Marina Nominees Ltd. V. Federal Board Of Inland Revenue (1986)
LawGlobal-Hub Lead Judgment Report
KAZEEM, J.S.C.
The point for consideration in this appeal falls within a narrow compass; and it is whether or not the appellant, a limited liability company incorporated under the Companies Act, 1968, and which earned fees (income) within the period under review, was liable to pay corporate tax under the Companies Income Tax Act, 1961. The facts on which the whole matter revolved may be stated thus:-
A firm of Accountants named Peat Marwick Casseleton Elliott & Co. (here-in-after called “Peat Marwick”) was acting as Secretaries to a number of limited liability companies; and according to the provisions of the Companies Act, 1968, whenever there is a change of Secretary of a limited liability company, the Company concerned is obliged to file returns with the Registrar of Companies of such change. Peat Marwick while acting as Secretaries to their clients, was making use of members of their staff as such Secretaries.
But whenever those employees left the services of Peat Marwick, it became necessary to file returns with the Registrar of Companies to satisfy the requirement of the Companies Act. In order therefore to take advantage of perpetual succession and to prevent frequent filing of returns of change of Secretaries, Peat Marwick formed the Appellant company in March, 1964, among other things, to act as Secretaries to limited liability companies on their behalf.
The subscribers of the Appellant company are two senior partners of Peat Marwick; but there is nothing in the Memorandum and Articles of Association of the Appellant Company (Exh. C) to show any connection with Peat Marwick. Mr. Ogunde, a partner of Peat Marwick who testified for the Appellant said the Secretariat work was done by Peat Marwick in the name of the Appellant and that all bills for services rendered by the Appellant were raised in favour of Peat Marwick; and the latter retained all the income and accounted for them in their books. He maintained that since the Appellant did not actually run the services, it had no right to the income.
Consequently, the Appellant neither filed any Income tax returns nor paid any Corporate tax since its inception.
That situation had continued since 1964 when the appellant company was incorporated until 1973 when the Respondent challenged the contentions of Peat Marwick not to allow the Appellant to file any returns or to pay corporate tax on the ground that the Appellant had no income of its own. The Respondent thereafter raised for the first time assessment of corporate tax payable by the Appellant from the year 1964/65 to 1972/73.
When all efforts by Peat Marwick to persuade the Respondent to change is mind with respect to the assessment failed, the Appellant which was the company directly concerned appealed to the Body of Appeal Commissioners in accordance with Section 56 of the Companies Income Tax Act, 1961. After hearing the appeal, the Body of Appeal Commissioners dismissed it and said: “We uphold the contention of the respondent that the income belonged to Marina Nominees Limited and that Marina Nominees should be liable to tax under Section 17.”
Subsequent appeal to both the Federal High Court and the Court of Appeal by the Appellant also failed. In both courts the Appellant contended that it acted as agents of Peat Marwick and that the income earned by it belonged to Peat Marwick which had already paid tax on such income. The decisions in three cases of Commissioner of Inland Revenue v Samson 8 Tax Cases 20; Smith Stones & Knight v Birmingham Corporation (1939) 4 All E.R. 116; and In Re F.G. Film Ltd. (1953) 1 WLR. 483 were cited and relied upon. But that contention was rejected.
The Appellant has again appealed to this court and with leave filed and argued the following grounds:-
“(1) The Federal Court of Appeal erred in law in failing to observe that the substantial question for determination in this appeal is as follows:
“whether (as the Appellants contend) Peat Marwick Casselton Elliot & Co (PMCE) are merely using the name of Marina Nominees for the purpose of the business of their Secretarial Department or whether (as the Respondents contend) Marina Nominees are the persons actually performing the secretarial jobs in their own right and through their own servants and agents.
(2) The Federal Court of Appeal erred in law and on the facts in failing to observe that the appeal before them raised no question as to whether the profits derived from the secretariat jobs concerned are chargeable to tax and that the only question in issue is whether, they are chargeable as part of the profits of PMCE (as the Appellants contend) or as part of the profits of Marina Nominees (as the Respondents contend).
(3) The Federal Court of Appeal erred in law in holding (per Ademola JCA) as follows:
“I would like to say that I am not impressed by the argument that if the Appellant Company is characterized as an agent of the PMCE, the income earned by such agent is not taxable. That cannot be correct. An agent who works for a principal and derives income by so doing is in my opinion liable to assessment of income tax under s. 17 of the Company Income Tax Law” (sic.)
Particulars of Error
(a) The appeal in this case does not raise any issue as to the liability of an agent to be charged for tax on the income of such agent derived from his employment as agent.
(b) Neither of the parties to the appeal contended that the profits which the Respondents claimed the right to tax in this case are profits derived by Marina Nominees from its employment as an agent of PMCE.
(4) The Federal Courts of Appeal (per Ademola JCA) further erred in law and on the facts in holding as follows:
“The fact that the Appellant has no staff of its own to do its work and that it does not pay those who work for it cannot deny it the right of a separate existence from PMCE nor can those very facts make it an agent of PMCE.”
Chief F.R.A. Williams S.A.N. learned counsel for the Appellant submitted that the points for determination in the appeal were (i) whether tax should be paid to the Lagos State Government as personal income tax as Peat Marwick has done; or to the Federal Government as Corporate tax as the respondent contended; (ii) whether the staff of the Appellant was working as staff of Peat Marwick particularly when the former had no staff of its own; and (iii) whether nor not the Appellant was working as agent of Peat Marwick. He referred to all the three authorities cited at both the Federal High Court and the Appeal Court as well as Fire-stone Tyre & Rubber Co. Ltd. v Lewellin (1956) 1 W.L.R. 352 and (1957) 1 W.L.R. 464; Gilford Motor Co. v Horne (1933) Ch. 0.935 at pages 942 – 943 and 961 and Wallersteiner v Moir (No. 1) (1974) 1 W.L.R. 991 at page 1013; and he then submitted that the staff of the appellant company was provided by Peat Marwick and the income earned by the appellant must therefore go to Peat Marwick; that the appellant was acting no more than as agent of Peat Marwick; and as such the view held by the appellant was right that since it had no independent income of its own, there was no liability to pay corporate tax to the Federal Government.
However Chief Williams was confronted with the facts that the appellant was not only incorporated under the Companies Act and therefore had a separate independent existence, but it was also carrying on trade or business within the meaning of section 17(1) of the Companies Income Tax Act, 1961; that it earned fees or income from such trade or business and therefore had its own separate income. He then conceded that if the appellant earned any income it will agree to pay corporate tax, but his contention was that it did not. Chief Williams also cited in support of his arguments copiously from a book entitled “A Practical Approach to Company Law” by Stephen W. Mayson and Derek French.
In reply Mrs. Wonu Folami, Director in the Federal Ministry of Justice who represented the respondent, reiterated the undisputed facts in this case and submitted that the appellant company was an incorporated body which was performing corporate functions which Peat Marwick could not; that it was earning fees which went to Peat Marwick, but that could not absolve it from paying corporate tax; that the appellant company was incorporated to act as managers and also has a wide variety of objects and that what-ever it earned, from those transactions belong to it. Hence it was submitted that the more fact that an individual owns a company does not make the income of that company a personal income, and that sort of company is not absolved from paying corporate tax.
It was also pointed out that it was not shown before the Body of Appeal Commissioners and the two courts below that an agency existed between the appellant and Peat Marwick; but what was shown was that the staff of Peat Marwick was working for the appellant. Learned counsel therefore contended that a person can work for more than one company. Finally, Mrs. Folami submitted that the appellant company was neither a front, nor a hoax or a sham, but it was duly incorporated to perform certain duties which were duly performed. She also referred to page 57 of the book “A Practical Approach to Company Law” and relied on the statement in its last two paragraphs, in support of her arguments.
At a certain stage of the appeal, Chief Williams observed that according to the evidence, Peat Marwick had already paid personal income tax to the Lagos State Government on the fees received by the appellant; hence it would appear that the interest of that government was also involved in the matter. It was therefore suggested that the court should invite the Lagos State Government to come and say whether or not it will consider making a refund to Peat Marwick if the appeal was lost and the appellant has to pay corporate tax on the same fees. After hearing the respondent’s counsel on the suggestions and giving the matter further consideration, an order was accordingly made to invite the Lagos State Government as amicus curiae.
Later, that government appeared and filed a brief; and while urging the court to dismiss the appeal, made the following points:-
(i) That the appellant being a company registered under the Companies Act 1968, was liable under section 117 of that Act to file its Accounts and Annual Returns;
(ii) that the contention that the appellant has no staff of its own but uses the staff of Peat Marwick is irrelevant since secretariat fees are charged for services rendered in the name of the Company;
(iii) that the appellant being a registered limited liability company has a separate legal personality of its own distinct from the subscribers under the principles enunciated in Salomon v Salomon (1897) A.C. 22 at page 51; and Lee v. Lee Air Farming Ltd. (1961) A.C. 812;
(iv) that the appellant company in compliance with section 40 of the Companies Income Tax Act, 1979 should file its Annual Account with the Federal Board of Inland Revenue, and pay its tax to the Board; and
(v) that Peat Marwick are to charge for services rendered by its staff to the Appellants for secretarial duties performed on its behalf and pay tax on such earning under the Personal Income Tax (Lagos) Act 1961 to the Lagos State Government.
Mr. George who represented the Lagos State Government, relied on the points made in their brief. But he said that both the Federal Government as well as the Lagos State Government are entitled to share in whatever tax is paid by the appellant; and that adjustment can be made at the appellant’s request on the tax already paid by Peat Marwick.
Finally Chief Williams referred to page 20 of Bowstead on “Agency” 14th Edition and submitted that unless the Appellant has power under its Memorandum and Articles of Association to carry on the agency duties assigned to it by Peat Marwick (which it does) there would certainly have been trouble.
Before considering this appeal, there is one small point worthy of some clarification. Both counsel for the respondent and the Lagos State Government in order to buttress their arguments made references in their briefs and submissions before us to the provisions of the Companies Income Tax Act, 1979 as the law applicable to the matter. I do not think that is so. That Act by its Section 79 (2) was made to commence in respect of tax charged for the year of assessment beginning on 1st April, 1977 and each succeeding year of assessment; except other provision is made in the Act. But its Section 77(1) which repealed the Companies Income Tax Act, 1961, provides as follows:-
“Subject to this section and without prejudice to the provisions of section 6 of the Interpretation Act, 1964, the Companies Income Tax Act, 1961 shall, except where other provisions are made in that behalf in this Decree (Act), cease to have effect with respect to tax on the income or profits of companies for all years of assessment beginning after 31st day of March, 1977.”
It is therefore clear from the above provisions that the Companies Income Tax Act, 1979, will only be applicable to income tax assessments made with effect from 1st April, 1977. However, since the period of assessment covered by this appeal is between 1964 and 1973, I am of the opinion that the law applicable to this matter was the Companies Income Tax Act, 1961.
I now come to the consideration of the submissions made by the parties in this appeal.
It is not disputed that the appellant company was duly incorporated and registered under the Companies Act, 1968. Hence by virtue of that incorporation, the appellant company became a separate legal entity, as a body corporate. See section 15(2) of the Companies Act, 1968. The recognition of this legal fiction which first caused the courts some problems was laid down in the case of Salomon v Salomon & Co. Ltd. (1897) A.C. 22. In that case, Salomon converted his leather business into a limited company which was formed with himself, his wife, and five of his children as subscribers. He sold his business to the company at an over-valuation partly for debentures, partly for paid-up shares, and partly for cash. A year later, when the company went into liquidation, the assets were sufficient to pay the debentures (which the Salomon had in the meantime used as security for a business loan) but insufficient to pay the unsecured creditors. The trial judge and the Court of Appeal refused to recognise the separate personality of the company, describing it as an alias for and agent of Salomon, and held him liable to indemnify the company against the claims of the unsecured creditors. The House of Lords, however, disagreed, and reversed the decision of the lower courts. Lord Macnaghten at page 51 explained: ‘When the memorandum is duly signed and registered….the subscribers are a body corporate “capable forthwith” to use the words of the enactment, “of exercising all the functions of an incorporated company”. Those are strong words. The company attains maturity on its birth. There is no period of minority – no interval of incapacity. I cannot understand how a body corporate thus made “capable” by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment.’ and at page 30 Lord Halsbury L.C. said:-
‘It seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are …. either the limited company was a legal entity or it was not. If it was, they belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not.’
See further the Privy Council Case of Lee v. Lee’s Air Farming Ltd. (1961) A.C. 12 where in pursuance of the principle, it was held that a company could be liable to pay compensation for the acts of its assistant who was the controlling shareholder and governing director of a company formed by him. Thus it is clear from these cases that a company must be regarded as a separate entity from anyone of its shareholders, no matter how many shares he may hold, and the company cannot be an agent of its subscribers.
It is not also disputed that the appellant company by clause 3(1) out of its seventeen specific objects was incorporated:
“To act as Managers, agents and Secretaries to Companies, Registrars, Trustees, Executors or Administrator, and to accept any office of Trust or confidence, and to perform and discharge the duties and obligations of and incident to any such office….”and it was in pursuance of that object that Peat Marwick used the company to act as secretaries to several of its own clients. There was also no dispute that the appellant had no separate staff of its own in carrying out the functions assigned to it; but used the staff of Peat Marwick in doing so, and the clients of Peat Marwick paid for such services. But the bone of contention was that since those fees were earned by Peat Marwick’s staff and not the appellant’s, it was that partnership whose officers were the main subscribers to the appellant’s Company that was entitled to the fees. Hence the appellant had no separate income of its own and was therefore not liable to file returns or pay corporate tax under the Companies Income Tax Act, 1961. It was then submitted by the appellant’s Counsel that the appellant, regardless of its separate corporate legal entity, was merely an agent of Peat Marwick; and it was Peat Marwick, the disclosed principal that should apply, and had paid the relevant tax on the fees paid by the clients. Several authorities were cited in support of this submission to show that in this case, like many other similar cases. the corporate personality of a Company can be ignored or its veil or incorporation can be pierced. Other similar cases are those where the Corporate entity principle was being used as an instrument of fraud or where a Company was incorporated as a sham or the puppet of the controlling shareholders or of another. One of such cases was In Re F.G. (Films) Ltd. (1953) 1 W.LR. 483. In that case, an English company was formed for the purpose of making a film which could claim certain advantages from being a ‘British’ firm. The company was controlled by an American company which provided the finance and staff for the production of the film. Valsey J. at page 486 held that the participation of the English company in the film-making arrangement was so small as to be practically negligible, and they acted in so far as they acted at all in the matter merely as the nominee for and agent for the American company so that the film did not qualify as a British film. And in Gilford Motor Co. Ltd. v. Horns (1933) Ch. 935, the defendant had entered into a covenant which was reasonable and not in restraint of trade, not to compete with the plaintiff company. The defendant formed a company. J. M. Horne & Co. Ltd. which carried on business in competition with the plaintiff company, with the intention of avoiding the consequences of the Covenant. The Court of Appeal reversing the judgment of Farwell, J. enforced the covenant (which was not considered too wide) against the defendant and its company. Lord Hanworth M. R. at page 956 observed that the company was formed as a device or a strategem in order to mask the effective carrying on of a business of Mr. E. B. Horn for the purpose of enabling him under what was a cloak or a sham, to engage in a business in respect of which he had a fear that the plaintiff might intervene and object. Also in a tax case of Firestone Tyre and Rubber Co. Ltd. v. Lewellin (1957) 1 W.L.R. 464. the plaintiff company fulfilled orders for tyres from authorized distributors in Europe, payment being made in the U.K. The plaintiff company retained out of these payments the cost price plus 5%, and remitted the balance to its holding company in America. The House of Lords held that the trade of selling tyres to persons outside the United Kingdom was carried on within the United Kingdom by the American Company through the plaintiff company as its agent. Accordingly, tax was chargeable in respect of that trade. Again, recently in Wallersteiner v. Moir (No. 1) (1974) 1 W.L.R. 991 a libel case where Dr. Wallersteiner was accused of using many companies, trusts or other legal entitles as if they belonged to him personally, Lord Denning M.R. pierced the corporate veil to detect the activties of Dr. Wellersteiner. He said at page 1013 as follows:-
“It is plain that Dr. Wallersteiner used many companies, trusts, or other legal entitles as if they belonged to him. He was in control of them ….. It was quite wrong (said counsel for Dr. Wallersteiner) to pierce the corporate veil – The Principle enunciated in Salomon v Salomon & Co. Ltd. was sacrosanct. If we were to treat each of these concerns as being Dr. Wallersteiner himself under another hat, we should not, he said, be lifting a corner of the corporate veil. We should be sending it up in flames. I am prepared to accept that (Dr. Wallersteiner’s companies) …. were distinct legal entities….Even so, I am quite clear that they were just the puppets of Dr. Wallersteiner. He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures – for whose doings he should be, and is, responsible.” However the device of agency by using one incorporated company for the purpose of carrying on an assignment for another company or person must not overlook the fact that that incorporated company is a separate legal entity which must fulfill its own obligations under the law. This view was expressed by Atkinson J. in Smith Stone & Knight Ltd. v Birmingham Corporation (1939) 4 All E.R. 116 where he observed as follows:-
“It is well settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business, nor does it make the company his agent for the carrying on of the business. That proposition is just as true if the shareholder is itself a limited company. It is also well settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders’ agent for the purpose of carrying on the business and make the business the business of the shareholders.” In their book entitled “The Practical Approach to Company Law” Stephen Mayson and Dereck French stated:- “It is submitted that, by treating a company as the agent of its controllers, the court is not in fact lifting the corporate veil – it is not necessary to do this in order to ascribe an agency relationship. Indeed, the finding of an agency is a complete affirmation of the corporate entity principle since the relationship demands two legally recognizable parties”. I entirely share the same view; and I am of the opinion that in the circumstances of this case, the principle of agency in the cases relied upon by Chief Williams are not applicable. What in my view is relevant here is the fact that the appellant Company was neither incorporated as a sham or a stratagem nor as an instrument of fraud. but as a limited liability Company charged with the duties inter alia of acting as Secretaries to clients of Peat Marwick; and being an incorporated body under our law, it is obliged by section 117 of the Companies Act, 1968 to file an Annual Return in the form stipulated under that section. That section provides as follows:-
“117(1) Every company having a share capital shall, once at least in every year, make and deliver to the Registrar a return containing with respect to the registered office of the company, registers of members and debenture holders, shares and debentures, indebtedness, past and present members and directors and secretary, the matters specified in Part I of Schedule 6 of this Decree, and the said return shall be in the form set out in Part II of that Schedule or as near thereto as circumstances admit:……
It is also required under section 44(1) of the Companies Income Tax Act. 1961 to file for each year of assessment when required to do so by any notice in writing given by the Federal Board of Inland Revenue showing among other things, the amount of its profits from each and every source, of such period or periods, as are indicated in such form.
But Chief Williams had forcefully submitted to us that the appellant had no staff of its own and made no profits; hence it could not be required to file any Assessment Returns or pay any Corporate tax particularly when Peat Marwick had already paid personal income tax on the fees paid to and collected by the Appellant on behalf of Peat Marwick. In my view, this submission had overlooked the provision of section 17(a) of the Companies Income Tax Act 1961 which imposes tax payable by companies thus:-
“17. The tax shall, subject to the provisions of this Act, be payable at the rate hereinafter specified- for each year of assessment upon the profits of any company accruing in, derived from, brought into, or received in, Nigeria in respect of –
(a) any trade or business for whatever period of time such trade or business may have been carried on;”
The question then is: Was the appellant carrying on any trade or business within the period of assessment so as to be liable to pay corporate tax to the respondent The word “trade was considered by Lord Hewart C.J. in Skinner v. Jack Breach Ltd. (1927) 2 K.B.220 in respect of a job of mending, refitting and reconditioning of draft, seine or similar nets; and in holding that it was a trade he said at pages 225 and 226:-
“No doubt in a great many cons, the word “trade” indicates a process of buying and selling, but that is by no means an exhaustive definition of its meaning. It may also mean a calling or industry or a class of skilled labour…
Also in Arbico v. F.B.I.R. (1968) 1 All N.L.R. 263, section 17(a) of the Companies Income Tax Act, 1961 was interpreted and it was held that a sole transaction of a sale of property by a construction company was “trading” under the section. It has been shown that the appellant is a separate legal entity even though it may be fully owned by Peat Marwick.
It was not incorporated as a sham, front, or stratagem; or as an instrument of fraud; but as a legal person to perform the services as Secretaries to several clients of Peat Marwick. For performing such services which entailed the provisions of skilled labour, fees were paid to it.
Whatever therefore might have been the arrangement between the appellant and Peat Marwick for the use of its staff for performing those services, it does not affect the fact that it has earned its own income. Hence in performing those services I am of the opinion that the appellant was carrying on a trade or business within the meaning of section 17(a) of the Companies Income Tax Act, 1961 and had earned an income on which corporate tax was payable under the Act.
In the circumstances, the appeal fails and it is hereby dismissed with N300.00 costs to the respondent. Once the assessed tax in this appeal is paid it is then up to Peat Marwick which is not a party to this appeal, to approach the Lagos State Government for any adjustment that can be made in respect of the income tax it has already paid for the period covered by this appeal.
SC.112/1984
