British Insulated and Helsby Cables Ltd v Atherton
[1926] AC 205(Judgment by: Lord Atkinson)
Between: British Insulated and Helsby Cables Ltd - Appellants
And: Atherton - Respondent
Judges:
Viscount Cave LC
Lord AtkinsonLord Buckmaster
Lord Carson
Lord Blanesburgh
Subject References:
REVENUE
INCOME TAX
TRADE PROFITS
DEDUCTIONS
Lump Sum set aside out of Profits to establish Pension Fund for Employees
Trust Deed
'Money wholly and exclusively laid out .... for the purposes of the trade'
'Capital withdrawn from or any sum employed .... as capital in such trade'
Income or Capital Expenditure
Legislative References:
Income Tax Act, 1842 (5 & 6 Vict. c. 35), Rules applicable to Cases I. and II., r. 1 - s. 100, Sch. D, Case I., rr. 1 and 3
Judgment date: 11 December 1925
Judgment by:
Lord Atkinson
My Lords, the facts of this case have been already fully stated. I abstain from repeating them save so far as may be necessary to make my judgment intelligible. I am of opinion that the sum of 31,784l. paid by the appellants to the trustees of the trust deed of August 8, 1916, to be employed by them in the manner, for the objects, and under the conditions in the deed set forth, was money wholly and exclusively laid out and expended for the purposes of the appellants' trade, manufacture, adventure or concern, within the meaning of the first rule applicable to Cases I. and II. under Sch. D, s. 100, of the Income Tax Act of 1842, and therefore that the deduction of this sum from the balance of the gains and profits of the appellants' trade, realized in the years in which the payments were made, was not prohibited by this rule.
But a careful examination of the provisions of the trust deed, coupled with the facts found, has convinced me that the payment of this large sum of money to these trustees for the purposes of the trust amounted to an actual employment or intended employment of it as capital in the appellants' trade, manufacture, adventure or concern within the meaning of the third rule of Case I. of Sch. D, quite as much as if it had been devoted to the purchase in fee of recreation fields or bath houses to improve the health of their staff, or of a library to increase their knowledge or discipline their minds. The use and enjoyment of these last-named things by the staff might not unnaturally make them more contented, more attached to their employers' service, and consequently more efficient than they otherwise would have been, and their employers would in this way be rewarded for their outlay; but if a portion of the profits and gains of the employers' trade and business, received in the year in which those things were acquired, was devoted to their acquisition it would, prima facie, I think, lead to an employment of their cost as capital, or an intended employment of it as capital, the deduction of which from the above mentioned profits and gains for income tax purposes is prohibited by this r. 3 of Case I., Sch. D, of the Income Tax Act of 1842.
The authorities do not supply any clear, precise, and sufficiently comprehensive definition of the operation styled a capital investment for the purposes of the Income Tax Acts. In the case of the Royal Insurance Co. v. Watson, [F14] the appellant company were by statute empowered to acquire and, in fact, did acquire from the Queen Insurance Co., their whole undertaking, which was regularly transferred to the purchasing company on August 19, 1891. The agreement into which the two companies had entered for this purpose provided, amongst other things, that the purchasing company should, until the transfer was completed, retain in their service the former manager of the Queen Insurance Co. at a salary of 4000l. per annum. Liberty was reserved, however, to the purchasing company to commute this salary by payment of a bulk sum calculated on the basis of certain tables in the agreement mentioned. The purchasing company availed themselves of this liberty and, shortly after the manager had been taken into their service, commuted this salary by payment to him of the sum of 55,846l. 8s. 5d. The Royal Insurance Co. contended that they were entitled, in fixing the amount of their liability to assessment for income tax for the year ending April 5, 1893, to deduct this large sum from the gains and profits of the business for the year 1891-1892, the year in which the payments had, in fact, been made.
The Court of Appeal held that the company was not entitled to make this deduction, and on appeal to this House that decision was affirmed on the ground that this large sum of money was, in reality, part of the consideration to be paid by the purchasing company to the vending company for the transfer by the latter to the former of the latter's business, and was, therefore, money employed as capital within the meaning of the aforesaid r. 3. Lord Halsbury, in delivering judgment, said: [F15]
"It is often a very difficult question to ascertain, in dealing with a commercial account, what is capital and what is income; but if it is established as a fact that the expenditure is capital, the language of the statute itself determines that that expenditure cannot be deducted from the profits, and that the profits are to be ascertained without reference to the capital expenditure."
It was, as I understood, suggested in this case during the argument of this appeal that the sum of 31,784l. paid by the appellant company to the trustees of the trust deed of August 8, 1916, was precisely of the same nature and character as the 21/2 per cent. of the aggregate amount of the subscriptions of the members of the appellants' staff to the pension fund, paid monthly by the appellants to the trustees, and as this monthly payment was obviously a recurring payment and not capital expenditure, so must the payment of the sum of 31,784l. be treated as a recurring payment, though, in fact, made once for all. One of the two principal questions raised upon the appeal, however, is whether the payment made once and for all of this large sum to secure the solvency of the pension fund amounts to a real or intended employment of capital. I am quite unable to see how the recurring monthly payment by the same company of a sum - possibly varying in amount from month to month - can infect, as it were, the payment of the larger sum, so as to convert the payment of each into matters of the same nature and character.
Lord Herschell concurred with Lord Halsbury. Referring to the sum of between 50,000l. and 60,000l. paid to the former manager, he said [F16] it was "a payment made in pursuance of the obligation contained in the contract by which the business of the Queen Insurance Co. was purchased, and, therefore, is properly capital expenditure." Lord Macnaghten held that the payment of this same large sum was a payment on account of capital, and Lord Davey held that it, in fact, formed part of the consideration for the purchase of the company's business and connection, and that being so, the point was sufficient for the decision of the case. It will be observed that no question was raised as to the source from which the sum paid to the manager was obtained, no suggestion was made that it was obtained from capital withdrawn from the business of the appellants. The natural conclusion from the reports of the case would appear to be that it was paid out of the gains and profits of the year in which the payment was made.
In the argument of the present appeal your Lordships' attention was not drawn to any case in which what was claimed to be a precise, full and accurate definition of the phrase capital expenditure was given. Lord Dunedin, however, in Vallambrosa Rubber Co. v. Farmer, [F17] when dealing with the expenses incurred every year in weeding and tending certain rubber trees on the lands of the company, which trees had not reached the rubber bearing age, said:
"I do not say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure - as against what is income expenditure - to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."
This rough test (Lord Dunedin did not pretend it was more than that) has been approved in many cases as, though a rough, yet an effective test, and I cannot find any case in which it has been disapproved of. In Ounsworth v. Vickers, Ld. [F18] Rowlatt J. appears to have approved of and adopted it, saying, however:
"I take it, and indeed both sides agree, that no stress is there laid upon the words 'every year': the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all."
Much assistance is not to be gained in this case from the judgment of Scrutton J. (as he then was), in the case of Smith v. Incorporated Council of Law Reporting for England and Wales. [F19] The question for decision there related to a gratuity of 1500l. given by the respondent society to a member of their reporting staff on his retirement after long service. The Commissioners had held that this sum of 1500l. was allowable to the respondents as a business expense in calculating for income tax purposes the profits of the year in which it was paid. On a case stated by the Commissioners it was held by Scrutton J. that the question whether this sum could be deducted from the respondents' profits as being "money wholly and exclusively laid out for respondents business" within the meaning of r. 1 applying in the First and Second Cases under Sch. D, was a question of fact for the Commissioners to decide, and that as there was evidence before them adequate to support their finding of fact their decision was not a matter which could be reversed upon appeal, even although the appellate tribunal might itself have come to a different conclusion upon the evidence given.
In Usher's Wiltshire Brewery v. Bruce [F20] the tenants of the appellant's tied houses were under their agreement bound to repair their houses and to pay certain rates and taxes. They failed to do so. The appellant company, though in no way legally or morally bound to do so, paid for these repairs, and paid these rates and taxes. They did so, not as a matter of charity but of commercial expediency, in order to avoid the loss of their tenants, and consequently the loss of the market for their beer, which they had acquired those houses for the purpose of affording. It was held that, though the appellant company were not legally or morally bound to make those payments, yet they were, in estimating the balance of the profits and gains of their business for the purposes of assessment of income tax, entitled to deduct all the sums so paid by them as expenses necessarily incurred for the purposes of their business. There is no suggestion in the present case that the appellant company were bound by a similar necessity to pay the sum of 31,784l. or any portion of it to the trustees to carry out the pension scheme.
I now turn to the trust deed of August 8, 1916. First the payment of the sum of 31,784l. was made once for all. It was made to secure that the pension fund should be adequate to meet the claims of the older members of the staff on their retirement before the contributions of all the contributors had amounted to a sum adequate to meet those claims - a laudable object, no doubt, and perhaps a prudent one in the interest of the company's trade. Second, it was optional with the eligible members of the appellant's staff to join the scheme, as it is styled, or not, even if their respective salaries amounted to 100l. per annum. From the salary of every member who joined 5 per cent. was to be deducted by the company monthly and paid over monthly to the trustees of the deed to be added to the pension fund. In addition, as I have already pointed out, the company paid monthly to the trustees for the same purpose 21/2 per cent. of the aggregate amount of these contributions.
These are the only recurring payments made to the credit of the pension fund. They are, I think, irrelevant to the question for decision touching the payment of the larger bulk sum. Next the appellant company are, by the terms of the deed, almost altogether deprived of all direction or control over the management, administration or application of the pension fund. So much is that the case, that by the 23rd clause of the deed it is provided that if a resolution should be passed or an order made for the winding up of the company and neither the Government nor any other company or body should within six months from the date of the resolution or order undertake the obligations of the company under the deed, two actuaries are to be appointed, one by the directors' trustees and the other by the staff's trustees, who are to decide in what manner the fund (i.e., the pension fund) should be divided among the members of the fund or such of them as shall be living or in receipt of retiring pensions, the first charge upon the fund being the return to the members of all sums contributed by them with interest at 4 per cent.
The decision of these actuaries, it is provided, is to be final and binding on all parties concerned. The fund is not treated as part of the assets of the company. The debts of the company due to their creditors are not to be satisfied out of it to any extent. Again, the trustees have absolute power to invest all money in their hands, not required for the time being in making payment of pension, in such securities as they may deem fit. They are empowered to pay the pensions allowance as far as may be necessary out of the capital of the fund. There is to be an actuarial valuation of the position of the company every five years from January 1, 1916, or at such other period as the trustees may determine. If, as a result of the actuaries' report, there should appear to be a surplus beyond the requirements of the fund, that surplus or any part of it may be set aside and invested by the trustees as a reserve fund. If, on the other hand, there should appear to be a deficiency, that is to be made good in such manner as the trustees may determine. By the 14th clause it is provided that the business of the trust is to be managed by the trustees or a majority of such of them as may be present at their meetings, and all powers, expressly or by implication given to the trustees, may be exercised by this majority. The trust deed contains many other provisions supporting the conclusion that the company have once and for all parted with all proprietary rights in and all powers over this donation of 31,784l.
It is difficult to see on what principle the company are, for the purposes of the assessment of income tax for the year in which the payment was made, entitled to deduct it from their profits and gains for that year, since it cannot, I think, be regarded as forming part of the cost by which those profits and gains have been acquired, nor as an expenditure which, however prudent from the employers' point of view, was essentially necessary for the acquisition in that, or any subsequent year, of any portion of the profits and gains of the appellants' business. It would certainly appear to me not to be - to adopt Lord Sumner's phrase used by him in his judgment in Usher's Wiltshire Brewery v. Bruce [F21] -
"a proper debit item to be charged against incomings of the trade when computing the balance of profits of it."
That is apparently the view of it taken by Warrington L.J. He said: [F22]
"The real question I think which we have to determine is whether this is a proper debit item to be charged against the incomings of the trade when computing the balance of profits of it."
He held it was not a proper debit item. Scrutton L.J., after pointing out that the Attorney-General's definition of capital expenditure, namely,
"Any money expended upon a business which is intended to and does result in an asset is capital,"
cannot apply to the circulating capital of a trade or business, holds that the payment of this large sum of 31,784l. by the company, which they were not under any liability to make, was either a withdrawal of capital from the business for the purposes of the fund, or capital employed in creating an asset or advantage in the business, something added to the business not in discharge of any existing liability but, in the result, creating a new asset.
If the word "asset," as used in this connection, be confined to something material - and I do not think it well can be so confined - then I am inclined to agree with Scrutton L.J., that, if the existence of this pension fund results in making the staff of the company more contented and less inclined to change their service and therefore, on the whole, more efficient, these results when secured would amount to an "asset" of the company's business. The Master of the Rolls expresses the same idea at the end of his judgment, in the following words: [F23]
"It appears to me that when you consider what is the nature of this payment, not for the purpose of meeting an existing, an actual liability, but only for the purpose of, in a very general way, improving the position of the staff, the right attribute to apply to this is that it was a payment made as and for the purpose of a capital outlay and cannot be deducted from the revenue as payment made in the course of seeking profits and gains."
Rowntree's case [F24] is quite distinguishable from this.
In the case of Hancock v. General Reversionary and Investment Co. [F25] Lush J. said:
"In Ounsworth v. Vickers, Ld., [F26] Rowlatt J., following a judgment of the Lord President in Vallambrosa Rubber Co. v. Inland Revenue Commissioners, [F27] said that the proper test to apply is this: Was the money paid to an insurance company to purchase an annuity for an actuary long in their service, an expenditure incurred in order to meet a continuing business demand, in which case it would be treated as an ordinary business expense a deduction of which was admissible, or was it an expenditure incurred once for all, in which case it should be treated as a capital outlay? I agree with that view, and applying that test I think that it necessarily follows .... that the 4994l. should be treated, as the pension was treated, as an ordinary business expense, and that the deduction should be allowed. It is the pension in another form; it is actuarially equivalent in value and it is identical in character. It was paid to meet a continuing demand which was itself an ordinary business expense as the surveyor had treated it."
I cannot find that this reasoning was ever expressly approved of in any authority. The learned judge apparently treats the payment of this large sum as if it were made by the company to one of its employees. Little assistance is to be got from Rowntree's case [F28] and other cases owing to the special findings of the Commissioners on several questions of fact. On the whole I think the judgment appealed from was right and should be affirmed and this appeal be dismissed with costs.