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of <h1>Limited partnerships trading activities for profit upheld, entitled to first-year allowances. Appeal allowed.</h1> <h3>Ensign Tankers (Leasing) Ltd. Versus Stokes (Inspector of Taxes)</h3> Ensign Tankers (Leasing) Ltd. Versus Stokes (Inspector of Taxes) - [1990] 186 ITR 666 Issues Involved:1. Entitlement to first-year allowances under Section 41(1) of the Finance Act 1971.2. Whether the partnerships were 'carrying on a trade.'3. Whether the plant 'belonged' to the partnerships.4. Whether the partnerships 'incurred' expenditure.5. Application of the Ramsay principle.Detailed Analysis:1. Entitlement to First-Year AllowancesThe taxpayer company claimed first-year allowances on capital expenditure for two cinematograph films, 'Escape to Victory' and 'Outland,' under Section 41(1) of the Finance Act 1971. The court examined whether the taxpayer company, through its involvement in limited partnerships, was entitled to these allowances. Section 41(1) stipulates that allowances are available when a person incurs capital expenditure on machinery or plant for trade purposes, and the machinery or plant belongs to them during the chargeable period.2. Whether the Partnerships Were 'Carrying on a Trade'The court assessed whether the limited partnerships were engaged in trade. The production and distribution of films were considered typical commercial transactions. The court emphasized that the presence of fiscal motives does not negate the commercial nature of a transaction if it also has a genuine commercial purpose. The court found that the partnerships engaged in commercial transactions with a view to profit, despite the taxpayer company's fiscal motivations.3. Whether the Plant 'Belonged' to the PartnershipsThe Crown argued that the partnerships did not 'own' the plant (master negatives) because they had granted distribution and exploitation rights in perpetuity. The court rejected this, noting that the partnerships retained ownership of the master negatives and had the rights to distribute and exploit the films, even if they appointed agents for distribution.4. Whether the Partnerships 'Incurred' ExpenditureThe Crown contended that only the portion of expenditure funded from the partnerships' resources should be considered, excluding non-recourse loans. The court clarified that 'to incur' means to render oneself liable to expenditure. The partnerships legally committed to the expenditure and disbursed it, regardless of the source of the funds. Therefore, the entire expenditure, including amounts from non-recourse loans, was incurred by the partnerships.5. Application of the Ramsay PrincipleThe court examined whether the transactions were preordained steps in a composite transaction designed solely for tax avoidance, invoking the Ramsay principle. The court found that the transactions were not merely paper transactions without commercial purpose or effect. The creation of the partnerships and the subsequent transactions were genuine commercial activities structured to secure fiscal advantages without losing their commercial nature.Conclusion:The court concluded that the limited partnerships were engaged in trading activities with a view to profit. The transactions were commercial and genuine, despite being structured to achieve fiscal advantages. The taxpayer company was entitled to the first-year allowances, and the appeal was allowed with costs.
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