Fattorini (Thomas) (Lancashire), Ltd. v. Inland Revenue Commissioners

The Lord Chancellor.—This appeal arises out of a case stated for the opinion of the High Court by the Board of Referees under paragraph 2 of the First Schedule to the Finance Act, 1922. The appellant is a company "under the control of less than five persons" to which section 21 of that Finance Act applies. The company is purely an investment company and before entering into the transactions next to be stated held investments for which the company had paid over £ 18,000, and which were producing revenue.

2. Those controlling the company were Mr. Wilfred Fattorini and his wife ; they were, as I understand, the only shareholders and were the directors of the company. It was desired to increase the investments held by the company by acquiring certain large holdings of shares in other companies (which have been called "the operative companies" to distinguish them from the investment company), but the appellant company had no sufficient resources of its own by means of which to make the purchase. Accordingly, it approached Martins Bank, Ltd., and on September 22, 1936, an agreement was made under which the bank undertook to advance a sum not exceeding £ 108,000 at a stipulated rate of interest. With this advance, supplemented by its own cash, the company acquired the shares of the operative companies at a price of £ 121,221. The bank's loan was secured by a deposit of all the shares, including the investments already owned by the company, and the company bound itself to pay to the bank, until the loan was completely discharged, all dividends which it received in respect of any of its investments. These dividends were the company's sole source of income. The investments in the operative companies' shares brought in an excellent return ; in the financial year 1936-37 the income from all investments was £ 6,540 ; and in the financial year 1937-38 no less than £ 34,855. These amounts were paid over to the bank in accordance with the agreement with the result that the bank loan was proportionately reduced.

3. The appellant company declared no dividend during or in respect of the two years above referred to. The Special Commissioners, acting under the powers conferred upon them by section 21 of the Finance Act, 1922, as amended, directed that for the purpose of assessment to surtax, the total income from all sources of the company for the years of assessment 1936-37 and 1937-38 respectively (see section 14(2)(a), Finance Act, 1937) should be deemed to be the income of the members of the company, and that the amount should be apportioned among them. The company appealed to the Special Commissioners in their judicial capacity against such direction, and the Special Commissioners allowed the appeal and discharged the direction for both years. The respondents required the appeal to be reheard by the Board of Referees which, subject to the case stated, reversed the decision of the Special Commissioners and restored the direction. The Special case came before Macnaghten, J., who delivered judgment reversing the determination of the Board of Referees and restoring that of the Special Commissioners. From this decision the respondents appealed to the Court of Appeal (Scott, L.J., Clauson, L.J., and Goddard, L.J.) which reversed the decision of Macnaghten, J., and restored the determination of the Board of Referees. There has thus been a constant alternation of view in the course of this litigation, each tribunal in turn reversing the decision brought to it on appeal.

4. Counsel for the appellant, in his excellent argument, placed before the House the statutory history of successive efforts made by the Legislature to prevent the avoidance of super-tax, or of its successor surtax, by using the cloak afforded by company law. Since the tax is charged only in respect of the income of an individual, its incidence might be avoided by transferring to a company controlled by such individual, in return for shares, the source of such income and by securing that, instead of any dividends being declared, the profits made by the company should be accumulated and ultimately distributed in a capital form as the results of voluntary liquidation or by creating bonus shares (Inland Revenue Commissioners v. Blott ; Same v. Greenwood [1921] 2 AC 171 : 8 Tax Cas. 101) or otherwise. Accordingly, by section 21 of the Finance Act, 1922, it was enacted : "With a view to preventing the avoidance of the payment of super-tax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted as follows :

"(1) Where it appears to the Special Commissioners that any company to which this section applies has not, within a reasonable time after the end of any year or other period ending on any date subsequent to the fifth day of April, nineteen hundred and twenty-two, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of super-tax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to super-tax, the said income of the company shall, for the year or other period specified in the notice, be deemed to be the income of the members and the amount thereof shall be apportioned among the members :

"Provided that, in determining whether any company has or has not distributed a reasonable part of its income as aforesaid, the Commissioners shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of that business."

5. The First Schedule to the Act of 1922 (para. 6) provides that "actual income from all sources" is to be computed by reference to the income for the year in question, and not to that of a past period. In order to complete the statutory scheme as it applied to the years 1936-37 and 1937-38, it is necessary to add a reference to the Finance Act, 1927, section 31, and the Finance Act, 1936, section 20. These later enactments, however, do not affect the present case, since the shares of the operative companies purchased as the result of the agreement of September 22, 1936, were not the first property of a substantial character acquired by the investment company, and moreover the loan was from a bank.

6. Counsel pointed out that the Legislature has now, in the case of some investment companies, made it more difficult to escape the burden of surtax (see Finance Act, 1939, section 14(1)), but this is outside the period within which the present dispute falls, and it must not be assumed as a matter of statutory construction that earlier provisions have a particular meaning because if so interpreted the need for the later enactment is elucidated.

7. The paragraphs of the special case which raise the matters now to be decided are the following: "23. We the members of the Board sitting to rehear the appeal hold as a matter of construction of the contract with Martins Bank that it would not have been a breach of contract for the company to distribute a dividend and we found as a fact that if we were wrong on this point and a distribution of a dividend would have been a breach of contract it was not reasonable for the company to make such a contract. We hold that the case of Glazed Kid, Ltd. v. Inland Revenue Commissioners [1930] 15 Tax Cas. 445 was distinguishable, as it was assumed in the judgment in that case that the distribution of a dividend could only have been made if moneys payable to the bank had been retained, a course which would have been restrained by injunction ; and there appeared to be no argument that the contract was not a reasonable contract, 24. We considered that as the company was an investment company, which after August 24, 1936, held investments producing revenue for which the company had paid £18,000, there was prima facie case that the reasonable course was that the company should so manage its affairs as to provide for distribution of dividend ; and that the company had not displaced such prima facie case by evidence that this could not have been done without jeopardising the interests of the company or without making it impossible to acquire the shares which it desired to buy. 25. We found as a fact that the company had not within a reasonable time distributed in the manner referred to in section 21 of the Finance Act, 1922, a reasonable part of its income for either of the periods in question." And the questions for the opinion of the Court are thus stated : "(1) Whether our conclusions of law as set forth in paragraph 23 were correct. (2) Whether there was evidence to support our finding of fact as set forth in paragraph 25. (3) Whether the matters set forth in paragraph 24 are such as to show that we misdirected ourselves as to the onus of proof in a case where it is admitted that an investment company with a substantial income has not distributed any part of it."

8. As regards paragraph 23, I agree that the contract with the bank did not bind the company not to distribute a dividend, and inasmuch as the company made profits in each of the years in question, the fact that it used the dividends it received (as it was bound to do) in reducing the charge on the shares, did not make it unlawful to distribute a dividend. There is nothing in law to prevent a company using an income-receipt as cash in its hands to discharge a capital liability or to purchase a capital asset, and then, after the close of its financial year, paying a dividend out of other cash or borrowing for the purpose, to the extent of the credit balance standing on profit and loss account. This was very clearly explained by my noble and learned friend Lord Romer, when sitting in the Court of Appeal in Montague Burton, Ltd. v. Inland Revenue Commissioners (152 L.T., at p. 16 ; 20 Tax Cas. at p. 70), and his view was affirmed on appeal to this House, particularly in the speeches of the Lord Chancellor (Lord Hailsham), and of Lord Russell of Kilowen (105 LJKB at pp. 237, 240 ; 20 Tax Cas. at pp. 74-77). The Board of Referees sought to distinguish the decision of Rowlatt, J., in Glazed Kid, Ltd. v. Inland Revenue Commissioners [1930] 15 Tax Cas. 445, where the company made a very similar arrangement to borrow from a bank the purchase price of shares, on the terms that it paid over to the bank the dividends as received. Macnaghten, J., in reversing the decision of the Board of referees, declared himself unable to see the distinction ; and I agree with him. Rowlatt, J.^!s judgments in income-tax cases deserve, in my opinion, particular attention, but in this instance, with all respect to that learned Judge, his view cannot be upheld. He said : "It is not open to anyone to say that they" (the Glazed Kid Company) "have not distributed a reasonable part when they could not distribute any part of what were their profits, because every penny of those profits, which solely consisted of these dividends, were under contract receivable by somebody else." This is to confuse the use made of an income-receipt to discharge a capital liability with the quite distinct question of the use of a credit balance on the profit and loss account to justify the distribution of a dividend.

9. As for paragraph 24 of the special case, the Commissioners had contended before the Board of Referees that as the company was purely an investment company, its profits should have been distributed to its shareholders. I do not think that this general proposition can be sustained ; as already pointed out, the additional investments were highly profitable. There was no evidence that the company could have financed its purchase on less onerous terms, and the Solicitor-General rightly admitted that it was no part of the case for the Revenue before this House that the company should not have entered into this bargain with the bank. As Scott, L.J., observed, a finding that it was "not reasonable to make such a contract" is irrelevant.

10. There remains paragraph 25, which contains a finding of fact in the exact terms which would justify the Commissioners' direction under section 21. The question to be decided is whether there was evidence to support this finding of fact, and the answer to that question must be found by examining the contents of the case and of the annexed documents. The case does not state what the evidence was upon which the Board of Referees relied in coming to this conclusion. If the finding in paragraph 25 is to be treated as based upon the Board's view, expressed in paragraph 24, that the company had not followed a reasonable course in making its agreement with the bank, then this view, as I have already pointed out, would not provide a firm foundation for the conclusion. Apart from this, the only material upon which the conclusion in paragraph 25 can be regarded as based is the fact, to be deduced from the documents, that the company might still pay a dividend if it could borrow the necessary amount on the equity of redemption of the deposited shares. This would be an unusual proceeding, and there is no evidence referred to in the case that it would be commercially possible for the company to do so, or to support the view that, in the circumstances, the failure to do so would amount to a failure to distribute a reasonable part of the company's actual income. I do not forget that the Board of referees is a tribunal of business men capable of applying a business judgment to the question before them, but I find it impossible to say that the case contains conclusions of fact which will support the finding in paragraph 25, when in truth no such conclusions are formulated at all. There is no evidence on the matter to be found in the case; and in the absence of material adequate to support the conclusion, I think the House is bound to answer the question put in the negative and to allow the appeal.

I move that the appeal be allowed with costs.

11. Lord Atkin stated the preliminary facts, read section 14(2) of the Finance Act, 1937, and continued : By the appropriate sections dealing with appeals the Board of referees on appeal take the place of the Special Commissioners and can give the statutory direction. The Board are a special tribunal appointed indeed by the Treasury; though not to be lions under the Treasury chair, but to decide disputes judicially between Crown and subject, holding the scales impartially between them. No criticism at all has been directed against them in this respect. Their findings of fact are final ; and their decisions can only be questioned on case stated on points of law. I must deal as briefly as possible with the facts stated before discussing the points of law raised in this case. The appellant company was incorporated in 1919 with a nominal capital of £ 25,000 divided into 15,000 ordinary and 10,000 preference shares of £1 each, of which 15,000 ordinary and 1,765 preference shares have been issued as fully paid up. The company was formed to acquire a retail jewellery and mail order business carried on at Bolton by Thomas Fattorini, and in June, 1919, it duly acquired the business for £ 14,724 paid as to £ 12,000 in fully paid shares and the balance in cash. There were at this time three other companies in existence in each of which Thomas Fattorini was the principal shareholder : (1) Thomas Fattorini (Skipton), Ltd., incorporated in 1919 with an issued capital at the material date of 47,980 ordinary and 4,200 preference shares of £ 1 each. (2) Thomas Fattorini (Birmingham), Ltd., afterwards named Thomas Fattorini, Ltd., with an issued capital of 13,480 ordinary shares of £ 1 each. (3) H. Pearson, Ltd., with an issued capital of 24,980 shares of £ 1 each. Company No. 1 carried on a jewellery and mail order business at Skipton. Company No. 2 carried on the business of manufacturing medals and badges at Birmingham. Company No. 3 carried on the business of cycle dealers. Thomas Fattorini did not acquire his interest in this company until November, 1919. In 1924 the cycle business ceased and the company thereafter carried on a mail order business in Manchester.

12. In 1928 the appellant company discontinued its jewellery business, and sold its mail order business to company No. 1 for £ 14,000, which it lent to one or other of the three operative companies named. From that date up to at any rate 1936, it carried on a blameless existence as an investment company, distributing annually dividends of about £ 500 or £ 600 derived from the interest on the above loans. In the company as stated Thomas Fattorini was the principal shareholder, the other being apparently his son Wilfred. In June, 1934, Thomas Fattorini died and his son Wilfred acquired his father's shares in the appellant company, being registered in respect of them in September, 1936. After that date he and his wife were the sole shareholders in the company. In the same year the company proceeded to buy the shares held by the executors of the father and by his other son in the three above-named operative companies. The shares held by Frank were bought from him by an agreement made in the early part of 1936. The total price was £ 18,229, which the company paid out of its own resources, realising the loan for that purpose.

13. The shares were transferred in August, 1936. At the same time the company proceeded to buy the remaining shares in the operative companies, namely, those held by the executors of the father and by Wilfred himself. For these shares the price required amounted to a large sum, over £ 100,000, and it was necessary to get the assistance of the company's bank to finance the transaction. These further shares amounted to 77,300, and the price to be found was about £ 105,000, so that the shares were bought at a premium. Accordingly, the bank agreed to provide the necessary overdraft. They took as security all the shares in the operative companies, both those now to be purchased and those already purchased from Frank, which, of course, provided some margin. They had stipulated that the loan should be paid off within two and a half to three years; and in addition to a charge on the dividends they took from the company an agreement until the loan was repaid to pay to the bank all the dividends it received from the shares in reduction of the amount due to the bank from time to time for payment of capital and interest. There was a stipulation that the companies should not during the period of the loan pay directors' fees in excess of £ 6,000 a year, a provision which suggests that Wilfred was not left without resources. But, as far as the company was concerned, for the time being it placed all its resources of every kind at the disposal of the bank, and was left without any income of any kind which it could, without the consent of the bank, devote to any purpose. There is no finding that this agreement was made in bad faith, or to avoid super-tax, and the Crown expressly disclaimed any attack upon it as being unreasonable. Indeed, it is easy to see that Wilfred and his wife, as the directors and sole shareholders of the company, might congratulate themselves upon getting an advance from a bank on this class of security of so large an amount with the result that they secured in the near future a very valuable asset at the cost of foregoing for a few years' dividends which so far had amounted to £ 500 or £ 600. The receipts from dividends during the years of charge were £6,540 and £34,855, or, deducting bank interest (in the first year for half a year), £ 5,340 and £ 31,140. The Board of Referees have found that the company had not within a reasonable time distributed in the manner referred to in the section a reasonable part of its income for either period, and restored the direction of the first Special Commissioners that the actual income of the company from all sources should be deemed to be the income of the members and the amount apportioned among them. It is unnecessary to emphasise the highly penal nature of the section. It matters not how small a proportion of the whole income is "the reasonable part" found not to have been distributed. If the company are in fault over a few hundred pounds the shareholders may be credited with many thousands of pounds with correspondingly heavy liabilities for surtax. In the present case the Board of Referees have not found what would have been a reasonable sum to distribute. It is said that they have the support of some decision for this. If it be so I can only say that the decision is wrong in a case stated such as this where the question is, was there evidence to support the decision ? I find it impossible to approach the question whether there was evidence to support a finding that "a reasonable part" should be distributed, without knowing what part it was considered reasonable to distribute at least stated as a minimum. In the present case the Solicitor-General stepped into the breach and suggested that at least the company should have distributed £ 500 or £ 600, an amount corresponding to its resources, before it embarked upon the purchase of the operative companies' shares.

14. The first question stated by the Board refers to a contention that under the agreement with the bank it would have been a breach of contract to distribute a dividend. No such contention was sought to be made by the appellants before this House, and the question becomes irrelevant, The remaining questions are connected and should be set out.

15. In paragraph 24 of the case the Board of Referees state [his Lordship read the paragraph already set out], Incidentally it is not to me clear whether this means that the company had failed to produce the kind of evidence referred to, and that if they had produced the evidence they might have displaced the prima facie case ; or means that there was evidence of the nature referred to, but it did not displace the prima facie case. I think it probably means the former.

16. In paragraph 25 they say [his Lordship read the paragraph]. The two questions now relevant posed by the Board are: "(2) Whether there was evidence to support our finding of fact as set forth in paragraph 25. (3) Whether the matters set forth in paragraph 24 are such as to show that we misdirected ourselves as to the onus of proof in a case where it is admitted that an investment company with a substantial income has not distributed any part of it".

17. I do not know whether there is any meaning in the inversion of order of the paragraphs in the questions as put. In any case I should conclude that if the Board adopted a view as to the prima facie value of certain facts, and the failure of the company to displace those facts, their final decision that the company had not distributed a reasonable part of its income was necessarily based upon their expressed view of the prima facie case made and not displaced. On what other footing could the Board have reached a final decision on the facts ? It would follow that if they have in fact misdirected themselves in paragraph 24 their finding of fact in paragraph 25 is invalidated by this misdirection.

18. It seems clear that the discussion must proceed ab initio on the footing that the action of the directors must be judged by considering what their conduct would reasonably be if no question of surtax influenced their decision. Withholding of distribution for the purpose of "avoidance of the payment of surtax" by shareholders would, if found, obviously negative the reasonableness of any part so withheld. The other general point to be observed is that, as it seems to me, what has to be found is that the company acted unreasonably in withholding some part of its income from distribution. It is not enough to show that a part could reasonably be distributed, if at the same time it could be said, as it well might, that it was equally reasonable to withhold distribution. The section is highly penal and I feel no doubt that the onus is originally and remains on the Revenue to show that the company acted unreasonably in withholding part of its income from distribution. What is reasonable has consistently been held to depend upon the actual conditions. known at the time for decision. In the application of this section it is what these directors recommend and these shareholders decide in those conditions of that company. There is no abstract conception of reasonableness, and the conclusion is not to be reached on a priori reasoning. Assuming that the directors are business men, have they acted unreasonably in the circumstances in withholding a distribution ? From this point of view I am quite unable to agree that the fact that a company, even an investment company, during the year holds income-producing investments raises a prima facie case that the reasonable course for the company is so to manage its affairs as to provide for that income or any part of it to be distributed. It is certainly untrue of private commercial companies of whom I have no doubt numbers are now prospering because the members have year after year placed all their profits in the business, and have foregone any income other than such as they may derive from directors' fees or the like. And I see no reason why the supposed rule should apply to investment companies who are equally entitled if they choose to forego their income for a time to develop and improve the company's undertaking. I think, therefore, that the answer to question three is that the matters referred to do show that the Board misdirected themselves as to the onus of proof.

19. But I also think that the facts stated by the Board disclose no evidence on which it could be found that the company failed to distribute a reasonable part of its income in the years in question. We may eliminate the question which interested the Court of Appeal whether it was legal for the company, having disposed legally of all its income for the year, to distribute a dividend at all. It was pointed out in the Court of Appeal if the company had made profits it would be perfectly legal to distribute them if it could secure the means to do so out of its other free assets or by borrowing. The point was not argued before us by appellants' counsel in his cogent and convincing address. Whether it would be reasonable to exercise the legal right is another and the only relevant question. It will be convenient here to deal with the argument which was pressed upon us by counsel that in the present case the dividends from the operative companies' shares formed the whole of the "actual" income of the company within the meaning of section 21 of the Act of 1922, and that as the whole of that "actual" income had been assigned to the bank, there was no part of it which could have been distributed. The Court of Appeal have effectively disposed of this argument. Actual income does not mean the specific receipts that come in from time to time, but the "income-tax income" as calculated at the end of the year of assessment. To hold otherwise would make nonsense of the section when applied to commercial companies, who use their receipts as soon as they come in, and hardly ever have left for distribution the actual incomings as sought to be defined in the argument.

20. But when one begins to consider the circumstances of this company at the end of this year when they had to consider the distribution of dividend, I am at a loss to see what was unreasonable in their decision to distribute nothing. There were only two shareholders, in substance only one, Wilfred. They had agreed shortly before by an agreement, which is not now in any way attacked, to assign the whole of their resources to the bank to secure what appeared to be a profitable and reasonable purchase. As a result the company had not any asset left nor any source of free income. They therefore could not procure the funds with which to distribute a dividend without borrowing. They had no source of income from which they could pay interest on any loan. If they had to borrow from some one other than the bank they would have had therefore to pay some capital premium, in lieu of interest calculated for the period of the bank loan ; and presumably in the circumstances heavy. It was suggested that they might have approached the bank either for the necessary loan or to release some of the dividends. But the company were represented by the very two people, the only persons interested, who had only a few months before in an agreement which is unassailable agreed to carry out the bank's stipulation that the loan should be paid off in two or three years by surrendering for the time being all the dividends. What is the overwhelming impulse to declare dividends that would now induce them to depart from the bank arrangement, or induce the bank to vary it. In view of these considerations it appears to me that it was for the Inland Revenue authorities to give evidence indicating not only that it was possible for the company to borrow (the Court of Appeal say that it would have been easy to borrow), but that in the circumstances it was the reasonable thing to do. In the result, therefore, I come to the clear conclusion that there was no evidence that the company failed to distribute a reasonable part of its income. I regard the case as turning on the bank agreement. As long as that remains unassailed it must necessarily have controlled the actions of the company and their reasonable decisions. The Court of Appeal spoke of "the whole plan in the present case for protecting its two shareholders from surtax." I cannot reconcile this phrase with their attitude towards the bank agreement ; nor do I find it supported by any finding of the Board of Referees.

21. If the arrangement with the bank was in fact made as part of a plan for avoiding surtax there might very well be evidence of a failure to distribute a reasonable part of the income. But in the absence of any evidence or finding to that effect and in view of the respondents' disclaimer of any attack on that agreement it must be taken to represent a genuine business arrangement, and is a circumstance of the highest importance in estimating the reasonableness of the company's action.

22. I am of opinion therefore that the answer to question two should be No and to question three Yes ; that the appeal should be allowed and the order of the Court of Appeal should be set aside, and the order of Macnaghten, J., restored; and that the respondents should pay the cost in this House and in the Court of Appeal.

23. Lord Macmillan stated the facts and continued : Two matters dealt with by the Board of Referees have first to be considered. They held (1) that as a matter of construction of the contract with the bank it would not have been a breach of contract for the appellant company to distribute a dividend. That is clearly right. But it is equally clear that it would have been a breach of contract to apply the dividends which the appellant company received and which were its sole source of income to payment of a dividend to its own shareholders. Therefore if the appellant company was to pay a dividend it must find the money from some other source than the dividends which it had itself received. The only possible source suggested by the Inland Revenue is that "if necessary the company could lawfully have borrowed the necessary money to enable it to make such distribution." But in the stated case the Board do not find in fact that the company could have borrowed the necessary money or that it would in the circumstances have been reasonable for the company to do so. Then (2) the Board found as a fact that, if they were wrong in holding that the company without breach of contract could have declared a dividend, "it was not reasonable for the company to make such a contract." At your Lordships' bar, however, the Solicitor-General for the Crown expressly disclaimed any attack on the appellant company's contract with the bank as being in itself unreasonable. I think this concession was rightly made for, considered apart from any question of taxation, the contract appears quite unobjectionable.

24. Once it is conceded that the contract is not assailable as unreasonable and consequently that it was not unreasonable for the appellant company to contract to pay over its whole income to the bank, it becomes difficult to see how it can be said to have been unreasonable to refrain from distributing dividends which could have been provided only out of borrowed money. No indication is given of any grounds on which it would have been reasonable for the company to borrow money to enable it to pay a dividend. If a dividend had been paid it would not in fact have been paid out of profits, but out of borrowed money. It would not have been a distribution of profits but a distribution of borrowed money which it was legitimate to distribute because a corresponding amount of profits had been earned.

25. What, then, is the finding in fact by the Board which your Lordships are asked to hold as justifying the Board's conclusion that the appellant company had not distributed in dividends a reasonable part of its income? It is to be found in paragraph 24 of the stated case, which expresses the opinion of the Board [his Lordship read paragraph 24]. The reference to the figure of £ 18,000 relates to the purchase price of the shares which the appellant company purchased from its own resources as distinct from the money borrowed from the bank.

26. It will be observed that the paragraph I have quoted puts the matter as one of onus. If may well be that when the Special Commissioners make a direction under section 21 of the 1922 Act it is for the company to put forward reasons and if necessary evidence to show why the direction is in the circumstances unjustified. Here the appellant put forward their contract with the bank as justifying their having made no distribution of their income in dividends. And the Crown admit that it was quite reasonable for the company to contract to apply its income as it did. It seems to me that it was then for the Crown to show that it would have been reasonable for the company, notwithstanding its contract with the bank, to raise money by borrowing or otherwise in order to pay a dividend, as there was no legal obstacle to its doing so, and that the company could in fact have raised the necessary money. There is no trace of any such evidence in the case. But when the matter reaches the stage of a stated case, the question is not properly one of onus. It is simply a question of whether the facts found and stated afford evidence on which the Board could properly arrive at their conclusion. Now all that paragraph 24 of the stated case finds is that prima facie the reasonable course was that the company should so manage its affairs as to provide for distribution of dividend. This is rather an expression of opinion than a statement of fact, and no grounds are given for it. The result is that in my opinion the Board have not stated any facts such as to justify them in holding that the appellant company failed to distribute a reasonable part of its actual income in the years in question. I am accordingly in agreement with all your Lordships that the appeal should be allowed.

Lord Weight.—I have considered in print the speech which my noble and learned friend the Lord Chancellor has delivered. I agree with it and merely add a few words as your Lordships are differing from the Court of Appeal.

28. The Board of Referees have embodied their decision in a case stated for the opinion of the Court and have made it for present purposes subject to two questions of law. I disregard the first question which is now irrelevant. As to the second question which is whether there was evidence to support the Board's finding that the company had not within a reasonable time distributed a reasonable part of its income for the periods in question, that is a question of law which depends on an analysis of the facts found in the special case. But I think it cannot properly be disposed of without considering the other question which is logically prior though postponed in the order in which the case is stated. That latter is in truth a question as to the onus of proof, and can only be understood by referring to paragraph 24 of the case. I understand that paragraph to mean that the Board are treating the onus as of an ambulatory or shifting character, so that at a certain stage of the inquiry it finally shifts from the respondent to the appellant. I think that is wrong in law. The Crown set out to prove that the direction of the Board is justified because the appellant company has not distributed a reasonable part of its income within the meaning of section 21 of the Finance Act, 1927. It is obvious that the section is penal in character, and in my opinion the onus is finally on the Crown to prove its right to impose what is a very severe penalty. At the end of the day it is for the Crown to establish the facts necessary to show want of reasonableness on the part of the appellant. I cannot discover in the case as stated that there are facts found sufficient to justify the conclusion. Nor do I think that the Board would have come to their conclusion if they had not taken the view as to onus expressed in paragraph 24. It was for the Crown to establish that the appellant company could have produced funds (it being accepted that the contract with the bank was not unreasonable) out of which to declare a dividend "without jeopardising the interests of the company or without making it impossible to acquire the shares which it desired to buy." I accept this here as a correct statement of what would have been sufficient if established. The Board have not found that this has been proved. It seems to me that their conclusion in paragraph 25 was based upon their view as to the onus of proof. If the Board were wrong in that view, and I think they were, it follows that in law there was no evidence to support their finding of fact in paragraph 25.

Lord Porter.—I agree that this appeal should be allowed, and 1 think I can state with brevity my reasons for coming to this conclusion.

30. The facts have already been fully set out from the Woolsack, including in particular paragraphs 23, 24 and 25 containing the findings of the Board of Referees from which as I understand it that body draws its inferences and conclusion. The case ends by asking certain questions for the opinion of the Court, questions which as a result of the present appeal it is now incumbent upon your Lordships to answer.

31. As regards the first, I agree with the Lord Chancellor in thinking that it would not have been a breach of contract for the company to distribute a dividend despite the fact that it had already assigned all its income to the bank in order to repay the loan obtained, and had also hypothecated the whole of its assets for that purpose. Reference has already been made to the Montague Burton Case [1936] 20 Tax Cas. 48 ; 4 ITR Suppl. 12, which establishes this proposition. In view of this opinion the alternative suggestion that it was not reasonable for the company to make such a contract becomes immaterial, but I should not consider it material in any case. A company is entitled to manage its own business in its own way ; the question for the Board of Referees is not, as I see it, whether the company has taken a reasonable course, but whether, the particular course having been taken, the company has distributed a reasonable part of its actual income. In saying this I do not rule out the possibility that it may be seen in a particular instance that no genuine transaction has taken place and that the bargain made, actual or purported, is really a subterfuge merely adopted to avoid the payment of tax. I am not saying that such a state of affairs should not be taken into consideration in determining whether a reasonable part of a company's income has or has not been distributed. Moreover, I agree with the noble Viscount and with the Board that the decision in the Glazed Kid Case [1930] 15 Tax Cas. 445 is open to the objection that it appears to assume that a dividend, at any rate in the case of a holding company, can only be paid out of income received or receivable as cash. The fact that the income had been invested or hypothecated for some purpose elsewhere would not of itself necessarily prevent the distribution of a dividend.

32. Subject to the qualification that the opinion of the Board of Referees as to the reasonableness of the contract entered into is in this case an immaterial consideration, I should answer the first question asked by the case in the affirmative.

33. There is, however, as I think, more difficulty in answering the second question. As I understand the framework of the case the deductions and inferences drawn by the Board from the history of the transactions set out in the earlier paragraphs are brought to a conclusion in paragraph 24, and therein are to be found the grounds from which it is determined that a reasonable distribution of income had not been made.

34. Those reasons are, I think, as follows : (1) The company is an investment company ; (2) it held income-producing investments which cost £18,000 ; (3) having those investments it should have managed its business in such a way as to insure that the company enjoyed the income produced by them either directly or indirectly ; (4) the company had not proved that it could not have kept this income without endangering its interests and without preventing itself from purchasing the shares acquired by means of the loans from the bank.

(1) The company is indeed an investment company, and I suppose it is possible to say that in such a case the necessity for building up considerable reserves may not be so imperative as in the case of a trading company—at any rate the Board was entitled to think so, even in the case of a company holding somewhat speculative shares. But this circumstance seems to have little bearing upon a case where the putting by of reserves does not come in issue, but only the making of a speculative but profitable investment. (2) and (3). Nor does it seem to me of much assistance to say that the company once held and, subject to the bank's interest, still holds investments costing £18,000. The question is what distributable revenue those investments do or ought to produce. The statement in its bald form appears only to be another way of saying that the purchase of the additional shares ought either not to have been made at all or, at any rate, ought not to have taken the form it did, and seems to merge in allegation (4), namely, that it had not been proved impossible to acquire those shares in some other way, (4) To say that it would have been possible to raise the loan required on less onerous terms without any suggestion as to how it could have been done or whence the money could have been obtained is indeed to enter the realm of conjecture. In fact, the money was raised by loan from the bank, and in fact the bank insisted upon the terms agreed ; indeed, so far as the evidence is concerned it was anxious to have the total sum repaid at an earlier date than that finally stipulated.

35. If, then, positive evidence is required to support the finding in paragraph 25 of the special case that the company had not distributed a reasonable portion of its income, I can find none. So far as the bank is concerned it is negatived, and so far as any other source is concerned it is merely conjecture. Indeed, as I think, paragraph 24 depends, and having regard to the form of the case stated depends solely, upon the assumption that the onus of proof is on the company to show not that it could have raised money to pay a dividend after making the bargain into which it had entered, but that it could have made a better bargain. If the finding in the case had been that the appellants could and should reasonably have raised money or credit upon the equity of redemption of the assets pledged to the bank, and so could have provided funds sufficient to declare a dividend, or even that it would have been reasonable to raise the money in this way and the appellants had not shown they could not do so, I should have hesitated in differing from the Court of Appeal.

36. But that is not how I understand the Board to have reached the result arrived at. It is the bargain with the bank of which they complain, not the failure of the company, once that bargain was made, to obtain such funds as would enable it to distribute a dividend.

37. If the contract with the bank had not been, as it obviously was, a genuine transaction, but only a matter of avoiding tax, or if it had been found that the directors of the company could, and as reasonable business persons should, have borrowed on the security of their equity of redemption, or even that, as reasonable business persons, they should have done so if they could, and it had not been shown that they could not, I should be unwilling to vote for allowing the appeal. But there is no such finding and I do not think that the respondents' case is strengthened by a suggestion that quite a small sum should have been raised for the purpose. The question is what should reasonably have been done. If it was possible and reasonable for the appellants to borrow at all in the present case, I think the facts found would support the inference that a considerable sum could have been borrowed just as readily as they would support the inference that a small one should have been borrowed. But I do not think they support either. The appellant's duty is to act reasonably, not to adopt any and every means in order to scrape up enough money to declare a dividend, however small.

38. It will be seen that the opinion which I have expressed is based upon the exact findings of the Board of Referees as I understand those findings. May I add that it would assist a tribunal, to which a case stated is referred, if the facts found were carefully separated from the inferences of fact and law based upon them, and if those inferences themselves were clearly distinguished.

39. In Bomford v. Osborne (also a tax case) 110 L.J.K.B., at p. 479 ; [1942] A.C., at p. 46, I expressed the view that in setting out a case it was not legitimate, after stating the facts, to reach a certain conclusion by saying that such and such a thing is found as a fact. I am still of this opinion, and think that the final conclusion is not a fact but an inference from facts previously set out, and that therefore that conclusion is not binding upon the tribunal to which the case is referred unless it appears from the previous findings that there are facts which support it. In the present case I cannot find such support and should allow the appeal.