1957 (10) TMI 36 - HC - Income Tax

Evans Medical: lb100,000 Capital Receipt, Not Taxable Income

MORIARTY Versus EVANS MEDICAL SUPPLIES LTD.

The House of Lords determined that the lb100,000 received by Evans Medical Supplies Ltd. was a capital receipt for parting with secret processes, not an ... - Issues Involved:1. Classification of the lb100,000 payment as capital or income.2. Whether the lb100,000 was received in the course of the company's existing trade or a new trade.3. The appropriateness of remitting the case for further findings on the division of the lb100,000 payment.Issue-Wise Detailed Analysis:1. Classification of the lb100,000 Payment as Capital or Income:The respondent company, Evans Medical Supplies Ltd., received lb100,000 from the Burmese Government under an agreement dated October 20, 1953. The company was assessed for this amount as part of its profits for the year 1954-55. The Special Commissioners included this sum in the company's taxable income, considering it as a receipt in the course of trade. The company contended that the amount was a capital receipt, arguing that it was for the sale of secret processes and other fixed capital items. The Court of Appeal found that part of the lb100,000 should be attributed to the imparting of secret processes (capital receipt) and remitted the case to the Special Commissioners to ascertain this part. However, the House of Lords disagreed with this division, emphasizing that the entire sum was indivisible and should be considered as a whole. The Lords concluded that the lb100,000 was a capital receipt, as it was paid for the company parting with a capital asset, namely the secret processes.2. Whether the lb100,000 was Received in the Course of the Company's Existing Trade or a New Trade:The Special Commissioners held that the lb100,000 arose either from the company's existing trade or from a new trade commenced on October 20, 1953. The House of Lords found this alternative determination problematic. It was emphasized that if the sum was received in the course of a new trade, it could not be included in the assessment for the company's existing trade for the year 1954-55. The Lords noted that the company had chosen the best method to develop its business under the circumstances, but this did not definitively indicate whether it was an extension of the existing trade or a new trade. Ultimately, the Lords leaned towards the view that the company was engaging in a new activity, which could not be taxed under the existing trade's assessment.3. The Appropriateness of Remitting the Case for Further Findings on the Division of the lb100,000 Payment:The Court of Appeal's decision to remit the case to the Special Commissioners for further findings on the division of the lb100,000 was challenged. The House of Lords found that the case stated did not raise the issue of splitting the sum into parts. Both parties had argued the case on an 'all or nothing' basis, and no evidence was presented to support a division of the amount. The Lords criticized the introduction of this new point by the Court of Appeal, emphasizing that it was not open to the Court to remit the case for findings on a new point not raised before. Consequently, the House of Lords dismissed the Crown's appeal and allowed the company's cross-appeal, restoring the judgment of Upjohn J., which treated the entire lb100,000 as a capital receipt.Conclusion:The House of Lords concluded that the lb100,000 received by Evans Medical Supplies Ltd. was a capital receipt for parting with a capital asset (secret processes) and not an income receipt from the company's trade. The decision to remit the case for further findings on the division of the sum was deemed inappropriate, and the company's cross-appeal was allowed, restoring the initial judgment that the lb100,000 should not be included in the company's taxable income for the year 1954-55.