Capital expenditure treatment for pre-takeover bonus paid as part of business acquisition cost

Bonus paid above the statutory minimum for the pre-takeover period was capital expenditure where the liability had been treated as part of the consideration for acquiring the business. The payment was incurred to obtain the business itself, not in the course of carrying it on for profit, so it retained the character of acquisition cost rather than a revenue outgoing. Accordingly, the excess bonus relating to the period before takeover was not allowable as a revenue deduction.

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Issues: Whether bonus paid in excess of the statutory minimum for the period preceding the date of purchase of the business was revenue expenditure or capital expenditure.

Analysis: The liability for bonus relating to the pre-takeover period formed part of the liabilities taken into account in fixing the consideration for the business. The payment was incurred to obtain the business itself and not in the course of carrying it on for earning profits. On that footing, the payment retained the character of a cost of acquisition rather than an operating outgoing. The principle applied was that an amount paid to acquire possession of a business, even though referable to an existing liability, is not deductible as revenue expenditure.

Conclusion: The bonus payment in excess of the statutory minimum, insofar as it related to the period before takeover, was capital expenditure and not allowable as a revenue deduction.

Ratio Decidendi: A payment made to discharge a pre-existing liability taken into account in the purchase of a business is capital expenditure if it forms part of the consideration for acquiring the business and is not incurred in carrying it on.

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