 381 at page 389e 389).

In 1951 the Respondent sos only ship the "Rawhiti" and began to invest the proceeds eeds of sale and its capital in mortgages and shares. On 8th June, 1951, tmpany resolved in Annual Geal General Meeting to invest up to £10,000 on securities approved by its Directors and Solicitors. On 23rd May, 1953, a further resolution was passed in the following terms:

"It was resolved henceforth the available funds of the company should be invested at the discretion of the Directors in sound securities."

From the Statement of Agreed Facts, there was ample material upon which the Court of Review held, and, in my view, properly held, that since 1953 the company has ceased to carry on business as a shipping company and has carried on business solely on investors.

"The only bss carricarried on by the company since that date has been the investment of its capital in share and loan securities and the inof the company has been derived from interest and dividend returns on these investments. Ths. There is no evidence that the policy of the company has been to obprofits from dealing iing in shares for profit. In fact the agreed facts show a clear policy of investment in sound share and loan securities and interest return."

It is the contention of the company that it is only its income, profits or gains received by way of dividends and interest on its investments, that are liable to tax. It contends that the gains which were derived when it changed one capital asset into another capital asset were capital gains and not income, or trading gains and profit. It maintains that it is not a company that is trading or dealing in shares and does not make its income by buying and selling shares but by the dividends it recovers from such shares and the interest it receives on its mortgages. It contends that the fact that it has changed two of the capital assets it held by selling them and buying others does not alter the fact that it is not a company whose object is to make a profit by buying and selling shares or by dealing in or trading in shares.

For the Commissioner of Inland Revenue, the learned Attorney-General has pointed out that if it was the company's intention to hold its shares in perpetuity there might be some force in this argument. He contends that this is obviously not the intention of the company as is borne out by the fact that it has already sold two large holdings of shares. Once it is conceded that in order to carry out its scheme of profit making by the receipt of dividends on shares or sound securities, it must, in the very nature of things, become necessary from time to time to sell some of the securities held and re-invest in others, then any profits realised on the sale of such investments is a profit made in an operation of business in carrying out a scheme for profit making.

The material part of the definition of total income in Section 3 of the Income Tax Ordinance reads:

"Profits from a trade or commercial or financial or other business ... directly or indirectly received by a person ... from any trade, manufacture or business ...:

Provided that without in any way affecting the generality of this subsection 'total income' for the purpose of this Ordinance shall include-

(a) all profits or gains derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property, or if the property wasired for the purpose of e of selling or otherwise disposing of the ownership of it and all profits or gains derived from the carrying on or carrying out of any undertaking or scheme entered into or derived for that purpose of making a profit.

Provided that the profit or gain derived from a transaction of purchase and sale which does not form part of a series of transactions and which is not in itself in the nature of a trade or business shall be excluded."

It is the contention of the learned Attorney-General that it is not possible for an investment company to sell any of its holding of shares which it had acquired in the course of its business for the purpose of earning income from its dividends, with the intention of re-investing the proceeds of sale in other shares from which it presumably hopes to obtain a better or more secure source of dividend income, without any profit made on the transaction becoming, in the words of Lord Justice Clerk in Californian Coppericate cate v. Harris (1904) . 159:

"'a ga'a gain' made in the operation of business in carrying out a scheme forit making."

The Court below carefully reviewed the authorities cited before it, all all of which were among the many also cited to me by both Counsel, and then went on to say, having considered these authorities:

"I am satisfied that the true distinction to be drawn in cases of this nature is between cases where the realization of investments is an essential feature of a business and cases in which the realization of investment is merely incidental to a business."

With this statement both sides in this present case agree.

The learned Magistrate did, however, go on to say:

"I am satisfied that in this case the realization of the two share investments in question was not a normal nor a necessary step in the investment business carried out by the company. I accordingly hold that the sale of these shares was not an act done in carrying on or carrying out a business but merely a realization of investments."

It is with this conclusion that the Appellant disagrees.

I fully appreciate the object of the point made by the learned Attorney-General that since in fact the sole business of the Respondent company is that of investment, to re-invest its assets so as to safeguard its income or the soundness of the sources of income or to better its return on its investments generally, is an integral part of the carrying on of its business. On the other hand this argument leads to the conclusion that where an investment company is concerned there cannot be any distinction for tax purposes between one that ostensibly and deliberately sets out to make profits by the repeated sale and purchase of shares and is in fact a trader in shares, and one that quite clearly does not in fact trade in shares and does not wish or intend to trade in shares but expressly wishes to invest its assets in shares and to derive its entire income from the dividends and interest paid on those shares. This argument leads to the conclusion that it is never possible for an investment company of this latter sort to change an investment without any profit or loss on any such isolated transactions having to be brought into its profit and loss account for tax purposes. In other words that such a

I it difficult to a to accept this reasoning fully in view of the well known test formulated by Lord Justice Clerk in Californipper Syndicate cate v. Harris (1904) 5 T.C. 159 atin the following words:

:

"It is quite a well settled principle in dealing with questions of assessment of income tax, thate ther of an ordinary nary investment chooses to realize it, and obtains a greater price for it r it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assle to income taxe tax. But it is equally well established that enhanced values obtained frolization or conversion of securities may be so assessable, ble, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business ... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit making."

It appears to me that I am being invited to hold that this test cannot be applied to the case of the sale of shares by an investment company and that investment companies must be treated as persons to whom this test is inapplicable.

The only case I have been able to find in which this problem, as applied to investment companies, has arisen and has been dealt with is the case of Danmark Prop. and Forestorestwood Prop. Ltd. v. Commissioner of Taxation of the Commonwealth of Australia 2 A.I.T.R. 517.

In that case a private investment ny whose assets were all invested in shares sold a comparatparatively minor part of its shares which were earning a low rate of intern order to pay off a bank over-draft on which a higher rate rate of interest was being paid. The profit on the sale of these shares was assessed for income tax and the company appealed against that assessment. The total value of shares held by the company was about £55,000 and shares to the value of £1,800 were sold in one year and shares to the value of £7,000 were sold in the next year. The facts of the sale were consistent both with a mere realization of investment or with the undertaking of the business of trading in shares. The company concerned, although it admittedly had as its principal business the buying and selling of shares, contended that these particular sales were not for this purpose at all but were for the express purpose of paying off an overdraft.

A full Court of the Commonwealth High Court allowed the appeal and held that the profit on these particular sales of shares in these particular circumstances were not liable to tax. In the judgment of Williams J. appears the following passage:

"Having regard to the nature of the company's assets which have always consisted entirely of shares, to the length of time these shares have been held, and to the circumstances which gave rise to the sales, it appears to me that the proper conclusion on the facts is that in selling the shares in the relevant year the company was not trading in shares of carrying out any profit-making scheme but was engaged in realizing investments from which it was obtaining a lower rate of interest than it was paying on its overdraft witt with a view to reducing the overdraft and changing into investments carrying a higher rate of interest."

This decision in respect of an investment company whose avowed principal object and business was the buying and selling of shares appears to me to support the view that the question of whether an investment company is liable to tax on the profits made on the sale of its shares should be determined by the same test which applies to sales of such assets by other persons as was formulated by Lord Justice Clerk in the ornian Copper Syndicate case to which I have already referred. It appears to me that the method of applying this test to the case of an investment company is to ascertain whetherparti shares, when soln sold were treated as investments of the company, or whether they were trre treated as part of its "stock in trade" at the time they were sold. In other words the circumstances giving rise to each sale must be considered individually and on their merits before it can be determined whether the sale is a normal "trading transaction" the profit from which is liable to tax or is in fact a genuine change of investment made for a specific purpose other than a sale with a view to a profit in the normal course of the company's trading activities.

In applying that test to the facts of the present case it seems to me that the following factors, amongst others, must be considered:

1. The objects of the company as set out in its Memorandum of Association;

2. The purposes and intentions of the company as seen from its actual trading practices and the manner in which it has in fact carried on its business in general;

3. The evidence of what was in fact the object and purpose of the company in carrying out the transactions under consideration in. particular.

Considering these factors in respect of the present case the position appears to be as follows. Nearly all companies nowadays have power to invest funds in stocks and shares. The objects set out in the Memorandum of Association are, in my view, equivocal and are equally consistent with the Respondent company operating either as a bare investment company, by which I mean a company that derives its income solely from the dividends and interest received on its investments, or as a trading investment company, by which I mean a company that derives its income not only from the dividends and interest it receives on its investment but also from the profits it makes in its business of buying and selling shares.

The history of this company's activities shows that it first began to operate as an investment company after selling its only ship in 1951. In 1953 the company passed a resolution in the following terms:

"It was resolved henceforth thelable funds of the compacompany should be invested at the discretion of the Directors in sound securities."

In the period of nine years from 1951 to 1960 only two sales of shares have taken place. The reasons given by the governing director for these two sales by the company are as follows:

Huddart Parker Co. Ltd. Shares

"The Wanganella is a losing proposition and coal being won by the company is costing more than it is sold for so, I considered that this investment would eventually be a bad one for the company."

South Pacific Shipping Co. Ltd. Shares

"Some friends asked me to join them in this venture and become a Director. I agreed to do so if they would register the company and the ship in Fiji. They duly registered them in Fiji. The ship 'Babinda' was purchased in Australia, but arrived in New Zealand with a New Zealand crew, much against my wishes. They ran her for about six months and she lost heavily and they could not continue running her. I then found the money for them to get a crew from Fiji, and she was a paying proposition from then on. My reason for “selling the shares was that the bulk of the shares, and also the control of the ship, were transferred to Australia. I did not consider this set up satisfactory, and, as the Australian shareholders wished to buy my shares, I sold them and resigned as a director of the company."

The avowed intention of the company in 1953 appears to have been carried out and from the history of its own activities it seems to have implemented its own avowed object of becoming what I have termed "a bare investment company".

Under these circumstances I would apply the reasoning of the Lord President in Commissioner of Inland uevenue v. The Scottish Automobile & General Insurance Co. Ltd. 16 T.C. 389:

"The question is not whether thpany might possibly have traded as an investment company, but whether it was in fact tradinrading as such, and whether this particulansaction was part of that trading. Nothing could ould be imagines like like the record of an investment company than the record of this Company's transactions in government securities in connection with its reserve fund as set out on pages 5 and 6 of ase. es not necessarilsarily foly follow from the circumstance that the Company sees fit to sell a block of its government securities, whether the purpose be to get a better return, or whether the purpose be to increase the reserve fund by taking profit from the realisation of a particular block, that therefore the Company is trading in the purchase and sale of the securities forming its reserve fund. Occasional transactions of that kind are not necessarily trading at all, whether in the case of a private individual, a trust or an insurance company."

In that case the Court of Session held that the taxpayer was not liable to tax on the gain realised on the sale of an investment and supported the inferences drawn by the Commissioners from the facts that the profit made on the sale of that investment was not made by trading. Lord Blackburn said:

"In my opinion where the inference drawn by the Commissioners is one of fact their finding should be left undisturbed unless it is apparent that they have completely misdirected themselves, or that there is no evidence in the facts which they find are admitted or proved which would justify a reasonable man in drawing the inference which they have drawn."

For these reasons, on the particular facts of this particular case, concerning the sale of these particular shares in these particular circumstances, I see no reason why this Court should interfere with the decision of the Court of Review that the sale of these shares was merely the realisation of investments. This particular resulting gain was not made in an operation of business in carrying out a scheme for profit making and was not therefore a profit liable to assessment for income tax.

The appeal is therefore dismissed with costs.

Appeal dismissed.

----------------------------------------------------------