[1955] EACA 66

## COURT OF APPEAL FOR EASTERN AFRICA

Before SIR NEWNHAM WORLEY (Vice-President), SIR HERBERT Cox, Chief Justice (Tanganyika) and BRIGGS, Justice of Appeal

## COMMISSIONER OF INCOME TAX, Appellant (Original Respondent)

(1) AMBONI ESTATES LIMITED, as agent for Walter Schoeller, (2) AMBONI ESTATES LIMITED, as agent for Elizabeth Wigglesworth, Alexander Stuart Pirie Neish and Charles William Tyrell, the executors of Alfred Wigglesworth, deceased, (3) AMBONI ESTATES LIMITED, as agent for Frank Meyer, (4) AMBONI ESTATES LIMITED, as agent for Harold Garton-Ash, (5) HUGO TANNER, (6) AMBONI ESTATES LIMITED, Respondents (Original Appellants)

Civil Appeals Nos. 57, 58, 59, 60, 61 and 62 of 1953

(Appeal from the decision of High Court of Tanganyika, Sinclair, J.)

Income Tax—Company—Questioning of company directors' remuneration— Derivation of directors' remuneration—Agreement to pay person share of company's profits—Whether company expense—Source of company's income -Source of income of company's employees—Income Tax (Consolidation) Ordinance, sections 7 and 13.

The first, third and fourth respondents were directors of the sixth respondent (hereinafter referred to as "the company"). The second respondents were the executors of the will of A. W. deceased, who prior to his death was also a director, whilst the fifth respondent was the managing director of the company.

The company was incorporated in Guernsey and carried on business in Tanganyika.

The remuneration of the directors of the company, other than that of the managing director, was governed by Article 88 of the company's articles of association, and thereunder, apart from a fixed salary they were entitled "by way of further remuneration in any financial year ... to $7\frac{1}{2}$ per cent on the net profits of the company made during the financial year ...

Article 88 was substituted for the original Article 88 in 1929, the former being in somewhat different terms, but the amendment substituting the new Article 88 was not registered until immediately prior to the hearing before the High Court.

The fifth respondent was employed under an agreement in writing made in pursuance of Article 114 of the said articles of association, and under the said agreement, apart from a fixed monthly salary he "shall be entitled to receive, after the accounts have been passed by the company in general meeting, a sum equal to four per cent of the profit".

The company claimed to deduct, as an expense, the amounts paid to the directors and managing director under the aforesaid provisions giving them respectively $7\frac{1}{2}$ per cent and 4 per cent of the annual profits, but the Commissioner assessed the company on the basis that the sums paid as representing the said percentages, were not deductible, and he also assessed the five directors individually on their respective shares of the said sum on the ground that they were

income "accrued in or derived from" Tanganyika within the meaning of section 7 of the Income Tax (Consolidation) Ordinance, 1950, subparagraph 1 whereof commences: "Income tax shall, subject to the provisions of this Ordinance, be payable ... upon the income of any person, who is not resident in the territory, accruing in, derived from, or received in, the territory ...". The Commissioner also alleged that the payments to the directors and the managing director were excessive and ought to be disallowed accordingly. It was admitted, however, that the arrangements for remuneration were bona fide commercial transactions.

The directors, other than the fifth respondent were neither resident nor ordinarily resident in Tanganyika and their duties were performed in Guernsey, England or Switzerland but not in Tanganyika and they were paid by funds drawn from the company's Guernsey bank account, whilst the fifth respondent was resident in Tanganyika at the relative time but his work as such managing director was for the most part done in Switzerland, his service agreement was made in Switzerland and his remuneration was received there. Neither he nor the other directors at any time remitted any of the moneys received as remuneration from the company to Tanganyika.

Held (6-3-54).—(1) Notwithstanding the failure to register the amendment to Article 88 until a very late date, the new Article 88 was applicable for the purpose of the instant proceedings.

(2) Where directors' remuneration is paid in good faith under a purely commercial arrangement entered into by the company, the quantum thereof as an expense cannot be questioned by the Commissioner of Income Tax.

(3) Where a company agrees to pay any person a share of its profits, it is necessary, first, to ascertain the consideration for which the payment is made. If the true consideration is services rendered to the company in the conduct of its business by an employee (including a director or a managing director), the payment is, prima facie, a necessary expense for the purpose of making profits, it mattering not whether the profits on which the payment is to be made are only the "apparent" net profits and not the "real" net profits, a participation in which would be profit sharing.

(4) The company not being a Tanganyika company, the directors' remuneration might be said to be derived from the proper locus of the company which they serve, viz. Guernsey as well as from the country where they receive payment, or it might be said to be derived from the place where the company maintains its principal and central funds. In the instant case there was no reason for saying that the remuneration derived from Tanganyika

Per Worley V. P.-To say that a thing "derives from" a place, is merely saying that it has its source in that place, and a payment out of profits by A to B is derived, not from any contract between them but from whatever is the source of A's profits and one cannot go behind the contract and to look at the ultimate source of the said profits.

Per Cox C. J.—The source of income of a company and the source of income of the employees of the company, paid out of the assets thereof, may be two entirely different<br>sources, and it is the immediate source of revenue which must be looked at as far as individual employees of the company are concerned in relation to payments to them.

Appeal dismissed against all respondents.

Cases referred to: Muirhead v. Forth & North Sea S. M. I. Association (1894) A. C. 73;<br>Ho Tung v. Man On Insurance Co. (1902) A. C. 232; Employers Liability Assurance v. Mayor, etc. of Leanington (1882/3) 8 A. C. 517; Copeman v. Flood (1941) 2 K. B. 202; Aspro Ltd. v. Commissioner of Taxes, New Zealand (1932) A. C. 683; Johnson Bros. & Co. v. Inland Revenue Commissioners (19 9 T. C. 69: Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax, Madras 58 I. A. 239; British Sugar Manufacturers Ltd. v. Harris (1938) 2 K. B. 220; Moore v. Stewarts & Lloyds Ltd. (1906) 6 T. C. 501; Greshan Life Assurance Society v. Styles (1892) A. C. 309; Union Cold Storage Co. Ltd. v. Adamson (1932) 146 L. T. 172; Tata Hydro-Electric Agencies Ltd. v. Commissioner of Colquhoun v. Brooks (1889) 14 A. C. 493; Foulsham v. Pickles (1925) A. C. 458; Bennett v. Marshall (1938) 1 K. B. 591; Bray v. Colembrander (1953) 1. A. E. 1990; Commissioners<br>of Taxation v. Kirk (1900) A. C. 588; Liquidator Rhodesia Metals Ltd. v. Commissioner of Taxes (1940) A. C. 774; McMillan v. Guest (1942) A. C. 561: Brewster v. Goodwin<br>32 T. C. 80; O'Mahoney v. Inland Revenue Commissioner 33 T. C. 259; Morgan v. Tate &<br>Lyle Ltd. (1953) 2 A. E. 162; Indian Radio Communications v

Newbold, O. C. (Hooten with him), for appellant.

Borneman, O. C. (Dodd with him), for respondents.

BRIGGS, J. A.—These are six appeals by the Commissioner of Income Tax against an order of the High Court of Tanganyika allowing appeals by the taxpayers against certain assessments to income tax. The six cases are closely related. They were heard together in the High Court and we consolidated the appeals to this Court.

Amboni Estates Limited is a company incorporated in Guernsey in 1922 and carries on the business of sisal growers in Tanganyika. It is the sixth respondent. Hugo Tanner the fifth respondent, was at all material times the managing director of the company and was employed as such under an agreement in writing made in pursuance of Article 114 of the articles of association of the company. The first, third and fourth respondents are in substance three other directors of the company and the second respondents are in substance the three executors of the will of one Alfred Wigglesworth, now deceased, who was at all material times also a director, but died during the pendency of the proceedings. I use the words "in substance", because in form the company as statutory agent of the directors, other than Mr. Tanner, is the nominal respondent in the first four appeals. The remuneration of the directors, other than the managing director, of the company is governed by Article 88, which is as $follows: -$

"Each of the directors (other than a managing director), unless the Board otherwise determine shall be entitled by way or remuneration for his services to a fixed salary at the rate of £150 per annum with an additional £50 per annum in the case of the chairman. The directors (other than a managing director) shall also be entitled by way of further remuneration in any financial year or other period comprised in the account submitted to each ordinary general meeting of the company to $7\frac{1}{2}$ per cent on the net profits of the company made during the financial year or other period comprised in the accounts submitted to each ordinary general meeting as aforesaid, and such further remuneration shall be divided amongst the directors in such proportions and manner as they shall determine, and in default of such determination equally. The directors' remuneration and further remuneration aforesaid shall be deemed to accrue de die diem. For the purpose of this Article the said net profits shall be arrived at in the same way as the net profits of a business of this description are usually arrived at and after making all proper and usual deductions and reserves, except that no deductions shall be made in respect of any further remuneration by way of percentage on the profits provided for by this Article. The certificate in writing of the company's auditors as to the amount of such net profits or as to there being none shall be conclusive. The directors shall also be entitled to be repaid all travelling and hotel expenses properly incurred by them in or with a view to the performance of their duties. Any remuneration or rate of remuneration aforesaid, whether of the directors or any of them may at any time and from time to time be altered by the company in general meeting, either permanently or for a year or longer period."

That article was substituted in 1929 for the original Article 88, which was in somewhat different terms. The original articles and other necessary particulars were duly registered under section 277 of the Indian Companies Act, 1913, which

was then in force in Tanganyika; but the amendment effected by substituting the new Article 88 was never registered until immediately before the hearing in the High Court.

Article 114 reads as follows: -

"The remuneration of a managing director shall from time to time be fixed by the Board, and may be by way of salary or commission or participation in the profits, or by any or all of those modes, and shall, if so determined by the Board, be in addition to his share of any remuneration payable to the Board, or to the managing director as one of the Board."

and paragraphs 3 and 4 of Mr. Tanner's agreement of service made thereunder are in these terms: $-$

"3. There shall be paid to the managing director during his engagement a monthly salary of £130. The managing director in addition to his salary aforesaid shall be entitled to receive, after the accounts have been passed by the company in general meeting, a sum equal to 4 per cent of the profit. The certificate in writing of the auditors of the company as to the amount which the managing director is entitled to receive under this provision shall be conclusive provided that in calculating such amount the additional remuneration of the directors of the company of $7\frac{1}{2}$ per cent on the net profits mentioned in Article 88 shall not be deducted before arriving at the net profits for the purposes of this clause.

4. If the agreement expires the managing director shall be entitled to a proper proportion (if any) of the percentage remuneration payable under the last preceding clause when the accounts shall have been passed by the company in general meeting and the profits of the company for the purpose of this payment shall be treated as having been earned rateably over the period comprised in such accounts."

In the year 1947 the company, which had previously been moderately, but not outstandingly, prosperous, made very large profits. These were due to the high prices received for sisal under the terms of a standing contract whereby the British Government purchased the whole of the company's output. In consequence the company paid to the managing director the sum of £13,469 and to the other directors the sum of £28,179 under the provisions giving them respectively 4 per cent and $7\frac{1}{2}$ per cent of the annual profits. In 1948 the company made still larger profits for the same reasons, and paid in like manner £19,769 to the managing director and £37,065 to the other directors. Part of the £19,769 was not paid to Mr. Tanner, but to a Mr. Feer who was acting for him during part of the year, but nothing turns on this. In the two years of assessment 1948 and 1949 the company claimed these sums of $\pm$ 41,648 and $\pm$ 56,834 as expenses "wholly and exclusively incurred in the production of" the company's income, within the meaning of section 13 of the Income Tax (Consolidation) Ordinance, 1950. The Commissioner rejected this claim and made certain counter-proposals which are not now material. He assessed the company in respect of the years 1948 and 1949 on the footing that the sums in question were not deductible. He also assessed the five directors individually on their respective shares of the said sums on the ground that they were income "accrued in or derived from" Tanganyika within the meaning of section 7 of the 1950 Ordinance: The details of the cases differ slightly but the differences are not material. The respondents all appealed to the High Court against these assessments. They succeeded in their appeals. The company was allowed in full the deductions claimed and the assessments on the directors were quashed. The Commissioner now appeals to this Court and asks that the original assessments be restored.

The first issue is whether this Court must for the purpose of this application have regard to Article 88 of the company's articles of association in its original form or to the same article in the amended form which was substituted in 1929. I will defer consideration whether the different articles would lead to the same or different conclusions. Assuming that there are material differences, I think the new article must apply. There is no question that it was regularly passed and has been acted on by the company ever since 1929, and there can have been no reason for failing to register it locally under section 321 of the Companies Ordinance (Cap. 212), or its earlier equivalent, save mere forgetfulness of a type which every practitioner sees often enough. Whose forgetfulness it was is immaterial, but it was not that of the company's present legal advisers. As regards the consequences of non-registration, I distinguish between failure to make the initial registration of general particulars under paragraphs (a), (b), (c), and (d) of section 321 and failure to register a mere alteration under the last part of the section. Failure to register initially involves substantial disabilities, in particular that the company cannot lawfully hold land in the territory, but the same consequences do not apply on failure to register an alteration. The power to hold land under section 322 clearly does not determine. It is commonplace that, if a third party deals with the company on the faith of the articles of association as registered under section 321 (a), the company will not be permitted to rely on its own default in registering an amendment of the articles and to put forward the new unregistered article to the detriment of the third party. This is on the normal principles of estoppel, and ensures the effectiveness of the register as a local source of information on which persons having business with the company can safely rely. But, apart from penal liability under section 327, I cannot see that any further consequences follow.

I reject the submission that the company as registered in Tanganyika is in any way a different or separate juridical entity from the company at its home in Guernsey. The power to wind up a foreign company under section 315 does. not support the submission, but is merely a special provision to preserve in certain circumstances the rights of local creditors, or of creditors against local assets. Sub-section (2) is of value chiefly where the company has ceased in law to exist, but assets remain unadministered in the territory. It is quite unnecessary for its purposes to invoke the conception of the company having at all times a mysterious ghost in Tanganyika which is a separate persona from the real company. The proviso to section 319 read with section 314 appears to support this view. If then we are concerned with the company only, and not with a local doppelganger, there must be very good reason before we will act, not on the articles of association as we know them in fact to be, but on superseded articles. The court will always be reluctant to act on something which it knows to be incorrect, and estoppel forms no exception. Liability arises in that case not because the court assumes the false representation to be true, but because the plaintiff is entitled to be protected from the loss he would incur by being misled by the defendant.

Mr. Newbold expressly disclaimed any rights under the doctrine of estoppel and I think it could not possibly be shown that Government had dealt with the company in any sense which could give rise to an estoppel. He cited *Muirhead* v. Forth & North Sea S. M. I. Assn., (1894) A. C. 73, which shows that an amended or new article, though not validly adopted, may yet form the basis of a contract with a third party, and *Ho Tung v. Man On Ins. Co.*, (1902) A. C. 232, which shows that a set of articles which have been acted on for a long period will be deemed to embody the contract between the shareholders, although never formally adopted. He also relied on Employers Liability Assurance v. Sedgwick Collins, (1927) A. C. 95, which turned on the position of a representative authorized to accept service of process on a foreign company, and Sabatier v. The

Trading Co., $(1927)$ 1 Ch. 495, a case of the same kind where it was held that, even if the company had no longer a place of business in the United Kingdom, service on the company through the person registered as authorized to accept service was still valid. Lastly on this issue Mr. Newbold cited Young & Co. v. Mayor, etc.; of Learnington, 8 A. C. 517, on the necessity of giving effect to the provisions of a statute notwithstanding alleged hardship. None of these authorities appears to me to establish any principle under which the old Article 88 should be held to apply for the purposes of these proceedings. I therefore find it unnecessary to consider what effect the old article would have had on the profit-sharing issue. It may well be that the Crown would be in a better position than, as I think, it now is.

I turn now to the contention that the sums paid to the directors under Article 88, other than their fixed salaries, and the sums paid to the managing director under his agreement of service, other than the fixed monthly sum of £130, were paid by the company by way of a distribution of part of its profits under a profit-sharing arrangement and were therefore not expenses "wholly and exclusively incurred... in the production of the income" so as to be a deductible expense. So far as this is a question of fact, the High Court has found the facts against the Crown, and this, though not conclusive should be borne in mind. Mr. Newbold made some point of the fact that these sums were large, over £41,000 in one of the years under consideration, and over £56,000 in the other. He relied also on the fact that, owing to statutory Government purchase of sisal during the years in question, not only were profits greatly increased, but the normal duties of the Board as regards sale of the company's product in effect disappeared, so that they made more money for doing less work. On this basis he said the payments were grossly excessive and ought to be disallowed on that ground alone. For this purpose he relied on *Copeman v. Flood*, (1941) 2 K. B. 202. I think these arguments are unsound for several reasons. The routine sale of products is not normally a function of the Board as a whole: they are normally concerned only with policy as regards sales, and sales under the Ministry of Supply contract may well have presented as many difficulties for their consideration as sales in the open market. Copeman y. Flood and similar cases merely show that directors' fees are not always or necessarily sums wholly or exclusively expended for the purposes of the trade of the company. They may, for example, be paid by those controlling the company to themselves for the purpose of avoiding distribution by dividend, as in Aspro Ltd. v. Commissioner of Taxes, New Zealand, (1932) A. C. 683, or to relatives as a personal subvention, as in Copeman v. Flood, Johnson Bros. & Co. v. Inland Revenue<br>Commissioners, (1919), 2 K. B. 717, or Stott and Ingham v. Trehearne, 9 T. C. 69. There is nothing sacred about directors' fees. They are subject, like other expenses, to examination; and, if they are very large, their size alone may be some indication that they may not have been paid solely as remuneration for services rendered as a director of the company. If, however, as was conceded by the Crown in this case, they are paid in good faith under a purely commercial arrangement entered into by the company with a view only to obtaining and remunerating properly the best type of directors for its purpose, the question of amount is secondary, and in any event cannot fairly be considered only in relation to two boom years. The history of the company over a quarter of a century shows good years and bad. In some years the directors' remuneration was small, but they had always the knowledge that a period of prosperity would balance matters up. Their function was to make profits for the company and, if they did so, they would receive a rich reward, which the company on its side would be delighted to pay. There has never been a case, so far as I know, where the quantum of remuneration to directors, bona fide paid and received as such, has been questioned or where part of it has been disallowed as an expense. On principle I do not think there could be such a case.

The main argument for the Crown stands, however, apart from questions of quantum. It is that by reason of the terms of Article 88 and the managing director's agreement, read with Article 114, the sums of $7\frac{1}{2}$ per cent and 4 per cent calculated on profits represent an agreement by the company to share its profits with third parties, and are therefore within the rule laid down by Lord Macmillan in *Pondicherry Railway Co. Ltd. v. Commissioner of Income Tax. Madras*, 58 I. A. 239. The short reply of the respondent is that these sums are not a share of profits distributed as such, but are "a commission sum as remuneration for their services" within the rule in *British Sugar Manufacturers* Ltd. v. Harris, (1938) 2 K. B. 220. It is necessary to consider these and related authorities in some detail. Mr. Borneman with a just sense of history cited first Moor v. Stewarts & Lloyds, (1906) 6 T. C. 501, as the first reported case where a payment for services by share of profits was allowed as an expense. The Commissioners having found that the payment was made for the purpose of the company's trade and might enable it to sell its products more advantageously. it was held that the question was one of fact rather than of law and the deduction was rightly allowed.

As far as I can understand the situation, it was not thereafter questioned that a sum calculated by reference to a company's profits and paid to a director for his services as such could properly be allowed as an expense until after the Pondicherry case. There Lord Macmillan said at p. 170,

"A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits."

The facts in that case were that under a convention made between the taxpayer company and the Minister of Marine and Colonies acting on behalf of the French Colony of India the company agreed to construct and work a railway and the Minister undertook to pay a subsidy of about 1,250,000 francs and to provide free the necessary land. There was a clause providing that after an initial period the company would pay one-half of its profits ascertained in a special manner annually to the Colonial Government. The company later entered into an agreement with the South Indian Railway Co., Ltd., whereby the latter undertook to work Pondicherry Company's line and to pay the annual profits to the Pondicherry Company. That sum was received by their agent in Trichinopoly who paid to the Colonial Government its proper share and remitted the balance to the company's head office in England. The advice of the Judicial Committee continues:

"It was persuasively argued that inasmuch as the Pondicherry Company as a condition of making any profits must pay over one half of them to the French authorities and could never itself receive the whole profits the payment so made was of the nature of a rent payable by the company or a charge on the undertaking. But the analogy in their Lordships' opinion is imperfect, and the form in which the parties have contracted that the French Government shall participate in the success of the undertaking precludes the deduction claimed."

Their Lordships then reaffirmed the principle laid down in Gresham Life Assurance Society $\hat{v}$ . Styles (1892) A. C. 309, that:

"The thing to be taxed is the amount of profit or gains. The word 'profits' I think is to be understood in its natural and proper sense—in a sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial."

In the following year Lord Macmillan had the opportunity in Union Cold Storage Co., Ltd. v. Adamson (1932) 146 L. T. 172, to explain his meaning. The taxpayer company was the lessee under a formal lease which reserved an annual rent of £960,000 which, however, was subject to abatement in any year if, after providing for the rent, interest on debenture stock and specific mortgages, dividend on preference shares and a 10 per cent dividend on ordinary shares, a deficit appeared, the abatement to equal the deficit. The Crown contended that, in so far as the rent was a payment due only after dividends, and therefore profits, were assessed, the rent was payable out of the surplus of profits and the scheme amounted in truth to a profit-sharing arrangement. The Commissioners found the facts in favour of the Crown, but the courts he'd that the payments of rent were deductible. Lord Buckmaster said (p. 178):

"The first thing, and, to my mind, the only thing, to be considered is this: is this or is this not rent payable under this lease? No attack whatever has been made upon the document itself. It was said that there had been an arrangement of property to try to avoid payment of income tax, of which, it may be, this document is one of the instruments: but nobody has challenged the bona fides of the document itself; nobody has said that the £960,000 is a fictitious or an artificial sum."

## Lord Warrington said (p. $179$ ):

"It seems to me that the mere fact that the amount of the rebate of the rent is measured by the question whether or not the net profits are sufficient to pay such interest and dividends is a mere detail which has no effect upon the real substance of the transaction. The real substance of the transaction is that in the events specified there shall be a rebate of the rent: whatever is the rent, after the application of that rebate, is still to be paid, and it seems to me it still remains an expense necessarily incurred in earning the trading profits of the company."

## Lord Macmillan said (ibid):

"I also agree, but as reference has been made to the case of the Pondicherry Railway Company Limited v. Income Tax Commissioner (1931) 58 I. A. 239, an Indian appeal before the Privy Council in which I took part, I should like to point out that the circumstances there under consideration differed entirely from those which the House has been considering in the present appeal. We were reminded very properly by the Solicitor-General that these cases all turn upon their particular circumstances, and in that case the convention under which the payments were made provided as follows: 'The company undertakes on its part to make over to the Colonial Government during the whole duration of the concession one-half of the net profits which shall be arrived at' in a manner which is then set out in detail, provision being made for the deduction of all outgoings, such as rates and taxes, and so on. In that case, therefore, the ascertainment of profits preceded the coming into operation of the obligation to pay, and when the profits had been ascertained the obligation was to make over one-half thereof to the French Colonial Government. The obligation was conceived in language entirely different from the language which your Lordships have been considering in the present appeal, where there is a common form obligation in a lease to pay

rent. When, therefore, in the passage referred to by the Attorney-General in the Pondicherry case I said at p. 251 that 'a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits', I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner after providing for all outlays incurred in earning them, and then to divide them. Here the question is whether or not a deduction for rent has to be made in ascertaining the profits, and the question is not one of the distribution of profits at all."

Before leaving these authorities I would stress three matters, first, that "the form in which the parties have contracted" may well determine the question whether a payment is profit-sharing or a deductible expense, although the practical effect of the transaction may be much the same in either case for purposes other than taxation; secondly, that the real nature of the transaction as expressed in the relevant document is the governing factor, provided always that the transaction was bona fide; and thirdly, that in the Pondicherry case the payment to the Colonial Government was one of profits ascertained "after providing for all outlays incurred in earning them".

I can pass rapidly over Tata Hydro-Electric Agencies Ltd., v. Commissioner of Income Tax, Bombay (1937) A. C. 685, and Indian Radio Communications v. Commissioner of Income Tax, Bombay (1937) 3 A. E. R. 709. In the former case liability to make the payments in question was incurred "in consideration of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business". In the latter the same line of reasoning was adopted. The payments were held to be the consideration for carrying on a joint venture for a number of years and were thus payments for the opportunity to earn profits. I need quote only the following passage from the judgment delivered by Lord Maugham (at p. 713),

"It may be admitted that, as Mr. Latter contended, it is not universally true to say that a payment, the making of which is conditional on profits being earned, cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word 'profits' in more than one sense. If a company having made an apparent net profit of £10,000 has then to pay $£1,000$ to directors or managers as the contractual recompense for their services during the year, it is plain that the real net profit is only £9,000. A contract to pay a commission at 10 per cent on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, that is, in the case supposed, a commission on the £ $10,000.'$

In both these cases the Privy Council was careful to say that the decisions were not based on the reasoning of the Pondicherry case, and in the latter Lord Maugham referred to the Union Cold Storage case. Before discussing the British Sugar Manufacturers case, I would say that it appears to me that, if it did not exist at all, there would still be sound authority for the deducton of the sums now in issue under the earlier authorities and particularly the dictum of Lord Maugham. They should be considered as prima facie deductible.

In British Sugar Manufacturers Ltd. v. Harris the sums claimed as deductible expenses had been paid to two companes, referred to as "Skoda Works" and "the Corporation", in consideration of their giving to the taxpayer company" skilled technical and financial advice on the manufacture and disposal of its products. The payments were a percentage of the company's "profits", but the profits in question were to be ascertained by reference to a specal account and were not the same as would be shown in the annual accounts. The Commissioners found that the payments were a distribution of profits and not an admissible deduction. The High Court (Finlay J.) upheld the Commissoners, but the Court of Appeal allowed the deduction. The following passages appear in the judgment of Sir Wilfrid Greene, M. R.

"It appears to me that, when the true nature of this provision is appreciated, it is not possible to avoid the conclusion that it is an agreement for remuneration by way of a commission representing a percentage of profits for services to be rendered to the company; in other words, it is nothing more or less than a very common type of agreement under which officers of companies are remunerated by a commission on profits, which after all is nothing more than a share of profits, provided that the word 'profits' is construed in the right sense. Some suggestion was made by the Attorney-General that the absence of a fixed salary in addition to commission affected the matter. I am unable to see that. I can see no reason at all in principle why a contract providing for remuneration by commission and nothing else should not produce the result that the sum payable under it to the employee is a proper deduction.

Now the matters to be observed in this case, I think, are, first of all, the nature of the work that is being done. The nature of the work that is being done is what one may succinctly describe as ordinary management work or ordinary advisory work in respect of technical matters. The next point to observe is that what is referred to as 'net profits' is a figure to be arrived at upon a conventional basis, not the basis upon which the company would ascertain its profits for commercial purposes or the basis upon which it would ascertain its profits for income tax purposes, although, speaking for myself, I think that the latter consideration is not one of any importance. But it is an important factor to be considered (although I agree not necessarily in any individual case conclusive) that the fund of so-called profits, to 20 per cent of which the companies are to be entitled for their services, is a fund ascertained by means of a conventional account between the parties.

Now bearing all those things in mind, the question arises: On which side of the line does the case fall? I quite accept the propositon that there is a line between a contract for payment of a share of profits simpliciter and a payment of remuneration which is deductible in truth before the profits divisible are ascertained, and that line in some cases may be very difficult to draw."

"It is not cash that passes in exchange for these profits, it is services, and the badge of such a contract is remuneration for services, and, therefore, the first thing that this remuneration would certainly not be is a share of profits purchased by the employee. Again I quite accept the proposition that the mere circumstance by itself that services are rendered may not be conclusive. I can conceive of a case where a person contributes to some sort of joint adventure services, while others contribute perhaps capital, land, plant and goods, arranging between themselves (it may be something short of a<br>partnership) that nobody shall get anything until the pool of profits is ascertained, and then they shall divide it up between them in specified proportions. That, it seems to me, would be a real agreement for division of profits, because there would be one profit fund only. There would not be two profit funds to be ascertained for different purposes. There would be one profit fund, and nobody would have any interest in anything until that profit fund was ascertained and fell to be divided, but, in the present case, that is not the fact. In the present case there are two funds of so-called profits which come into the picture."

"It seems to me that the circumstance that those two accounts have to be made out throws a very clear light upon the real nature of this transaction, and, looking at the clause in question as a whole, it seems to me clear beyond any reasonable doubt that the agreement is merely an agreement under which, before ascertaining the divisible profits of this company at all, the Skoda Works and the Corporation are to receive upon a particular conventional basis a commission sum as remuneration for their services. When that has been said, it appears to me that it brings the case within a very familiar category."

The Master of the Rolls proceeds to consider the judgment of Romer, L. J., in *Union Cold Storage Co. v. Adamson* and the judgment of the Privy Council in the *Indian Radio case*. After quoting the passage to which I have referred above he proceeds: -

"That passage, in my opinion, contains sufficient to dispose of this case, and if I may link it up, as I understand it, with what I said a moment ago about the two accounts, the two accounts are I think what may be called the accountancy aspect of the two different senses in which the word 'profits' is used in these cases, as explained by Lord Maugham. Once you realize that as a matter of construction the word 'profits' may be used in one sense for one purpose and in another sense for another purpose, I think you have the real solution of the difficulties that have arisen in this case."

He then deals with the *Pondicherry case* and says:—

"It is to be observed that Lord Macmillan in that paragraph was quite clearly using the word 'profits' in one sense and one sense only; he was using it in the sense of the 'real net profit' to which Lord Maugham referred. That he was doing that is, I think, abundantly clear when the nature of the contract there in question is considered, which was merely a contract under which a percentage of profits was payable by the railway company to the French Government. There was no question of services or anything of that kind in the case; it was merely a sum payable out of profits."

Mr. Newbold for the Commissioner submitted that in the British Sugar Manufacturers case the true ratio decidendi was that there were two funds, the fund of nominal profits ascertained in a special manner from which the percentage was paid to the Skoda Works and the Corporation and the true profits as shown in the annual accounts. It is true that in that respect the case is clearly distinguishable from this, for here only a single calculation of profits fell to be made and the only adjustment before submitting it to the shareholders was the deduction of the sums of $7\frac{1}{2}$ per cent and 4 per cent. It is true also that, in his short judgment agreeing with the Master of the Rolls, Romer, L. J., found the "two funds" argument of much assistance, and Mackinnon L. J. also referred to it as a material consideration. But I think it is impossible to say that it was the governing consideration. When the Master of the Rolls says that in his view the matter would be concluded by Lord Maugham's remarks alone, it is clear that he is using the "two funds" argument as matter of confirmation rather than as fundamental to the case. It may have been of particular value where the employees were not individuals, but companies performing services of a somewhat special kind which were said to be in part "of a capital nature". It was not so clearly apparent in that case that the amounts paid were in truth remuneration for services to the company.

Mr. Newbold also argued that the British Sugar Manufacturers case could be distinguished on the ground that the sums there paid were held to be "commissions". He pressed on us the point that neither Article 88 nor the managing director's agreement refers to "commission", although Article 114 gives power to remunerate by commission. He said that the references in the annual accounts to "directors' commissions" and "managing director's commission" were merely misnomers, and that in each case what was paid was a share of profits. He said that, since Article 114 authorized remuneration "by salary or commission or participation in the profits, or by any or all of those modes" and this percentage was not a commission, it must be a share of profits. I am not impressed by this argument. "Commission" is not a term of art, and it is a word not universally popular. If the company chooses in Article 88 to avoid that word and instead to speak of "further remuneration", it by no means follows that the sums are not in fact commissions, I think they may correctly be so described and that there is no misnomer in the accounts. Sir Wilfrid Greene, M. R., speaks of "a commission sum as remuneration for their services", and I would not seek for a more precise description in this case.

I think the true principle to be derived from the authorities is that, where a company agrees to pay to any person a share of its profits, it is first necessary to find as a fact what is the consideration for which the payment is to be made. If the true consideration is services rendered to the company in the conduct of its business by an employee, in which term for this purpose I include managing and ordinary directors, the payment is prima facie a necessary expense for the purpose of making the profits. If that conclusion is reached, it matters not whether the profits on which the payment is to be made are arrived at by some special method of calculation or by the ordinary commercial method. In either event the profits from which the payment is made are only the "apparent net" profit", to use Lord Maugham's phrase, and not the "real net profit", a participation in which would be profit-sharing as described in the *Pondicherry case* by Lord Macmillan. Mr. Borneman, relying on Mr. Garton-Ash's evidence, preferred the terms "intermediate balance" and "ultimate net profit" to those used by Lord Maugham; but whichever words are used, it is clear that to receive "a commission sum as remuneration for ... services" out of an intermediate balance or apparent net profit is not to receive a share of profits in the true sense. It was admitted freely that the arrangements for remuneration of the managing and other directors were bona fide commercial transactions. The payments made thereunder must in my view be admissible expenses, wholly and exclusively incurred for the purpose of earning the company's profits, and the appeal as against the company should be dismissed.

As regards the remaining appeals, the relevant words of section $7$ (1) of the Income Tax (Consolidation) Ordinance, 1950, provide that "income tax shall be payable ... upon the income of any person $\ldots$ accruing in, or derived from, or received in, the Territory ... in respect of $\ldots$ (b) gains or profits from any employment ...". It was conceded by the Crown that the payments to the directors were not received in this Territory, but it was submitted that they accrued in or were derived from the Territory, and were thus liable to tax. The facts were as follows.

The directors other than Mr. Tanner were neither resident nor ordinarily resident in Tanganyika. Their duties were performed in Guernsey, or in England, or in Switzerland, and not in Tanganyika. They were paid by funds drawn from the company's Guernsey bank account, the English directors receiving sterling in England, and the Swiss directors Swiss francs in Switzerland under appropriate permission from Exchange Control. Mr. Tanner was found on the facts to have been resident in Tanganyika during the years 1947 and 1948, and this is not now

disputed. His work as managing director was for the most part done in Switzerland, but he paid visits to Tanganyika of some months duration and a substantial part of his work was done in Tanganyika. His service agreement was made in Switzerland and his remuneration was received there. Neither he nor the other directors at any time remitted any of the moneys received as remuneration from the company to Tanganyika.

Mr. Newbold's first argument was that the directors shared in profits which the company derived from Tanganyika. This depended on his general argument, which I have sufficiently elaborated in connexion with the appeal against the company. It fails on the same grounds,

Mr. Newbold's other arguments on this point were based on a submission that the English authorities dealing with Case V to Schedule D of the Income Tax Act, 1918, are inapplicable to Tanganyika. He referred to Colquhoun v. Brooks (1889) 14 A. C. 493, Foulsham v. Pickles (1925) A. C. 458, Bennett v. Marshall (1938) 1 K. B. 591 and Bray v. Colenbrander (1953) 1 A. E. R. 1090, as showing that in England the only issue was the *locus* of the "possession", which in the case of employment was the place of payment of the remuneration. In the last-named case Lord Normand states the issue thus, at page 1093,

"The question debated in Bennett v. Marshall was whether the ratio decidendi of this House in Foulsham $v$ . Pickles was (a) that the place or places where the employee performed his duties were irrelevant to the question whether his employment was wholly outside the United Kingdom, and that the only relevant matter was the place of payment of his remuneration, or $(b)$ that the place of payment was a relevant consideration, without excluding as irrelevant the place or places at which the duties were performed."

His answer and that of the other Lords of Appeal was that Bennett v. Marshall rightly decided that one must look to the source of the income, in order to ascertain the locus of the possession, and they approved the dictum of Romer, L. J. that.

"... in the case of an employment the locality of the source of income is not the place where the activities of the employee are exercised, but either the place where the contract for payment is deemed to have a locality or the place where the payments for the employment are made, which may mean the same thing."

Mr. Newbold asked us to hold that this line of authorities was irrelevant and to rely instead on the decisions in *Commissioners of Taxation v. Kirk* (1900) A. C. 588, and Liquidator, Rhodesia Metals Limited v. Commissioner of Taxes (1940) A. C. 774. As Privy Council decisions these would undoubtedly have first claim to our attention if they were in point; but the former case deals only with the question whether a mining company's income was derived from the place where its ore was mined and processed so as to be merchantable, or from the place where the product was sold and payment therefore received. The statute spoke of "income derived from lands of the Crown held under lease or licence issued by or on behalf of the Crown". Their Lordships held that the extraction of ore was clearly within those words, and the processing fell within another charging section, and said that it was a fallacy to disregard these initial stages and fasten attention exclusively on the final stage of sale and payment. If it were in question here whether the company derived its income from Tanganyika, the case would be a governing authority, but it seems to me irrelevant to the issue before us. Its only possible importance seems to lie in a phrase of Lord Davey's, at p. 592.

"Their Lordships attach no special meaning to the word 'derived', which they treat as synonymous with arising or accruing."

I think the Rhodesia Metals case is helpful in various ways, even if not in the way Mr. Newbold contends. It is valuable for the warning it contains (at p. 788) against the danger of applying decisions on one statute to cases under another statute differently worded. I bear in mind that the words "derived from" do not appear in English law and must be construed on their own merits. It is valuable again for its decision (at p. 789) that "income can quite plainly be derived from more than one source even where the source is business". Most valuable of all, I think, is their Lordships' apparent acceptance of the view that the source of an income and the place from which it is derived are the same. and that the source or derivation is a question of fact. On this footing it is not difficult to see that when the only business of a company is the purchase, development and sale at a profit, of mining rights over land in a certain country, its business income is derived from that country, whether or not it is also derived from other places; but I am unable to see that that part of the decision applies in any direct way to questions of income from employment.

If this company were a Tanganyika company, I should be somewhat reluctant to find, other facts being the same, that the directors' remuneration was not derived from Tanganyika. I incline to the view that on a strictly common-sense and general interpretation of the words "derived from" it might be true to say that in this case the directors' emoluments are derived from the proper *locus* of the company which they serve, i.e. Guernsey, as well as from the country where they receive payment. I think they might also be derived from the place where the company maintains its principal and central funds: but I can see no reason for saying that they are derived from Tanganyika. Mr. Newbold put his case in two ways, first that the word "derived" entitled one by its basic meaning to look, not merely to the intermediate source, but to the original source, and secondly that, since the directors are entitled to an aliquot part of profits derived by the company from Tanganyika, what they receive must be derived from Tanganyika. I do not attempt to deal with these arguments in any closely reasoned way. As regards the second, it is a consideration to be borne in mind that not all, though nearly all, the company's income is derived from Tanganyika. Again, it seems to me that, if the directors' emoluments are derived from Tanganyika, the same must be true of every employee in the Guernsey or London or Geneva offices of the company, a conclusion which, though not logically impossible, does not attract me. But my basic ground for rejecting Mr. Newbold's submissions is that, even if I could disregard the English cases, which have been closely directed to the question of the true source of emoluments, I should still consider that one could in no case look for a source of income more remote that the company itself. I am of opinion that it is perfectly legitimate to accept the guidance of the English authorities as to where income has its source, and should, if necessary, rely here on the cases which Mr. Newbold has asked us to ignore, but I think it is hardly necessary to do so. On the facts I am satisfied, as the learned trial Judge was, that the remuneration of the directors, including the managing director, was not derived from Tanganyika.

I must mention shortly McMillan v. Guest (1942) A. C. 561, and Brewster $\gamma$ . Goodwin, 32 T. C. 80. These cases also were cited by Mr. Newbold only for the purpose of inviting us to disregard them. They dealt with the question of the proper *locus* of a "public office", especially an office of director or managing director of a company, and laid down the principle that an officer of a company has his office at the *locus* of the company, i.e. where it is registered and has its "head seat and directing power". I do not regard these cases as of direct importance for the decision of the present case; but at least they do not appear to conflict with the opinion I have formed.

I am of opinion that the appeals against the individual respondents also fail. I would only add that in general I endorse and adopt the reasoning and conclusions of the learned trial Judge, whose careful judgment has been of great assistance to us. If I have made little reference to the arguments addressed by the respondents, it is because I have on almost every material point accepted them.

I think that all these appeals should be dismissed with costs. I would certify that the costs of two counsel should be allowed.

SIR NEWNHAM WORLEY (Vice-President).-I have had the advantage of reading the judgment prepared by the Justinee of Appeal and agree so fully with his opinion that it would be a mere waste of time to go over again the ground that he has so completely and satisfactorily covered for I should. I have no doubt, in the end merely express the same conclusions in different language.

I shall therefore in this judgment confine myself to three relatively unimportant points arising out of the submissions made to us by Mr. Newbold.

Firstly as to the *Pondicherry case* which was, I think it may fairly be said, the sheet anchor of the Crown case, and particulary of course the passage which has been so often quoted in which Lord Macmillan said-

"A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits."

Mr. Newbold pressed upon us that this statement by the Privy Council is still good law and is binding upon this Court whether or not it is at variance with the decisions of English courts. He asserted that it has never been stated to be. incorrect, but that where referred to in subsequent cases there have merely been expressions of opinion to the effect that it was not applicable to the facts of those cases. It is of course beyond dispute that this Court is bound to follow any statement of law contained in any advice given by the Judicial Committee, but it still remains for this Court to consider the true construction of anything said by the Privy Council, and I did not understand Mr. Newbold to deny that we were entitled to have regard to the construction put upon the passage cited above, not only by Lord Macmillan himself in the Union Cold Storage case but also by Lord Maugham in the *Indian Radio case* and by Sir Wilfred Greene, M. R., in the British Sugar Manufacturers case. Once these explanations of the passage are accepted, it is easy to see, not only why the passage cited was held to be inapplicable to the facts of the subsequent cases, but also why it does not really assist the appellant in the instant appeals; for, as Greene, M. R., said in the British Sugar Manufacturers case, Lord Macmillan in that paragraph was quite clearly using the word "profits" in the sense of the "real net profit" to which Lord Maugham referred in the Indian Radio case (1938) 2 K. B. 220 at p. 237. In other words, the paragraph does not in any way assist us in solving the problem posed in these appeals which is, in effect to decide whether the additional remuneration payable to the directors and managing director of the Company was or was not a percentage of the "real net profit".

Secondly, Mr. Newbold took exception to three passages in the judgment of Sinclair J. relating to the quantum of the additional remuneration payable to the Directors under Articles 88 and asked us to express our disapproval of them. These passages were, I think, as follows: —

"I am of the opinion that, if the sums were truly paid as remuneration for the directors' services pursuant to a bona fide commercial transaction, they were expenses wholly and exclusively incurred in the production of the Company's income and they cannot be challenged merely on the ground of excess or over-generosity. However, if the amount paid to the directors is excessive, that is a circumstance which can, I think, be taken into consideration together with the other circumstances in determining whether the whole of the amount was truly paid as remuneration for the directors' services."

"How the Company's profits were made is a matter which to my mind is irrelevant. And whether the directors in any particular year really earned their remuneration is also a matter which I think is irrelevant in this case. They were paid by results."

"Although I do not think it necessary to decide whether the Directors' remuneration was excessive in relation to the services they performed, after taking all the circumstances into consideration, I am of the opinion that it was not excessive."

I understood Mr. Newbold to challenge these passages on the ground that it was a misdirection in law for the learned Judge to direct himself that he need have no regard to the relation between the services rendered and the remuneration paid for those services. Put in such a general way there might be substance in the objection, for it is easy to conceive of cases in which the remuneration might be so excessive as to justify the conclusion that it was not a genuine remuneration for services and therefore not an expense wholly and exclusively incurred in the protection of the taxpayer's income. But I do not think it fair to the learned Judge to take those three passages out of their context and to consider them apart from the background of the case he was dealing with, which was a case where the remuneration was payable under a contract, which was admittedly a bona fide commercial transaction and which had been in force over a long period of years both lean and fat.

Thirdly, as to whether the remuneration of the directors was derived from the territory of Tanganyika. There is no mystery in the words "derived from"; to say that a thing derives from a place is merely to say it has its source in that place. I think Mr. Borneman summarized correctly the appellant's argument on this point when he said that it amounted to this: that a payment out of profits by A to B is derived not from any contract between B and A, but from whatever is the source of A's profits. In my view none of the cases cited by Mr. Newbold assists him in his proposition that the Court is entitled to go behind the contract and to look at the ultimate source of the Company's profits. In Bennett v. Marshall (1938) 1 K. B. 591 at p. 603, Sir Wilfred Greene, M. R., $said-$

"Employment arises from a contract of employment ... I should have thought therefore that in the case of employment the contract is the first thing which must be looked at to find out the answer to the question raised in any particular case of employment: is it or is it not income derived from a source out of the United Kingdom?"

## And again at p. $611$ —

"If I am right in my view as to the effect of *Foulsham* $v$ . Pickles it has the result in this case that the test for ascertaining the source of income is to look for the place where the income really comes to the employee, and that place is Canada. That is where the source is, and it is outside the United Kingdom."

That judgment was approved, subject to one minor criticism, by the House of Lords in Bray v. Colenbrander (1953) 1 A. E. R. 1090. It seems to me that the test applied by the Master of the Rolls is also the test to be applied in these appeals, and if that is so, the appellant's argument falls to the ground. These appeals are therefore dismissed and an order as to costs will be made in the terms set out in the judgment of the learned Justice of Appeal.

SIR HERBERT Cox, C. J.—I have had the advantage of reading the judgment prepared by the Vice-President, who presided over the hearing of this appeal, and also the judgment of the Justice of Appeal, and I can do no better than say that I concur so fully with the opinions expressed in those two judgments that to cover again the ground so fully covered would. I fear, do little more than possibly cause confusion because the same opinion expressed in different words and possibly from a different angle seldom results in improving upon an opinion already clearly expressed.

There are two matters to which, nevertheless, I would like to refer. Mr. Newbold in the appeal in which the company is the respondent attacked the finding of the trial Judge that the percentage of profits paid to the managing director and to the directors is not a payment in furtherance of a profit sharing scheme. Mr. Newbold urged that it was necessary to ascertain first of all the profits of the company in order to ascertain the share of the officials concerned and, having ascertained that profit and given them their percentage, that was carrying out a profit-sharing scheme. It was argued that the profits were first ascertained and then divided, $11\frac{1}{2}$ per cent altogether going to the managing director and the directors and the remaining $88\frac{1}{2}$ per cent to the shareholders; that it was one profit fund which was divisible in those proportions; and that the officials of the company were thus sharing in a division of profits and according!y the sums in question, that is to say, the 4 per cent and the $7\frac{1}{2}$ per cent, were not sums which should be deducted as expenses wholly incurred in the production of the profits of the company—they were, it was argued, in fact a part of the profits earned. Mr. Newbold compared this original 100 per cent of profit with a cake. The fact, said he, that the directors are one slice and the shareholders the remainder did not make it two cakes. It was, he urged, still one cake.

Mr. Newbold also asked the Court to agree with him that the words "derived from" referred to the actual, even if distant, source of the revenue from which the payments became available, and for that reason it was necessary to consider that if there had been no sisal company operating in Tanganyika there would have been no income from which to pay the directors and shareholders. Therefore, he argued, the income must have been "derived from" Tanganyika. To Illustrate this argument Mr. Newbold likened the receipt of this income to the receipt of water delivered in a house out of a tap, arguing that the water does not come from the tap or the pipe behind the tap: it comes from the outside source, passing through the pipe, delivery being controlled by the tap, the pipe being the mechanical contrivance for conducting the water. True, but where is this source? In Mr. Newbold's argument he mentioned it would be a stream as in the case of the company it would be Tanganyika. But it was admitted that ail the company's revenue did not come from Tanganyika, and also it must be appreciated that a stream may have tributaries before the water is effectively controlled by some method or another for delivery to a house. Mr. Newbold was quite prepared to pursue the income of the company to any provable source no matter in which part of the world that might be, those different sources corresponding with the tributaries. Mr. Borneman, in his interesting address, did not answer these arguments and simile in detail, "refusing", as he said, "to accompany Mr. Newbold in his excursions into confectionery and plumbing".

I consider it is clear, from the authorities cited, that Mr. Newbold was not wrong in considering that there was only one cake, but where he went wrong was in the size of that cake. It is in my opinion apparent from a study of the authorities that the amounts paid to the managing director and to the directors of the company were sums properly deductible for income tax, and that they were one of the proper charges incurred by the company to effect its earnings. The fact that the amount paid out to achieve that object varies from year to year according to the profits made by the company does not, to my mind, of necessity affect the question at all once it is admitted, as it is in this case, that the transaction is a bona fide transaction, and moreover a contract which has stood the test of time in years lean and years not too lean. Why should it now change its nature because the year is fat? If it did change its nature, who is to say the proportions into which the amounts in question are to be divided, and why into those proportions? Would not those proportions of necessity have to be arbitrary and thus no one could say with precision what they should be? No, I am afraid that Mr. Newbold was correct in saying that there was only one cake but it was a smaller cake than he visualized. The directors' slice of the cake to which he referred was not really a slice of the cake at all, but it was the equivalent of some of the ingredients used by the company to make the smaller cake—the shareholders' cake.

From the authorities to which this Court's attention was directed, it appears that the source of income of a company and the source of income of the employees of that company paid out of the assets of that company may be two entirely different sources, the residence and operations of the company being of exceptional importance so far as the company is concerned, but that it is the immediate source of revenue which we look at, certainly in so far as individial employees are concerned. In arriving at this opinion I have had some difficulty in satisfying myself that the word "derived" is synonymous with "arising or accruing" even though that is stated by so high a judicial authority as Lord Davey in the Commissioners of Taxation v. Kirk, 1900 A. C. 588 at 592, a case which binds me. In considering that, I bear in mind the words of Lord Aitken in Liquidator, Rhodesia Metals Limited, v. Commissioners of Taxes, 1914 A. C. 774, when he said at $778:$

"Their Lordships have no criticism to make of any of those decisions but they desire to point out that decisions on the words of one statute are seldom of value in deciding on different words in another statute, and that different business operations may give rise to different taxing results."

$I$ am inclined to the view that, while it is clearly possible for "derived" and "arising and accruing" to be synonymous in certain cases, it may well be possible also that they be not so in all, and thus, when Lord Davey in the *Commissioners* of Taxation v. Kirk said that their Lordships attached no special meaning to the word "derived", which they treat as synonymous with "arising or accruing", that was itself being used with special reference to the facts of the case, a case relating to the extraction of ore from the soil and the conversion of that crude ore into a mercantile product.

As stated, I agree with the opinions already expressed that these six appeals should be dismissed, and I concur in the proposed order as to costs, including the certifying for two advocates.

Finally, I should like to say how much we all appreciated the very clear, able and sincere arguments addressed to the Court by the learned leaders in these appeals.