1964 PLP 261 (PTD)

Income‑tax‑Employment ‑ Benefit to Director ‑ Costs of defence of company Director on criminal charge‑Costs paid by company‑Company anxious not to lose services of Director Costs paid more than Director would have incurred on own behalf Whether an expense incurred in or "in connection with provision of . . . benefits"‑ Whether "benefit" to Director‑Whether chargeable to income‑tax under Schedule E‑Income‑tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), Ss. 160 & 161 (1).1 A motor car belonging to a company was being driven by a Director of the company on the company's business, when it unaccountably left the road and a pedestrian was killed as a result. The director was charged with causing death b5 reckless or dangerous driving, and his defence was undertaken by solicitors and leading and junior counsel instructed by the company at the company's expense. The Director was duly acquitted and the bill of costs ammounted to

641. The Director would not and could not have spent so much on his own defence if left to himself. The solicitors had advised the company that if the Director were convicted he would be imprisoned and that his conviction might involve the company itself in liability. The company were anxious not to lose the services of the Director ; his services being virtually indispensable to the company and particularly so at the time of the accident. The Director was assessed to income tax under Schedule for the year 1958 to 1959 in a sum which included the sum of 641 costs as a benefit within section 161 (1) of the Income‑tax Act, 1952.1 1Income‑tax Act, 1952, section 160 (1) : "Subject to the provisions of this chapter, any sum paid in respect of expenses by a body corporate to any of its Directors . . . . shall, if not otherwise chargeable to income‑tax as income of that Director . . be treated for the purposes of paragraph I of Schedule 9 to this Act as a perquisite of the office . . . . . of that Director . . . . . and included in the emoluments thereof assessable to income‑tax accordingly : Provided that nothing in this subsection shall prevent a claim for a deduction being made under paragraph 7 of the said Schedule 9 in respect of any money expended wholly, exclusively and necessarily in performing the duties of the office or employment. Section 161 (1) : Subject to the following provisions of this chapter, where a body corporate incurs expense in or in connection with the provision, for any of its Directors . . . . . of living or other accommodation, of entertainment, of domestic or other services or of other benefits or facilities of whatsoever nature, and, apart from this section, the expense would not be chargeable to income‑tax as income of the Director . . . . . para graphs 1 and 7 of Schedule 9 to this Act, and section 27 of this Act, shall have effect in relation to so much of the said expense as is not made good to the body corporate by the Director . . . . . as if the expense had been incurred by the Director . . . and the amount thereof had been refunded to him by the body corporate by means of a payment in respect of expenses. The Director appealed to the special Commissioners contending that the 641 was not incurred "in or in connection with" the provision of a benefit or facility for him but that it was expended for the company's own purposes; alternatively, that any benefit was limited to the sum which the Director could have spent on his own defence if the company had not incurred the expense of it. The special Commissioners upheld the assessment and Buckley, J. allowed an appeal by the Director and remitted the case to the Commissioners to find what sum was a reasonable sum for the company to have expended on the Director's defence. On appeal by the Crown :‑ Held (Sellers, L., J. dubitante), that the sum of E41 was an expense incurred by the company in the provision of a benefit to the Director: that the condition, precedent to liability specified in section 161 (1) of the Income‑tax Act, 1952, were, therefore, satisfied: and that by virtue of section 160 the expense in question must be treated as a perquisite of the Director's Office as Director and must accordingly be included in his emoluments assessable under Schedule E. The combined effect of sections 160 and 161 (1) was to lay the charge upon the sum paid by the company as an expense, and not upon the "benefit" to the Director, and there was no justification for limiting the sum to so much only as the Director would have paid himself Appeal‑from Buckley, J. The taxpayer, J. S. Rendell, appealed to the special Commis sioners against an assessment to income‑tax under Schedule E made upon him for the year 1958 to 1959 in the sum of 3,919 in respect of his emoluments as a Director of Peter Merchant Ltd. Included in the assessment appealed against was a sum of 641 which was paid by Peter Merchant Ltd. in the circumstances set out below. The question for determination was whether that sum of 641 was an expense incurred "in or in connection with the provision" for the taxpayer of "other benefits or facilities of whatsoever nature" within the meaning of section 161 of the Income‑tax Act, 1952, with the result that it was a perquisite of his office as Director to be included 1n the emoluments thereof assessable to income‑tax. The following facts were found by the special Commis sioners :‑The tax payer was a full‑time Director of Peter Merchant Ltd. On July 23, 1958, while returning to the bead office of the company after making a call on the company's business the car which he was driving unaccountably left the road and killed a pedestrian. The car belonged to the company. The taxpayer was injured and was taken to hospital, and on the following day he instructed his secretary, Miss Greig, to get in touch with the Automobile Association, of which he was a member, and ask them to arrange for a solicitor to see him to give him legal advice. The Chairman and Managing Director of Lockhart Group Ltd., of which Peter Merchant Ltd. was a wholly owned sub sidiary, happened to hear the taxpayer's secretary speaking to another Director about her instructions when she returned to the company's office, and he instructed her not to get in touch with the Automobile Association. He then telephoned a partner in the firm of solicitors who acted as solicitors to Lockhart Group Ltd. and to the company, and gave him details of the accident in which the taxpayer had been involved; and asked what the latter's position might be. The solicitor stated that the taxpayer might be charged with causing death by reckless or dangerous driving; and that if he were convicted, he would be imprisoned and his conviction might involve the company in liability. The chairman expressed concern at that possibility and said that he could not afford to be deprived of the taxpayer's services and accordingly gave instructions to spare no reasonable expense to obtain the taxpayer's acquittal of any charge made against him or, if he were convicted, to avoid his going to prison; for if he went to prison, the company and Lockhart Group Ltd. might lose much business. The company carried on the trade of an industrial and staff caterer. It made annual contracts with owners of factories and other establishments with many employees. The price charged to the owner was based on individual items of food supplied to the employees, and the company worked on a very small profit margin and the financial terms of every contract had to be kept under constant review. The taxpayer was the contract Director in charge of that side of the business. He had a service agreement with the company. Only the taxpayer was in a position to negotiate contracts with the owners of industrial establishments, to negotiate contracts for vending machines, and he had to ensure that neither the company nor Lockhart Group Ltd. made a loss. At the time of the accident, the chairman was particularly anxious not to lose the services of the taxpayer because the group was in the process of acquiring control of a company manufacturing automatic vending machines and the taxpayer was needed to co‑ordinate the activities of that company and those of Peter Merchant Ltd. The solicitor saw the taxpayer in hospital on the evening of July 24, 1958, and told him that the Chairman had given instructions that the taxpayer was not to have anything further to do with the provision of his defence in any proceedings that might be brought against him. That would be provided by the company. The solicitor then Instructed the taxpayer what he should do in connection with any such proceedings. In fact, the taxpayer was subsequently charged under section 8 of the Road Traffic Act, 1956 (now section 1 of the Road Traffic Act, 1960), with causing the death of another person by reckless or dangerous driving and was liable if convicted to imprisonment for a term of up to five years. His defence was undertaken by the company's solicitors. They instructed junior counsel to appear at the police Court on September 18, 1958 and October 9, 1958, and leading and junior counsel to appear at the Central Criminal Court on November 3, 1958, when the taxpayer was acquitted. The taxpayer gave no instructions relating to his defence, and was not consulted about his representation in Court, those being arranged by the company's solicitors in consultation with the Chairman. The bill of costs, totalling 611, for the defence of the taxpayer was presented by the solicitors to the company, which paid it in April 1959. The taxpayer would not have spent on his own defence as much as was spent by the company. He was very relieved when he was informed on July 24, 1958, that the company was paying for his defence. It was contended on behalf of the taxpayer that the sum of 641 was not an expense incurred in or in connection with the provision for the taxpayer of a benefit or facility ; that the sum was expended by the company for its own purposes, namely, to ensure that it was not deprived of the taxpayer's services ; that no benefit or facility resulted to the taxpayer from the expense incurred by the company ;that at the relevant moment of time; namely, when the expense was incurred, the providing of a benefit or facility for the taxpayer was not intended ; and that, alternatively, if any benefit or facility was provided for the taxpayer its value did not exceed the amount ( 50 or 60) which he could have spent on his own defence if the company had not incurred the expense of it. It was contended on behalf of the Crown that the whole of the sum of 641 was an expense incurred by the company in or in connection with the provision for the taxpayer of a benefit or facility, and that that sum was accordingly to be treated as a perquisite of his office as a Director of the company, and included in the emoluments thereof assessable to income‑tax. The special Commissioners dismissed the appeal, holding that the sum in dispute, paid by the company for services rendered by its solicitors in arranging for the taxpayer's defence against a charge of causing the death of another person by reckless or dangerous driving, provided a benefit for the taxpayer, and that he was assessable under Schedule E in respect of it in accordance with the provisions of sections 160 and 161 of the Income‑tax Act, 1952; and that the fact that the company spent 641 in defending him because it was anxious not to lose his services at a critical time did not affect his liability for what was an undoubted benefit to him, and that that liability should not be limited to an estimate of what the taxpayer might have spent on his defence if the company had not undertaken to provide it. The taxpayer appealed from the decision, when it was further contended on his behalf (i) that the word "in" in section 161 (1) of the Income‑tax Act, 1952, should be construed as "for the purpose of : (ii) that the expense must be incurred for the director or employee in question in contradistinction to its being incurred for the purposes of the company itself ; and (iii) that the words "or of other benefits," which was only one of a series of heads of charge, pointed to an inquiry as to whether the benefit aimed at was that of the Director or that of the company ; (iv) that where the purpose of the expenditure was to protect or advantage the company itself in some way the words of the subsection were inapplicable ; and (v) that, on the facts, the company's purpose in undertaking the taxpayer's defence was to protect its own position by retaining the taxpayer's services and avoiding the possibility of their being interrupted by a period of imprisonment. Alternatively, it was contended that the only extent to which it could be said that the taxpayer was benefited, was the extent by which his own pocket was relieved, and that the relevant inquiry was not what the company spent but what the taxpayer might reasonably have been expected to spend, in his own defence, that being the amount of which he was in fact relieved by the company's undertaking his defence free of charge. For the Crown it was contended that the only questions to be determined were: (i) did the company spend money in providing something and (ii) if so, was that a benefit to a Director or employee, and that the company's motive was wholly irrelevant : were that not so, section 161 (2), (3) and (4) would be otiose if it were an answer to a claim under section 160 that the expenditure was either entirely or predominantly for the purposes of the company's own business ; that the question whether the expenditure was a benefit to a Director or employee was a question of fact and that in the present case the special commissioners had found as a fact that it was a benefit. There was no room for any apportionment of the expenditure ; the taxpayer was not compelled to accept a defence on a more lavish scale than he wished. Buckley, J. held that the company clearly incurred an expense in providing the taxpayer with a defence, and that in considering whether what the company had done was a benefit to the taxpayer one must "take into account what has been achieved for the Director." The Judge continued: Now what was achieved for the Director here was that he was defended at his trial. How much of the expenditure then ought really to be regarded as having been made for his benefit? Is it right to say that the whole of the 641 was expended for his benefit or is it right to say that of the 641, 60 or whatever may be the measure of the reasonable amount to be expended for his defence was spent for his benefit and the rest was spent by the company, perhaps ex majori caurela for its own benefit because it considered that it was desirable to do the thing on a lavish scale? It seems to me that it must be right to consider what sum the company could reasonably have spent in whatever may be the particular circumstances of the case and the particular method of expenditure for the benefit of the Director or employee concerned, and that only what could reasonably have been spent, can be regarded as spent beneficially for that Director or employee. So far as the company chooses to spend more than what is reasonably required for the purpose, I think the company must be assumed to make that expenditure for its own purposes and not to make it for the Director for his benefit. That the company had reasons for wanting to protect itself in the present case is clear from the findings. What the company did was not disinterested, which makes it easier for me to reach the conclusion that some part of the expenditure here was not incurred for the appellant or as a benefit to him, but was incurred for the company's own purposes." Accordingly, Buckley, J. ordered that the case be referred back to the Commissioners to find as a matter of fact what sum was a reasonable sum for the company to expend on the taxpayer's defence at his trial and that to the extent of that sum he would be chargeable to tax ; but that to the extent of any excess over that sum he would not be chargeable. The Crown appealed, and the taxpayer cross‑appealed, on the grounds, inter alia, that the inquiry which the Commissioners ought to make was as to what sum the taxpayer would have spent if left to himself and not what sum the company might reasonably have spent. Doyle v. Davison 1962 T R 147 ; Cape Brandy Syndicate v. Inland Revenue Commissioners (1921) 2 K B 403 ; Canadian Eagle Oil Co. Ltd. v. The King (1946) A C 119 ; Wilkins v. Rogerson (1961) Ch. 133 ; Luke v Inland Revenue Commissioners (1963) 2 W L R 559 ; Nolder v. Walters (1930) 46 T L R 397 ; McKie v. Warner (1961) 1 W L R 1230 and Sanderson v. Durbidge (1955) 1 W L R 1087 ref. Peter Foster Q. C., Alan S. Orr Q. C. and Raymond Phillips for the Crown. F. N. Bucher Q. C. and R. Buchanan‑Dunlop for the Taxpayer. Solicitors: Solicitor of Inland Revenue; Allen & Overy. JUDGMENT DONOVAN, L. J.‑

Giving the first judgment : I agree with the special Commissioners in this case. The company clearly incurred an expense, namely, the sum of

641. That expense was incurred in connection with the provision of a benefit to the taxpayer Rendell, namely, the benefit of being defended by solicitors and counsel on his trial. The conditions precedent to liability specified in section 161 (1) of the Income‑tax Act, 1952, are therefore satisfied ; and by virtue of section 160 the expense in question has to be treated as a perquisite of the taxpayer's office as a Director, and included in his emoluments assessable under Schedule E. Against this it is said that if the company incurs the expense primarily in its own interests and only secondarily in the interests of the Director then no benefit is provided within the meaning of section 161 (1). This Inter pretation I am unable to accept. For present purposes I see no sufficient distinction between the case of a company expending money primarily for its own benefit, and the case of a company expending money for its own benefit, which, as a by‑product, benefits a Director, always assuming that this was part of the company's purpose. The latter kind of expense could not be justified unless there were some benefit to the company. It is also argued that the taxpayer would not have spent 641 on his own defence if left to himself. He could and would have spent no more than 60 or so. Thus he had been saved that sum and no more. Accordingly that sum represents his only benefit, and the charge to tax should be restricted accordingly. Section 161 (1), however, does not lay the charge upon the benefit. The combined effect of sections 160 and 161 (1) is to lay the charge upon the sum paid by the company as an expense in connection with the provision of the benefit. At the same time the rather curious language at the end of section 161 (1) gives the Director the opportunity to claim a countervailing deduction under Schedule 9, paragraph 7, if the facts justify it. Here, admittedly, they do not ; but as a matter of construction I can see nothing in the language of the Act of 1952 which would justify the Court in investigating how much of the expenses would have been incurred by the Director had he been left to provide the benefit, or a corresponding benefit, for himself. Buckley, J. remitted the case to the special Commissioners with a direction to discover how much the company would reasonably have incurred for the taxpayer's defence. Nobody had suggested that this was the question to be decided and I think that in this respect a slip has probably occurred. Although in the last resort Mr. Bucher would wish to retain the Judge's decision, his real alternative argument before us has been that liability under Schedule E extends only to the sum the taxpayer would have paid out if his defence had been left to himself. Failing this he says that the liability should not exceed tax upon the sum the company would have paid for his defence if the company had no interests of its own to consider. I find this last proposition somewhat elusive, seeing that the company could not properly pay out anything if it had no interests of its own to consider. In any event, however, the true construction of these two sections leaves no room for either of Mr. Bucher's interpretations. Finally it is said for the taxpayer that it is obviously unjust if he has to be saddled with income‑tax liability on any extra vagant sum that a company might choose to expend on a benefit to a Director, notwithstanding that the benefit could have been obtained by him for much less. That may be so, but I do not think this possibility can of itself justify a construction of the Act which would involve writing in a proviso which is not there. Moreover, wanton extravagance of the kind suggested would probably be ultra vires the company and therefore not something to be contemplated by the Legislature. Once a benefit has designedly been conferred upon a Director, the Act itself prescribes what the measure of liability shall be, namely, the sum expended by the company; and I find nothing in the language of these two sections for dissecting that sum and taxing only so much as the Director would have paid himself. For those reasons, I think, this appeal must be allowed and the cross‑appeal dismissed. RUSSELL, L. J.‑

I agree with everything that has fallen from Donovan, L. J. I cannot see how the provision of solicitors and counsel for the defence of the taxpayer was anything other than the provision of a benefit for the tax‑payer. The expense incurred by the company in providing that benefit was 641, and section 161 requires that that sum should be treated in effect as money paid by the company in respect of expenses, which throws it into the ambit of section 160, and since in this case no part if spent by the Director could be described as expenses necessarily incurred by him as such, it will all fall to be taxed as emoluments of his office. There is no justification in my view for the suggestion that either the word "in", or the word "for" in section 161 somehow import the possibility of analysing the purpose or motive of the company making the expenditure. So far as the alternative suggestion is concerned, namely, that it could be said that the only benefit to the taxpayer was a saving to him of that amount of money which he would have expended if he had been left to his own resources, I cannot, for my part, accept that argument either. Suppose the case to have been that he had paid, or was prepared to pay himself for his defence on a fairly inexpensive scale and the company came to him at the last moment and said, for the reason the company gave in this case, namely, his importance to them: "We will pay the solicitor to employ in addition leading counsel" and did so. I cannot for my part see how it could possibly be said in such a case that the provision of leading counsel by and at the expense of the company was not the provision of a benefit for the Director of the company in respect of which the company had incurred the expense of his fee. But the contrary would be a necessary result on the basis of Mr. Bucher's alternative argument. For those reasons, which are substantially, I think, repetitions of what my Lord has said, I agree with him that the cross‑appeal fails and the appeal should be allowed. SELLERS, L. J.‑

The decision of Buckley, J., as I would interpret its reasoning, although not in the form of the order which was drawn up, seems to me to be sensible and reasonable, but it is said by the Crown that it is not in accordance with the statute and that there is no power to remit back to the Commissioners as the Judge directed. I have been much inclined to interpret section 161, coming as it does in the sequence of sections dealing with expenses allowed‑expenses to Directors and others‑in such a manner that it would support the Judge's conclusion. It would seem to me, having regard to the particular facts of this case, an unusual application of the section, although I claim no great familiarity with this branch of the law, and so exceptional that it would lead one to believe that such circumstances ought not to be embraced by a section such as this. As I understand the intention of these sections, it might be shortly expressed thus‑to bring perquisites of employment into tax; and from that broad approach the total expenditure does not seem to me, to the extent which has been charged against this particular taxpayer, to be properly in the category of a perquisite. The facts are quite simple. It may be quite true, as counsel for the Crown put so clearly and emphatically, that within the four corners of the section are the questions to which the answers follow almost inevitably: Did the company spend money for the provision of counsel for the taxpayer? Answer, "Yes". Was that to the benefit of the taxpayer? And the answer is "Yes" also; and it is said this is conclusive. The only matter on which I feel there is an outlet for the taxpayer is to consider the extent of the benefit. It is said that because of the strict wording of section 161, the extent of the benefit is the extent of the expenditure which has been incurred, but that is hardly the reality of the situation. So far as the benefit to the taxpayer is concerned, it seems to me that you might well get a case where the benefit might, on any real interpretation of the object of this taxing section, be something less. In the course of argument the case was envisaged of an operation on a young Director who had fallen sick. He might have been quite content to have had the operation performed without expense, as it could have been under the National Health provisions, or at a reasonable sum of 100 guineas which he could afford to pay the surgeon, and if the company said: We will go to the best man" he might find himself having the services of a highly qualified and fashionable surgeon at a figure of 1,000 guineas. That sum would be in no real sense a perquisite of his employment. It may, I recognise, come within the precise terms of section 161 unless one is to give some narrow inter pretation to the word "benefit". I think the extent of the benefit was a matter which appealed to the Judge, and it appeals tome. I would not myself have used the language which is reflected in the order, and I doubt whether the Judge intended to put it that way, either. Mr. Bucher's contention was‑and it was this, I must say, which has appealed to me‑that the benefit was only to the extent by which the taxpayer's pocket was relieved, and the relevant inquiry is not what the company spent but what the taxpayer might reasonably be expected to spend in his own defence, that being the amount by which he was relieved and therefore benefited. However, I am not quite satisfied that the wording of the section permits that conclusion and I am not going to dissent from the views my brethren have taken. 1 find no further difficulty in the matter complained of by the Crown in the Judge's order to remit this matter back to the special Commissioners. Reliance was placed on Evans Medical Supplies Ltd. v. Moriarty ((1958) 1 W L R 66). 1 do not think that that case ought to be regarded as a general prohibition against a Judge ordering that a matter should go back to the Commissioners. Power is given by a section in the statute enabling remission in appropriate circum stances. That particular case is explained by the fact that throughout the whole proceedings in relation to a sum of 100,000 the contention had been that it was "all or nothing." It was really too late to consider any sort of apportionment and there was no basis on the facts of that case for remitting it to the Commissioners. I would not regard that as authority for depriving the Court of power to send back an appropriate case. With much reluctance, I do not dissent. Appeal allowed and cross‑appeal dismissed with costs. Leave to appeal to the House of Lords.