inl_rev.txt [1947] 80 Ll.L.Rep. 549 KING'S BENCH DIVISION. May 15, 16, 19, 1947. COMMISSIONERS OF INLAND REVENUE v. LAURENCE PHILIPPS & CO. (INSURANCE), LTD. Before Mr. Justice Atkinson. Revenue - Excess Profits Tax - Assessment - Underwriting agents - Advances by agents - "Debts due to the person carrying on the business" - "Capital employed in the business" - Company carrying on business as underwriting agents at Lloyd's - Formation of marine and non-marine syndicates, company to act as agents - Advances made by company to A. and B. (associated with company) to enable them to qualify as underwriting members of Lloyd's and as "names" in, syndicates - Loans repayable out of profits accruing to A. and B. as "names" - Profits resulting from use of moneys loaned to A. and B. included in assessment of company's profits - Computation of capital - Contention by company that such loans were made by company in the furtherance of their business, and that the debts owing to the company in consequence of the making of such loans formed part of the capital employed in the company's business - Submission by Crown that such debts were not capital employed in the company's business; alternatively, if employed in the company's business, that they were investments - Finance (No. 2) Act, 1939, Sects. 13(3), 14(2), Seventh Schedule, Parts I and II. - Held, that the loans were an employment of capital by the company in the ordinary course of their business as underwriting agents and were not investments (being moneys used for business purposes to produce business revenue), and were therefore to be included in the computation of capital for the purpose of Excess Profits Tax - Appeal by Crown from decision of Special Commissioners dismissed. This was an appeal by the Crown against a finding by the Commissioners for the General Purposes of Income Tax for the city of London in favour of Messrs. Laurence Philipps & Co. (Insurance), Ltd., Lloyd's insurance brokers, of Leadenhall Street, London, E.C.3, who had appealed against assessments to Excess Profits Tax made upon them for the chargeable accounting periods ended respectively on Dec. 31, 1939, and Dec. 31, 1940, in the sums of £2250 and £2400. The appeal concerned certain loans which the company had made, it being found by the Special Commissioners that such loans were capital moneys employed in the company's business. The Special Commissioners stated a case for the High Court. According to the case stated, the company was incorporated in 1921, its objects being (inter alia) to carry on the business of insurance brokers and insurance agents in all its branches; to act as agents or managers for any insurance company, club, or association or for any individual underwriter in connection with its or his insurance or underwriting business; and to lend money to any person or company, and on such terms as may seem expedient, and in particular to customers and others having or contemplating dealings with the company. The case then went on to describe the business of insurance at Lloyd's. It said that risks were underwritten at Lloyd's for and on behalf of groups of underwriting members known as "syndicates" by an "underwriting agent." The actual underwriting was done by a person duly appointed for the purpose by this underwriting agent. He was known as the "underwriter" and frequently was an employee, director, or partner of the individual, firm or company acting as agent. This underwriter might or might not be an underwriting member of Lloyd's, and if he was such a member he might or might not be a member of the syndicate on whose behalf he was underwriting. The members of the syndicate, though sometimes called underwriters, were more correctly described as "underwriting names," or more shortly as "names." Each name entered into a separate agreement with the underwriting agent, usually identical in form with agreements entered into by all the other names in the syndicate, and a provision was included expressly negativing a partnership between the names in the syndicate and providing for the underwriting agent to conduct the business of each name in the syndicate. The underwriting agent accordingly conducted the business of underwriting on behalf of each name in the syndicate, and the individual name took no part therein. The conduct of the business involved not only the actual underwriting of the risks and the issue of policies, but also the adjustment of premiums the handling of claims under the policies, the reinsurance of risks, and all other matters arising in any way under the policies. All underwriting accounts were kept by reference to the calendar year, and the accounts were kept open for the following two years at least, to enable risks underwritten in the first year to run off and all matters relating thereto to be settled. The account for the first year was usually closed finally at the end of the third year, and any matters still remaining outstanding were dealt with by way of reinsurance of the risk in the next underwriting year. In the year 1934 the respondent company, with the object of increasing its business, promoted the formation of a marine syndicate at Lloyd's, for which the company would act as underwriting agent, and in that capacity would receive from each member of the syndicate a salary and commission. The syndicate (*550) was to consist of at least six people, who had necessarily to be underwriting members of Lloyd's. It was generally recognized that it was not an economic proposition to have a small syndicate, because (a) the overhead expenses were virtually the same whatever the size of the syndicate, (b) unless a syndicate was large enough to accept a substantial amount of risks offered by brokers, it was almost impossible to obtain a sufficient "show" of business, as brokers would not offer business to a syndicate which could accept only small lines of risks; and, therefore, an adequate premium income was not obtainable by a small syndicate. The control of the management of a syndicate was in the underwriting agent, and it was not unusual for an insurance-broking company to form and manage one or more underwriting syndicates. In order to be a name in a syndicate, a person had to become an underwriting member of Lloyd's, and for this purpose he had to deposit with Lloyd's securities of the value required by the Committee. In the present case these values were fixed in the first instance at £5000 in respect of the marine syndicate and £1500 in respect of the non- marine one. These sums did not represent any limit of the liability of a name for losses or expenses, for the liability was unlimited. It was the aim of the company to form the marine syndicate with ten or more names, but only four names could be arranged for at the time, and it was decided, therefore, to add two other gentlemen (A. and B.), directors of the company, as names in the syndicate to make up the minimum of six. In 1935 the company formed a non-marine syndicate, and the same two gentlemen were made names in this syndicate also. In 1936, C., an employee of the company, and who at the inception of the marine syndicate had been appointed underwriter of that syndicate, was added as a name in the syndicate, and in 1938 he was also added as a name in the non-marine syndicate. In 1943, after the period with which the present case was concerned, another director of the company became a member of each of the company's syndicates. Continual efforts had been made to enlarge the syndicates, and now there were 14 names in the marine syndicate and 13 names in the non-marine syndicate. There were additional advantages in having persons associated with the company as names in the company's syndicates, In that (a) it encouraged other persons to join the syndicates and assume the consequential unlimited liability, (b) the members of the syndicates who were also in the service of the company were less likely to leave the syndicates than were outside members, (c) these members became more closely connected with the company and were less likely to transfer to other insurance-broking businesses. From the standpoint of the members in question, the inducement to join the syndicates was the opportunity, as shown hereinafter, of obtaining the unencumbered ownership of the securities deposited at Lloyd's. On the other hand, if these members incurred heavy losses, the company as a matter of business would have to meet the losses in order to prevent its directors from becoming defaulters at Lloyd's. Neither B. nor C. was able personally to supply the deposits of £5000 for the marine syndicate and £1500 for the non-marine syndicate, which were fixed by the Committee of Lloyd's for the purpose of qualifying them to become underwriting members of Lloyd's and members of these syndicates, and the company agreed to lend to each of them the necessary money for that purpose. In addition to these deposits, Lloyd's required that sums should be deposited by underwriting members of Lloyd's with the underwriting agent of the syndicate. These sums formed the nuclei of premium trust funds, and with the premiums and other underwriting receipts had to be held, under a premium trust deed, on trust for the payment of losses and other outgoings. As B. and C. were unable personally to supply the necessary sums, the company made loans to them for the purpose. There were also certain other moneys advanced by the company to B. and C. in the circumstances mentioned below. The question for the determination of the Commissioners was whether for the purposes of Excess Profits Tax these loans, and the other loans mentioned below, were capital employed in the business of the company, or whether they were investments made by the company and consequently to be excluded from the computation of the company's capital for the purposes of Excess Profits Tax. The above arrangements were duly carried out by the following agreements and deeds: (A) Underwriting Agency Agreements made for the marine and non-marine business respectively. The agreements were in common form and were expressed to be made between the name of the first part and the company, therein referred to as the underwriting agent, of the second part. They were duly signed by each name in each syndicate and contained (inter alia) the following provisions: 1 (a) The underwriting agent agrees and is retained and authorised to act as agent of the name for the purpose of the underwriting business . . . (d) The underwriting agent shall carry on and conduct the underwriting business, the expenses of the underwriting business being borne by the name . . . (e) The name shall pay to the underwriting agent as remuneration for his services a fixed salary at the rate of £200 per annum and also a commission [calculated as therein provided] at the rate of 25 per cent. 3 (a) The underwriting agent shall have the sole control and management of the underwriting business and sole discretion as to the manner in which the underwriting business shall from time to time be conducted. (*551) (B) Deposit Deeds, marine and non-marine, which were also in common form made between the name (therein called "the candidate" in the marine deposit deed and "the member" in the non-marine deposit deed) of the first part, the company of the second part and the Society incorporated by Lloyd's Act, 1871, by the name of Lloyd's (thereinafter sometimes called "the Society") of the third part. The marine deposit deed recited (inter alia) that the candidate with a view to and in consideration of being admitted as an underwriting member of Lloyd's had transferred or caused or procured to be transferred to or into the name of the Society the stocks, funds, shares or securities mentioned in the Schedule thereunder written, to be held after his admission as a member of Lloyd's upon the trusts thereinafter mentioned. The non-marine deposit deed, after reciting various provisions of the Assurance Companies Act, 1909, and the conditions upon which an underwriting member of Lloyd's might be exempted therefrom, recited that the member had accepted the conditions, and had transferred or caused or procured to be transferred to or into the name of the Society the stocks, funds, shares or securities mentioned in the Schedule thereunder written, to be held by the Society upon the trusts thereinafter mentioned. The deposit deeds provided for the deposited securities to be held on ultimate trust for the company. This was in accordance with the usual practice, it being left to the underwriting agent to settle all matters relating to the underwriting with the name. In the present case it was a part of the arrangement between the company and B. and C. that the company would hold the respective securities after the satisfaction of all claims relating to the underwriting in trust for them, subject to repayment of the loans. At a later date the Committee of Lloyd's required B. and C. to deposit further securities to the value of £1000, which they accordingly did. (C) Premium Trust Deeds (which were also in common form) made between the name of the first part, the company of the second part, and Lloyd's of the third part, whereby provision was made for all premiums and other moneys relating to the name's underwriting business to be held in the trusts therein stated. (D) Loan Agreements made between the company of the one part, and B. and C. respectively of the other part. After reciting that C. had appointed the company to be his underwriting agents for his marine underwriting and for his non-marine underwriting, and that the company had made to C. the three following loans (therein called "the marine loans") for purposes connected with his marine underwriting, namely, (a) the sum of £5000 for the purchase of securities to be deposited by him in trust as his marine deposit at Lloyd's (hereinafter called "the first marine loan") and (b) the sum of £1000 to be handed to the company as the underwriting agents for his marine underwriting and to be held upon the trusts of the premiums trust deed executed by C. (hereinafter called "the second marine loan") and (c) the sum of £300 7s. 2d. representing C.'s first annual subscription and entrance fee to Lloyd's and certain other expenses payable by C. in connection with his marine underwriting (hereinafter called "the third marine loan"), and that the company had made to C. the three following loans (therein called the "non-marine loans") for purposes connected with his non-marine underwriting, namely, (a) the sum of £1500 for the purchase of securities to be deposited by him in trust as his non-marine deposit at Lloyd's (hereinafter called "the first non-marine loan") and (b) the sum of £1000 to be handed to the company as the underwriting agents for his non-marine underwriting and to be held upon the trusts of the premiums trust deed executed by C. (hereinafter called "the second non-marine loan") and (c) the sum of £10 9s. 3d. representing certain expenses payable by C. in connection with his non-marine underwriting (hereinafter called "the third non- marine loan"), and that the first marine loan and first non-marine loan had been applied in the purchase of securities in respect of the marine deposit deed and the non-marine deposit deed; and that the second marine loan and the second non-marine loan had been handed by C. to the company as the underwriting agent for his marine underwriting and for his non-marine underwriting, and were then held upon the trust of the premiums trust deed, the agreement went on to provide as follows: C. thereby acknowledged that he was indebted to the company in the amount of the marine loans and the non-marine loans thereinbefore recited. The annual income of the first marine loan and the first non-marine loan or any part thereof from time to time outstanding or any investments representing the same should be paid to the company. . . . The annual income of the second marine loan and the second non-marine loan or any part thereof from time to time outstanding or any investments representing the same should be paid to the company. C. should pay to the company interest at the rate of 3 per cent. per annum upon the third marine loan and the third non-marine loan or any part thereof from time to time outstanding. . . . The company undertook and agreed that no part of the loans or any investments representing the same should at any time be repayable (*552) to the company by C., either directly or indirectly out of C.'s premiums or other underwriting moneys, except out of ascertained net profits on closed underwriting accounts. C. should be entitled at any time to repay the loans or any part thereof subject to certain provisions. At a later date, to enable C. to provide the additional deposit mentioned in (B) above, the company made further advances to him. These further advances were recorded by indorsement on the loan agreement. A similar loan agreement was entered into between B. and the company, and further advances were made to him. When the loans to C. were made it was known that repayment would be delayed because of the closed system of accounts as described above, and because of the retention of a part of each year's profit under the underwriting agency agreement. The company contended before the Special Commissioners that the formation and management of the underwriting syndicates in question was a part of the company's business; that the lending of the sums in question in this case was an operation in the course of the company's business; that the sums in question represented money lent in the furtherance of the company's business; that the debts owing to the company in consequence of the making of the loans, or, alternatively, the amounts of the loans themselves, were capital employed in the company's business, and that the debts were not investments. The Crown contended that the loans were not capital employed in the business of the company; that B. and C. used the money lent to them in their own businesses and the moneys were not used in the company's business; and that if the loans were to be regarded as employed in the business of the company, then they were in any case investments and to be left out of account in computing the company's capital for the purposes of Excess Profits Tax. The Special Commissioners found in favour of the company that the loans in question were capital moneys employed in the company's business and were not investments. The Crown appealed. Sir Frank Soskice, K.C., S.-G., and Mr. R. P. Hills (instructed by the Treasury Solicitor) appeared for the Crown; Mr. N. E. Mustoe (instructed by Messrs. Slaughter & May) represented the respondents. Judgment was reserved. The following cases are cited in the judgment below: Acme Flooring and Paving Company (1904), Ltd. v. Commissioners of Inland Revenue (unreported); Commissioners of Inland Revenue v. Gas Lighting Improvement Company, Ltd., 12 Tax Cases 503; ------------ v. Imperial Tobacco Company (of Great Britain and Ireland), Ltd., N.D.C. Leaflets No. 1; English Crown Spelter Company, Ltd. v. Baker, 5 Tax Cases 327; Reid's Brewery Company, Ltd. v. Male, 3 Tax Cases 279; Roberts (Westminster), Ltd. v. Commissioners of Inland Revenue, E.P.T. Leaflets No. 42; Waldie & Sons, Ltd. v. Commissioners of Inland Revenue, 12 Tax Cases 113. Friday, June 6, 1947. JUDGMENT. Mr. Justice ATKINSON: Messrs. Laurence Philipps & Co. (Insurance), Ltd., carry on business as insurance brokers and insurance agents in all its branches. They are, therefore, assessable to Excess Profits Tax. Certain assessments were made upon them for the year ending Dec. 31, 1939, and Dec. 31, 1940, against which they appealed. They claimed they were entitled to an increase in their standard profits for the purpose of ascertaining the excess in those two years because of an increase of capital employed in the business. The Special Commissioners decided in their favour, and the Commissioners of Inland Revenue appeal by way of stated case. The case states in par. 3: The objects for which the respondent company was incorporated include the following: (1) To carry on the business of insurance brokers and insurance agents in all its branches . . . (2) To act as agents or managers for any insurance company, club, or association, or for any individual underwriter in connection with its or his insurance or underwriting business . . . (37) To lend money to any person or company, and on such terms, as may seem expedient, and in particular to customers and others having or contemplating dealings with the company. In order to understand this case, it is necessary to appreciate how business is carried on at Lloyd's. The following details are extracted from the case. Risks are undertaken by groups of underwriting members known as "syndicates." The members are described as "names." This is a very apt description - that is all they are. The entire business is conducted for the syndicate by an agent called the "underwriting agent." Exhibit "B" is a typical form of agreement entered into between a member of a syndicate (*553) and the underwriting agent. It will be useful to refer to just a few paragraphs for the purpose of indicating the complete control of the business exercised by the underwriting agent. Clause (E) says: The underwriting business shall mean (i) the entering into on behalf of the name as one of the members of the syndicate of contracts of marine insurance hereinafter called "the underwriting" and (ii) the signing of policies in the name of the name the admission rejection or compromise of claims the giving or refusing of any returns and the placing of any reinsurances hereinafter called the working-out of the underwriting and (iii) the collection of any moneys due to or by the name as a member of the syndicate. . . . Then it was agreed by Clause 1 (a) that The underwriting agent agrees and is retained and authorised to act as agent of the name for the purpose of the underwriting business - that is as defined by Clause (E) - as from such and such a date. Then (b) says: The name shall have such share in the syndicate as the underwriting agent shall think fit and that share may at the beginning of any year or upon any member of the syndicate ceasing to be a member of the syndicate be made greater or smaller at the discretion of the underwriting agent. Then: (d) The underwriiting agent shall carry on an conduct the underwriting business, the expenses of the underwriting business being borne by the name in the manner hereinafter provided. (e) The name shall pay to the underwriting agent as remuneration for his services a fixed salary at the rate of £200 per annum and also a commission (calculated in the manner provided in Clause 11 (a) hereof) at the rate of 25 per cent. Then Clause 2 (a) says: The name shall at all times comply with and hereby irrevocably authorises the underwriting agent on the name's behalf to comply with any statutory requirements for the time being in force and relating to the underwriting business . . . Then Clause 3 (a) is: The underwriting agent shall have the sole control and management of the underwriting business and sole discretion as to the manner in which the underwriting business shall from time to time be conducted. I think I have read enough of that agreement to show how complete the control of the syndicate's business is by the underwriting agent. The actual technical accepting of the risk, that is, the signing of the slip, is done on behalf of the syndicate by a person known as the underwriter, but he is appointed by the underwriting agent. He may or may not be a member of Lloyd's, and, if a member of Lloyd's, he may or may not be a member of the syndicate on whose behalf he initials the slips. Each member of the syndicate enters into the agreement to which I have referred with the underwriting agent, and authorizes the underwriting agent to conduct the business on his behalf. In 1934, the respondents, Messrs. Laurence Philipps & Co., with the object of increasing its business, promoted the formation of a marine syndicate at Lloyd's for which they would act as underwriting agents. This was a usual undertaking in the business of brokers and insurance agents. It was to consist of at least six names, but the ultimate aim was to have ten, or even more. Every member of the syndicate would have to be an underwriting member of Lloyd's. To be an underwriting member of Lloyd's a man has to deposit with Lloyd's securities of a value fixed by the Committee. In this case the values were fixed at £5000 in respect of the marine syndicate. The more names there are in a syndicate the better: more substantial risks can be accepted, the overheads are reduced, and the underwriting agent gets more salaries and more commission. Only four names could be collected at the start, and it was decided that two of the company's directors (A. and B.) should be added as names. The company appointed one of their employees (C.) to be underwriter of the syndicate, and in 1936 he was added as a name. In 1935 the company formed another syndicate, a non-marine syndicate. Again at the outset only four names were obtained, and A. and B. were made names in that syndicate also, and in 1938 C. was added as a name in that syndicate. The value of the security to be deposited was fixed by the Committee at £1500 per member, a sum later increased to £2500. To-day the marine syndicate consists of 14 members, and the non-marine of 13. There are material advantages in having in a syndicate persons closely associated with the underwriting agent, whether as directors or employees; besides getting the salary and commission, others are encouraged to join, and it creates confidence in the syndicate because members who are connected with the company are less likely to leave the syndicate, and the syndicate is less likely to transfer the underwriting agency to other insurance-broking businesses. Neither B. nor C. could supply the deposit of £5000 for the marine syndicate, nor the (*554) £1500 for the non-marine syndicate, nor the further £1000 when the £1500 was increased to £2500. The company thereupon agreed to lend them these sums for the express purpose, the only purpose, of providing the necessary deposits. But there was also other money to be found: the amount, fixed by the Committee, to be deposited by the names with the underwriting agent in order to form the nucleus of the premium trust fund, a fund into which the premiums are also paid and out of which claims are paid. The necessary loans were made to comply with these requirements. Then £300 was required by each of them for the first annual subscription, and one or two other small sums. These amounts were also lent at 3 per cent. interest. The question for the Commissioners was whether for the purposes of the Excess Profits Tax these loans were capital employed in the business of the company, or whether they were investments and, therefore, to be excluded from the computation of the capital for the purpose of the tax. I have referred to the agreement, and I will now refer to Exhibits "C" and "D," the deposit deeds. I need only refer to one deposit deed, that for the marine syndicate, Exhibit "C." It is a deed made between C. and the respondent company and the Society of Lloyd's, and it recites that the candidate is desirous of being admitted to the privileges of an underwriting member of Lloyd's, and that he has transferred or caused or procured to be transferred to or into the name of the Society the stocks funds shares or securities mentioned in the Schedule hereunder written, which in this case consisted of 5188 2 per cent. Funding Loan, 1956-61, (. . . hereinafter called the "Trust Fund") to be held by the Society upon the trusts and for the purposes hereinafter mentioned . . . Then the deed witnessed and declared that the Society shall stand possessed of the Trust Fund upon trust for the company until the candidate shall be admitted a member of Lloyd's as aforesaid and from and after his admission upon trust to allow the Trust Fund or any part thereof to remain in its present state of investment for so long as the Society shall think fit. Then the Society had power to realize it and reinvest in other securities. Then: Upon trust until the Committee shall receive notice in writing that the candidate has made default in paying the just claims upon any policy or policies underwritten by him or on his account at Lloyd's and shall pass a resolution declaring such default to pay the annual income of the Trust Fund to the company or its assigns or as it or they shall direct. Then, later on, it is provided: And subject to the trusts aforesaid the Society shall hold the Trust Fund or so much thereof as shall not be applied for any of the purposes aforesaid in trust for the company or its assigns. There is a good deal more in the deed, but what I have read shows the position in which the securities representing the £5000 stood. The non-marine agreement is to the same effect and relates to the £1500. Then it is necessary to look at Exhibit "F," which is the agreement made between the company and C. There is a similar agreement with B. It provides: Whereas C. has appointed the company to be his underwriting agents. . . . And whereas the company has made to C. the three following loans (hereinafter called the "marine loans") . . . (a) the sum of £5000 . . . and (b) the sum of £1000 . . . and (c) the sum of £300 7s. 2d. representing C.'s first annual subscription and entrance fee to Lloyd's, and so on. Then follows the list of loans for the purposes connected with the non-marine underwriting representing £1500 and £1000 - that £1000 being held upon the trusts of the premium trust deed - and a further £10 for certain expenses. The deed witnesses that C. acknowledges that he is indebted to the company in the amounts of the marine loans and the non-marine loans hereinbefore recited. Then Clause 1 (a): The annual income of the first marine loan and the first non-marine loan or any part thereof from time to time outstanding or any investments representing the same shall be paid to the company in accordance with and subject to the provisions of the marine deposit deed and the non-marine deposit deed respectively. Clause 1 (b): The annual income of the second marine loan and the second non-marine loan or any part thereof from time to time outstanding or any investments representing the same shall be paid to the company. Clause 1 (c): C. shall pay to the company interest at the rate of 3 per centum per annum upon the third marine loan and the third non-marine loan, (*555) and so on. Clause 3 (a): The company hereby undertakes and agrees that no part of the said loans or any investments representing the same shall at any time be repayable to the company by C., either directly or indirectly out of C.'s premiums or other underwriting moneys, except out of ascertained net profits on closed underwriting accounts. Clause 3 (b): C. hereby undertakes and agrees that the net ascertained profits on closed underwriting accounts of his marine underwriting shall from time to time be paid to the company in repayment of the loans in a certain order until they have been all paid; there is a similar provision as to the non-marine loans, and that he is entitled to repay at any time. By Clause 5 it is provided that the marine loans outstanding shall become repayable to the company if C. ceases to be a member, or if the company ceases to be the underwriting agents, or if C. ceases to be the underwriter for the company's marine underwriting. There is a similar provision as to the non-marine loans. When the further £1000 was required as extra security of the non-marine syndicate a memorandum was added: The company having increased the amount of the first non-marine loan hereunder by the sum of £1000, it was to be in the same position as the original loan. So that there was no question that these advances did result in debts from B. and C. to the company. To complete the exhibits, I will refer to Exhibit "I," which shows how remunerative this transaction was for the company. The account, Exhibit "I," shows, for example, that in the year ending December, 1939, the company received by way of interest and dividend from B. £274, a salary of £200, and a commission of £230, and from C. £263 interest, £200 salary, and £230 commission. The following year, in the case of B., the commission was increased to £249, and a little less in C.'s case, namely, £216. In 1941 there was £420 commission in the case of B. and £396 in the case of C., and in 1942 £701 commission in the case of B. and £627 commission from C. In other words, from the two of them, in 1942, the commission amounted to £1300 in addition to salaries of £400. So that this transaction was very remunerative from the company's point of view. The Finance (No. 2) Act, 1939, contains the relevant provisions. Sect. 13 describes how the standard profit is to be computed. The second paragraph of sub-s. (3) provides as follows: Provided that if the average amount of the capital employed in the trade or business in any chargeable accounting period is greater or less than the average amount of the capital employed therein in the standard period, the standard profits for a full year shall, in relation to that chargeable accounting period, be increased, or, as the case may be, decreased, by the statutory percentage of the increase or decrease in the average amount of the capital employed in the trade or business. That percentage is later fixed at 8 per cent. Sect. 14 (2) provides: The average amount of the capital employed in a trade or business in the standard period or any chargeable accounting period shall be computed in accordance with Part II of the Seventh Schedule to this Act. Turning to Part II of the Seventh Schedule, par. 1 (1) provides: Subject to the provisions of this part of this Schedule, the amount of the capital employed in a trade or business (so far as it does not consist of money) shall be taken to be - (a) so far as it consists of assets acquired by purchase . . . [I need not trouble with that.] (b) so far as it consists of assets being debts due to the person carrying on the trade or business, the nominal amount of those debts, subject to deductions which are irrelevant for this purpose. That is the important part of par. 1 - that the capital includes the debts due to the person carrying on the trade or business. Par. 3 of Part II provides as follows: Any investments the income from which is by virtue of the provisions of Part I of this Schedule not to be taken into account in computing the profits of the trade or business, and any moneys not required for the purposes of the trade or business, shall be left out of account . . . Turning back to Part I, par. 6 (1) says: Income received from investments shall be included in the profits in the cases and to the extent provided in sub-par. (2) of this paragraph and not otherwise. Sub-par. (2) limits that to the business of a building society, or of a banking business, assurance business, or business "consisting wholly or mainly in the dealing in or holding of investments." There is no doubt that this business was one in which the income received from investments was not to be included in the profits of the concern. If the income is not to be included, then par. 3 of Part II makes it quite clear that the investments themselves are not to be deemed part of the capital. I think those are the relevant statutory clauses. It is to be noted here that all the profits resulting from the finding and use of this (*556) money was included in the assessed profits of the company. I do not know whether the interest was included. The Solicitor-General said that the interest ought not to be included, but whether it has in fact been included or not no one seemed to know. Anyhow, it is sufficient to say that these large profits, which were received solely as the result of the financing of these two employees of the company, all form part of the profits in respect of which the assessment has been made. The Crown contends that these advances or debts to the firm were not capital employed in the business, or, if employed in the business at all, they were still only investments. On the other hand, the respondent company says - and this is the view the Commissioners have taken - that the money was used in and in furtherance of its own business - in furtherance of an operation which was one in the ordinary course of its business. It was used for business purposes to produce business revenue, and it resulted in debts which, according to the section I have read, form part of the capital of the concern. There is no doubt about this. The advances were loans and did result in debts owing to the company. But investments might do that as well, so that that does not settle the question. As I have said, the profits accruing to the business of the company as a result of the agreement form part and parcel of the company's assessable profits. Several cases were referred to, one or two of which are helpful. The first is the English Crown Spelter Company, Ltd. v. Baker, 5 Tax Cases 327. There the company carried on the business of zinc smelting and they wanted to be certain of their supply of "blende." They bought two Welsh mines and they formed a new company to take them over and to carry on the working of them. Then they proceeded to lend money to this new company at various times to keep it going; when they had advanced up to £40,000, they refused to advance any more, with the result that the company was wound up and the £40,000 was a bad debt. The only question there was, could the bad debt be brought in to the profit and loss account as a trade loss reducing their profits? The view that the Commissioners took was that it was not an ordinary business transaction. They said that they were of opinion that the amounts advanced to the Welsh company represented advances quite out of the usual course of trade, and, therefore, they were not ordinary trade losses which would come into the profit and loss account. That view was upheld by the Court. That does not help much in this case, because what has been done here was something in the usual course of trade and not completely out of the usual course of trade. The next case referred to, James Waldie & Sons. Ltd. v. Commissioners of Inland Revenue, 12 Tax Cases 113, seems to me very much in point. There certain coal merchants, who had the exclusive disposal on commission of the output of a colliery in which they had a controlling interest, made advances to the colliery. The question was whether these advances could be treated as capital for the purposes of excess profits duty assessments, and it was held that they could. It was a case in the Court of Session. Lord Salvesen said this on p. 117, and these remarks seem to me to be very applicable to the case with which I have to deal: These being the facts and the respective arguments, I am of opinion that the appellants are right. I think in a commercial sense the sums in question were employed in the appellants' business. It was on purely business grounds that they made the advances and if they had no other business than that of agents for the Hirst Coal Company there would have been no profits to assess. It is conceded that if they gave their customers long credits for payment of their accounts and so needed a much larger working capital than if they had been able to get cash on delivery of the coal which they sold, the additional capital so used would have been employed in their business. Equally I think they were entitled to use their capital in financing for business reasons the sellers from whom they derived the raw material in which they deal. Ex hypothesi they could not have withdrawn these sums from their business and put them on deposit receipt or invested them in War Loan without materially affecting the profits of their own business. The sums advanced have none of the features that are associated with investments, e.g., any fixed permanence or any expectation of profit whether in the shape of dividends or otherwise. I think they were merely temporary items (as they are descried in the argument for the appellants) in the running agency account, very similar to advances which a law agent may make to a client in the course of a litigation and for the purpose of enabling the litigant to carry on his suit. Then a little lower down he quotes with approval a passage from the judgment of Baron Pollock in Reid's Brewery Company, Ltd. v. Male, 3 Tax Cases 279, at p. 285*: It is found on the facts that in no case is any loan or advance made by way of permanent investment whether it be by way of deposit of deeds, mortgage, promissory note or otherwise. That might not be perhaps in itself sufficiently but the description of the course of business shows beyond doubt that this is not capital invested; it is capital used by the appellants, but used only in the sense that all money laid out by traders whether in the purchase of goods be they traders only, or raw materials be they manufacturers or on loans in the case of moneylenders or pawnbrokers is used. It is used and is out of capital but is not invested in the ordinary sense of the word. * See footnote on p. 557. (*557) The next case which was referred to, which the Solicitor-General relied upon very strongly, was the case of Commissioners of Inland Revenue v. Gas Lighting Improvement Company, Ltd., 12 Tax Cases 503. There the company which carried on the business of refining and distributing petroleum and petroleum products, held certain shares in a Belgian company formed for the purpose of selling petrol, and certain shares and debentures in two Rumanian oil-producing companies. The shares in the Belgian company were acquired as part of an arrangement under which the respondent company transferred its existing business in Belgium to the Asiatic Petroleum Company for which the Belgian company was to act as distributor. The shares and debentures in the Rumanian companies were acquired for the purpose of securing a supply of crude oil. There was no question but that they were investments. That was conceded. The point which was taken, and the only point which was decided, was this: Was the exclusion of investments in the clause in the schedule which I read limited to the exclusion of investments not connected with the trade or business? The decision, quoting from Viscount Cave's opinion on p. 535, was: I find nothing in the Act which compels or admits of such a limitation of the meaning of the word "investments." The expression cannot be intended to apply to investments wholly unconnected with the business to be assessed; for investments of that character could in no case be regarded as capital of the business, and it would be quite unnecessary to direct their exclusion. It must therefore refer to investments connected with the business, and I see no reason why it should not include an investment of part of the business capital in an outside security, though made with the object of forwarding the trading operations for which the business was constituted. Mr. Justice Lawrence made some useful observations on this matter in Commissioners of Inland Revenue v. Imperial Tobacco Company (of Great Britain and Ireland), Ltd., N.D.C. Leaflets, No. 1. Having read that - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Note: - The passage from the judgment of Baron Pollock in 3 Tax Cases, at p. 285, reads as follows: - In the first place, it is found upon the facts, in no case is any loan or advance made by them a permanent investment, whether it be by way of deposit of deeds, mortgages promissory notes, or otherwise. That of itself might not be sufficient, but when you come to read what is the course of dealing, no person who is acquainted with the habits of business can doubt that this is not capital invested. What it is is this. It is capital used by the appellants, but used only in the sense that all money which is laid out by persons who are traders, whether it be in the purchase of goods be they traders alone, whether it be in the purchase of raw material be they manufacturers. or in the case of money lenders, be they pawnbrokers or money lenders, whether it be money lent in the course of their trade, it is used and it comes out of capital, but it is not an investment in the ordinary sense of the word. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - passage from Lord Cave which I have already read, he said (at p. 2): In my opinion, the crucial words for the present purpose there used by the Lord Chancellor are: "in an outside security.' That is the limitation which, in my opinion, has to be imposed upon these words, Later on, dealing with the question whether it was income from other properties, he says, on p. 4: In my opinion, the rule contrasts investment income as opposed to trade profits. I think the words mean, as Lord Cave, L.C., seems to me to have suggested in his judgment in the Gas Lighting Improvement Company, Ltd., case, income derived from sources outside the trade, income produced by money or money's worth not then used in the trade. It seems to me it would be quite impossible to say that these profits were profits from an outside security or that they were investment income as opposed to trade profits. It is perfectly clear that the profits derived from this transaction were trade profits. In the case of the Gas Lighting Improvement Company, Ltd., sup., they were dealing with something which was, beyond question, an investment. Here the question is whether these loans were investments or not. I think that this money was capital put into the business and expended in a business transaction. The income derived from the transaction was not from a source outside the trade, but within it, it being a customary part of their trade to promote syndicates. If it was customary to promote syndicates, it must be part of their ordinary business functions to advance money to the syndicates where required. The case finds that it was not unusual for an insurance broking company to form and manage one or more underwriting syndicates. I think the payments were temporary deposits on loan made with the object of securing a business revenue, not some collateral kind of revenue, but ordinary business revenue. That business revenue is included in the assessed profits. That business revenue could not have been earned without these deposits being made to finance the two members. It was capital employed in the business. It was all the time serving the essential purpose of maintaining B. and C. as underwriting members of Lloyd's. There is never any difficulty about regarding money lying idle in the bank as money employed in the business, providing there is a reasonable probability of it being wanted in the accounting year or in a short space of time after the accounting year. (See Thomas Roberts (Westminster), Ltd. v. Commissioners of Inland Revenue, E.P.T. Leaflets, No. 42, and Acme Flooring and Paving Company (1904), Ltd. v. Commissioners of Inland Revenue.) These deposits on loan to B. and (*558) C. were performing an active operation as compared with the passive operation of such balances. I read par. 1 (1) of Part II: Subject to the provisions of this Part of this Schedule, the amount of the capital employed in a trade or business . . . shall be taken to be - . . . . . . . . (b) so far as it consists of assets being debts due to the person carrying on the trade or business as meaning, or at any rate as including, debts arising from a business transaction, or from the employment of money in the business. I agree with the Solicitor-General that the paragraph does not mean any debt however it comes about, because an investment may lead to a debt - for instance, a mortgage is a debt, notwithstanding that it is an investment. If a debt arises from a business transaction or through the employment in the business of money, it seems to me that the debt is capital within par. 1 of Part II of the Act. I think these debts arose from the employment in its normal course of business of capital belonging to the company, and that it is impossible to regard the advances as an investment, if the word is used in its ordinary meaning or in any of the meanings suggested by Lord Sterndale, M.R., in the Gas Lighting Improvement Company case, sup., at p. 525. It is an employment resulting in a considerable profit inuring to the company, not profit from an outside source, but profit inuring to the company in the conduct of its own ordinary business, a profit which would not have inured but for the use made of this money. I think there was ample evidence to support the finding of the Special Commissioners, and the appeal must be dismissed, with costs.