Manor Investments Ltd v Commissioner of Income Tax

• Jurisdiction: Montserrat
• Court: High Court (Montserrat)
• Judge: Arrindell, J.
• Judgment Date: 06 June 1979
• Neutral Citation: MS 1979 HC 1
• Date: 06 June 1979

High Court

Arrindell, J. (Acting)

Manor Investments Ltd.

and

Commissioner of Income Tax

Income Tax - Transfer — of proceeds of sale of shares and debenture — Whether adventure in the nature of trade

Facts: An appeal by company against a decision of the Commissioner of Income Tax confirming an assessment made by the Comptroller of Inland Revenue against the company. The appeal was brought by virtue of section 699(1) of the Income Tax Ordinance 1967. The company was formed to set up a trust in order that Nigel Broacles could transfer part of his shareholdings in a certain company to his mother. After being in operation for five years the company went into voluntary liquidation. The issues before the court were whether the purchase of the shares in the company and debenture stocks and their subsequent resale and the alleged transfer of the proceeds to Switzerland from Montserrat were “trading or an adventure in the nature of trade” and so liable to be taxed, or whether the profits realized from the said re-sale were merely an accretion to capital.

Held: The appellant company was carrying on a trade or at least carried out an adventure or concern in the nature of trade and the Comptroller of Inland Revenue had sufficient evidence before him to determine that the company was liable for the assessmgent which he made against it. Assessment confirmed. Appeal dismissed.

Arrindell, J.

1 This is an appeal to the High Court by a locally registered company, Manor Investments Ltd., against a decision of the Commissioners of Income Tax confirming an assessment made by Comptroller of Inland Revenue against the company. The appeal is brought by virtue of Section 69 (1) of the Income Tax Ordinance, No. 19 of 1967.

2 Mr. Time Kendall appears on behalf of the appellant, with Mr. John Kelsick. Mr. David Brandt represents the Commissioners, the then Attorney General Mr. John Weekes with him (occasionally).

3 The following is an outline of the facts which to me seem pertinent to the appeal:

4 Manor Investments Ltd., was established here on 8th November 1969. The directors are all nominees of overseas directors based in London and Bahrain. The authorized share capital of the company is 9600 shares of E.C. $1.00 each, of which 100 were issued and fully paid up. The company is contesting tax assessments totalling $223,901.89 calculated on the figure for the two fiscal years ending 30th June 1971 and 30th June 1972. Its objection is based on arguments which I will come to shortly.

5 The origins of the company go back to an alleged intention of one Nigel Broackes, a major shareholder of an English company named Trafalgar Investments, Ltd., to transfer part of his shareholdings in that company to his mother, a Mrs. Craig-Alford. Towards this end a trust was set up called the Nigel Broackes 1963 Settlement; and Mr. Broackes transferred to it, for his mother, 436,774 of his Trafalgar Investments shares, and 109,200 7% debenture stock. Subsequently, it is said, Mrs. Craig-Alford decided to leave England to retire in Switzerland, and was desirous of getting her said share assets into Switzerland. Owing to high United Kingdom taxation on such direct transfer of assets (alleged to be some 20% of assets) a less expensive way was sought, and eventually Manor Investments Ltd was set up in Montserrat in 1969, and in June 1970 the 436,774 Craig-Alford shares and the 109,200 7% debenture stock were sold to Manor Investments Ltd.

6 For financing this transaction the company gave a Promissory Note for 554,151 at some 12% interest to the Nigel Broackes 1963 Trust, repayable within 20 years. In the event, the Note was redeemed within only one year. (The explanation for this was that repent changes in the tax laws of the United Kingdom rendered the Manor Investments holdings less valuable than they hitherto were, necessitating their quick sale and/or the early redemption of the Note). It may be relevant to note that the company was able to redeem the Note after selling only a portion of the Craig-Alford shares, and the whole debenture stock, and at the very substantial surplus of 155,158.51 as the accounts up to June 1971 show. Proceeds from sale of the remaining shares were invested abroad, also generating surplus revenue.

7 After being in operation for some five years the company went into voluntary liquidation in 1975. The argument advanced on its behalf is that having achieved its ‘dominant’ purpose of getting Mrs. Craig-Alford's assets into Switzerland -- for which incidentally there is no evidence on the record -- it accordingly went out of business.

8 The taxation under appeal was imposed against it on the basis that it was carrying on a trade or if not a trade at least an ‘ adventure in the nature of trade’, and that its profits were thus liable to taxation by virtue of Section 3(a) of the Income Tax Ordinance aforementioned. There is no quarrel with the arithmetical, determination of the amount. (Some income tax was paid by the company for the 1970 year of operations, amounting to $16,561.31, assessed on profits from revenue it obtained in the way of dividends on its Trafalgar Investments shares and debenture stock which it purchased from the 1963 settlement. There is no dispute concerning this leg of taxation either. Subsequent assessments were made, so far unpaid, although there have been no appeals in respect of them).

9 For the company it is contended that the purchase of the Craig-Alford shares and debenture stock and their subsequent resale, and the alleged eventual transfer of the proceeds to Switzerland from Montserrat was neither trading nor ‘an adventure in the nature of trade’; and that the profits realized from the said re-sale were merely an accretion to capital, that is to say, were capital gains. Both sides agree that under the laws of Montserrat capital gains are not taxable, as contrasted with profits from trading or from ‘an adventure in the nature of trade’?

10 So the issue to be decided is: Was Manor Investments Ltd carrying on or did it carry out, ‘an adventure or concern in the nature of trade’? Or instead was it merely doing only those acts which were necessary for the achievement of its purpose of formation namely, to get the proceeds of the Craig-Alford shares and debenture stock into Switzerland, with the resulting profits being merely capital gains from an operation or operations that did not constitute ‘an adventure in the nature of trade’?

11 Essentially the facts are not in dispute, if allowance is first made first made for one supposition or assumption namely, that Mrs. Craig-Alford did finally get her funds into Switzerland, via Montserrat. There is no hard indication of this on the record. The exhibits however contain mention of funds transferred to the Bahamas, funds invested in bank deposits ‘abroad’, and such like, from the Manor Investments operations here. In the welter of subsequent activities pregnant with opportunities for profit, this so-called ‘dominant purpose’ may all too easily have metamorphosed into something less than dominant, however unintentionally.

12 I will firstly touch upon the term ‘an adventure or concern in the nature of trade’. It is clear that this term in the tax laws of Montserrat follows verbatim a similar section to be found in the Income Tax Act, 1952, Sec. 526 (1) of the United Kingdom. Hence a look at how this term has been judicially defined would be appropriate. In Inland Revenue Commissioners v. Livingston [1927] II Tax Cases, at p. 542, Lord Clyde in the House of Lords had this to say: “I think the test which must be used to determine whether a venture such as we are now considering is, or is not, ‘in the nature of trade’ is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made”. I will not advert to the facts in that case, since they are not similar to those in the instant appeal.

13 As to the word “trade”, this is defined in Halsbury's Laws of England, 3 Ed., Vol. 20, at page 113, thus: ‘the term trade includes every trade, manufacture, adventure or concern in the nature of trade”. The Montserrat ordinance also adapts this rather unhelpful definition.

14 I now move on to look at some judicial precedents dealing with this vexed issue of whether or not a given set of activities fell within the term ‘an adventure in the nature of trade’. As there is a plethora of such cases I will confine myself to just a few of them where definite guidelines and relevant considerations are perceived.

15 The New Zealand case of Hunter v Commissioner of Inland Revenue N.Z.L.R [1969] pages 426/29 used as a sort of flagship case by counsel for Manor Investments Ltd, is of some interest. In that case a certain woman, resident in New Zealand and carrying on a farming business, owned same shares, in the United Kingdom. She sold these shares in the U.K., bought United Kingdom stock with the proceeds and then sold the stock on the New Zealand market for New Zealand currency, at a profit. The Commissioner of Inland Revenue made a tax assessment on this profit, which resulted in an appeal to the Supreme Court. The Court held that in the circumstances this was not ‘an adventure in the nature of trade’ since it is clear that the dominant purpose for the transaction was the transfer of assets from one country to a next, with no intention to trade; so that the profits were not taxable under the laws of New Zealand. Although at first glance that case seems to parallel the instant appeal, I am of the firm opinion that it can properly be distinguished from the Manor Investments situation. The relevant section of the New Zealand tax laws is to be found in section 88 (1) (c) of the Land and Income Tax Act 1954. It reads: ‘Without in any way limiting the meaning of the term,...