TaxTMI 
TaxTMI 
1954 (6) TMI 13
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....licable to Cases I and II of Schedule D, but other portions of the Income Tax Act, 1918, should be quoted. Section 209(1) provides: "In arriving at the amount of profits or gains for the purpose of income-tax-(a) no other deductions shall be made than such as are expressly enumerated in this Act......" Schedule D, paragraph 1(a)(ii) is as follows: "Tax under this Schedule shall be charged in respect of-(a) the annual profits or gains arising or accruing...(ii) to any person residing in the United Kingdom from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom or elsewhere." Paragraph 2 provides: "Tax under this Schedule shall be charged under the following cases respectively; that is to say-Case I. Tax in respect of any trade not contained in any other Schedule," The rule application to Case I of Schedule D is: "The tax shall extend to every trade carried on in the United Kingdom or elsewhere.....and shall be computed on the full amount of the balance of the profits or gains....." The rules applicable to Cases I and II, so far as relevant, are as follows: ....
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.... the nationalization of the sugar refining industry would become part of the Labour Party's considered official programme and they endeavoured, without success, to persuade the Policy Committee of the Labour Party to receive a deputation. Paragraph 8 and 10 of the stated case are as follows: "8. Efforts to obtain consent to the said deputation having failed, the directors were more than even convinced that nationalization of the industry was intended an that the company would thereby lose its business and assets. Accordingly, at an extraordinary meeting of the stockholders of the company which was held on September 15, 1949, the following resolution was proposed and passed: "Believing as we do that nothing but harm to workers, consumers and stockholders alike can spring from the nationalization of the sugar refining industry, the members of this company hereby empower the board of directors to do everything in their power to meet the threats of the nationalizers who, learning nothing from the chaos, losses and labour unrest that they have created in other industries, now wish to seize the assets of this company.'" There follows a reference to Lord Ly....
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....t laid down by rule 3(a). He accepted the Solicitor-General's argument that money laid out merely for the purpose of preventing a change in the identity of the stockholders could not be regarded as being laid out for the purposes of the trade. My Lords, I am content to assume that the argument so accepted was correct in law, for there is no evidence that any such intimation was given, and there is abundant evidence that the money was laid out solely for the purpose which I have already stated. I have already quoted paragraphs 8 and 10, and Lord Lyle said, in his oral evidence, that he "had never thought of the alternative method of nationalization by which the State would have acquired all the capital stock of the company from its members." Lord Lyle was the President of the board of directors and the only one of the three witnesses who was a director of the company at the time when the money was spent. Mr. W.R. Booth, who was secretary to the company when the money was spent and became a director later, said that it did occur to him that one way of nationalizing the company would be for the State to acquire all the capital stock, but there is no evidence that he communicate....
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....pent?" If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade. The same result follows if I apply to the present case the oft-quoted observation of Lord Davey in Strong & Co. of Romsey Ltd. v. Woodified [1906] A.C. 448, 453; 22 T.L.R. 754 in regard to the words "for the purposes of such trade" in the corresponding provision of the Income Tax Act, 1842. "These words," said Lord Davey, "are used in the other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits." The last sentence of this observation has sometimes been quoted in isolation, but it cannot be supposed that in this one short passage Lord Davey intended to ascribe two different meanings to the words in question, and if h....
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....ment Act, 1922-1932, "wholly and exclusively laid out or expended for the production of assessable income." The case of Southern v. Borax Consolidated Ltd. [1941] 1 K.B. 111, 120; [1940] 4 All E.R. 412; [1942] 10 I.T.R. Suppl. 1 has a strong bearing upon the present case. There the company was in danger of losing a valuable asset, not by confiscation but by legal proceedings attacking the company's title to that asset. Lawrence, J., held that the expense of resisting these proceedings was deductible, and said: "It appears to me that the legal expenses which were incurred by the respondent company did not create any new asset at all, but were expenses which were incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the title and not the value of the company's business does not, in my opinion, make it any different." This decision was approved by the Court of Appeal in Associated Portland Cement Manufacturers Ltd. v. Kerr [1945] 62 T.L.R. 115, 117; [1946] 1 All E.R. 68, and was applied by Croom-Johnson, J., in Cooke v. Quick Shoe Repaid Service [1949] 30 T.C. 460. Further, I derive assistance from....
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....t expressly prohibits its deduction from such income. This question must, we think, be answered in the negative. We find it quite impossible to hold that the expenditure was incurred exclusively, or at all, in the production of the assessable income. It was incurred not for the production of income, but for the purpose of preventing the extinction of the business from which the income was derived, which is quite a different thing. It was contended by the company that it was illogical that while legitimate expenses incurred in the production of the income are deductible, similar expenses incurred for the much more important purpose of keeping the profit-making business alive are not deductible, and, further, that it was in equitable that the Legislature should, on the one hand force a certain class of traders into a struggle for their very existence, and, on the other hand, treat the reasonable expenses incurred in connection with such struggle as part of the profits assessable to income tax. These aspects of the matter are clearly and forcibly set out in the contentions of the company as embodied in the correspondence with the commissioner contained in the case, but they raise ques....
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....ecessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade; and it appears to me that the findings of the commissioners in the present case bring the payment in question within that description." The Crown also called in aid the recent decision of Danckwerts, J., in Boarland v. Kramat Pulai Ltd. [1953] 1 W.L.R. 1332; [1953] 2 All E.R. 1122, but I do not find that case on any assistance, as the judge took the view that the expenditure in question had two objects, one of which was not for the purposes of the company's trade. I come now to the last argument advanced on behalf of the Crown, which may, I think, fairly be stated as follows: (1) Although "the trade," within the meaning of rule 3(a) is no doubt the trade which the company was carrying on when the sum in question was spent, yet the trade of a company or of any other trader is regarded by the Income Tax Acts as being an entity which can continue to exist not withstanding that its ownership is transfe....
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....ers seem to me very remote from the question now under consideration. As to (3), this seems to me to be an assumption wholly unwarranted by the evidence. There is no evidence that a transfer of the assets to a national body or authority would not destroy or adversely affect the company's business. The whole of the assets might be merged with those of some other company compulsorily taken over, and by these or other means the business at present carried on by the respondent company might case to exist. It is true that, when a transfer of a business has been carried out, it is possible to look back to what was actually done by the transferee after the transfer and to decide whether or not the business had ceased to exist: see Inland Revenue Commissioners v. Barr [1954] 1 W.L.R. 792 and cases there cited. It is, however, impossible to say in advance what the transferee will do with the business. He may put an end to it altogether, as I have pointed out. It is equally impossible to say in advance whether the transfer will or will not adversely affect the business. In the present case the resolution set out in paragraph 8 of the case stated, already quoted, and the speeches of Lo....
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....enabling a person to carry on and earn profits in the trade, surely he meant for the purpose of enabling the trader claiming to deduct that expenditure to carry on and earn profits in his trade. It is clear on the authorities that Lord Davey's formula includes expenditure for the purpose of preventing a person from being disabled from carrying on and earning profits in the trade. Here, too, it seems to me reasonably plain that the relevant trade is that of the trader claiming to make the deduction. There is no doubt that legislation compulsorily divesting a trade of the whole of the assets and goodwill of his business, and (one may suppose) precluding him from establishing any similar business in the future, would utterly disable him from carrying on an earning profits in his trade." Hodson, L.J., said [1953] Ch. 601, 646: "In my opinion the expenditure is a proper debit item to be charged against the incomings of the trade when computing the balance of the profits of it, and is none the less a proper revenue charge because it is laid out for the purpose of preserving the assets of the company. It is not, I think, a good answer to say that the asset is not in danger....
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....rd of directors, and therefore I turn first to see what was the purpose of the board. In the case stated the commissioners set out fully the evidence which was before them and which they accepted, and then they state that they " found that the sum in question was money wholly and exclusively laid out for the purposes of the company's trade," but they do not state specifically what the purposes were. The purpose of a person or of a board of directors in spending money is a pure matter of fact. It may be that it can only be ascertained by drawing an inference from other facts, but the commissioners are entitled to draw inferences. Probably they did so in this case, but, as their conclusion is not expressed, and from reading the case I cannot feel satisfied that I know what it was, I find it necessary to examine the case and draw my own inference. It appears from the case that after 1945 the directors were becoming increasingly concerned by the statements of supports of the Labour Government advocating nationalization of the sugar refining industry. Early in 1949 statements in the press, which are quoted, led them to believe that the Labour Party Executive were discuss....
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...." The only other relevant parts of the case are, I think, a summary of the evidence of Lord Lyle of Westbourne, president of the board, and copies of speeches delivered by him at the stockholders' meeting which are annexed to the case. I do not think that the evidence of Mr. Booth is of assistance on this matter: he was not then a director and he only gives his personal views. As I think that the commissioners accepted Lord Lyle's evidence as indicating the purpose of the board of directors, I shall quote the relevant part of it: "The directors though that if nationalization occurred the State would take over the company's assets and its business, and they decided that they would take such legal steps as they could to try and prevent this. The primary object of the propaganda campaign was to prevent the company from losing its business and to preserve it assets intact. he agreed that if the company lost its business the stockholders would also suffer and he also agreed that the preservation of the company's business would, incidentally, save the stockholders from injury as well. He had never thought of the alternative method of nationalization by which t....
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.... who should own the trade, and was not in any way incidental to the earning of profit in carrying on the trade : the respondents' "trade" was an entity which could and would continue in existence after it had been nationalized, and that trade could not benefit in any way from this expenditure. There are many authorities which deal with the meaning of the phrase "the purposes of the trade," and although none is directly in point I find it necessary to examine several for the light which they throw on this case. The appellant founds strongly on the decision of Privy Council in Ward & Co. Ltd. v. Commissioner of Taxes [1923] A.C. 145. That was an appeal from New Zealand where the rule corresponding to rule 3(a) is in different terms : it prohibits the deduction of expenditure "nor exclusively incurred in the production of the assessable income." In that case a brewery company spent money on an anti-prohibition campaign and their expenditure was held not to be deductible. In delivering the judgment of the Board Viscount Cave, L.C., said Ibid. 149, 150: "The expenditure in question was not necessary for the production of profit, nor was it in fact incurred for that purpo....
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....lso held entitled to deduct certain fire and licence insurance premiums. In Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 K.B. 674, to which Lord Cave also referred, a retiring gratuity to one of the reporting staff was held deductible. In the course of his judgment Scrutton, J., said Ibid. 684: "Payment for political purposes might conceivably be for the purposes of trade. It might be that a payment by a company to the Tariff Reform League might be of grant advantage to its trade. It might be that a payment by a company to a political party which was supposed to be identified with the interests of a particular trade might be to the advantage of the trade; but one can easily imagine cases, such as a payment by a company to the National Service League, where it would be impossible to conceive that anybody could find that such money was wholly or exclusively laid our or expended for the purposes of the trade." Those statements were obiter but we were not referred to any later case where they were disapproved. In Boarland v. Kramat Pulai Ltd. [1953] 1 W.L.R. 1332 the expense of distributing a chairman's speech containing general polit....
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....missioner v. Warnes & Co. Ltd. [1919] 2 K.B. 444; 35 T.L.R. 436 ); and insurance against loss owing to strikes has been held not to be deductible (Rhymney Iron Co. Ltd. v. Fowler [1896] 2 Q.B. 79; 12 T.L.R. 404; Thomas Merthyr Colliery Co. Ltd. v. Davis [1933] 1 K.B. 349; 48 T.L.R. 633; [1933] 1 I.T.R. 12). I find these last cases difficult to follow and I cannot find that they throw any light on the present case. The ground of judgment is most clearly stated by Slesser, L.J., in the latter case where he said [1933] 1 K.B. 349, 374; [1933] 1 I.T.R. 12: "I find the greatest difficulty in taking the view that an expense which is incurred exclusively for the purposes of the trade can be extended to cover an expense wholly and exclusively laid out for the purpose of protecting the trader against the absence of trade." That may or may not be right in its context, but I do not think it sets out any general rule capable of wider application. The case of Strong & Co. of Romsey Ltd. v. Woodifield [1906] A.C. 448 was relied on by both sides. The brewery company owned an inn which was carried on as part of their business. A customer in the inn was injured by the fall of a chimn....
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....f a trade are that which is gained by the trading, for whatever purposes it is used' and therefore what your Lordships have to determine is whether the expense is incurred in order to earn gain or is application or distribution of that gain when earned." Lord Simonds said [1948] A.C. 508, 526-7: "It is, think, important to emphasize that the words 'for the purposes of the trade' in their context, i.e., where a computation of 'profits' for the ascertainment of taxable income is being made, must mean for the purpose of enabling a person to carry on and earn profits in the trade.' These familiar words I cite from Lord Davey's speech in Strong & Co. of Romsey Ltd. v. Woodifield [1906] A.C. 448, 453......neither the cost of ascertaining taxable profit nor the cost of disputing it with the Revenue authorities is money spent to enable the trader to earn profit in his trade." Lord Normand, who was also one of the majority, said [1948] A.C. 508, 530: "There is the more substantial reason, that Income-tax is an impost made upon profits after they have been earned, and that unless the observations of Lord Davey in Strong & Co. of Romsey Ltd.....
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.... had been effected before 1949 the assets of those engaged in the industry had been compulsorily acquired from them and vested in statutory bodies which used those assets to carry on the industry. But in two cases, the Bank of England and Cable & Wireless Ltd., nationalization had been effected by compulsory transfer of all the stock or shares to Government nominees.. It was admitted for the respondents that expenditure to resist the latter form of nationalization would not be expenditure for the purposes of the trade; and it was argued for the appellant that, as there is no substantial difference between these forms of nationalization in the result, it would be anomalous if expenditure to resist one form were deductible while expenditure to resist the other form were not. But in law there is an essential difference: the company is held in law to be a person entirely different from the shareholders, and the company is the trader, not the shareholders. By the first form of nationalization the company, the trader, is deprived of its assets. But by the latter form the company's position is unchanged ; it retains its assets and continues to carry on its business. All that happens i....
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.... conception of "a trade." I do not find any assistance in any provisions beyond Schedule D, and I shall refer as shortly as I can to those provisions in Schedule D and its rules which have some relevance. Schedule D provides that tax shall e charged in respect of profits arising or accruing to any person from any trade, profession, employment or vocation carried on in the United Kingdom or elswhere [paragraph (1)(a)(ii)] or exercised within the United Kingdom [paragraph 1(a)(iii)]: and that tax shall be charged under Case I in respect of any trade not contained in any other Schedule. The rule applicable to Case I provides for computation of tax on an average of the profits of the preceding three years. The rule applicable to Case II makes similar provisions with regard to professions, employments and vocations. In the rules applicable to Cases I and II there are several which deal with setting up a trade, discontinuance of a trade or succession to a trade. Rule 8(1) beings: "Where a person charged or chargeable with tax in respect of any trade, profession or vocation which has been set up or commenced within the period of three years...." (not "Which has been set up or ....
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.... year of assessment. The Act of 1918 contains rules for an artificial computation of profits for the year of assessment which might bring in to the computation receipts and expenses of his predecessor if he had recently succeeded to the trade, and in such a case rule 3 must apply to all expenditure which is being brought into the computation whether or not it was incurred by the person who is being assessed. Moreover, it is not difficult to suppose c case where a trader is shortly to be succeeded in his trade by another person and where he spends money the benefit of which will accrue in whole or in part to his successor. It could not be said that for that reason the money was not wholly and exclusively laid out for the purpose of the trade. But does that mean that expenditure by a trader to protect his own business is deductible if his assets are to be taken from him and vested in some other body to be used in carrying on the same or a similar trade in future? This is a question which could not arise in any ordinary case. In all other cases a trader who is protecting his business is doing so both in the interest of himself and of possible successors (if the considers them at al....
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....e successor of all those firms in the income tax sense so that "the trade" of each of them would continue: and I find nothing in the case stated to indicated that that would have happened or that the respondents' directors or shareholders had any views about that matter. On nationalization the respondents' trade might or might not have been discontinued in the income tax sense. That would depend on the terms of the statute. But, as I have said the argument of the appellant is based on the assumption that the respondents' trade would not have been discontinued. Of course the industry would not have been discontinued, but that is quite a different matter. The respondents' expenditure was wholly and exclusively laid out to prevent their business and assets being taken from them, and I do not think that it is a sufficient answer to say that their trade might not have been discontinued after nationalization even if it were an answer to say that it would not have been discontinued. If the further fate of their trade was indeterminate it cannot be said that the only matter in question was who should own that trade, and that its continued existence was not in question. ....
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....ion of Y, a permissible deduction? It is, of course, true that it is the trader who is being taxed, but his tax is computed on the profits or gains arising or accruing from his trade. My Lords, in their language paragraphs 1 and 2 of Schedule D, rule 1 of the rules applicable to Case I, rule 3 of the rules applicable to Cases I and II and the old rules 8, 9 and 11 all, I think, point to the conclusion that "the trade" is regarded as an entity for tax purposes distinct from the persons who may be carrying it on at a particular moment. Your Lordships had recently to consider this question in connexion with a balance charge under Section 17(1) of the Income Tax Act, 1945, in the case of Inland Revenue Commissioners v. Barr [1954] 1 W.L.R. 792. The actual decision of that case has, of course, no bearing on he present appeal, but it shows that in cases of discontinuance of and succession to a trade the Income Tax Acts regard the trade as distinct from the trader. Perhaps the clearest and most relevant example for present purposes is to be found in the fact that when the profits of the trade were computed on the average of the preceding three years, and the trade had changed hands during....
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....or the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits," he was not considered the question whether any distinction was to be drawn between the trade and the particular trader carrying on that trade. When he spoke of "a person" he was not referring to A as distinct for B. Every business must be carried on by a person or persons who of necessity must have incurred the expenditure in question, but to use the language of Lord Davey to support the proposition that expenditure directed solely to securing that the trade shall in future be carried on by A rather than B is "money wholly and exclusively laid out or expended for the purposes of the trade" seems to me wholly unwarranted. These words of Lord Davey have often been quoted with approval, but never in any context involving consideration of the fresh element which has given rise to the present case. It is on this as....
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....ese circumstances it does not seem profitable to examine the precise difference in the language o the relevant legislation or to speculate as to what the decision might or might not have been in different circumstances. My Lords, I conceive that if this be the true construction of the rule, cases may still arise where the evidence shows that the change of ownership will or may bring about the extinction o the trade previously carried on and the expenditure is incurred to prevent this result. In the present case there is no such finding, nor is there any trace of any such issue having been canvassed before the commissioners or in the courts below, nor do I think there is sufficient material to justify your Lordships in drawing any inferences with regard to such risk. For these reasons I would allow the appeal. LORD KEITH OF AVONHOLM. My Lords, the Commissioners for the General Purposes of the Income Tax have found that the sum involved in this appeal was money wholly and exclusively laid out for the purposes of the respondent company's trade and was an admissible deduction from its profits for income tax purposes. In so finding the commissioners have done little more th....
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....as sole shareholder. It is just here that the finding of the commissioners seem to me to be deficient, because they do not find whether the expenditure was incurred exclusively to resist nationalization by way of acquisition of business and assets or to resist control by either form of nationalization. It was maintained, however, that the findings may be held to support the view, however unrealistic it may be, that the expenditure was primarily to prevent the company-with emphasis on the company from losing its business and assets. I am not prepared to say that this is not a supportable view of the facts, and if so it leads to the question whether the commissioners were entitled to hold that in law the expenditure was made for the purposes o the company's trade. It is on that view that I propose to examine the case, with reference to the statute and the authorities. It is necessary, in my opinion, to distinguish between a threat to the assets of a business and a threat to the right of the owner of the business and assets to carry on the business. The assets of a business may be threatened in a variety of ways. They may be said to be under a constant threat of loss by fire, o....
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....control of a business is expenditure laid out for the purpose of the trade within the meaning of rule (3)(a). Counsel for the respondents agreed that this is the question. As he put it, the expenditure was to determine who was going to carry on the trade. And, he submitted: "It was not the trade as an entity that was to be looked at but the person who was carrying on the trade." For this view reliance was placed on a passage in the speech of Lord Davey in Strong & Co. of Romsey Ltd. v. Woodifield [1906] A.C. 448, 453. Referring to the words "for the purposes of the trade" Lord Davey said: "These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursement permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits." I am unable to attach any special significance to the words "for the purpose of enabling a person to carry on and earn profits in the trade." ....
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....a person not as trader but as taxpayer (Inland Revenue Commissioners v. Dowdall, O'Mahoney & Co. Ltd. [1952] A.C. 401; Smith's Potato Estates Ltd. v. Bolland [1948] A.C. 508; 17 I.T.R. Suppl. 1; Rushden Heel Co. Ltd. v. Keene [1948] W.N. 283; [1948] 2 All E.R. 378; 30 T.C. 298; 17 I.T.R. Supp. 19, or as property owner or householder (Strong & Co. of Romsey Ltd. v. Woodifiedl [1906] A.C. 448; Union Cold Storage Co. Ltd. v. Jones [1924] 8 T.C. 725, or as law-breaker (Inland Revenue Commissioners v. Warnes & Co. Ltd. [1919] 2 K.B. 444; Inland Revenue Commissioners v. Alexander Von Glehn & Co. Ltd. [1920] 2 K.B. 553; 36 T.L.R. 463. Here I would say that the expenditure was made by the company not as trader, but as owner of the trade, and from purely personal consideration not connected with the purposes of the trade. Expenditure to be deductible before profits for the purpose of income tax are struck must, in my opinion, be related to, or affect, the profit earning capacity of the trade. That is not necessarily conclusive, for capital expenditure cannot be deducted. But it is, I think, a minimum requirement. In all the cases in which the question has been considered and in w....
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....uld be in no different position from expenses put out to protect any trading assets, for example, insurance premiums on the stock in trade of a business. The material point in that case was that the brewery company had acquired the tied houses for the purpose of its trade. In British Insulated & Helsby Cables ltd. v. Atherton [1926] A.C. 205 a company had established a pension fund for its clerical and technical salaried staff and made an initial payment of GBP 31,784 to form the nucleus of the fund. This House held that this was an expenditure wholly and exclusively laid out of expended for the purposes of the company's trade but disallowed the deduction as being a payment in the nature of capital expenditure. On the first point Viscount Cave, L.C. said [1926] A.C. 205, 211-2: "It was made clear in the above cited cases of Usher's Wiltshire Brewery Ltd. v. Bruce [1915] A.C. 433 and Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 3 K.B. 674 that a sum of money expended, n not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly ....
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....and with a view to defeating a proposal for the prohibition of the sale of intoxicating liquors throughout New Zealand to be voted on by a special poll of the parliamentary electors. If carried this proposal would have meant the destruction of the company's business. The company would no doubt be left in possession of its assets but as they could not be employed for brewing beer for sale in New Zealand it was really the business that was theratened with destruction. The language of he statute in New Zealand was somewhat different from that of rule 3(a) in this country. What was prohibited as a deduction was expenditure "not exclusively incurred in the production of the assessable income." I quote one short passage from the judgment of the Court of Appeal in New Zealand in rejecting the claim o the taxpayer [1921] N.A.L.R. 934, 939: "We find it quite impossible to hold that the expenditure was incurred exclusively, or at all, in the production of the assessable income. It was incurred not of the production of income but for the purpose of preventing the extinction of the business from which the income was derived, which is quite a different thing." On appeal to th....