Scottish Court of Session Decisions

The Finance Act 1916 (6 and 7 Geo. V, cap. 24) enacts—Section 49 (1)—“Where the prewar standard of profits is taken to be the percentage standard, or is calculated by reference to the statutory percentage, in the case of any trade or business owned or carried on by a company or other body corporate whose directors have a controlling interest, the Commissioners of Inland Revenue may, if they think fit, as respects any accounting period, including a past accounting period, for the purpose of the provisions relating to the statutory percentage, and for the purpose of the determination and computation of profits under Part I of the Fourth Schedule to the principal Act, treat the company or body corporate as if it were a firm and not a company or body corporate, and the directors or any of them as if they were partners in the firm.”

The Glasgow Expanded Metal Company, Limited, appellants, being dissatisfied with a decision of the Commissioners for the General Purposes of the Income Tax Acts, and for executing the Acts relating to inhabited house duties for the Lower Ward of Lanarkshire at Glasgow, sustaining an assessment to excess profits duty, appealed by way of Stated Case, in which J. Anderson, Inspector of Taxes, Glasgow, was respondent.

The assessment appealed against, which was made under the Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), was in respect of the accounting period ending 31st December 1918 on the sum of £2419, the duty on which at the rate of 80 per cent. being £1935.

The Case stated, inter alia—“The following facts were admitted or proved:—1. The company was incorporated on the 30th day of December 1914, and by its articles of association the regulations in Table A of the First Schedule of the Companies (Consolidation) Act 1908 were made applicable to the company so far as not excluded, altered, or modified by the said articles. … 2. The company's capital consists of 6000 preference shares of £1 each and 4000 ordinary shares of 2s. 6d. each, of which 3600 preference shares and 4000 ordinary shares have been issued and subscribed. The company is a private one consisting of twenty-three shareholders, seven of whom are directors who hold the following shares:—

The directors thus hold 4300 shares out of a total number of 7600 shares. 3. Mr W. S. Gallie is managing director, and Messrs Watt, M'Cubbin, Fergusson, Graham, Cairns, and Hindson are also directors. Mr Graham is secretary, and Messrs Cairns and Hindson are representatives of the company in London and Manchester respectively, and as such these three gentlemen receive salaries. 4. Remuneration has been paid to the directors as follows:—1915, £255; 1916, £265; 1917, £265; 1918, £1975. At the fourth ordinary general meeting of the shareholders held on 21st February 1919 an honorarium of £600 was voted for allocation amongst the directors as they might determine. By mutual agreement this was divided as follows:—

John Fergusson	£50
W. S. Gallie	50
Hugh Watt	150
Thos. M'Cubbin	150
John B. Graham	50
John Cairns	25
J. J. Hindson	25
	£600

included in above £1975. 5. Article 9 of the company's articles of association gives the managing director power to fix the remuneration payable to the managers, agents, and servants of the company. Article 11 provides that a director shall not vacate office by reason of holding any other appointment under the company although he receives remuneration therefor. Article 12 provides that the remuneration of the directors as such (including the managing director) shall be payable only out of surplus profits remaining in each year after payment to preference and ordinary shareholders of dividend and share of profits specified in paragraphs ( a) and ( b) of clause 2 of the articles. 6. By section 69 of Table A, First Schedule, to the Companies (Consolidation) Act 1908 (8 Edw. VII, cap, 69) it is provided that the remuneration of the directors shall from time to time be determined by the company in general meeting. 7. The company having been incorporated in December 1914 had no pre-war standard for the purposes of excess profits duty, and consequently its pre-war standard must be taken to be the statutory percentage on the average amount of capital employed in its business during the accounting period as provided by the Finance (No. 2) Act 1915, Fourth Schedule, Part II, Rule 4. 8. By the

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Finance Act 1916, sec. 49 (1), the Commissioners of Inland Revenue may, where the pre-war standard of profits is calculated by reference to the statutory percentage, in the case of any business carried on by a company whose directors have a controlling interest, if they think fit, treat the company as if it were a firm, and the directors or any of them as if they were partners in a firm. Proceeding upon this section the Commissioners of Inland Revenue have treated the company as if it were a firm, and written back to profits the whole of the directors’ remuneration in the accounting period to 31st December 1918. 9. There is no dispute in regard to the figures involved in this case, and the only point at issue is the question whether the directors have a controlling interest in the company, and if so, whether the Commissioners of Inland Revenue were right in treating it as if it were a firm, and the directors as if they were partners in such firm.

The Commissioners having considered the points raised, found as a fact that the directors of the company possessed a controlling interest, and that consequently the Commissioners of Inland Revenue could treat the company as a firm and its directors as partners of such firm. The Commissioners accordingly dismissed the appeal and confirmed the assessment.”

Argued for the appellants—The expression “directors” referred to in the Act meant effective directors. In this company the directors, acting rather in the capacity of employees as they did, had no real “controlling interest.” They exercised no control over the company's internal policy, nor over the remuneration payable to the directors. The following authorities were referred to:— Dillworth v. Commissioners of Stamps, (1899) AC 99, per Lord Watson at p. 105; Buckley on the Companies and Limited Partnership Acts (9th ed.), pp. 619, 622.

Counsel for the respondent was not called upon.