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Smith's Potato Estates Ltd v. Bolland (Inspector of Taxes); Smith's Potato Crisps (1929) Ltd v Inland Revenue Commissioners

[1948] 2 All ER 367
[1948] AC 508

Between: Smith's Potato Estates Ltd
And: Bolland (Inspector of Taxes)
Between: Smith's Potato Crisps (1929) Ltd
And: Inland Revenue Commissioners

Court:
House of Lords

Judges: Viscount Simon
Lord Porter
Lord Simonds
Lord Normand
Lord Oaksey

Subject References:
Excess Profits Tax
Deductions
Cost of litigation
Appeal vital to retain services of valuable employee
Income Tax
Deductions
Cost of Litigation
Appeal vital to retain services of valuable employee

Legislative References:
Income Tax Act 1918 (c 40) - sched D, Rules Applicable to Cases I and II, r 3 (a)
Finance Act 1940 (c 29) - s 32(1)
Finance (No 2) Act 1939 (c 109) - s 14(1)

Case References:
Allen v Farquharson Bros & Co, considered - (1932) (17 Tax Cas 59)
Worsley Brewery Co Ltd v Inland Revenue Comrs, considered - (1932) (17 Tax Cas 349)
Strong & Co Ltd v Woodified - [1906] AC 448; 75 LJKB 864; 95 LT 241; 5 Tax Cas 215; 28 Digest 57, 290
Smith v Lion Brewery Co Ltd - [1911] AC 150; 80 LJKB 566; 104 LT 321; 5 Tax Cas 568; 75 JPJo 87; 28 Digest 57, 291
Usher's Wiltshire Brewery Ltd v Bruce - [1915] AC 433; 84 LJKB 417; 112 LT 651; 6 Tax Cas 399; 28 Digest 56, 286
British Insulated & Helsby Cables v Atherton - [1926] AC 205; 95 LJKB 336; 134 LT 289; 28 Digest 52, 264
Allen v Farquharson Bros & Co - (1932) 17 Tax Cas 59, Digest Supp
Mersey Docks & Harbour Board v Lucas - (1883) 8 App Cas 891; 53 LJQB 4; 49 LT 781; 48 JP 212; 2 Tax Cas 25; 28 Digest 21, 104
Rushden Heel Co Ltd v Keene (Inspector of Taxes), Rushden Heel Co Ltd v Inland Revenue Comrs - [1947] 1 All ER 699
Worsley Brewery Co Ltd v Inland Revenue Comrs - (1932), 17 Tax Cas 349

Hearing date: 19, 20, 22, 23 APRIL 1948
Judgment date: 14 JULY 1948
To secure a supply of potatoes for the purpose of their business a company formed and held all the shares in a subsidiary company which, with the parent company's money, acquired a large estate, previously managed for many years by an experienced farmer, Y. To retain Y's services, the subsidiary company entered into an agreement with him under which he was paid, in the accounting year ending 31 March 1941, £6,486, which was included in the accounts of the subsidiary company. In computing the profits of the subsidiary company (which were included in the parent company's profits for assessment to excess profits tax for that chargeable accounting period), the Commissioners of Inland Revenue decided that for excess profits tax purposes no deduction should be allowed in respect of Y's remuneration in excess of £3,500, being the amount the commissioners considered reasonable and necessary having regard to the requirements of the trade or business and to the actual services rendered by Y. Both companies, regarding Y's employment as essential to the well-being of the enterprise and fearing they would suffer through Y's discontent, appealed to the Board of Referees against this decision and the Board held that £5,800 out of the sum of £6,486 was deductible. As a result, the commissioners did not seek to disallow any part of Y's remuneration in subsequent years. The subsidiary company incurred legal and accountancy costs of £622 in the preparation and prosecution of the appeal:-
Held - (Viscount Simon and Lord Oaksey dissenting) the legal and accountancy costs incurred were not a disbursement "wholly and exclusively laid out of expended for the purposes of the trade" within the meaning of r 3 (a) of the Rules Applicable to Cases I and II of sched D to the Income Tax Act, 1918, and so were not deductible by the subsidiary company for the purposes of its assessment to income tax and were not deductible by the parent company for the purpose of the assessment subject to excess profits tax.
Dicta of Lord Loreburn LC and Lord Davey in Strong & Co Ltd v Woodifield ([1906] AC 448, 452, 453), applied.
Dictum of Viscount Cave LC in British Insulated & Helsby Cables v Atherton ([1926] AC 205, 211, 212), considered.
Allen v Farguharson Bros & Co (1932) (17 Tax Cas 59) and Worsley Brewery Co Ltd v Inland Revenue Comrs (1932) (17 Tax Cas 349), considered.
Decision of Court of Appeal ([1947] 1 All ER 704), affirmed.
Notes
As to Expenses Wholly or Exclusively Expended for Purposes of Trade, see Halsbury, Hailsham Edn, Vol 17, p 152, para 312; and for Cases, see Digest, Vol 28, pp 42-44, 56, 57, Nos 215-266, 286-292.
Consolidated Appeals
Consolidated Appeals by the taxpayers from a decision of the Court of Appeal (Lord Greene MR Morton and Somervell LJJ), dated 2 April 1947, and reported [1947] 1 All ER 704.
The Special Commissioners had disallowed a deduction, for the purposes of income and excess profits tax, of legal and accountancy costs incurred by the first appellants in successful appeals by both appellants against the proportion of the remuneration of an employee which was allowable in computing the profits of the first appellants, a company subsidiary to the other taxpayer, assessable to excess profits tax. Atkinson J allowed the appeals by the taxpayers, but his decision was reversed by the Court of Appeal. The House of Lords now affirm, by a majority, the decision of the Court of Appeal. The facts appear in the opinion of Lord Porter.
Their Lordships took time for consideration.
14 July 1948.  The following opinions were delivered.

ORDERS

Appeals dismissed with costs.


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