1937 (12) TMI 8 - DSC - Income Tax

Court allows appeal, deems payments deductible expenses, not profit distribution, based on services rendered.

BRITISH SUGAR MANUFACTURERS, LTD. Versus HARRIS (INSPECTOR OF TAXES)

BRITISH SUGAR MANUFACTURERS, LTD. Versus HARRIS (INSPECTOR OF TAXES) - [1939] 7 ITR 101 (CA) Issues Involved:1. Whether the payments made to Skoda Works and the Corporation under the agreement were deductible as expenses for the purposes of computing trading profits under Schedule D.2. Whether the payments constituted a distribution of profits or were necessary for earning the profits.Detailed Analysis:Issue 1: Deductibility of Payments as ExpensesThe appellants, British Sugar Manufacturers, Ltd., entered into an agreement with Skoda Works and the Corporation on May 18, 1926. The agreement stipulated that Skoda Works and the Corporation would receive 20% of the net profits for their technical and financial services. The company claimed these payments as deductible expenses under Rule 3 of Cases I and II of Schedule D, arguing they were 'money wholly and exclusively laid out or expended for the purposes of the trade.'The Special Commissioners initially concluded that the payments were not deductible, viewing them as a distribution of profits. Finlay, J., upheld this decision, feeling constrained by authority despite his inclination to rule otherwise.Issue 2: Nature of Payments - Distribution of Profits vs. Remuneration for ServicesGreene, M.R., after reviewing the facts, concluded that the payments were indeed for remuneration by way of commission on profits for services rendered, a common type of agreement. He emphasized that the absence of a fixed salary did not alter the nature of the payments. The work performed by Skoda Works and the Corporation was ordinary management and advisory work, and the 'net profit' was calculated on a conventional basis, not for commercial or income tax purposes.Greene, M.R., distinguished between a contract for a share of profits and remuneration deductible before profits are ascertained. He referenced the case of Last v. London Assurance Corporation, noting that the policyholder in that case purchased a share of profits, which was not the situation here. Instead, services were exchanged for remuneration, not a share of profits.The judgment highlighted that two profit funds were involved: one for calculating the 20% commission and another for determining divisible profits. The first fund was solely for calculating the payment to Skoda Works and the Corporation, and once this was done, it ceased to be relevant. The second fund, which included the commission paid, was used to ascertain the company's divisible profits. This dual-account system clarified that the agreement was for remuneration for services, not a division of profits.Greene, M.R., found support in Union Cold Storage Co. v. Adamson and Indian Radio and Cable Communications Co. v. Bombay Presidency and Aden Income Tax Commissioner. Both cases supported the view that payments contingent on profits could still be considered expenses incurred for earning those profits. The ambiguity in the term 'profits' was addressed, noting that it could mean different things in different contexts.Separate Judgments:Romer, L.J.:Romer, L.J., agreed with Greene, M.R., emphasizing that the key question was whether the payment was a division of profits or a payment necessary for earning profits. He found no doubt that the payment was necessary for earning the company's profits and thus a legitimate deduction.Mackinnon, L.J.:Mackinnon, L.J., also agreed, noting that the ambiguity in the term 'profits' caused difficulty. He clarified that the annual payment in question was necessary for ascertaining the annual profits and not a payment out of profits after they had been ascertained.Conclusion:The appeal was allowed, with the court concluding that the payments to Skoda Works and the Corporation were deductible expenses necessary for earning the company's profits. The judgment clarified the distinction between remuneration for services and a division of profits, resolving the ambiguity in the term 'profits.'