1. PLOWMAN, J.-------This is an appeal by British-Borneo Petroleum Syndicate Ltd. (which I shall call "the company'`) against assessm ents to income-tax Schedule D for 1965-66 and profits tax for the chargeable accounting period April 1, 1964, to March 31, 1965. It is common ground that the decision in the profits tax case must follow that in the income-tax case, and I, therefore, confine my remarks to the latter.
2. The question which I have to decide is whether a sum of --900,000 paid to the company in 1964 in consideration, inter alia, of the surrender and release of the company's rights under a certain royalty agreement was a trading receipt, as the special commissioners held, or a capital receipt, as the company claims.
3. [His Lordship stated the facts set out above and continued:] Mr. Heyworth Talbot, for the company, submitted that it was a capital receipt on two alternative grounds. The first, based on Moriarty v. Evans Medical Supplies Ltd. ((1958) 1 W L R 66), as distinguished in Rolls-Royce Ltd. v. Jeffrey ((1962) 1 W L R 425) and Musker v. English Electric Co. Ltd.
4. ((1964) 41 T C 556) was to the effect that, by entering into the royalty agreement with its "keep out" covenant, the company was not just selling an oil concession which it held as part of its stock-in- trade, but was giving up its Brunei trade altogether and cutting itself off from an important area of trading operation ; that it was, therefore, disposing of a capital asset, and that the royalty agreement, as the price of that capital asset, was itself a capital asset ab initio, although of course the periodic payments of royalty would be income in the company's hands.
5. This point of law was not taken before the special commissioners, whose view of the matter is expressed as follows: "We think that there can be no doubt that the royalty agreement, when it was first entered into, was stock-in-trade of the appellant, and had it been disposed of at that time the proceeds must have been assessable to income-tax " On the evidence I think they were entitled to come to that conclusion, and I propose to assume that they were right.
6. I turn, therefore, to Mr. Heyworth Talbot's alternative submission. This was to the effect that even if in 1922 the royalty agreement became part of the company's stock-in-trade, it had become transmuted long before 1964 into a fixed asset. It was not suggested on behalf of the Crown that there is any reason in law why a trader should not appropriate stock-in-trade as a fixed capital asset nor was it suggested on behalf of the company that the mere effluxion of time could have that effect. The dispute is what is the proper inference to be drawn from the facts.
7. "In order to provide for and maintain a slowly increasing dividend in the future when the royalty income would be diminished, the directors invested a large part of the royalty receipts in stock and shares with growth possibilities. The present directors of the appellant, one of whom had joined the board in 1933, had never considered the possibility of realising or terminating the royalty agreement which they looked upon as having become a permanent income-producing asset of the appellant."
8. On the evidence before them, the special commissioners might have gone even further and said that the board regarded the royalty agreement not merely as "a" but as "the principal" income- producing asset of the company.
9. Secondly, there is the evidence of the company's balance --sheets. The balance-sheet as at March 31, 1948, showed under the heading "Assets," "Oil interests and investments at or under cost, - -287,967." That figure included the sum of ten pounds to which I referred earlier. On July 1, 1948, however, the Companies Act, 1948, came into force, and paragraph 4 of Schedule VIII of that Act required fixed assets to be distinguished from current assets in a company's balance-sheet. This led to consultation between an accountant member of the company's board and its auditors, and as a result of this the item "Oil interests and investments at or under cost" was expanded in the balance-sheet as at March 31, 1949, to read as follows "Quoted investments, --297,030 ; Unquoted investments, --1,078 ; Fixed Asset : Royalty interests at not amount standing in company's books at 1st July 1948, --10." Then follow the items designated "Current Assets."
10. The special Commissioners' decision on this matter is set out in the case stated as follows: "We apprehend, from the cases cited to us, that the mere passage of time would not of itself convert stock-in-trade into a fixed asset, and we are unable to find, in the circumstances of this case, that the making of the royalty agreement and its subsequent retirement''-which I take to mean surrender-"for the consideration referred to above, represented anything other than the best method of exploiting the former Borneo and Brunei concessions of the appellant."
11. I was invited on behalf of the Crown to treat that as a finding of fact with which I ought not to interfere.
12. The relevant finding of fact is, I suppose, contained in the words "we are unable to find ...That the..." surrender of the royalty agreement "represented anything other than the best method of exploiting the former Borneo and Brunei concessions of the appellant." If that is intended to be a finding that the royalty agreement had at no time become converted into a fixed asset, it is far from happily expressed. But in any case such a finding cannot, in my judgment, be supported on the evidence.
13. In my judgment, the only inference which is consistent with the evidence is that at some time which cannot be pinpointed, but long before 1964, the company had appropriated the royalty agreement as a fixed capital asset. I can see no evidence to displace that inference.