[IN THE COURT OF APPEAL.]

THE GRAMOPHONE AND TYPEWRITER, LIMITED v. STANLEY.

Revenue - Income Tax - Company resident in United Kingdom - Shares held in foreign Company - Control - Income Tax Act, 1853 (16 & 17 Vict. c. 34), Sched. D.

An English company carrying on business in the United Kingdom was the holder of all the shares in a German company:-

Held, that that fact alone did not make the business of the German company the business of the English company so as to render the English company liable to income tax under Sched. D of 16 & 17 Vict. c. 34, upon the full amount of the profits made by the German company; and that the English company was only liable to pay income tax upon such profits of the German company as had been received in this country.

Decision of Walton J., [1906] 2 K. B. 856, affirmed.

APPEAL from a decision of Walton J. (1) on a case stated by the Commissioners of Inland Revenue, the point being whether the above-named English company was liable to income tax in respect of profits made by a German company in which the English company held all the shares.

The case stated by the Commissioners is set out in detail in the report of the case in the Court below, and the following summary is sufficient for the purposes of this report.

At a meeting of the Commissioners on January 22, 1903, the Gramophone and Typewriter, Limited, the appellants, appealed against an assessment under Sched. D of 16 & 17 Vict. c. 34 for the year ended April 5, 1902, amounting to 79,348l. The appellant company is an English company registered under the Companies Acts, 1862 to 1898, on December 10, 1900, having a registered office at 21, City Road, in the city of London (formerly at 31, Maiden Lane, Covent Garden, in the city of Westminster). The memorandum of association of the appellant company states that the objects for which the company is established are (inter alia) to acquire and take over, as a going concern, the business and undertaking carried on at 31, Maiden Lane, London, W.C.,

(1) [1906] 2 K. B. 856.

and elsewhere, under the style or firm of "The Gramophone Company, Limited," and all or any of the assets and liabilities of the proprietors of such business and undertaking. The Deutsche Grammophon Aktiengesellschaft, herein referred to as the German company, was registered on January 30, 1900, and amongst those who united in forming it were the Gramophone Company, Limited, named in the memorandum of association of the appellant company. The German company was constituted on January 30, 1900, under a deed of association, a joint stock company with limited liabilily in conformity with the German law, with its head office in Berlin. Art. 213 of the German Code is as follows:- "Shareholders cannot demand back their money, they have only a right during the duration of the company to net profit, unless such distribution is prohibited either by the law or by the articles." The constitution, or administration as it is called, of the German company provides that "The official bodies of the company are (a) the general meeting of shareholders, (b) the board of supervision, (c) the board of management." The balance-sheet and distribution of profits is to be prepared and made in accordance with the following articles: "The business year comprises the period from September 1 to August 31 of the following year. The first business year extends from the day of the registration of the company to August 31, 1900. The board of management has to determine every year, with the sanction of the board of supervision, how much shall be written off annually from the book value of the immovable and movable property. With regard to the depreciation of the patents, at least one-third of the working profit remaining after deduction of all the business expenses shall, before anything is written off the immovable property, be devoted to writing off amounts on patents or similar accounts. The balance-sheet is to be made up to August 31. The net profit remaining after writing off all depreciation and setting aside all reserves and carrying forward any sum to new account shall be distributed as follows: (1.) In the first place the shareholders shall receive a dividend up to 4 per cent. on the paid-up share capital. (2.) The board of supervision shall then receive a percentage of 6 per cent. of the remainder. (3.) The rest shall be distributed as a

further dividend." The German company in making up its balance-sheet stated its total profits at 79,348l. 10s. 10d., but of that amount 15,000l. was, in accordance with the requirements of German law, transferred to a depreciation fund. The appellant company now holds all the shares of the German company, and the members of the board of management of the German company are also directors of the appellant company, and the members of the board of supervision of the German company are nominees of the appellant company. The directors of the appellant company, in accordance with the requirements contained in the articles of association of the same company, presented their report to their shareholders for the year ended June 30, 1901. From that report a total credit balance appears of 79,348l. 10s. 10d., which balance was appropriated in manner set forth in the report, and the whole of which balance was included in the assessment now appealed against. It was admitted on the hearing of the appeal that the whole of the sum of 79,348l. 10s. 10d. was liable to be taxed under Sched. D except as to 15,000l., part thereof, a sum stated in the report to have been transferred "to patents account, Germany, in accordance with German law." This sum of 15,000l., transferred to patents account to meet the requirements of the German law, concerns the appellant company in respect of their interest in the German company. In the report of the directors of the appellant company the whole of the profits of the German company are brought in in one sum, but the board of management of the German company have set aside and transferred to their patents account the sum of 15,000l., which amount is equivalent to the deterioration during the year of the value of the patents purchased by the German company, since these patents at the time of the constitution of the German company had three years to run. This sum of 15,000l. is provided out of earnings of the German company. It was contended on behalf of the appellant company (1.) that the sum of 15,000l. transferred to the patents account in conformity with the German law by the German company is not chargeable with income tax; that the sum of 15,000l. was not profits of the appellant company, inasmuch as there was no resolution in general meeting of the German

company for the distribution of this sum among the shareholders, and by German law this sum could not be so distributed; and that the sum of 15,000l. was not profits or gains at all within the meaning of the Income Tax Acts, either of the German company or the appellant company. The Commissioners held (1.) that the English company controlled the German company from England, and that the head and seat and directing power of the appellant company were at the appellants' registered office in London; (2.) that the entire business of the German company was carried on by and was the business and property of the appellant company, and that the profits of the German company were the profits of the appellant company, and that this sum of 15,000l. was profits of the appellant company within the meaning of the Income Tax Acts, and, further, that all the profits of the German company should be assessed without regard to the mode of application of such profits, and they confirmed the assessment.

Walton J., in a considered judgment, came to the conclusion that there was no evidence that these profits were the profits of the appellant company: that the mere fact that the English company held all the shares in the foreign company did not make the business of the foreign company the business of the English company; and he accordingly allowed the company's appeal.

From this decision the surveyor of taxes appealed. The appeal was heard on March 12, 13, and 16.

Sir W. S. Robson, A.-G., and William Finlay, for the Crown. The Commissioners have found that the Gramophone Company carries on business wholly or partially in Germany, and that finding cannot be disturbed if there is any evidence to support it. This company holds all the shares in the German company, nominates the officers of the German company, and the English directors are also the German directors. If the head and seat of the German business are in fact in England, then the whole of the profits of the German business are brought into account in assessing the profits of the English business. Therefore the whole of the German profits are to be taken into account, however appropriated. The mere interposition of a

foreign body does not defeat the claims of the revenue if in point of fact the English company is carrying on the business: Alianza Co., Ld. v. Bell (1); San Paulo (Brazilian) Ry. Co., Ld. v. Carter (2); Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (3); St. Louis Breweries v. Apthorpe (4); London Bank of Mexico and South America v. Apthorpe. (5)

[FLETCHER MOULTON L.J. referred to Colquhoun v. Brooks. (6)]

That is distinguishable because there the English business and the foreign business were entirely distinct; it was not a case of an English company controlling the business of a foreign company by acquiring the whole of its shares, and it is distinguished by the Court of Appeal in Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (3), which is on all fours with the present case. In estimating profits for revenue purposes, no deduction is made for depreciation of capital, and it is immaterial how those profits are applied: Mersey Docks and Harbour Board v. Lucas (7); Coltness Iron Co. v. Black. (8) The English company are therefore liable to taxation in respect of the 15,000l.

Danckwerts, K.C., and R. Vaughan Williams, for the English company. The English law does not tax the person who carries on a business in respect of profits which do not belong to him except in certain specific cases included in ss. 40-45 of the Income Tax Act, 1842, of which this is not one. The point is, to whom does the foreign business belong and by whom is it being carried on? If the profits are the profits of the English company, the employment of a foreign company is immaterial, and it is immaterial whether the employer has all the shares or only sufficient to control the foreign company, and when once it is found that the profits are taxable, it is immaterial how they are to be applied, whether in the formation of a sinking fund or in any other way; but the question is, whose profits are these? The fact that the same people are on the boards of the two companies does not make the one company's business or the one company's profit the business or profit of the other.

(1) [1906] A. C. 18.

(2) [1896] A. C. 31.

(3) (1899) 4 Tax Cases, 41.

(4) (1898) 4 Tax Cases, 111.

(5) [1891] 2 Q. B. 378.

(6) (1889) 14 App. Cas. 493.

(7) (1881) 1 Tax Cases, 385.

(8) (1881) 6 App. Cas. 315.

The two boards have independent functions and independent responsibilities, and they are regulated by different laws. By the law of Germany a German company cannot carry on the business of the company for the benefit of a third party without the consent of a general meeting, and in this case no such consent has been obtained. The holding by one company of the whole or a preponderating proportion of the shares in another company, does not constitute that other company the agent of the first: Kodak, Ld. v. Clark. (1) A shareholder has no interest in the property as such or the profits as such of the company; he has no inchoate or other right until the dividends have been declared: Browne v. Collins (2); and he has no right to complain of those who are managing the affairs of the company except through the company: Orr v. Glasgow, &c., Ry. Co. (3) Therefore in this case the business of the German company is not the business of the English company, and the English company is not entitled to the profits of the German company, except what it gets as a shareholder of that company, i.e., the divisible profits which come over here. In Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (4) the American company was a mere simulacrum. The American company held the property as trustee for the English company; the business was carried on by the English company with English servants and with English capital; and the American directors were delegates of the English directors. The decision in Bartholomay Brewing Co. (of Rochester), Ld. v. Wyatt (5) is in favour of the respondents.

[BUCKLEY L.J. referred to Automatic Self-Cleansing Filter Syndicate Co., Ld. v. Cunninghame. (6)]

No one can be taxed under Sched. D except for his own profits: here there are two separate entities; the English company is only a holder of shares in the German company, on which it receives dividends on which income tax is paid. The profits in question are therefore the profits of the German company and are not liable to income tax.

(1) [1902] 2 K. B. 450, 464-5; [1903] 1 K. B. 505.

(2) (1871) L. R. 12 Eq. 586, 594.

(3) (1860) 3 Macq. 799, 804.

(4) 4 Tax Cases, 41.

(5) [1893] 2 Q. B. 499.

(6) [1906] 2 Ch. 34.

Sir W. S. Robson, A.-G., in reply. This really is a question of fact more than of law, and the findings of the Commissioners in the case are findings of fact which cannot be interfered with, and on these findings the company are "stated out of Court."

March 27. COZENS-HARDY M.R.This is an appeal from the judgment of Walton J., who held that the plaintiff company, whom I shall call the English company, are not liable to pay income tax in respect of 15,000l., part of the profits of a German company, not distributed in the way of dividend or transmitted to England, but written off by the German company in Germany to meet the depreciation of patents. The question arises on a case stated by the Commissioners. It is undoubtedly true that, if the Commissioners find a fact, it is not open to this Court to question that finding unless there is no evidence to support it. If, however, the Commissioners state the evidence which was before them, and add that upon such evidence they hold that certain results follow, I think it is open, and was intended by the Commissioners that it should be open, to the Court to say whether the evidence justified what the Commissioners held. I am satisfied that the case stated by the Commissioners falls under the latter head. They have carefully stated the evidence, but they have not, in my opinion, to use the words found in one of the authorities, "stated the appellants out of Court." I may add that the arguments before Walton J. proceeded upon this footing.

The German company was established in Germany in 1900 in accordance with German law. It was undoubtedly a company with several shareholders, who brought in considerable capital. One of those shareholders was an English company whose undertaking was subsequently acquired by the present English company. At some date, which is not stated, the English company acquired all the shares of the German company, and I assume in favour of the Crown that this event had happened before the material dates. The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the

company in the sense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the rights or powers of the directors, or make the property or assets of the company his, as distinct from the corporation's. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby become his business. He is still entitled to receive dividends on his shares, but no more. I do not doubt that a person in that position may cause such an arrangement to be entered into between himself and the company as will suffice to constitute the company his agent for the purpose of carrying on the business, and thereupon the business will become, for all taxing purposes, his business. Whether this consequence follows is in each case a matter of fact. In the present case I am unable to discover anything in addition to the holding of the shares which in any way supports this conclusion. The German company was not at first, and there is no evidence that it has ever become, a sham company or a mere cloak for the English company. It has its board of management and its board of supervision as required by the German law. Its accounts are made out in accordance with German law. On the other hand the English company has its board of directors, some of whom are on the German board. It has a proper account and balance-sheet, in which its interest in the German company is described accurately as so many shares in the German company, and the gross profits of the German company are in no way brought into the profit and loss account of the English company. Against this the only thing to be said is that the chairman of the English company made a foolish speech in which he treated the gross profits of the German company as profits of the English company, but the dividend declared by the English company did not proceed upon this footing. In my opinion it would be wrong to attribute to the loose and inaccurate language of the chairman a force sufficient to override the formal acts of both the English company and the German company and all the other circumstances of the case. The Crown can, in my opinion, only succeed by making out that the German company was

merely the agent of the English company as principal in carrying on the business. Nothing short of this would suffice, and I can see nothing to justify such a conclusion. We have been greatly pressed by the case of Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (1) But when the facts of that case are looked into it is apparent that the Chicago company was a mere form, kept up to satisfy the American law, and that the three American directors accepted the position of delegates of the English company. The officers and servants of the American company were appointed and dismissed by the English company, and the working capital required for carrying on the business was provided by the English company. In other words, the relation of principal and agent did exist in that case. If an action was brought by a creditor of the German company against the English company as undisclosed principal, and the only materials before the jury were those found in the case stated by the Commissioners, I think it would be the duty of the judge to nonsuit the plaintiff. If it is said that the relation between the companies was that of trustee and cestui que trust rather than that of agent and principal, I think it is equally clear that no action could be maintained on that footing. In my opinion Walton J.'s decision was perfectly right. The English company is only liable to pay income tax upon such portions of the profits of the German company as have been received in this country. The appeal must be dismissed with costs.

FLETCHER MOULTON L.J.I am of the same opinion.

Much of the law applicable to the question before us is not open to reasonable doubt. The holding of shares in a foreign corporation, entirely situated and carrying on business in a foreign country, comes unquestionably under r. 5. The English holder is liable only for such profits as he actually receives in this country by way of dividend, and is in nowise responsible for what the actual profits of the corporation itself have been, nor whether according to English law a larger amount might have been divided as dividend. The profits of the corporation are not profits of any business carried on by him in a foreign

(1) 4 Tax Cases, 41.

country, because the individual corporator does not carry on the business of the corporation. He is only entitled to the profits of that business to a certain extent, fixed and ascertained in a certain way depending on the constitution of the corporation and his holding in it.

This legal proposition that the legal corporator cannot be held to be wholly or partly carrying on the business of the corporation is not weakened by the fact that the extent of his interest in it entitles him to exercise a greater or less amount of control over the manner in which that business is carried on. Such control is inseparable from his position as a corporator and is a wholly different thing both in fact and in law from carrying on the business himself. The directors and employees of the corporation are not his agents, and he has no power of giving directions to them which they must obey. It has been decided by this Court, in the case of Automatic Self-Cleansing Filter Syndicate Co., Ld. v. Cunninghame (1), that in an English company, by whose articles of association certain powers are placed in the hands of the directors, shareholders cannot interfere with the exercise of those powers by the directors, even by a majority at a general meeting. Their course is to obtain the requisite majority to remove the directors and put persons in their place who agree to their policy. This shows that the control of individual corporators is something wholly different from the management of the business itself.

Nor is this principle less true when the holding of the individual corporator is so large that he is able to override the wishes of the other corporators in matters relating to the control of the business of the company. The extent, but not the nature, of his power is changed by the magnitude of his holding. It is not open in this Court to dispute this proposition of law, inasmuch as in Kodak, Ld. v. Clark (2) this Court decided that it applied to a case where the holding of an English company in a foreign corporation amounted to 98 per cent. of the total capital of the corporation. But apart from this decision, which is binding upon us, I am of opinion that it is sound law. I can see nothing changed in the relationship of the individual

(1) [1906] 2 Ch. 34.

(2) [1902] 2 K. B. 450; [1903] 1 K. B. 505.

corporator to the business of the corporation by the fact that he is a large holder of the stock.

The present case requires us to examine a more difficult question, namely, that of an individual corporator who owns the whole of the stock of the corporation. According to English law it is not possible for an individual corporator to be the legal owner of the whole of the stock of a company of this kind so as legally to be the sole shareholder, inasmuch as the company would by English law cease to exist if the number of corporators fell below a certain standard. But according to German law no such limitation appears to exist, and in the present case the respondents acquired the whole of the shares of the German Gramophone Company, without thereby terminating or interfering with its corporate existence or the legal incidents thereof and it is in consequence of such acquisition that the present dispute arises.

Treating it as an abstract proposition of law, I am of opinion that the acquisition of the whole of the shares of a corporation by one individual does not of itself alter the nature of his relationship to the corporation. His de facto control when he possesses 98 per cent. is probably complete from a practical point of view, and although it is no doubt rendered more complete in theory when he possesses himself of the whole of the shares, it is still of the nature of a control exercised by corporators over the corporation, and does not make him and the corporation in any sense identical. The directors of the corporation do not become his agents. Their duties are still controlled by the rules and constitution of the corporation itself. Nor is this consideration one of theoretical law only. The fact that the whole of the shares of the corporation are held by one individual at one moment by no means implies that they will be so held at a future time, and the responsibility of the directors and officers of the corporation is to the corporation itself, whatever be its composition at any moment as to number of corporators. It will be no excuse to them when called to account in the regular way and at the regular periods, according to the constitution of the corporation, to plead that they obeyed the directions of the individual corporators as they existed at a

particular moment (unless given in the manner prescribed by the constitution of the corporation), and on the strength of such directions failed to obey the corporate rules.

The German company was not in its inception a "one man" company. It was formed by the coalition of three firms or companies, of which one was a predecessor of the present English company. Its capital consisted of 1000 shares, of which 540 were held by the then existing English company and the other 460 were held independently. Although, therefore, from the first the English interest in the company was what is often called a "controlling interest," there was a substantial holding in the company in other hands, so that there can be no doubt that initially it was a bona fide German company in which the interest of the English company was only that of holding shares. From the time of its formation to the date with which we have to deal it has been carried on, so far as appears, in a strictly regular manner as a German company. It possesses German statutes, the requirements of which have been punctiliously complied with by the governing body of the company. The balance-sheets for each year are before us, and they shew that the management have put aside the sums which they were required to put aside for depreciation by German company law, and they have also put aside sums in respect of the depreciation of the patents which were in accordance with the provisions of the statutes of the company, though larger than the minimum prescribed thereby. Dividends have been regularly declared and the balance carried forward. It is further to be remarked that there is no trace of anything like the relationship of agency between the German company and the English company at any part of its existence. The proceedings at the general meetings are quite regular, and in some cases deal with the price at which goods are purchased by the German company from the English company. They regulate the salaries to be paid to the German Aufsichtsrath or board of supervision, and it is evident from the accounts that the German Vorstand or management was paid an amount based on the result of the trading. Indeed, there has been no suggestion from first to last that the German company has not been regularly carried on as

though it were an independent company (except perhaps as to one matter with which I shall presently deal), and it seems to me clear that at any time the English company, which now possesses the whole of the shares of the German company, might have sold any proportion of them to independent corporators, and the latter would have found the affairs of the German company in strict order, just as though it had been carried on throughout as a company in which the shares were held in many hands.

During the argument counsel for the Crown pressed upon us certain decisions with regard to companies formed in England to purchase breweries in the United States of America, and more especially the case of Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (1) and St. Louis Breweries, Ld. v. Apthorpe. (2) These cases are very valuable as illustrating the principles to be applied in cases of businesses carried on in foreign countries in which English companies are interested, but there is a danger in regarding them as mainly turning upon abstract principles or laying down general rules. In almost all the cases special facts are to be found which greatly influenced the decisions of the Courts, and as they are confessedly cases that are near the border line, it is impossible to say that the ultimate decision of the Court was not arrived at by reason of these special facts. In both of the above cases I find that the English company was formed for the specific purpose (among other things) of purchasing the foreign undertaking, and that its purpose was carried out by a direct sale of the property, plant and business of that foreign undertaking to the English company. It is true that in both these cases, in order to evade the laws in force in the State as to the holding of certain types of property by foreign corporations, substantially the whole of the shares of the foreign company were simultaneously transferred to the English company for the purpose of keeping up the fiction that the American property still belonged to the American company. But it is evident from the facts stated in each of the special cases that the business was carried on by means of the plant and property of the English company and with working capital provided by it.

(1) 4 Tax Cases, 41.

(2) 4 Tax Cases, 111.

It was far more than merely the holder of the shares in the American company. In my opinion in each of these cases the persons who managed the American business after it had been transferred to the English company were in the position of agents of the English company and would have been accountable to it in that capacity. In my opinion no relation of this kind is shewn to exist in the present case. The English company has no relation to the German company, except as being the holder of its shares.

In order to bring the present case within these decisions, counsel for the Crown relied very strongly on the language of the finding of the Commissioners in the present case, and he contended that it must be looked upon as a finding of fact binding on all the Courts, and that, in other words, the Commissioners had "stated the appellants out of Court" by these findings. In my opinion the findings were not intended to have that effect, and it would have been very unfair of the Commissioners thus to have shut the appellants out from the right to take the opinion of a superior Court. The point of law which they desired to raise was whether there was any such evidence as would justify a jury in coming to the conclusions expressed in the Commissioners' findings, and an examination of the case convinces me that the Commissioners intended to put before the Court the whole of the evidence which they had before them, so that the Court might judge whether it justified those findings.

The only special circumstances on which counsel for the Crown relied, (beyond the fact that the English company was the holder of the whole of the shares of the German company,) are to be found in the speech delivered by the chairman of the English company at a general meeting of the shareholders and in a report to those shareholders which was put before them at that meeting. In my opinion it is impossible to look upon such statements as altering the legal position of the English company or creating any estoppel against it. The first set of references in the speech of the chairman reduces itself to an expression of opinion that the profits of the German company belonged to the English company and were available for distribution. The passage is unquestionably incorrect, because the whole

of one of the items mentioned and part of another could not have been used for distribution without violating the German law to which the German company was of course subject. But apart from this it is only the expression of a layman for whose views the company is not responsible, nor could the expression of those views on such an occasion give any rights to the Crown. The most important part of the second paragraph relied on reads as follows:- "Those two resident directors in Germany would be content with a nominal sum in future, for they had practically nothing to do, the whole of the shares of the German company being held by this company." On examining the passage it is clear that in using the word "directors" the speaker referred to members of the Aufsichtsrath or committee of supervision, and he is referring to the arrangement by which the German company had fixed 200l. as the total remuneration of the five members of the Aufsichtsrath, to be divided amongst them in such proportions as they agreed among themselves. To my mind this is no indication that the English company was anything more than the holder of the shares of the German company. It was natural that they should put on the German board of supervision men who were directors of the English company, and on the English board the German members of the board of supervision, and that the functions of the German board of supervision would be reduced to a minimum by the unity of holding. But I can see nothing in this to indicate that the German company was not carrying on a bona fide business under German management in all respects according to German company law, and that its property and capital in fact as well as in form belonged to such company.

The other piece of evidence relied upon by counsel for the Crown was the report of the directors to the company which was presented at the same meeting. This speaks of the profits of the German company and of the holding of 74 per cent. of the French company, and no doubt adds them to the credit balance of the trading of the English company in order to obtain the total credit balance. But it goes on to make substantially the same deductions that are made in the balance-sheet of the German company, so that the objection is in reality to the form of the

statement, and not to its substance. There is nothing in this statement, moreover, which indicates any intention to interfere with the independence of the German company, and I think that both it and the speech of the chairman are wholly insufficient to distinguish this case from the simple case in which the whole of the shares of a foreign company carrying on an independent business are held by an English company. As I have said, this is insufficient in itself to make the business of the foreign company a part of the business of the English company. The shares remain, in my opinion, possessions in that foreign country and come under the fifth case. Duty, therefore, is payable on so much of the profits of the German company as are remitted to the English company by way of profits or dividend, and the sum of 15,000l., which unquestionably was not so remitted, is not chargeable with duty. I am therefore of opinion that this appeal should be dismissed.

BUCKLEY L.J.I am of the same opinion and, after the judgments which have been given, need do no more than state shortly my reasons in my own words. The question is, I think, one of fact, and one upon which we are not concluded by any findings of fact on the part of the Commissioners. The question of fact is whether the business in Germany is carried on by the appellant company. If it is, the respondents do not dispute that the Attorney-General is right. If, on the contrary, the German business is not carried on by the English company, then equally the Attorney-General cannot dispute but that the English company is assessable only upon the dividends which it may receive upon its shares in the German company.

In order to succeed the Attorney-General must, I think, make out either, first, that the German company is a fiction, a sham, a simulacrum, and that in reality the English company, and not the German company, is carrying on the business; or, secondly, that the German company, if it is a real thing, is the agent of the English company. As regards the former of these, there are no facts at all to shew that the German company is a pretence. It was formed in January, 1900, by the union of three other companies, each of which brought in substantial properties, and

of two individuals. It is duly constituted and governed according to German law, and there is no ground whatever for saying that it is other than a real German corporation carrying on business in Germany under circumstances in which the company and its officers are amenable to German law and with a view to the acquisition of profit. The only remaining question, therefore, is whether the German company is agent of the English company, whether the English company is really carrying on the business and is employing the German company to do so on its behalf. Upon this point the Attorney-General relies principally upon the fact that, as stated in paragraph 17 of the case, the appellant company now holds all the shares of the German company. In my opinion this fact does not establish the relation of principal and agent between the English company and the German company. It is so familiar that it would be waste of time to dwell upon the difference between the corporation and the aggregate of all the corporators. But I may point out the following considerations as bearing upon the question whether the possession of all the shares is evidence of agency. Suppose that during the year whose accounts are under review the appellant company had held no shares at all in the first six months and had held all the shares in the last six months, or suppose that, having held all the shares but ten to-day, it became the holder of all to-morrow and again parted with ten the next day, it cannot seriously be suggested that each time one person becomes the holder of all the shares an agency comes into existence which dies again when he parts with some of them.

Further it is urged that the English company, as owning all the shares, can control the German company in the sense that the German company must do all that the English company directs. In my opinion this again is a misapprehension. This Court decided not long since, in Automatic Self-Cleansing Filter Syndicate Co. Ld. v. Cunninghame (1), that even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company's affairs. The directors are

(1) [1906] 2 Ch. 34.

not servants to obey directions given by the shareholders as individuals; they are not agents appointed by and bound to serve the shareholders as their principals. They are persons who may by the regulations be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by the statutory majority which can alter the articles. Directors are not, I think, bound to comply with the directions even of all the corporators acting as individuals. Of course the corporators have it in their power by proper resolutions, which would generally be special resolutions, to remove directors who do not act as they desire, but this in no way answers the question here to be considered, which is whether the corporators are engaged in carrying on the business of the corporation. In my opinion they are not. To say that they are involves a complete confusion of ideas.

The inquiry may be put in another form by asking who would be liable upon the contracts of the German company. Obviously the German company, and not those who are the holders of its shares.

Another test to be applied may be whether the English company has ever in fact interfered with and controlled the German company. The case contains no statement at all that they have ever done so. The German company is and must be the actor in carrying on the business, and none the less if the English company owns all the shares. The fact is that from (a) the control of the business, which no doubt is in the power of the corporators by taking proper steps for the purpose, to (b) carrying on the business is a long jump. The argument of the Attorney-General seeks to make the two things identical. Much reliance was placed in argument upon the form of the English company's report and accounts. To my mind nothing turns upon it. It would be illusory to found upon the statement in the report the conclusion which the Attorney-General desires, shutting one's eyes at the same time to the form of the balance-sheet. If the profits of the German company were profits earned in a business carried on in Germany by the English company, they ought to have been included in the balance-sheet and certified by the auditors at its foot. They were not so included, but were made

the subject of a footnote which separates them from the profits of the English company to which the auditors had spoken.

Holding this to be a question of fact, it is not useful, I think, to deal at any length with the cases. I content myself by using, for the purposes of illustration and contrast, the two cases of Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (1) and Kodak, Ld. v. Clark. (2) The point in Apthorpe v. Peter Schoenhofen Brewing Co., Ld. (1) was that the English company bought all the shares but three, and (so far as was possible under those circumstances) all the property, plant, and business of the American company. The agreement between the two companies provided that the American company should be kept on foot, and that the American company were to do all things required for vesting the management of the American company in the English company. The English company raised and found the working capital, and the board of directors of the English company were to have the entire right of control and entire directing power over the affairs of the American company. It was upon these facts as analysed in the judgment of A. L. Smith L.J., and indicated by the other members of the Court, that they held that the English company was really carrying on the American business. Romer L.J. at the commencement of his judgment negatived the case as being one in which the English company merely occupied the position of owning all the shares. In Kodak, Ld. v. Clark (2), by way of contrast, the English company owned 98 per cent. of the shares. It is true that they did not own them all, but that was not the ground of the decision. The ground was that, while the English company as holding 98 per cent. of the shares no doubt had the control, they had it only as shareholders, and it was the corporation and not the shareholders who were carrying on the business.

To my mind nothing results from the fact that the two managers of the German company are directors of the English company. I have no doubt that the English company in a popular sense, by its ownership of the shares and by the person of those who conduct affairs in Germany, has an effective control

(1) 4 Tax Cases, 41.

(2) [1902] 2 K. B. 450; [1903] 1 K. B. 505.

over the German business. That to my mind is not the question. The question is whether the English company is carrying on the business of the German company. In my judgment it is not. Upon these grounds I think that this appeal fails and should be dismissed with costs.

Solicitors: Broad & Co.; The Solicitor of Inland Revenue.

W. C. D.