1946 (3) TMI 18 - HC - Income Tax

Precept Sums Classified as Trading Receipts: Court Rejects Local Authority Comparison

Pontypridd and Rhondda Joint Water Board Versus Ostime (HM. Inspector of Taxes)

The Court of Appeal affirmed that the sums received under precept by the appellant board should be included as trading receipts in the computation of ... Pontypridd and Khondda Water Act, 1910 Issues Involved:1. Whether the sums received under precept by the appellant board from the Pontypridd and Rhondda Urban District Councils should be included as receipts in the computation of the appellant board's trade profits.2. Whether the appellant board's position in respect of the sums raised by precept is similar to that of a local authority raising a rate to make good trading losses.Detailed Analysis:1. Inclusion of Sums Received Under Precept in Trade Profits:Viscount Simon articulated two propositions to determine the nature of the sums received. The first proposition states that payments in the nature of a subsidy from public funds to assist in carrying on a trade or business are trading receipts. The second proposition, an exception, applies if the subsidy is the proceeds of rates imposed by a rating authority, where the identity of the source with the recipient prevents any question of profits arising. The appellant board's situation did not meet the criteria for the second proposition as there was no such identity between contributors and recipients.Lord Thankerton elaborated that the sums paid under precept by the Pontypridd and Rhondda Urban District Councils were to be included as receipts in the computation of the appellant board's trade profits. The sums were intended to meet a deficiency in the net revenue of the board, arising from trading activities, and were therefore trading receipts.The Commissioners for General Purposes of the Income Tax initially held that these sums were not trading receipts. However, on appeal, the Court of Appeal reversed this decision, holding that the sums were indeed trading receipts and should enter into computation.2. Appellant Board's Position Compared to Local Authority:The appellant board argued that its position was similar to that of a local authority raising a rate to make good trading losses. They referred to the First Glasgow Case (Glasgow Water Commissioners v. Inland Revenue Commissioners [1875] 1 Tax Cas. 28), where it was held that sums raised by a local authority for public purposes were not trading receipts. However, the Court found significant differences between the Glasgow case and the present case.The Glasgow Water Commissioners were directly representative of the community and had the power to levy rates directly on the ratepayers. The rates collected were used for public purposes, and any surplus was carried forward to reduce future rates, thus benefiting the inhabitants. In contrast, the appellant board was not directly representative of the inhabitants, had no power to levy rates except on default of a constituent authority, and the sums obtained by precepts were intended to cover trading losses rather than public expenses.Lord Thankerton rejected the appellant board's contention that the sums were in the same category as a local rate raised by a public body. The sums were received to make up the profits or gains of their trade, similar to trading receipts, as established in the Lincolnshire Sugar Co. v. Smart [1937] 20 Tax Cas. 643, where advances made to a company to meet trading obligations were considered trading receipts.Conclusion:The appeal was dismissed with costs. The sums received under precept by the appellant board were correctly included as trading receipts in the computation of trade profits. The appellant board's position was not analogous to that of a local authority raising a rate for public purposes. The decision of the Court of Appeal was affirmed, and the sums in question were deemed trading receipts, thus entering into computation for income tax purposes.