British Insulated and Helsby Cables Ltd v Atherton
[1926] AC 205(Decision by: Lord Carson)
Between: British Insulated and Helsby Cables Ltd - Appellants
And: Atherton - Respondent
Judges:
Viscount Cave LC
Lord Atkinson
Lord Buckmaster
Lord CarsonLord 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'Capital withdrawn from or any sum employed ....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
Decision by:
Lord Carson
My Lords, it was not contended, nor in face of the findings of the Commissioners could it have been successfully argued, that the sum in question was not money "wholly and exclusively laid out or expended for the purposes of the trade," and indeed it is under modern views and conditions not only a proper but essential expenditure for carrying on any properly organized business; and that being so the question which has to be determined is whether it is a proper legal deduction to be made in arriving at the "full amount of the balance of profits and gains."
Of course, as Lord Buckmaster points out, if the sum in question cannot be properly deducted in determining the balance of profits and gains, there is no necessity to consider whether this money should be treated as capital withdrawn from the trade or intended to be employed as capital in the trade. But as I do not take the same view of this expenditure as my noble friend, I think it necessary to state that I can find no grounds (and here I find myself in agreement with the noble Viscount on the Woolsack) for holding that the sum in question comes within either of the said categories. It is clear from the terms of the trust deed, as already pointed out, that in no sense was the sum an investment, that it would be eventually exhausted in payment of the pensions, and that in the event of a winding up of the company it could never form any part of the assets of the company.
I cannot, under these circumstances, conceive any system of commercial accountancy under which this sum could ever appear in the capital accounts of the company. Nor is it capital withdrawn from the business, as it was admittedly paid out of the earnings of the year. It is not disputed that an annual sum contributed to the pension fund on an actuarial basis for the purposes of making the fund solvent for paying the pensions of the older members of the staff would be a proper deduction in arriving at the balance of profits and gains, it would be an ordinary business expense.
Nor, I think, can it be disputed that if at any time the fund threatened to become insolvent after it was started a sum paid to prevent such insolvency would be a proper disbursement in arriving at the balance of profits and gains. Why, therefore, should the payment of the sum in question, which by an actuarial calculation represents the sum equal to the annual payments which would be necessary, not be considered as in the same position? To use the words of Lush J. in Hancock's case, [F32] which was the case of a lump sum paid in purchasing an annuity in lieu of an annual pension:
"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."
Or as expressed by the Master of the Rolls in Rowntree's case: [F33]
"Then,"
he says,
"we come to another class of cases, in which an expenditure is made on business grounds of a sum, apparently a capital sum, but which really comprises and compresses what is an annual charge."
My Lords, I agree with their statements of principle, and in my opinion they are entirely applicable to the present case. Indeed a careful comparison of the reasoning on which the judgments are founded in these two cases greatly helps to determine on which side of the line such an expenditure should be placed. I can find no reason for holding that a payment made to make up the contribution to a sufficient sum to enable the older servants of the company to enjoy the benefits of the pension fund brings into existence an asset or an advantage for the enduring benefit of trade and might therefore be attributed not to revenue but to capital. I notice that my noble friend on the Woolsack agrees with the decision in Hancock's case [F34] as I also do, but I fail, as Rowlatt J. failed, to see how it can in principle be distinguished from the present case. I am of opinion that this appeal should be allowed.