| SooperKanoon Citation | sooperkanoon.com/886134 |
| Subject | Direct Taxation |
| Court | Kolkata High Court |
| Decided On | May-22-1991 |
| Reported in | [1992]197ITR462(Cal) |
| Appellant | J. Sainsbury Plc. |
| Respondent | Oconnar (inspector of Taxes). |
| Cases Referred | Wood Preservation Ltd. v. Prior |
In October, 1978, the taxpayer company enterer into negotiations with a Belgaum company, G.G.I.N.N.O.B.M. ('G.B.') for setting up a joint venture company in the United Kingdom. The purpose was to develop c chain of home-improvement stores, with or without associated ragden centres. The initial intention was that the shares should be held in the proportion 70 per cent. the raxpayer company and 30 per cent. G.B. But in August, 1979, it was relaised - it is perhaps surprising that it was not realised before - that the taxpayer company would not be able to take advantage of the group relief provisions unless the new company were a 75 per cent. subsidiary. So the solution which the parties reached was as follows. By a principal agreement dated 4 cOctober, 1979, ('the joint vanture agreement') the taxpayer company agreed to subscribe 75 per cent. of the share capital in the joint company, and G.B. 25 per cent. By a seprate optiopn agreement of the same date, the taxpayer company granted G.B., an option to purchase 5 per cent. of the share capital, ('the call option'), and G.B. granted the taxpayer company an option to require G.B. to purchase 5 per cent. of the share capital ('the put option').These options were not to be exercised within five years of the incorporation of the new company. In the event neither option was exercised, and the option agreement was cancelled by deed dated 9 August, 1985. It is not suggested that the agreement were a sham. By a principal agree
Two questions arise. The first is whether the taxpayer company was 'the beneficial owner' of the whole of its 75 per cent. holding, for the purpose of section 258 of the act of 1970, notwithstanding G.B.s option to purchase five per cent. of the share capital after five years. The second question is whether, if the taxpayer company would otherwise have been entitled to claim the benefit of group relief, the option agreement was an 'arrangement' within the meaning of paragraph 5(3) of Schedule 12 to the Finance Act, 1973. If so, the taxpayer company would lose the benefit of group relief by virtue of section 28 of the Act of 1973. The special commissioner answered the first question in favour of the taxpayer company, and the second question in favour of the Crown. On appeal, by way of case stated, Millet J., answered both questions in favour of the taxpayer company.
I find myself in complete agreement with the judge, not only with his conclusion, but also, subject to one minor point, with his reasion so much so, that I would be content simply to adopt his judgment as my own. But as there is always the possibility of this case going higher, I must spell out my own reasion for dismissing the appeal.
Statutory framework
I start by setting out for convenience the statutory provisions relevant to both question. I start with the Act of 1970. Section 258 provides :
'(1) Relief for trading losses ... may in accordance with the following provisions of this Chapter be surrendered by a company (called the surrendering company) which is a member of a group of companies and, on the making of a claim by another company (called the claimant company) which is a member of the same group, may be allowed to the claimant company by way of a relief from corporation tax called group relief ... (5) For the purpose of this section ... (a) two companies shall be deemed to be members of a group of companies if one is the 75 per cent. subsidiary of the other or both are 75 per cent. subsidiaries of a third company ...'
Ection 532 provides :
'(1) For the purposes of the Tax Acts a body corporate shall be deemed to be ... (b) a 75 per cent. subsidiary of another body corporate if and so long as not less than 75 per cent. of its ordinary share capital is owned directly or indirectly by that other body corporate ... (3) In this section references to ownership shall be construed as references to beneficial ownership.'
Section 28 and 29 of the Act of 1973 are 'anti avoidance' provision. SEction 28(2) provides :
'Notwithstanding that at any time a company (in this sub-section referred to as the subsidiary company) is a 75 per cent. subsidiary ... within the meaning of section 532 of the Taxes Act, of another company in this sub-section referred to as the parent company) it shall not be treated at that time as such a subsidiary for the purpose of the enactments relating to group relief unless, additionally, at that time - (a) the parent company is beneficially entitled to not less than 75 per cent ... of any profits available for distribution to equity holders of the subsidiary company; and (b) the parent company would be benefically entitled to not less than 75 per cent ... of any assets of the subsidiary company available for distribution to its equity holders on a winding-up.'
Thus the broad effect of section 28 is that it is not enough for group relief that the parent company is beneficial owner of 75 per cent. of the ordinary share capital of its subsidiary; it must also be beneficially entitled to 75 per cent. of the dividents, and 75 per cent. of the assets on winding up. Section 28(5) gives affect to Part I of Schedule 12 to the Act. Section 29 applies to an arrangement whereby a company may case to be a member of one group, and becomes a member of another group. Where such an arrangement is in existence, the company is treated as not being a member of the first group.
Schedule 12 is simple in concept, but complicated in detail, I shall refer to the relevent companies as parent and subsidiary, and for the sake of clarity I shall omit all reference to assets on a winding up. The provisions relevant to the entitlement to dividents are as follows :
'1. (1) For the purpose of section 28 of this Act and this Schedule, an equity holder of a company is any person who - (a) holds ordinary shares in the company ...'
'2. (1) Subject to the following provisions of this Part of this Schedule, for the purposes of section 28 of this Act, the percentage to which one company is beneficially entitled of any profits available for distribution to the equity holders of another company means the percent. age to which the first company would be so entitled in the relavant accounting period on a distribution in money to those equity holders of - (a) an amount of profits equal to the total profits of the other company which arise in that accounting period (whether or not any of those profits are in fact distributied), or (b) if there are no profits of the other company in that accounting period, profits of Pound 100, and in the following provisions of this Part of this Schedule, that distribution is referred to as the profit distribution ...'
'4. (1) This paragraph applies if any of the equity holders - (a) to whom the profit distribution is made ... holds, as such an equity holder, any shares or securities which carry rights in respect of divident or interest ... which are wholly or partly limited by reference to a specified to a specified amount or amounts (whether the limitation takes the form of the capital by reference to which a distribution is calculated or operates by reference to an amount of profits or assets or otherwise). (2) Where this paragraph applies, there shall be determined - (a) the percantage of profit to which above would be entitled ... if, to the extent that they are limited as mentioned in sub-paragraph (including the first company concerned if it is such an equity holder( had been waived. (3) if, on the profit distribution, the percentage of profits determined as mentioned is sub-paragraph 2(1) above is less than the percantage of profit determined under paragraph 2 (1) above without regard to that sub-paragraph, the lesser percantage shall be taken for the purposes of section 28 of this Act to be the percantage of profits to which, on the profit distribution, the first company referred to in paragraph 2(1) above would be entitled as mentioned in that paragraph.'
Thus if there is a class of shares carrying limited rights, such rights are deemed to be waived to the extent that they are so limited. If, as a result, the parent companys dividend, as a percentage of the whole, is less than it would have been without the waiver, the lesser percentage is taken for the purpose of section 28.
Paragraph 5 of Schedule 12 provides :
'(1) This paragraph applies if, at any time in the relevant accounting period, any of the equity holders -(a) to whom the profit distribution is made .... holds, as such an equity holder, any shares .... which carry rights in respect of dividend or interest .....which are of such a nature (as, for example, if any shares will cease to carry a right to a dividend at a future time) that if the profit distribution .... were to take place in a different accounting period the percentage to which, in accordance with the preceding provisions of this Part of this Schedule, that equity holder would be entitled of profits on the profit distribution .... would be different from the percentage determined in the relevant accounting period. (2) Where this paragraph applies, there shall be determined - (a) the percentage of profits to which, on the profit distribution, the first company referred to in paragraph 2 (1) above would be entitled ... if the rights of the equity holders in the relevant accounting period were the same as they would be in the different accounting period referred to in sub-paragraph (1) above.'
I will return to paragraph 5(3) in a moment. Paragraph 5(4) provides :
Sub-paragraph (3) ... of paragraph 4 above shall apply for the purposes of this paragraph as they apply for the purposes of that paragraph and, accordingly, references therein to sub-paragraphs 2(a) ..... of that paragraph shall be construed as references to sub-paragraphs 2 (a) ...of this paragraph ....'
Thus if there is a class of shares carrying rights which may vary in the future, and if as a result, the parent companys dividend as a percentage of the whole will become less than it is in the current accounting period, the lesser percentage is taken for the purpose of section 28.
Paragraphs 4 and 5 are the operative paragraphs, as the judge said [1990] S.T.C.516,534 :
'Paragraph 4 introduces the requirement that the taxpayer should be entitled to not less than 75 per cent. of the dividends or distributions on a winding up no matter how large the dividend or distribution, and paragraph 5 the requirement that the taxpayer should be similarly entitled no matter when the dividend or the distribution on a winding up should occur.'
Paragraph 5(5) provides that if there is a class of shares to which both paragraphs 4 and 5 apply, then one applies each paragraph separately, and takes the lower percentage for the purpose of section 28.
I now return to paragraph 5(3) on which the second question turns. It provides :
'If in the relevant accounting period an equity holder holds, as such, any shares or securities in respect of which arrangements exist by virtue of which, in that or any subsequent accounting period, the equity holders entitlement to profits on the profit distribution or to assets on the notional winding-up could be different as compared with his entitlement if effect were not given to the arrangements, then for the purposes of this paragraph - (a) it shall be assumed that effect would be given to those arrangements in a later accounting period, and (b) thoseshares or securities shall be treated as though any variation in the equity holders entitlement to profits or assets resulting from giving effect to the arrangements were the result of the operation of such rights attaching to the shares or securities as are referred to in sub-paragraph (1) above .'
The taxpayer company argued that paragraph 5(3) applies, and applies only, where an arrangement exists which could affect the rights carried by the shares in question, whether in the same or some future accounting period. The option agreement was not such an arrangement, since the rights carried by the shares which are the subject of the option agreement would have been precisely the same, whether before or after the exercise of the option. The Crown argued that you look at the taxpayer companys overall entitlement to dividend. If an arrangement exists which would reduce the taxpayers overall entitlement in the future, then you assume that the arrangement, since, if the call option had been exercised, it would have reduced the taxpayer companys entitlement from 75 per cent. of the dividend to 70 per cent.
For reasons which I will explain later, I have no doubt that the tax payer companys argument is to be preferred. But first I must deal with the question whether, apart altogether from paragraph 5(3), the taxpayer company should be regarded as 'the beneficial owner' of 75 per cent. of the share capital.
Beneficial ownership
As Lord Diplock pointed out in Ayerst v. C. and K. (Construction)Ltd. [1976] A.C. 167 at p. 177, the concept of beneficial ownership owes its origin to the Court of Chancery :
'The archetype is the trust. The legal ownership of the trust property is in the trustee, but he holds it not for his ow benefit but for the benefit of the cestui que trust or beneficiaries. Upon the creation of a trust in the strict sense as it was developed by equity the full ownership in the trust property was split into two constituent elements, which became vested in different persons : the legal ownership in the trustee, what came to be called the beneficial ownership in the cestui que trust.'
The term 'beneficial ownership' is therefore very well established. It is first found in a taxng statute, so far as I have been able to ascertain, in section 55 of the Finance Act, 1927, where it appears in connection with relief from stamp duty on transfers. But in property legislation the term was already familiar to Parliament from section 7 of the Conveyancing and Law of Property Act 1881. Indeed, it had appeared even earlier in section 1 of the Larceny Act 1868, and again in the cross-heading to section 58 of the Merchant Shipping Act 1894. But nowhere did Parliament see fit to define beneficial ownership. No doubt this was because it was already a term of art, well known and understood among lawyers.
Mr. Park argued the contrary. He submitted that the term should be given its ordinary meaning, whatever that might be. But that approach finds no support in Lord Diplocks speech in Ayerst v. C. and K.(Construction) Ltd. In that case the House of Lords were concerned with section 17 of the Finance Act 1954. Lord Diplock held, at p. 176, that the expression should be given the meaning 'which would have been ascribed to it in 1954 as a term of legal art.....'
In Parway Estates Ltd. v. Inland Revenue Commissioners (1957) 45 T. C. 135 there was an unconditional contract for the sale of the share capital of a wholly-owned subsidiary. Upjohn J. held that, since the contract was one in respect of whic the court would have granted a decree of specific performance, equitable ownership passed to the purchasers at the date of the contract. However, at the end of his judgment he said, at page 142 :
'It seems to me, therefore, that, even taking the most technical view of the whole matter, it is not right to describe the vendors at the date of the transfer as the equitable owner.owever, I rest my judgment in the main on this : that wen you look at the words beneficial owner in section 42 of the Finance Act 1930, those words must in my judgment be construed in what has been described in connection with another statute as its ordinary or popular sense : see English Sewing Cotton Co.Ltd. v. Commissioners of Inlad Revenue (1946) 62 T. L. R. 608, 610. I do not further refer to that case, for it was dealing with a different statute. But when one looks at the facts of this case, and asks oneself was the appellant company in its popular or ordinary sense the beneficial owner of the shares on 28 February 1956, there can only be one answer to that question : it was not; it was bound by contract to transfer them to another the very next day.'
This paragraph lends substance to Mr. Parks argument. But the Court of Appeal expressly repudiated Upjohn J.s concluding observations. Jenkins L. J. said, at page 148 :
'I need only add that I find myself in complete agreement with the learned judge, who reached the same conclusion as I have done; that is, with one qualification ....'
Jenkins L. J. then quoted from Upjohn J.s judgment and referred to English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners [1947] 1 All ER 679. He continued :
'Speaking for myself, I find it difficult as at present advised to derive any assistance from consideration of what the ordinary person would understand by the words beneficial owner in their ordinary sense. I am open to conviction, but prima facie it seems to me difficult to ascribe any different meaninng to those words from their legal meaning, and that little assistance can be derived from speculation as to what an ordinary person would take them to mean in their popular sense. For my part, I prefer to found myself on the ground that there is nothing in this agreement to take the case out of the general rule, under which there is no doubt that the equitable interest in the shares became vested in the purchaser when the agreement of 12 January 1956 was signed.'
What then was the 'legal' meaning of which Jenkins L.J. spoke The answer must surely be clear. Jenkins L. J. was assimilating beneficial ownership with equitable ownership. Since the courts would have granted a decree of specific performance of the contract of sale 'the well-established general principle' applied, and the shares became in equity the property of the purchaser. He said, at page 146 : 'one is coming near to saying that the vendors have become trustees of the shares for the purchaser on the strength of the purchasers right to call for specific performance'. 'Near to saying' because the vendors were not trustees in the full sense, but in the qualified sense in which that word is frequently used, where the property has passed in equity under a specifically enforceable contract : see, for example, Megarry and Wade, The Law of Real Property, 5th edn. (1984), page 602 and the cases there cited. Jenkins L. J. concluded his judgment, at page 148 :
'The point is not one which admits of any great elaboration, but I cannot see any reason here for excluding the general rule, and if the general rule applies so that Mr. Peck, the purchaser, becomes by virtue of the agreement the owner in equity of the shares in question, then, in my view, it necessarily follows that at the date of the two transfers the appellant company, Parway Estates Ltd., was not the beneficial owner of the share capital of Parr (Builders) Ltd. No doubt the appellant company was the legal owner and the registered proprietor, but the equitable or beneficial interest in the shares had vested in the purchaser.'
So Jenkins L. J. was, as I say, treating the equitable and beneficial ownership as being one and the same thing.
Similarly, in Rodwell securities Ltd. v. Inland Revenue Commissioners [1968] 1 All ER 257 it was argued that 'beneficial owner' is not a term of art, but is an expression which falls to be construed liberally, so as to include anybody who has complete control over the disposition of the shares in question. Pennycuick J. rejected the argument. He held that the words have a clear, no undefined, legal meaning, following the judgment of Jenkins L.J. in the Parway case, which I have already quoted.
Finally it is worth referring to a decision of Robert Goff J. in a completely different field, namely section 3(4) of the Administration of Justice Act 1956, now section 2 of the Supreme Court Act 1981. Section 3(4) is concerned with the Admiralty jurisdiction in rem. It provides for the jurisdiction to be invoed against.
'(a) that ship, if at the time the acftion is brought it is beneficially owned as respects all the shares therein by that person or (b) any other ship which at the time when the action is brought, is beneficiallhy owned as aroresaid.'
In The Andrea Ursula [1973] Q. B. 265, 272, Brandon J., held that the expression 'beneficially owned' should be given a broad meaning so as to cover the case of a ship, which, though not legally or equitably owned by a person, was nevertheless in that persons full possession and control, such as a charterer by demise. In I. Congreso del Partido [1978] Q.B. 500, Robert Goff J. declined to follow Brandon J.s decision. He held, at p. 538, that 'beneficially owned' referred only to equitable ownership, whether or not accompanies by legal ownership, and did not include possession and control. He said, at p. 539 :
'A demise charterer has, within limits defined by contract, the beneficial use of the ship; he does not, however, have the benefical ownership as respects all the shares in the ship.'
So there is good authority for the view that 'the beneficial owner' of shares, when that term is used in a statute in contrast to the registered holder, meas the equitable owner; neither more nor less. By equitable owner is meant, inter alia, the purchaser under a specifically enforceable contract. Applying that test in the present case, G. B. was not the equitable owner of five per cent. of the shares which were the subject of the option agreement, since it could not claim specific performance until it had exercised its option under the agreement, and it could not exercise its option under the agreement until five years after the incorporation of Homebase Ltd., namely, 12 November 1984. Indeed Mr. Park did not even argue that equitable ownership had passed to G. B.
Does it follow that equitable ownership remained in the taxpayer company In my view it does. For as Lord Greene M. R. pointed out in the English Sewing Cotton Co.s case [1947] 1 All ER 679 it is difficult, at any rate in the case of a contract, to see how the equitable ownership could have become severed from the legal ownership unless it had passed to somebody else. There are, of course, special circumstances in which a person or company may be deprived of the beneficial ownership of his assets, even though it is not yet possible to identify his successors in title. The best known example would be property held by a trustee in bankruptcy, or the property of a company in liquidation : see Ayerst v. C. and K. (Construction) Ltd. [1976] A.C. 167. Another example would be the estate of a deceased person in course of administration, or assets vested in a custodian of enemy property. In such cases it is right to regard the equitable or beneficial ownership as being in suspense. But in all these cases the legal owner is deprived of his beneficial ownership by operation of law as a consequence of supervening events. I would be reluctant to extend the same concept ot the case of an ordinary commercial transaction inter partes. So if beneficial ownership means the same as equitable ownership for the purpose of the Taxes Act and if, as Mr. Park conceded, the equitable ownership in the shares never passed to G.B. I would be disposed to hold that the taxpayer company never ceased to be the beneficial owner of those shares.
But there remains one authority on which Mr. Park relied strongly, which, I have not yet mentioned, namely, wood Preservation Ltd. v. Prior [1969] 1 W. L. R. 1077. In that case there was a contract for the sale of a subsidiary company. The subsidiary was the U.K. distributing agent for a German manufacturer. It was a condition of the contract for the sale that the vendors would obtain a letter from the German company within one month of the contract assuring the purchasers that the agency agreement would not be terminated. The vendors then assigned their business to the subsdiary, which later claimed to deduct the trading losses of the business from its own profits for tax purposes. At the date of the assignment the letter from the German company had not been obtained. Subsequently the purchaser obtained a satisfactory assurance from the German manufacturers direct. So they wrote to the vendors 'withdrawing the condition. 'In these circumstances', they said, 'the contract between the two companies has now become unconditional'. The question was whether the vendors remained beneficial owners of the shares until the condition was withdrawn, in which case the trading losses would have been deductible, or whether they ceased to be beneficial owners when the contract was made, in which case they would not.
In a lengthy judgment Goff J. held that the vendors had ceased to be beneficial owers at the date of the contract. After referring to Parway Estates Ltd. v. Inland Revenue Commissioners, 45 T.C. 135 he
'It appears to me to follow quite clearly from that authority that ordinarly where the mutual obligation of sale and purchase is subject to a condition precedent the property does not pass so long as the condition remains unperformed, but in the present case I have to consider whether it makes any difference that this was a condition, as I find, solely for the benefit of the purchaser and which he could, therefore, waive. In a sense, therefore, he had expressly provided that he would buy the shares subject to the condition of the letter which he needed being produced to him. Mr. Monroe says, Well, he could have waived, and if he did waive it it, would not. That I think, is not an entirely easy matter to decide, but on the whole I have come to the conclusion that as the matter of waiving the condition rested entirely with the purchaser, he could at any time require specific performance of the contract, and therefore to use the words of Jenkins L.J. in the Parway caseone is coming near to saying that the vendors have become trustees of the shares for the purchaser on the strength of the purchasers right to call for specific performance. On the whole, therefore, I have come to the conclusion that as the matter of waiving the condition rested entirely with the purchaser, he could at any time require specific performance of the contract, and therefore to use the words of Jenkins L. J. in the Parway case one is coming near to saying that the vendors have become trustees of the shares for the purchaser on the strength of the purchasers right to call for specific performance. On the whole, therefore, I have come to the conclusion that under this contract the beneficial interest had sufficiently passed to the purchaser and that the conclusion of the special commissioners was right.'
It will be seen that Goff J. approached the case much as I have approached the present case, by asking whether the purchasers could have called for specific performance. But in the Court of Appeal things took a different turn. Instead of asking whether the purchasers could obtain specific performance by waiving the condition in their favour, the Court of Appeal analysed the nature and extent of the rights retained by the vendors, pending the waiver. In short judgment Lord Donovan summarised the argument for the Crown, at pp. 1095-1096 :
'The position (they say) even before this condition was waived was this; First, Silexine could not have disposed of the shares to anybody else : had it tried to do so it could have been restrained by injunction. Second, it could not declare or pay any bonus or dividend on its shares : it had specifically precluded itself from doing so. Third, it would have been bound at any time actually to transfer the shares if British Ratin waived the condition in question - which i law at any rate it could have done at any time after the contract was signed. The shares (in a word) were like a tree which the owner could not sell and could not cut down and of which he could enjoy none of the fruit.'
He then continued, at p. 1096 :
'But if one finds, as here, that the company which made the losses, though still the legal owner of the shares, is bereft of the rights of selling or disposing or enjoying the fruits of these shares, then, bearing in mind the purposes of section 17, I have in the end concluded that it would be a misuse of language to say that it still remained the beneficial owner of these shares. I am not deciding this case in the least upon the merits; but it is difficult to think that the Legislature intended the benefit it was conferring to be enjoyed in these circumstances .... It would be rash indeed to attempt an exhaustive definition, and I do not do it. I merely say that the facts in the present case do not, in my opinion, satisfy any reasonable interpretation, involving, as they do, that on 25 March, 1960, by the contract of sale of the shares, which was accepted shortly afterwards, Silexine ceased to be able to appropriate to itself any of the benefits of ownership. This does not necessarily involve the consequence that British Ratin became the beneficial owner while the condition remained operative. It is possible for property to lack any beneficial owner for a time, for example property which is still being administered by an executor which will go eventually to the residuary legatee.'
Harman L.J. said, at p. 1097 :
'After accepting this offer Silexine was not able to deal with the property in any way at all, as has already been pointed out by my Lord. Therefore it seems to me to be a contradiction in terms to talk about beneficial ownership in Silexine. There was no benefit at all in their ownership : it was mere legal shell .... They were tied hand and foot. Therefore, merely to say : Oh well, this is a conditional contract and in the ordinary way a conditional contract does not pass beneficial ownership until the condition is satisfied, does not seem to me to apply to this case at all, and I think that the judge was right, though perhaps not quite for the reasons which he gave in his judgment.'
Widgery L.J. clearly felt some difficulty, as indeed had Lord Donovan. Since his judgment is very short, I will quote it in full, at p. 1097 :
'I have found it very difficult to accept Mr. Gouldings propostion that on a contract of sale of this kind the beneficial ownership can leave the vendor without simultaneously arriving in the purchaser. I appreciate that there are many other circumstances in which there may be no identifiable beneficial owner of property, but I would have thought that where an unquestioned beneficial owner enters into a contract of sale he should be regarded as remaining beneficial owner until that interest has passed to the purchaser. If that were the right test in this case, I would have thought, contrary to the view of the judge below, that as the beneficial ownership had not reached British Ratin it remained at the material time in the original owners. But I have been persuaded that, having regard to the problem which is posed to this court, as Lord Donovan has pointed out, one must not look so much at whether beneficial ownership has reached the purchaser : one must examine the situation of the vendor and ask whether the legal ownership, which unquestionably remained in him, retained the attributes of beneficial ownership for the purposes of the section. In the end, I have reached the same conclusion as that expressed by my Lords on that point and accordingly I also would dismiss this appeal.'
Mr. Park relied on the Wood Preservation Ltd. case for two purposes : first, to show that beneficial onwership is not synonymous with equitable ownership and second, to show that property may lack a beneficial owner even in a commercial context.
The Wood Preservation Ltd. case was considered by Pennycuick J. in Brooklands Selangor Holdings Ltd. v. Inland Revenue Commissioners [1970] 1 W.L.R. 429. On the facts of the latter case, the contract had become unconditional, so that on any view equitable onwership of the stock in question had passed to the transferees. But Pennycuick J. said, at page 450 :
'I would only add this, that considerable difficulties arise in this connection if one seeks to equate the expression beneficial owner with the expression equitable owner in the technical sense in which that term is used in equity law .... I do not think, however, that equitable ownership is to be thus equated for this purpose with beneficial ownership although no doubt, in many instances they may come to the same thing.'
Although the Brooklands Selangor Ltd. case supports Mr. Parks argument that equitable and beneficial ownership are not the same concept, the observations of Pennycuick J. were necessarily influenced by the decision in the Wood Preservation Ltd. case. It goes without saying that we are bound by the ratio decidendi of the Wood Preservation whatever it may be. It follows, I think, that we cannot decide the first question on the straightforward ground which I would otherwise favour, that beneficial ownership and equitable ownership are one and the same thing, and that since the taxpayer company retained the equitable as well as the legal title to 75 per cent. of the share capital throughout the period in question, they should be regarded as beneficial owner of the five per cent. Instead we must look into the nature and extent of the rights retained by the taxpayer company in relation to the five per cent. If the taxpayer company were bereft of all rights which would normally attach to that parcel of shares, so that their ownership was, in the words of Harman L.J., nothing more than a legal shell, then we would be bound to hold that the taxpayer company were not the beneficial owner of the shares, even though the rights which would normally attach to the shares had not yet passed to G.B. Mr. Park, submitted that that was precisely the position here.
Mr. Park relied on three factors to establish his argument on the facts. In the first place, the taxpayer company had no right to dispose of its shares prior to 12 November, 1984, without G.B.s consent. Second, the taxpayer company had no expectation of any dividend on its shares, prior to 12 November, 1984, since the payment of a dividend was in the joint control of the taxpayer company and G.B., by virtue of the joint venture agreement. G.B. would have been most unlikely to agree to the payment of any dividend while the call option remained outstanding. Thirdly, the price at which G.B. was entitled to purchase the shares under the call option was the aggregate amount paid up on the shares plus interest at one per cent. over base lending rate, less the amount of any dividend paid on the shares meanwhile. So if the call option had been exercised, the taxpayer company would have been deprived of any increase in the value of the shares. Such increase in value would have accrued to G.B., not to the taxpayer company, as would any fall in value, should the taxpayer company have exercised the put option.
As to these three factors, the first two, as Mr. Park accepted, apply not only to the five per cent., but also to the remaining 70 per cent. It could not possibly be argued that the taxpayer company were not, by virtue of these factors, the beneficial owner of 70 per cent. Then does the third factor make all the difference Mr. Park submitted that the cumulative effect of the three factors was such as to deprive the taxpayer company of all fruits of ownership. I do not agree. The question is not whether the taxpayer company required the consent of G.B. before a dividend could be paid, or whether a payment of dividend was likely or not (it was clearly contemplated as a possibility). The question is rather whether the taxpayer company would have received the dividend if it had been paid. The answer is in the affirmative. The fact that the amount of any dividend would have been deducted from the option price, whether under the call option or the put option, does not mean that the taxpayer company was not beneficially entitled to the dividends in the meantime. So I am not persuaded that the taxpayer companys rights in relation to the shares were no more than 'a mere legal shell'. That being so, the ground on which the Court of Appeal held that the vendors in the Wood Preservation Ltd. case were not the beneficial owners of the shares in question does not apply.
But Mr. Parks argument does not stop there. Assuming the taxpayer company was not bereft of all the fruits of ownership, as in the Wood Preservation Ltd.s case, Mr. Park invited us to form what he called a 'balanced judgment' as to whether the taxpayer companys ownership of the shares was or was not beneficial. But I would not for my part be willing to extend the decision in the Wood Preservation Ltd. case beyond what was actually decided. How, otherwise, could one ever draw the line Where legal onwership is a mere shell, as it was in the Wood Preservation Ltd. case, it is relatively easy to draw the inference, as a matter of construction, that Parliament cannot have intended to confer the advantages of group relief. But it is much more difficult to draw such an inference where, as in the present case, the taxpayer company retained almost all the rights which normally attach to shares in a joint venture company; and even the option agreement did not, for the reasons already mentioned, deprive the taxpayer company of all rights in relation to the five per cent. pending the exercise of the call option by G.B. So I would not accept Mr. Parks further argument. Like the commissioner and the judge, and for substantially the same reasons, I would answer the first question in favour of the taxpayer company.
Schedule 12 to the Finance Act, 1973
I have already anticipated my answer to the second quetion. Once the legislative purpose underlying section 28 and Part I of Schedule 12 is understood - and I confess that the meaning does not exactly leap to the eye - the answer is clear enough. Millet J. held that the option agreement was not an arrangement in respect of any particular shares held by the taxpayer company, since the taxpayer company could in theory buy in shares from a third party to satisfy the call option. I have some difficulty with that line of reasoning. I much prefer the alternative line of reasoning, that the whole of paragraph 5 is concerned with shares of a certain description, namely, shares carrying special rights whereby they may, for example, cease to carry the right to any dividend in the future. If that is the right view, then paragraph 5(3) is concerned solely with arrangements whereby shares, or a class of shares, may be brought within that description. An arrangement affecting the ownership of shares is a very different sort of arrangement, and quite outside the ambit of paragraph 5.
The judge went on to hold that, for paragraph 5 to operate the 'equity holder' must be the holder of the share throughout the material time, that is to say, he must be the holder of the shares in the future accounting period to which the arrangement relates, as well as the holder in the current accounting period. The judge may well be right about that. But it is sufficient for present purposes that, for paragraph 5 to operate, the arrangement must be one which affects the rights attaching to the shares. The option agreement was an arrangement which could affect ownership of the shares. But it could not affect the rights attaching to the shares. The fact that those rights would have accrued to the benefit of G.B., and not the taxpayer company, if the call option had been exercised, is wholly beside the point. The paragraph is not concerned with a reduction in the overall right to dividend, but with the reduction in the right to dividend attaching to particular shares. That seems to me to be the plain meaning of the words. It is said that this meaning would emasculate paragraph 5(3). It is sufficient to say that I do not agree. I say nothing about the third reason given by the judge for holding that the option agreement is not caught by section 28 or Schedule 12.
For the reasons given I would answer the second question in favour of the taxpayer, as well as the first. It follows that I would dismiss the appeal.
NOURSE L.J. I agree. The first question is whether, within the meaning of section 532(3) of the Income and Corporation Taxes Act 1970, the 'beneficial ownership' in the five per cent. of the shares in Homebase Ltd. which were subject to the unexercised put and call options in favour of G.B. was vested in the taxpayer company or not. The broad purpose of section 532(3), which was not, in its application to group relief, modified by the restrictions introduced by the Finance Act 1973, is that in deciding the extent to which one company is owned by another you look not at the legal ownership of the shares but at their beneficial ownership. The only distinction made is between legal and beneficial ownership and there is nothing to suggest that the latter expression is to have some special meaning.
There is no difficulty in ascertaining the legal ownership of shares, which is invariably vested in the registered holder. Equally, it ought not to be difficult to ascertain their beneficial ownership, albeit that it may arise in a variety of ways, for example under a declaration of trust or by operation of law. I therefore approach the construction of section 532(3), a provision having general application for the purposes of the Taxes Acts, in the expectation that the extent to which one company is beneficially owned by another was not intended to depend on fine distinctions between different cases.
Although I might not, with Lord Diplock, have gone so far as to think that the expression 'beneficial ownership' is a term of art, it is certainly one which has for several centuries had a very well recognised meaning amongst property lawyers. And there can be no doubt that, in enacting a provision such as section 532(3), Parliament must have intended to adopt that meaning. It means ownership for your own benefit as opposed to ownership as trustee for another. It exists either where there is no division of legal and beneficial ownership or where legal ownership is vested in one person and beneficial ownership or, which is the same thing, the equitable interest in the property in another. Thus, to take the simplest case of dividend ownership to which section 532(3) can apply, if company A is the registered holder of shares in company B as nominee, i.e., as a bare trustee, for company C, the beneficial ownerhip of the shares or the equitable interest in them is vested in company C.
Another case to which section 532(3) can apply is where company A enters into an unconditional contract to sell shares in company B to company C. Shares in company B not being readily obtainable in the market, such a contract is specifically enforceable at the suit of company C. By parity with contracts for the sale of land, it has long been held that the right to specific performance gives company C the equitable interest in the shares, company A becoming a qualified trustee in the sense that it must preserve the shares for company C while remaining entitled to any dividends accruing before completion.
In that state of affairs in which of the two companies is the beneficial ownership of the shares vested pending completion of the contract It cannot be doubted that it is vested in company C. In other words, in this instance at any rate, no distinction is to be drawn between the beneficial ownership and the equitable interest. As appears from the passages in their judgments in Parway Estates Ltd. v. Inland Revenue Commissioners, 45 T.C. 135 to which Lloyd L.J. has referred, that is an assumption which has in the past been made by judges as eminent in this field as Lord Jenkins and Lord Upjohn. In the same company I would cite the observations of Sir George Jessel M.R. in relation to a contract for the sale of land in Lysaght v. Edwards (1876) 2 Ch. D. 499, 506 :
'It appears to me that the effect of a contract for sale has been settled for more than two centuries; certainly it was completely settled before the time of Lord Hardwicke, who speaks of the settled doctrine of the court as to it. What is that doctrine It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser ....'
So far therefore I see no reason to doubt that Parliament intended, in the application of section 532(3) to specifically enforceable contracts for the sale of shares, that there should be no difference between the beneficial ownership of the shares and the equitable interest in them. Nor, in the absence of authority to the contrary, would I be able to grasp the concept of the beneficial ownership being suspended somwhere between the vendor and the purchaser. I would think that it must be vested in the one or in the other and, if it has not passed to the purchaser, that it must remain in the vendor. That is not in any way to cast doubt on the well known examples of a suspension of beneficial ownership to which Lloyd L.J. has referred. They are far removed from contracts for the sale of land or of shares.
Then take the previous example, but suppose that the contract is subject to a condition precedent. Until the condition is satisfied the equitable interest in the shares will not pass to company C. It will remain in company A. What ground is there for thinking that the beneficial ownership of the shares will not also remain in company A In order to answer that question we must look to Wood Preservation Ltd. v. Prior [1969] 1 W.L.R. 1077. That is a difficult decision. Golf J. at first instance did not distinguish between the beneficial ownership of the shares and the equitable interest in them. In my view he was right not to make that distinction. However, he thought that, because the purchaser could obtain specific performance of the contract by waiving the condition precedent at any time, 'the beneficial interest had sufficiently passed to the purchaser'. I respectfully think that that was an error on the part of the judge. Unless and until the condition was either waived or satisfied there could be no right to specific performance and no passing of the equitable interest.
It seems that Goff J.s error was perceived by this court who, in the process of correcting it, gave a decision whose effect was to draw a distinction between the beneficial ownership of the shares and the equitable interest in them. Their approach was bound, as the present case demonstrates, to lead to fine distinctions between different cases in the application of section 532(3). Shortly stated, their view was that Parliament could not have intended that the concept of beneficial ownership should apply to the 'mere legal shell' of ownership which the vendor there retained. Lord Donovan, at any rate, was prepared to accept that this view might involve a suspension of beneficial ownership. It is to be noted that they did not refer, as Goff J. had done, to the Parway Estates Ltd. case. Lord Donovan said that he did not discuss the authorities which had been cited because none of them covered beneficial ownership within the meaning of that expression in section 17 of the Finance Act 1954. That was certainly correct so far as the Parway Estates Ltd. case was concerned, because that was a stamp duty decision under section 42 of the Finance Act 1930. However, the conditions for the operation of section 42 were of the same character as the conditions for the operation of section 17. I am not at all sure on what ground the Parway Estates Ltd. case could have been distinguished.
The decision of this court in the Wood Preservation Ltd. case is binding on us for what it decided. I would be unwilling to apply it to any case where the vendor retained more than a mere legal shell of ownership. The grantor of an option which has not been exercised retains much more than that. For the reasons given by Lloyd L.J. and by Millet J. at first instance, I agree that, within the meaning of section 532(3), the beneficial ownership in the five per cent. of the shares was vested in the taxpayer company.
In regard to the second question I do not wish to add anything to the reasoning of Lloyd L.J. and of Millet J. In my opinion the 'arrangements' referred to in paragraph 5(3) of Schedule 12 to the Finance Act 1973 were simply not intended to include a transaction of the kind effected by the option agreement in this case. I too would dismiss this appeal.
RALPH GIBSON L.J. I agree with both judgments.
Appeal dismissed with costs.
Leave to appeal refused.