Abbott v Philbin (Inspector of Taxes) [1960] UKHL 1 (21 June 1960)

ABBOTT

v.
PHILBIN (Inspector of Taxes)

21st June. 1960

Viscount
Simonds

Lord Reid

Lord
Radcliffe

Lord
Keith of
Avonholm

Lord
Denning

Viscount Simonds

MY LORDS,

This appeal relates to an assessment to income tax under Schedule E of
the Income Tax Act, 1952, made upon the Appellant for the year of assess-
ment 1955-1956 in respect of the emoluments of his office as secretary of
E. S. & A. Robinson Ltd., which I will call ” the company “. The Court
of Appeal decided the case against him in deference to a decision of the
Court of Session—Forbes’s Testamentary Trustees v. Commissioners of
Inland Revenue, 
1958 S.C. 177. Your Lordships will find it necessary to
review that case.

The facts are not in dispute. At the Annual General Meeting of the
company held on the 28th June, 1954, it was resolved that 250,000 of
290,319 unclassified shares of £1 each in the capital of the company be
classified as Ordinary Shares and that the directors be authorised to grant
options over such shares or any of them to executives of the company or
its subsidiaries at such times and generally on such terms and subject to
such conditions as the directors should think proper.

Pursuant to this resolution the directors of the company at a Board
Meeting held on 6th October, 1954, resolved that options upon the terms
contained in a draft letter then produced to subscribe for Ordinary Shares
in the company at 68s. 6d. per share (being the middle price ruling on the
Bristol Stock Exchange on that day) be granted to the executives. The
Appellant accordingly as secretary of the company sent to each of the
executives, including himself, a letter, of which the salient conditions were
that he was granted at the price of £1 for every 100 shares an option to
purchase a specified number of shares at the price of 68s. 6d. per share,
such option to be exercisable at any time within ten years from the date
of the grant of the option. The option was expressed to be non-transferable
and was to expire upon the death or retirement of the executive (or employee,
as I will call him) before the expiration of the ten years. If the employee
desired to purchase the option he was required to send in a form of
application (which accompanied the letter) together with his cheque for the
price of the option, whereupon an option certificate would be issued to him.
The Appellant, being included in the list as entitled to a grant of an option
in respect of 2,000 shares, applied accordingly on the 7th October, 1954, for
such option enclosing his cheque for £20 which was duly cashed. Some
delay occurred in the issue of option certificates and he was not given his
until the 6th May, 1955, but it bore on its face the statement that the option
was granted on the 6th October, 1954. It was endorsed with the conditions
as to the non transferability and expiry to which I have referred.

On the 28th March, 1956, the price of the company’s shares having then
risen to 82s., the Appellant exercised pro tanto his option by applying to
the company for the issue to him of 250 shares at the price of 68s. 6d.
per share and sent with his application his cheque for £856 5s. 0d. The
shares were duly issued to him. He was subsequently assessed to tax under
Schedule E for the year 1955-56 in (inter alia) the sum of £166 which was
made up as follows:

£ s. d.

£ s. d.

250 shares taken up on 28th March, 1956, when the middle market price

was 82s………….

1,025 0 0

Deduct: Option price 68s. 6d. …

856 5 0

Cost of option at £1 per 100 shares ……

2 10 0

858 15 0

£166 5 0

2

The Special Commissioners upheld the assessment considering the case
indistinguishable from Forbes’s case to which I have referred, Mr. Justice
Roxburgh, if I understand his judgment, thought it possible to distinguish
that case and upon Case Stated allowed the present Appellant’s appeal. The
Court of Appeal, as I have already said, decided in favour of the Crown.

My Lords, once more your Lordships have to consider the words of Rule 1
of the Rules applicable to Schedule E contained in the Ninth Schedule to the
Income Tax Act, 1952, which is as follows:

” Tax under Schedule E shall be annually charged on every person
” having or exercising an office or employment mentioned in Schedule
” E . . . in respect of all salaries, fees, wages, perquisites or profits
” whatsoever therefrom for the year of assessment . . .”
Summarily the question is: Was the difference betwen (a) the market price
on the 28th March, 1956, £1,025, and (b) the option price, £856 5s. 0d.,
plus a proportionate part of the cost of option, £2 10s. 0d., a ” perquisite
” or profit therefrom “, that is, from the office of secretary held by him, for
the year of assessment?

The curious feature of this case is that the Crown appears to reach the
conclusion that the sum of £166 was assessable for the year 1955-56 by first
denying that the grant of the option was itself a perquisite or profit of the
year 1954-55, and this is, I think, the aspect of the case that must first be
examined. For it would not, as I understand the argument of learned
counsel for the Crown, be contended that, if the grant of the option was
itself a perquisite or profit arising from the office, the subsequent exercise of
it would be another perquisite or profit.

My Lords, I cannot entertain any doubt that, when the company granted
the option to the Appellant, he acquired something of potential value. I do
not think that it matters whether it falls into the category of proprietary or
contractual right or into some dim twilight that divides those juristic concep-
tions. We are concerned with a taxing statute whose language is to be
reconciled with the law of England and Scotland alike, and the chosen words
” perquisite or profit whatsoever ” are as wide and general as they well could
be. I can concede no relevant limitation of their meaning except in the oft
cited words of Lord Watson in Tennant v. Smith [1892] AC 150 at p. 159 that
they denote ” something acquired which the acquirer becomes possessed of and
” can dispose of to his advantage—in other words, money—or that which
” can be turned to pecuniary account.”

How, then, can it be said that an option to take up shares at a certain price
is not a valuable or at least a potentially valuable right? Its genesis is in the
desire of the company to give a benefit to its employees and at the same time
no doubt to enhance their interest in its prosperity. It is something which the
employee thinks it worth his while to pay for: not a large sum truly, but £20
deserves a second thought. And it is something which can assuredly be
turned to pecuniary account. This was challenged because the option was
itself not transferable, but this objection is without substance. There was
no bar, express or implied, to a sale of the shares as soon as the option was
exercised and there could be no difficulty in the grantee arranging with a
third party that he would exercise the option and transfer the shares to him.
It was further challenged on the ground (to quote the language of Lord Justice
Sellers in the Court of Appeal) that ” a notional use of the option or a use
” unintended and undesired by the company, unrealised and unvalued,” does
not have the quality required by the accepted standard set by Lord Halsbury
and Lord Watson in Smith v. Tennant ” to make it a taxable perquisite, if
” indeed, it was a perquisite at all at that date “. With great respect to the
learned Lord Justice and to counsel who put it in the forefront of his
argument, I find great difficulty in giving any weight at all to this
consideration. It is mere guesswork what use of the option was intended
or desired. I would not myself assume that the company intended that the
grantee of an option should for ever, or for a day longer than he wished,
hold the shares that he took up, or that he should not at once, if he wished,
reap the benefit of a rise in price. But, guess right or wrong, there is nothing
to prevent him doing so: that is his legal right, and, if he could so deal with

3

the shares when acquired, nothing could prevent him so using his option by
arrangement with a third party as to secure for himself a similar advantage.
Two other adjectives are used by the Lord Justice, ” unrealised and
“unvalued”. But the fact that there was no realisation in the sense of
actual turning into money is irrelevant. The test is whether it is something
which is by its nature capable of being turned into money. Nor is it relevant
that it is ” unvalued “. I have little doubt that, if the Revenue authorities
had addressed their minds to the proper question, they could have ascertained
whether it had any and what value. But again I must say that it is really
irrelevant whether a value could be ascribed to it or not If it had no
ascertainable value then it was a perquisite of mo value—a conclusion
difficult to reach since £20 was paid for it. In my opinion, the Crown
cannot succeed in this essential aspect of the case unless it is established
as a general proposition that an option to acquire shares at a fixed price in
such circumstances as those of the present case is not a perquisite of office.
It must be shown that, even if at the date of the option being granted the
market price is higher than the option price, the option is not a perquisite
which falls within the Schedule. This appears to me an impossible
proposition. What distinguishes such a right from that commonly given to
a shareholder in a commercial company, when upon an issue of shares he
is given in the form of a provisional allotment letter the right to take up new
shares at a certain price? He can exercise his right and take up the shares
or he can sell his right to do so, or he can do neither and let the offer go
by default. But from the moment he has the letter he has a right of more
or less value according to the circumstances. So, too, the grantee of such
an option as that which we are considering has a right which is of its nature
valuable and can be turned to pecuniary account. He has something at
once assessable to tax.

My Lords, as I have said, the argument for the Crown appeared to demand
for its success that the grantee of the option did not acquire a perquisite at
the date of the grant. There could not be one perquisite at the date of the
grant and a second perquisite when the shares were taken up. Therefore
the Crown’s case, in my opinion, fails at the initial step. But there are other
grave difficulties in the way of its success. The taxable perquisite must be
something arising ” therefrom “, that is, from the office, in the year of
assessment. I do not want to embark on the notoriously difficult problem as
to the year to which for the purpose of tax a payment should be ascribed, if
it is not expressly ascribed to any particular year. But I do not find it easy to
say that the increased difference between the option price and the market
price in 1956 or, it might be, in 1964 in any sense arises from the office. It
will be due to numerous factors which have no relation to the office of the
employee, or to his employment in it. The contrast is plain between the
realised value, as it has been called, of the option when the shares are taken
up (though the realisation falls short of money in hand) and the value of the
option when it is granted. For the latter is nothing else than the reward for
services rendered or, it may be, an incentive to future services. Unlike the
realised value it owes nothing to the adventitious prosperity of the company
in later years. On this ground also I should reject the claim of the Crown.

My Lords, as I have said, the Court of Appeal were constrained to decide
this case in favour of the Crown in deference to the decision of the Court of
Session in Forbes. I agree that the two cases are not in any material respect
distinguishable and think that they took the proper course in following it.
The single fact upon which Mr. Justice Roxburgh appeared to rely, that in
that case, unlike this, the grant of the option was gratuitous, cannot in my
opinion affect the issue. The reasoning by which the learned Judges in Forbes
supported the conclusion to which they came is that which formed the
basis of the argument for the Crown on this appeal, and I have already dealt
with it. It treats the option as a thing of no value until it has been exercised
and places an importance, in my opinion unjustified, on the non-transferability
of the option. But, as I have pointed out, though that feature may reduce
the value of the option, it cannot alter its character so that it is no longer
something which can of its nature be turned to pecuniary account. Nor,
even if k be the fact, can I accept the view clearly entertained by the Court

30434 A2

4

of Session that, if in the year of grant the option had no value, it therefore
became a taxable perquisite when in later years it was exercised. It was,
in my opinion, a perquisite at the date of grant and, if it had no value, there
was nothing to tax, and that is the end of the matter.

Reference was also made to Weight v. Salmon, 19 TC 174. This case does
not assist the respondent. The tax-payer, Salmon, was a managing director
of a limited company at a fixed salary. In addition the directors in each
year gave him the privilege of applying for certain unissued shares of the
company at their par value which was less than the market value. He
accordingly applied for shares and they were issued to him. He was assessed
to tax on the difference between the par and market values, and the assessment
was upheld in the High Court and the Court of Appeal. The taxpayer
appealed to this House and his appeal was dismissed. Lord Atkin, with
whom the other learned Lords agreed, pointed out that while the Board
had expressed their willingness to entertain an application for shares, nobody
was bound and no right was given and no profit was received of any kind
by the appellant until the application had been accepted and the shares in
question had been allotted to him. It is by no means a decision that, if the
company had vested in him a right to have the shares allotted to him instead
of allotting them forthwith, that right would not have been a taxable perquisite
or profit.

The facts in Tait v. Smith, 35 T.C. 79, are somewhat obscure, but the
decision of Mr. Justice Wynn-Parry in that case appears, if anything, to be
favourable to the Appellant.

In Bridges v. Bearsley, 37 T.C. 289, there are to be found observations of
Danckwerts, J. and Jenkins, L.J. which support the contention of the Respon-
dent. But the substantial issue in that case was whether shares which had
been issued to the taxpayer were or were not profits of his office. The question
whether the profit lay in the right to acquire shares or in the shares when
acquired was a subsidiary issue which in the event did not arise. If, as I
think they probably were, the relevant facts of that case were indistinguishable
from those of the present case. I must with respect decline to follow them.

Upon a consideration of the whole case I am of opinion that this appeal
should be allowed with costs here and below.

Lord Reid

MY LORDS,

In 1954 the company of which the Appellant is secretary offered to its
executives options to buy a number of its unissued shares at 68s. 6d. which
was then the market price. The options were not transferable and were to
endure for ten years if the purchaser remained so long in the company’s
service. The price of the option was £1 per 100 shares, and in October,
1954, the Appellant acquired an option on 2,000 shares for which he paid £20.
The market price rose and in March, 1956, when the price was 82s. the
Appellant exercised his option to the extent of 250 shares and acquired them
at 68s. 6d. If he had immediately sold those shares he would have made a
profit of £166, and he has been assessed in this sum under Schedule E in the
year 1955-56. Rule 1 of Schedule E is as follows:

” Ninth Schedule.

” Rules applicable to Schedule E.

“1. Tax under Schedule E shall be annually charged on every person
” having or exercising an office or employment of profit mentioned in
” Schedule E, or to whom any annuity, pension or stipend chargeable
” under that Schedule is payable, in respect of all salaries, fees, wages,
” perquisites or profits whatsoever therefrom for the year of assessment!
” after deducting the amount of duties or other sums payable or charge-
” able on the same by virtue of any Act of Parliament, where the same
” have been really and bona fide paid and borne by the party to be
” charged.”

5

The parties agree that the Appellant received something which comes
within the words ” perquisites or profits whatsoever” The question in this
case is what it was. The Appellant says that the option was the perquisite.
and he admits that he was liable to be assessed for the year 1954-5; in
respect of the value of the option when it was granted minus the price he
paid for it. He maintains that the subsequent appreciation of its value is
not taxable. On the other hand, the Respondent maintains that he received
no perquisite in 1954, the perquisite being the shares which were allotted
to him when he exercised his option: if that is right the shares when allotted
were worth £166 more than he paid for them and he has been properly
assessed.

The first observation which I would make is that on the Crown’s view
the granting of the option in 1954 might result in ten different perquisites
being received by the Appellant in ten different years if he chose to exercise
his option piecemeal. He was entitled to do this and in fact in 1955-56 he
only exercised it to the extent of 250 out of 2,000 shares, and the company
retained no control over the times at which or the extent to which he might
exercise the option. If he did not exercise the last of his option until 1964-65
he would then, in the Crown’s view, be receiving a perquisite taxable in that
year in consequence of an irrevocable act of grace of the company ten years
earlier. If in 1965 he held 2,000 shares which he had acquired in ten different
parcels under his option he would have made precisely the same profit on
each share—the difference between 68s. 6d., the price under the option, and
the then market price. But he would have been taxed very differently in
respect of each parcel, the tax depending on the market price at the date
when he had acquired it—for it is not suggested that further appreciation
after shares have been allotted can be taxed. Moreover, let me suppose that
the option had been exactly the same except that it was to last for ten years
whether the Appellant remained in the service of the company or not. It
could hardly be that that change so completely altered the nature of the
option as to change the basis of taxation and make the granting of the
option and not the issue of the shares the perquisite. If, then, it was exercised
years after the servant had retired what would the position be: would the issue
of shares then be the perquisite and for what year of assessment would it
be a perquisite? There would be no assessment under Schedule E for the year
in which the shares were issued because the servant had retired. I realise that
one ought not to be surprised at anything that happens under the Income
Tax Acts, but nevertheless all this does seem a little strange.

Both parties rely on Tennant v. Smith [1892] AC 150, and in particular on
the familiar passage in the speech of Lord Watson: ” Is it, then, a perquisite
” or a profit of his office? I do not think it comes within the category of
” profits, because that word, in its ordinary acceptation, appears to me to
” denote something acquired which the acquirer becomes possessed of and can
” dispose of to his advantage—in other words, money—or that which can be
” turned to pecuniary account.” I agree that the question is whether this
option was a right of a kind which could be turned to pecuniary account. I
do not use these words as a definition, but it is undesirable to invent a new
phrase if an old one of high authority fits this case, and the parties agree that
it does.

But the test must be the nature of the right and not whether this particular
option could readily have been turned to pecuniary account in October, 1954.
Whether this option could then have been turned to pecuniary account is a
question of fact, and there is no finding about it. It is true that the option
was not transferable, but there are other ways of turning such a right to
pecuniary account than assigning it or calling for immediate performance of
the obligation to allot the shares. Even taking this particular option I find
nothing to indicate that there would have been much difficulty in finding some-
one who would have paid a substantial sum for an undertaking by the Appel-
lant to apply for the shares when supplied with the purchase money and called
upon to exercise the option and thereupon to transfer the shares. It is not an un-
reasonable inference from the whole circumstances that both the Appellant and
his employers must have thought the option worth a good deal more than £20,
and others may have thought the same. No doubt a person who wished to

6

acquire an option on the shares would pay less for an undertaking such as I
have indicated than he would pay for an assignable option because of the
risks involved, but that only goes to valuation of the right which the Appellant
acquired. And if it is asked why buy such an undertaking instead of buying
shares on the market the answer is that people often do prefer buying options
to buying shares. I am not prepared to assume in the absence of a finding
that this option could not have been turned to pecuniary account when it was
granted. But if there is any doubt about that let me assume that the option
had been to acquire shares at 10s. below the then market price. I cannot
doubt that that could have been turned to immediate pecuniary account, and
surely it could not be said that an option to buy at 58s. 6d. is itself a perquisite
but an option to buy at 68s. 6d. is not. And that was not argued.

The argument for the Crown was not based on any special difficulty in
turning the particular option to pecuniary account. It was based on the nature
of the right: it was said that a right of option does not have the necessary
qualities to make it a perquisite. I must confess that I do not understand that.
If in fact this type of option is a kind of right which can be turned to pecuniary
account, what more is necessary to make it a perquisite? I have not been
able to find any clear answer to that question in the authorities cited or from
the argument in this case. It appears to me that if a right can be turned to
pecuniary account that in itself is enough to make it a perquisite.

Then it was said that, if the Appellant had attempted in any way to raise
money on his option before he exercised it, he would have been acting con-
trary to the tenor of his agreement with his employers. It was not argued
that he would have been acting in breach of his contract with them—plainly
he would not—nor was it said that there was any ” gentleman’s agreement”
that he should not do this or even that he would have incurred his
employers’ displeasure if he had done it. There is no finding to that
effect. I am willing to assume that it would not be irrelevant to show that a
servant could only exercise his full legal rights at the risk of impairing good
relations with his employers, but I do not stop to consider what the position
would then be. In this case it was not suggested that his employers would
have thought it in any way improper if the Appellant had sold shares
immediately they were allotted to him, and I cannot assume that they would
have had any objection to his raising money on his option before he exercised
it.

Then there appears to me to be another difficulty in the way of the
Respondent. Rule 1 taxes a person exercising an office or employment of
profit ” in respect of all salaries, fees, wages, perquisites or profits whatsoever
” therefrom for the year of assessment”. It does not say salaries or per-
quisities received during the year of assessment. It may be difficult to relate
a perquisite strictly to a particular year. But if a reward is given in the
form of an option and the option is itself the perquisite, it would generally
be sufficiently related to the year in which it is given to be properly regarded
as a perquisite for that year. If, on the other hand, the option is not the
perquisite—if there is no perquisite until the option is exercised and shares
are issued, it may be many years later—in what sense would the shares be
a perquisite for the year when they were issued? There would be no relation
whatever between the service during that year and the giving of the option
many years earlier or the exercise of the option during the later year. I
do not wish to express any concluded opinion on this point, but it does seem
to lend support to the conclusion which I have reached on other grounds.

In the present case the Court of Appeal, though not bound to do so, very
properly followed the decision of the Court of Session in Forbes’s Trustees,
1958 S.C. 177. I say very properly because it is undesirable that there should
be conflicting decisions on revenue matters in Scotland and England. So I
must now examine the reasons for that decision. In that case Mr. Forbes,
having been appointed manager, was granted by his company an option
in 1938 which was repeated in a further agreement in 1944. This option
was in all essentials similar to the option in the present case. The only
distinction I need note is that the option in the 1944 agreement was to
purchase a large number of shares at par, though the market price was
then above par; and it was argued that the option gave Mr. Forbes an

7

immediately enforceable right to the shares and that right could have been
converted immediately into cash. Mr. Forbes exercised his option in 1946
and he was assessed under Schedule E, as in this case, on the difference
between the value of the shares when they were allotted to him and the price
which he paid for them. This assessment was upheld toy the First Division.

The Lord President’s grounds of judgment appear from two passages
which I shall quote from his Opinion:

” In my opinion the right which Mr. Forbes obtained on signing the agree-
” ment in 1944 was a right merely to apply for the shares: it gave him no
” right in or to any shares, for this could only emerge when he exercised
” his right and when he delivered to the company the par value of the shares
” he demanded.

” Moreover-—and this appears to me to be fatal to the Appellant’s con-
” tention—there was no pecuniary value to the mere right which he got
” by virtue of the agreement, for it was not a right to any shares and could not
” be disposed of or sold by him. . . . For the option itself could not be
” turned to pecuniary account.” (P. 183.)

And on the next page:

” The argument for the Appellants was that in 1944 a legally enforceable
” right had vested in Mr. Forbes when he signed the agreement, which hs
” could have converted into cash forthwith by securing an allotment of shares
” which he could sell in the market. Accordingly it is said his benefit should
” be assessed for tax as a benefit accruing in the year 1944. But this argument
” appears to me to involve two fallacies. In the first place, the right which
” Mr. Forbes got under the agreement was not a right to shares which sounded
” in money but a mere right to apply for shares which he never exercised
” that year and which in itself had no market value at all. But in the
” second place the right which he obtained under the agreement was not
” an unconditional one. He could not effectively exercise it unless he com-
” plied with its conditions, one of which was the payment to the companies
” of the par value of the shares applied for. These two considerations appear
” to me to point necessarily to the year 1946 when the right was effectively
” exercised as the year in which the profit accrued.”

The Lord President also derived some assistance from Weight v. Salmon,
19 TC 174, and Bridges v. Hewitt. Same v. Bearsley [1957] 1 W.L.R.
674: 37 T.C. 289.

The essence of the first passage which I have quoted appears to be that
because the option could not be sold or assigned therefore it could not be
turned to pecuniary account. I have already given my reasons for not accept-
ing that. The argument that a right could be turned to pecuniary account
by raising money on it without assigning it does not appear to have been
put forward, no doubt because the argument that it could be turned to
pecuniary account by exercising it and taking up shares worth more than
the option price may have seemed even stronger. That argument is dealt
within the second passage which I have quoted.

In the second passage the Lord President finds two fallacies in the argument
for the taxpayer, but I am afraid I have been unable to see the force of his
objections. If you get a share it is capable of being turned to pecuniary
account because you can immediately sell it. There is generally no difficulty
about that, and if there is any difficulty there are other ways of raising money
on it though you have to remain on the register. Similarly, if you get an
option to buy shares below the market price it seems to me that the option
is capable of being turned to pecuniary account by exercising it, acquiring
the shares, and immediately selling them. It is true that that involves an
extra step, but why should that matter? I can see no difficulty unless it be
in financing the transaction. But if the whole operation will yield a sub-
stantial profit I would not assume that that would be difficult.

The second fallacy appears to toe a variant on the first. If the condition
is one with which the taxpayer can easily and immediately comply, it does
not in my opinion, form an obstacle to turning the option to pecuniary
account. If the condition is one which cannot immediately be complied with

8

that may make a difference. In Bridges v. Hewitt and Bearsley the taxpayer
still had to earn his perquisite by a further four years’ service, and it may well
be that in such a case an agreement to confer a future benefit gives no
immediate perquisite. The case of Weight v. Salmon seems to me to be
entirely different. There the servant had no enforceable right at all until
he got his shares. He got his shares because the company chose to give
him something then, to give him a perquisite when the shares were issued.
But in this case the Appellant getting his shares did not flow from any volun-
tary act of the company when the shares were issued. It flowed from
the company’s voluntary act in the previous year when they gave him an
option by which they were thereafter bound. It would, I think, require some
peculiar circumstances to make a mere expectation capable of being turned
to pecuniary account.

Lord Carmont regarded the option as an open offer. I would not dispute
about words. But if it can be regarded as an offer it was an offer which the
company had no power to withdraw and which conferred a valuable con-
tractual right on Mr. Forbes. Lord Carmont then dealt with the restrictions
and conditions to which the option was subject and pointed out their material
bearing on the value of the option and the difficulty there would be in
valuing it. I agree with those observations. But if I am right that the
question whether a particular option is in itself a perquisite does not depend
on these factors but rather on whether rights of that class are perquisites and
capable of being turned to pecuniary account, then I do not think that these
observations necessarily lead to his conclusion.

Lord Russell clearly stated his grounds of judgment in the following
passage:

” In my opinion, whatever may be the rights vested in the holder of an
” option in the abstract, it is essential to have regard to the nature and the
” quality of the right created in Mr. Forbes’s favour in 1944. As previously
” stated, that right was personal and unassignable and was qualified by the con-
” dition that he must render cash in payment, while still remaining managing
” director, before being in a position to enforce compliance by the companies
” with their conditional obligation to allot. It appears to me that the latter
” contingency coupled with the personal and unassignable nature of the right
” prevents it from being something which could be ‘ turned to pecuniary
” account” …”

I think that I have already dealt with the reasons which he gives, but I can
sum up my view by saying that conditions and restrictions attached to or
inherent in an option may affect its value but are only relevant on the
question whether the option is a perquisite if they would in law or in prac-
tice effectively prevent the holder of the option from doing anything when
he gets it which would turn it to pecuniary account. I am therefore of
opinion that Forbes’s Trustees was wrongly decided and should be overruled
and that this appeal should be allowed.

Lord Radcliffe

my lords.

On 28th March, 1956, the Appellant applied for and received from E. S. &
A. Robinson Ltd. 250 of its Ordinary Shares. He paid the company £856 5s.
for them, a subscription at the rate of 68s. 6d. per share, although the current
market price was then 82s. per share. He was enabled to obtain this
advantage because in October, 1954, he and other officials and employees
of the company had been offered by it options to take up stated amounts
of Ordinary Shares at the market price then ruling, 68s. 6d. per share, and he
had thus acquired at the cost of £20, which he then paid for an option on 2,000
shares, the right to make this call at the date which he selected.

The Inland Revenue claim that he is assessable under Schedule E for
1955-56 on the difference between what he paid and the value of what he
got on the ground that this calculated amount is a profit or perquisite from
his office. I do not think that he is. Oddly enough, however, the argument

9

that took place before us was concentrated almost exclusively on a different
point, whether he was assessable under the same Schedule on the value of
the option itself in the year when he acquired it, 1954-55, the Revenue
maintaining with much persuasive force that he was not, the Appellant con-
ceding that he was, provided always that it could be shown that a monetary
value could fairly be placed on the option at the date of its acquisition.

It is a natural enough assumption for the tax gatherer that if a transaction
does not attract tax in one year it must in another. I do not myself, how-
ever, regard that as a good general principle upon which to found the con-
struction of the Income Tax code. Considering that, at any rate since the
decision of this House in Tennant v. Smith 1892 AC 150, it has been
necessary to put a somewhat restricted meaning upon the words ” all salaries,
fees, wages, perquisites or profits whatsoever” which now appear in the
Ninth Schedule of the Income Tax Act, 1952, I should not be surprised to
find that neither an option to take up shares at a price, more particularly
perhaps if the option is made non-assignable, nor the advantage obtained
later from exercising the option comes within the range of those words. On
the whole, however, I do not think that that is the situation, because in my
opinion the Appellant is right in saying that what taxable receipt there is
lies in the acquisition of the option and that if it had a monetary value when
received it is that value that represents the profit or perquisite of the
office.

The difficulty in dealing with this point lies wholly in relating words
used by several Members of the House in Tennant v. Smith, apparently of
general import, to circumstances that they were not dealing with. The benefit
of a right of occupation of part of bank premises which the occupier could
only enjoy for the service of the bank is not very like the benefit of an
option to take up freely transferable shares at a fixed price. The basis of
the Revenue’s claim in Tennant v. Smith was really to tax the bank manager
on expenditure which he was saved, not on any money that he got or could
get, while tax on the full annual value of the premises was taken from
the bank itself. It was not, however, the view of the House that profits or
perquisites, to be taxable, could consist only of money paid. It was accepted
that they could include objects or things of value received, payments in
kind, so long as they were ” capable of being turned into money ” (Halsbury
L.C.), ” money, or that which can be turned to pecuniary account” (Lord
Watson), ” money payment or payments convertible into money” (Lord
Macnaghten), ” that which could be converted into money ” (Lord Hannen).

I think that it has been generally assumed that this decision does impose
a limitation upon the taxability of benefits in kind which are of a personal
nature, in that it is not enough to say that they have a value to which there
can be assigned a monetary equivalent. If they are by their nature incapable
of being turned into money by the recipient they are not taxable, even though
they are in any ordinary sense of the word of value to him. It is obvious
that this conception raises many attendant uncertainties which are not, so
far as I know, cleared up except where some particular class of benefit in
kind has offended the eye of the legislature and has been dealt with by
special legislation. Must the inconvertibility arise from the nature of the
thing itself or can it be imposed merely by contractual stipulation? Does it
matter that the circumstances are such that conversion into money is a
practical, though not a theoretical, impossibility; or, on the other hand, that
conversion, though forbidden, is the most probable assumption?

I do not think that the decision of this case can go very far, if any
distance, to clear up such points as these. I think that the Revenue are
right in saying that a line has to be drawn somewhere between convertible
and non-convertible benefits and that somehow we have to put a general
meaning on the not very precise language used in Tennant v. Smith. What
I do not think, however, is that a non-assignable option to take up freely
assignable shares lies on that side of the line which contains the untaxable
benefits in kind. The option, when paid for, was thereafter a contractual
right enforceable against the company at any time during the next ten years
so long as the holder paid the stipulated price and remained in its service.
That right is, in my opinion, analogous for this purpose to any other benefit

10

in the form of land, objects of value or legal rights. It was not incapable
of being turned into money or of being turned to pecuniary account within
the meaning of these phrases in Tennant v. Smith merely because the option
itself was not assignable. What the option did was to enable the holder at
any time, at his choice, to obtain shares from the company which would
themselves be pieces of property or property rights of value, freely con-
vertible into money. Being in that position he could also at any time,
at his choice, sell or raise money on his right to call for the shares, even
though he could not put anyone he dealt with actually into his own position
as option holder against the company. I think that (the conferring of a
right of this kind as an incident of service is a profit or perquisite which
is taxable as such in the year of receipt, so long as the right itself can
fairly be given a monetary value, and it is no more relevant for this purpose
whether the option is exercised or not in that year than it would be if the
advantage received were in the form of some tangible form of commercial
property.

The claim to tax the advantage obtained in the year 1955-56 is not
claimed by the Revenue if the right view is that the option itself was
taxable in 1954-55. Even if there were no taxable subject in the earlier
years I should regard the 1955-56 claim as failing on its own terms. The
advantage which arose by the exercise of the option, say £166, was not a
perquisite or profit from the office during the year of assessment: it was
an advantage which accrued to the Appellant as the holder of a legal right
which he had obtained in an earlier year and which he exercised as option
holder against the company. The quantum of the benefit, which is the
alleged taxable receipt, is not in such circumstances the profit of the service :
it is the profit of his exploitation of a valuable right. Of course, in this
case the year of acquiring the option was only the year immediately preceding
the year in which, pro tanto, it was exercised. But supposing that he holds
the option for, say, nine years before exercise? The current market value
of the company’s shares may have changed out of all recognition in that
time, through retention of profits, expansion of business, changes in the
nature of the business, even changes in the market conditions or the current
rate of interest or yield. I think that it would be quite wrong to tax whatever
advantages the option holder may obtain through the judicious exercise of
his option rights in this way as if they were profits or perquisites from his
office arising in the year when he calls the shares.

I agree that the appeal must be allowed. As to previous authorities, I
am of opinion that for the reasons I have given Forbes’s Executors v. Inland
Revenue Commissioners, 
1958 S.C. 177, was decided in error. I do not
regard either the decision of or any observations in Bridges v. Bearsley,
37 T.C. 289, as being of any significance to the point we have to decide.

Lord Keith of Avonholm

MY LORDS,

This case may be presented so as to raise some interesting and possibly
fine legal points. I think it does. But I have come to the view that these
arise by considering certain aspects of the case in isolation and that this
is not the proper approach to the question at issue. The object of the option
under consideration was to afford certain selected ” executives” of the
company and of its subsidiary companies ” an opportunity of obtaining an
” interest in, or increasing an existing interest in, the capital of the company “,
as stated in the company’s letter of 6th October, 1954. There is nothing
novel in such an idea and, as the authorities show, the issue of shares to
employees of a company may, in certain cases, attract tax, under Schedule E,
as being a perquisite or profit from the employment. The simplest case
would be a free bonus issue or transfer of fully paid shares, unless this
could be related, as in Bridges v. Hewitt and Bearsley, 1957, 37 T.C. 289,
to some cause other than remuneration for service in the company.

11

The specialty in the present case is that the matter started with the grant
of an option to subscribe at 68s. 6d. a share of 2,000 Ordinary Shares of
£1 each in the capital of the company. For this the Appellant paid the
sum of £20, a somewhat illusory price of rather less than 2 1/2d. per share
on the number of shares over which the option extended. The option was
subject to certain terms and conditions. Among others it was not transfer-
able and, so long as the Appellant was in the company’s service, it would
last for ten years. As Lord Carmont pointed out in Forbes’s Executors v. Com-
missioners of Inland Revenue 
(1958 S.C. 177; 38 T.C. 12), in my opinion
correctly, such an option is no more than a standing personal offer. An offer
open for ten years is certainly something unusual, but in Scots law if expressed
in writing, it could not be challenged and would not be revocable. In English
law it may be that some element of consideration is required to prevent such
an offer being withdrawn, and (this may be the reason for the offer in the
present case taking the form of an option for which a nominal payment was
made. In my opinion, no element of consideration should make any
difference, in applying a taxing statute common to the two countries, to the
determination of the nature and effect of the right granted.

The argument for the Appellant is that though the option is not transferable
it left it open to him to turn it to account by agreeing with some third party,
in return for a payment, to exercise the option and to transfer the shares,
or some part of them, obtained as a result of that exercise to the third
party. Clearly the same could be done in the case of a simple irrevocable
offer of shares made on the same terms and conditions. But, in my opinion,
the agument introduces a quite irrelevant consideration. Whatever happens,
the Appellant has got to apply for shares before any benefit or transferable
right emerges. Whatever value the option has comes only from its exercise
and on its exercise the benefit offered to him arises. The option is an
offer, to be accepted or not as and when the Appellant pleases, but until
it is accepted the transaction is not complete, nor has any profit been
realised. The company has no concern with third parties, before the
Appellant gets his shares. When he gets his shares it will be seen what profit
he has got from his acceptance of the company’s offer. Even if he has
made some advance arrangement with a third party it is what he has got
from the company in shares that, in my opinion, determines the profit to
which he is taxable under Schedule E.

It is conceivable, although I should think unusual, that a company should
offer its employees shares, in the form of bonus shares fully paid or for
payment on favourable terms, which offer was freely transferable or renounce-
able in favour of third parties before allotment. That would merely emphasise
the favourable nature of the offer and would in no way impinge on the
principles to which I have referred. No one can be put on the share register
of a company without his consent. If an employee failed to take up the
shares offered or to renounce them in favour of a third party he could not,
in my opinion, be said by virtue of the mere offer to have obtained a profit
from his employment. If he renounces his shares in favour of a third party he
has accepted, or taken advantage of, an offer made to him by his employer
and by selling his rights has in effect secured a benefit equivalent to what
he would have received if he had applied for the shares to be registered
in his own name. I assume always that the renunciation would be for a
genuine and not for a fictitious price. The result, in my opinion, assuming
it could be regarded as a profit of the employment, would be in no way
different in principle from that of Weight v. Salmon, 1934, 19 TC 174.
Though that case was presented as a case of a privilege given to the servant
of applying for shares, it is clear from Lord Atkin’s speech in this House,
concurred in by all their other Lordships, that it was only upon the applica-
tion being granted by the issue of shares that a profit was regarded as
having (been received by the servant. Nor is it material, in my opinion,
that the offer of shares is at a price which, if accepted, will show an
immediate profit, as where the market value of the shares is higher than
the offer price. Until accepted, or otherwise dealt with in accordance with
the terms of the offer, the offer cannot, for the reason I have given, be
regarded as securing for the servant a profit from his employment. It

12

follows, also, that the same option offered to a number of employees
at the same time may have different results in the case of individual
employees, if it is as here a continuing option, according to the respective
dates when it is accepted. That follows from the nature and terms of the
offer and the action that the particular servant takes upon it. The result
is entirely consistent with a general rule of income tax law that there can be
no profit until it is realised, or can be quantified.

I find it unnecessary to speculate on the precise scope or effect of the
references by Lord Halsbury and Lord Watson in Tennant v. Smith [1892]
A.C. 150 to a benefit received by an employee from his employer capable
of being “turned to pecuniary account” in order that it should be
assessable to income tax. Their application must be considered in relation
to the kind of benefit received in specific cases. They were made in a
context which does not make their scope easily definable. They cannot
be confined to tangible or corporeal benefits, otherwise a share in a company
would not come within their scope. The dicta are not, however, in my
opinion, of any help to the Appellant, because the normal and, I think, in a
case like this, the only way of turning an option, or offer, to pecuniary
account is by exercising or accepting it. If it is exercised, as it was here,
the benefit then accrues and if capable of being valued in terms of money
is assessable to tax.

Under Schedule E no difficulty arises in the matter of relating a profit to a
particular fiscal year. Under Rule 1 of the Ninth Schedule it is the year
of assessment in which the profit is received that determines the rate of
tax. It is common ground here that there has been a profit of the employ-
ment and the only question is whether that profit is to be extracted from
the grant of the option per se or from the exercise of the option. Or
either view it is impossible to relate the profit to any year other than the year
of receipt. The benefit, however it is estimated, was no doubt given ir
respect of past services and possibly in the expectation of future services
but further than that it is impossible to say.

The situation, as I see it, is shortly summarised by Sellers, L.J., in words
which I would adopt. ” If the option was never exercised “, he says, ” it
” seems axiomatic that there would be no profit and no accrued benefit
” The contractual right given by the company, and it was by the company
” to the servant, the taxpayer, in this case could not be transferred, and the
” view I should be inclined to take of the case, which, I think, is in harmony
” with the Forbes’s Executors case, is that that merely set up the machinery
” for creating a benefit—that was its intention—which benefit ultimately
” accrued “. I would only add that a transferable option, if transferred,
might produce corresponding results, for the reasons which I have endeavoured
to explain, though it is unnecessary so to decide for the purposes of this
appeal.

I would dismiss the appeal.

Lord Denning

MY LORDS,

When I asked Mr. Heyworth Talbot in the course of the argument whether
there was any special virtue in the sum of £20 which Mr. Abbott paid for
this option, he said there was no particular merit in it. If the sum had been
one shilling or one penny, the result would be the same. It was a nominal
sum, he said, which was paid so as to provide consideration for the contract
and make it legally enforceable. But it soon appeared that it was essential
to his argument that there should be some consideration given for the option,
even if it was only, what Sir George Jessel once suggested, a tomtit or a
canary. For Mr. Heyworth Talbot acknowledged that if no consideration
had been given, then, unless the option were granted under seal, it would

13

have been unenforceable at law: with the result that the case would have
been governed by Weight v. Salmon (1935) 19 TC 174, 61 T.L.R. 333.

Now, in Weight v. Salmon, as your Lordships will recall, the directors of a
company passed a resolution that each of the three managing directors ” be
” permitted to make application for and to take up at par one thousand ‘ A’
” ordinary shares in the capital of the Company “. The managing directors,
in pursuance of that resolution, acquired for £1 apiece shares which were
worth £3 or £4 each in the market. It was held by this House that, when
the directors received those shares, and not before, they received profits
in the nature of money’s worth as remuneration for their services. The
shares, when received, were “profits” on which they were taxable under
Schedule E. That case shows decisively that the expectation of receiving
a benefit, no matter how well founded, is not itself a perquisite or profit.
It must be reduced into possession. A bird in the hand is taxable, but a
bird in the bush is not.

So here, if nothing had been paid for the option, the letters that passed
would have been nothing more than a standing offer by the company to
allot shares to Mr. Abbott at 68s. 6d. a share. That offer could have
been withdrawn by the company, at any time before acceptance, with
impunity. The offer itself would not be a perquisite or profit: for it con-
ferred only the expectation of profit, not any profit itself. But when it was
accepted, and shares worth 82s. apiece were allotted to Mr. Abbott for
68s. 6d., he would then receive ” profits ” which would be taxable in his
hands. No difficulty would arise about the year of assessment. The profits
would accrue to him in the year they were received.

My Lords, I ask myself, what is the difference, for tax purposes, between
the case I have just put, where nothing is paid for the option, and the case
we have before us, where a nominal sum is paid? The difference is that
in the one case he has only an expectation of profit: whereas in the other
he has a right to make profits in the future, if the opportunity arises. But
in either case, until the option is exercised, he has not the profits themselves.
And as I read the Act it is not the expectation to make profits, nor the
right to make profits, which is taxable, but only the profits themselves. Just
as it is not the expectation to salary nor the right to salary which is taxable,
but only the salary itself. A bird in the bush is not taxable, even if you
have the right to get it in the future, if it is still there. You must have
it in hand before you can be taxed for it.

And when you come to consider what ” profits ” the servant receives from
his employment by virtue of the option, surely it makes no difference whether
he pays a nominal sum or not. In either case the employer grants him the
option as a reward or return for his services: and the profits he makes out
of it are the same save for this: if he paid nothing, it is all profit; if he paid
a peppercorn, it is all profit less the value of a pepper berry; if he paid 1s.,
less 1s.; if he paid £20, less £20.

There is, moreover, a very compelling reason why no distinction should
be drawn according to whether a nominal sum is paid or not: for it would
mean that ” profits ” in the Income Tax Acts would have a different meaning
in Scotland from what it has in England. In Scotland, as your Lordships
well know, it is unnecessary to have consideration to support a promise. The
option would be legally binding in Scotland, even though nothing was paid
for it: whereas it would not be binding in England unless some nominal
sum was paid for it. It would not be right, I suggest, for the tax payable
to depend on the technical requirements of English law as to consideration.
The Income Tax Acts apply to England and Scotland alike and there is the
highest authority for saying that they must, if possible, be so interpreted as
to make the incidence of taxation the same in both countries, see Commis-
sioners for Special Purposes of Income Tax v. John Frederick Pemsol 
[1891]
A.C. 531 at p. 548 by Lord Halsbury, L.C., and at p. 557 by Lord Watson,
Commissioners for General Purposes of Income Tax for City of London v.
Gibbs and Others 
(19421 A.C. 402 at p. 414 by Viscount Simon, L.C., p. 419
by Lord Macmillan, p. 430 by Lord Wright.

My Lords, the point which I am now making can be tested by taking an
illustration which is suggested by what Lord Atkin said in Weight v. Salmon.

14

Suppose that a colliery company made an offer to supply a director, who
was in the coal trade, with 1,000 tons of coal at a price which was one-third
of the market price of the day. No profit of any kind would be made by
the director until he gave an order for coal. But as and when he ordered
the coal and got it, he would receive a profit in the nature of money’s
worth. It would be assessed, said Lord Atkin, at the difference between
the price he could get for it, and the price he had actually paid. Now take
the same illustration but suppose that, instead of the company making an
offer to the director, a clause was inserted in his service agreement giving
him the right of obtaining coal at a price which was one-third of the market
price of the day. Surely his profit would be just the same as before. It
would arise as and when he ordered the coal and got it: and it would be
assessed at the difference between the price he could get for it and the price
he actually paid. It would not be assessed differently simply because in the
one case he made the profit as a result of a standing offer and in the other
he made it under a service agreement.

It will be noticed that, just as Lord Atkin’s illustration corresponded very
closely in substance to the facts in Weight v. Salmon, so my illustration
of a service agreement corresponds very closely in substance to the facts
in Forbes’s Testamentary Trustees v. Commissioners of Inland Revenue,
1958 S.C. 177: and it leads me to the conclusion that that case was correctly
decided. And it is indistinguishable from the present case, as everyone
agrees.

But Mr. Heyworth Talbot took a further point. He likened the grant
of this option to the gift of a physical thing, such as a diamond, or a chose
in action, 
such as an issue of shares, to a servant as a reward for his services.
The value of it has to be assessed, he said, for tax purposes at the time of
the grant and it is immaterial that its value should rise or fall afterwards.
But I would point out those are all interests in property and they are
very different from purely personal rights such as this option. Take the
issue of shares on which Mr. Heyworth Talbot so much relied. It is clearly
an interest in property. Parke, B. said that ” the shareholder acquires, on
” being registered, a vested interest of a permanent character, in all the
” profits … of the Company, and when registered, may be deemed a
” purchaser in possession of such interest”, see The Birkenhead Company v.
Pilcher (1850) 5 Ex. at p. 125; and shares are now, by statute, personal
estate, see section 73 of the Companies Act, 1948. So also with any other
right which is by its nature assignable, such as a bill of exchange or a
” rights” issue of shares. It is in the nature of an interest in property.
It can be valued at the time it is given to the servant and assessed accordingly.
But a purely personal right stands on a very different footing. The right
of a servant to his salary or wages is a purely personal right. So is his
right to a bonus or commission. Suppose that a company in a service agree-
ment agrees to pay the servant a bonus of 10 per cent, of the net profits
whenever the net profits overtop £10,000. The servant, before he gets the
bonus, may be able to turn it to pecuniary account in just the same way
as it is suggested that he can turn this option to pecuniary account: for
he might get someone to pay him something for it, by means of the simple
expedient of undertaking to hand the bonus over to him when he gets it.
But nevertheless he is only taxable on the bonus when he receives it. And
if this be so, what is the difference. I ask, between giving a servant a right
to a share of the profits when profits rise, and giving him a right to take
up new shares when shares rise? For, after all, shares rise with profits. I
can see no difference in principle at all.

There remains to consider the case of Tennant v. Smith [1892] AC 150.
That case showed that a right or privilege which cannot be turned to pecuniary
account is not taxable at all. It does not prove the converse. It does not
prove that a right or privilege which can be turned to pecuniary account
is taxable. In any case, I doubt myself whether this option could be turned
to pecuniary account, at any rate, at the moment when it was given. There
was no evidence that it could be done. The option, as I have said, was
purely a personal right. Mr. Abbott could not sell it. But it was suggested
that he could agree with a third person that he would exercise it for his

15

benefit on his request: and in return the third person would give him
money. I should have thought it very difficult to get a third person
to do this. There is, so far as I know, no market in options which are purely
personal to the holder. But even if the option could be turned to pecuniary
account in such a devious way, I do not think it should be regarded as
taxable. It was, as I have said, only a right to make profits in the future,
if the opportunity arose. It was not itself a perquisite or profit.

My Lords, in all the cases hitherto when a servant has been granted by
his employer a purely personal right to receive in the future a benefit during
his service, the Judges have with one accord held that he receives the
” perquisite ” or ” profit” when the thing is actually transferred to him and
not before. So said Danckwerts, J. in Bridges v. Bearsley [1957] 1 W.L.R.
59 at pp. 68-9, and both Jenkins and Sellers, L.JJ. agreed with him on this
point, see [1957] 1 W.L.R. 674 at pp. 689, 703. So said all the Judges in
Forbes’s Testamentary Trustees v. Commissioners of Inland Revenue, 1958
S.C. 177. And I must say that I agree with them. It is the same point as
I have insisted on throughout. Tax is not payable on the right in the future
to receive ” salaries, fees, wages, perquisites or profits ” but only on those
things when received.

I would therefore dismiss this appeal.

 

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