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
(Judgment by: Lord Simonds)
Between: Smith's Potato Estates Ltd
And: Bolland (Inspector of Taxes)
Between: Smith's Potato Crisps (1929) Ltd
And: Inland Revenue Commissioners
Judges:
Viscount Simon
Lord Porter
Lord SimondsLord 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
Judgment date: 14 JULY 1948
Judgment by:
Lord Simonds
(Read by Lord Normand.) My Lords, these consolidated appeals, the one by Smith's Potato Estates Ltd which I will call "the estates company," and the other by Smith's Potato Crisps (1929) Ltd, which I will call "the parent company", since the estates company is its subsidiary, raise questions of income tax and excess profits tax on which Atkinson J and the Court of Appeal have come to different conclusions. In the income tax appeal the question is whether certain expenses amounting to £622 10s 11d incurred by the estates company in promoting an appeal to the Board of Referees under a statutory provision in respect of liability to excess profits tax ought to be deducted in computing the profits of the business of the company for purposes of income tax under Case I of sched D to the Income Tax Act, 1918. In the excess profits tax appeal the question is whether the same expenses ought to be deducted in computing the profits of that business for the purposes of excess profits tax under pt III of the Finance (No 2) Act, 1939, and enactments amending that part. The parent company are appellants in the excess profits tax appeal because they are chargeable to that tax in respect of the profits of the business of the subsidiary company. The appeal to the Board of Referees, the expenses of which have given rise to these questions, was an appeal by the estates company against the disallowance by the Commissioners of Inland Revenue under s 32 of the Finance Act, 1940, of the deduction of certain fees and payments for services to a manager of the business of the estates company in computing the profits of its trade or business for the purposes of excess profits tax. The appeal was allowed by the Board of Referees. It is not disputed that the expenses were reasonably and properly incurred.
It is necessary to refer to only a few statutory provisions. It is provided by s 14(1) of the Finance (No 2) Act, 1939, that for the purposes of excess profits tax the profits arising from a trade or business shall be computed on income tax principles subject to certain adaptations which are not relevant to the present case, and it is further provided that for the purposes of the subsection the expression "income tax principles" in relation to a trade or business means the principles on which the profits arising from the trade or business are computed for the purposes of income tax under Case I of sched D or would be so computed if income tax were chargeable under that Case in respect of the profits so arising. Section 18(1) of the same Act provides that the amount of the excess profits tax payable in respect of a trade or business for any chargeable accounting period shall, in computing for the purposes of income tax the profits and gains arising from that trade or business, be allowed to be deducted as an expense incurred in that period. As will appear the estates company relied on this section in the income tax appeal. The first section that I cited refers me back to Case I of sched D, under which income tax is imposed on the profits of any trade, manufacture, adventure or concern in the nature of a trade and the profits are directed to be computed in accordance with the rules applicable to the sources comprised in that case. By r 3(a) of the Rules Applicable to Cases I and II it is provided as follows:
- 3.
- In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -
- (a)
- any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation ...
These are the words round which the main argument has ranged. It has been contended, as a general proposition, that the expenses of disputing an assessment to income tax and litigating it to the utmost permissible extent are deductible for the purpose of computing the amount of profits of the trade to be charged, but a subsidiary argument also was developed on the facts of the particular case on which I must say a few explanatory words. The manager of the estates company, whose remuneration had been the subject of the disallowance by the Commissioners of Inland Revenue and of the appeal to the Board of Referees, was a Mr Young. His services were regarded as of great importance by the estates company, who feared that they might be lost if in the year under review and in future years any part of his remuneration should be disallowed. It was, therefore, contended that there was, in the exceptional circumstances of the case, a special business motive for incurring the expenses of an appeal, a matter which went to the earning of future, as distinct from the taxation of past, profits.
Both on the general and the subsidiary contentions the Special Commissioners were against the appellants. As I read their decision they accepted that there was the "special business motive" that I have stated, but added these words:
Nevertheless the immediate purpose of the appeal was that of all taxation appeals, namely, to get a reduction of tax, or, in other words, to retain a larger share of the profits. We regard this as a substantive purpose in itself and not as something merely incidental to the earning of future profits.
They, therefore, held that the expenses in question were not money "wholly and exclusively" laid out or expended for the purposes of the trade within r 3(a) of Cases I and II. They added that they were not a "loss" within r 3(e), but that is not a matter which has now to be considered. Atkinson J took a different view. He thought that an expense properly and reasonably incurred in the final ascertainment of profits could be considered an outlay in order to earn profits, and, apart from this general ground, he thought that in the particular circumstances of the case the expenses might be deducted on the footing that expenditure for the purpose of retaining somebody really vital to the business was expenditure which was "even on a narrow interpretation of the phrase incurred for the purpose of gaining profits." The Court of Appeal unanimously reversed the judgment of Atkinson J on both points, and in spite of the able and cogent arguments of counsel for the appellants I cannot entertain any doubt that the decision of the Court of Appeal is right.
My Lords, I suppose that few expressions have been discussed more often in the courts than that which you have once again to consider, "money wholly and exclusively laid out or expended for the purposes of the trade," but it is their application rather than their meaning that is in doubt. I agree with the submission of learned counsel that it does not help to substitute other words for those which are found in the statute and then to put a gloss on those other words, but it is, I think, important to emphasise that the words "for the purposes of the trade" in their context, ie, 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 Ltd v Woodifield ([1906] AC 448, 453). They have been cited and applied over and over again, and, if they are kept firmly in mind, they dispose in limine of the argument which prevailed with Atkinson J and has been urged before your Lordships.
A consideration of the numerous cases that were cited shows that it is not always easy to decide whether it can be said of a particular expenditure that it satisfies Lord Davey's test, but it is significant that counsel were not able to call to the attention of the House any case in which the appellants' present contention had been put forward. For a long period of years large sums of money have been devoted to the litigation of income tax claims. The most acute minds of the legal and accountancy professions have been at the service of the taxpayers, yet the claim that such money was expended wholly or exclusively for the purposes of the trade appears never to have reached a court of law. The reason is not far to seek. It is that 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. What profit he has earned, he has earned before ever the voice of the taxgatherer is heard. He would have earned no more and no less if there was no such thing as income tax. His profit is no more affected by the eligibility of tax than is a man's temperature altered by the purchase of a thermometer, even though he starts by haggling about the price of it. It is in this sense that the learned Master of the Rolls used a phrase which was challenged by counsel for the appellants. He said in the Rushden Heel case ([1947] 1 All ER 699, 702):
"... but his obligation to pay it [the tax] is his obligation as a subject and a taxpayer, and, in ascertaining the amount of his liability, he is putting himself in a position to discharge his duty to the Crown."
As a trader it is his job to make profits: as a taxpayer it is his duty, like that of any other subjects, to pay taxes. It is as little a part of his trade to find out how much tax he must pay as it is a part to pay it when he has found out. In this respect he is in the same position as any other taxpayer under any other Case of any other schedule. This aspect of the case may be examined more closely. Let me suppose that a trader, having been assessed to income tax in the sum of £x in a certain year, disputes the assessment, claiming that his taxable profits is not £x but a lesser sum, say £y. Suppose further that he succeeds in his claim. I fail to see how he has by the expenditure that he incurred earned profit in his trade. His taxable profit has been reduced, which was the object of his expenditure. But what has this to do with his trading profit? If his trading profit is to be regarded as the same thing as his taxable profit (which it is not or is not necessarily), then his money has been laid out for the purpose of reducing his trading profit, a purpose difficult to ascribe to a trader and impossible to bring within the scope of the rule. To use an expression of Rowlatt J unless the expenditure is at least intended to "bring grist to the mill" of the trader, it cannot, within the meaning of the rule, be money laid out for the purposes of his trade.
Two cases only need specific mention. On both I respectfully concur in everything that has been said by the Master of the Rolls, in the Rushden Heel case ([1947] 1 All ER 699, 702). In Allen v Farquharson Bros certain observations of Finlay J were relied on by the appellants. I would question whether that learned judge intended to say anything that would support their contention. I do not doubt that as a practical matter the Revenue authorities allow accountancy charges as a deduction in computing profits, both because such charges are necessary for trading as well as tax purposes and it would be vexatious to distinguish between them, and because they must find their own task an easier one if they are dealing with professional men who speak their language and understand their art. I do not think it necessary to decide how far in this direction the Revenue authorities are bound to go, but, if Finlay J meant that an expense incurred solely for the purpose of dispute with the Crown could be deducted, then I must join with the Master of the Rolls in expressing my respectful dissent. In Worsley Brewery Co Ltd v Inland Revenue Comrs, certain observations of Romer LJ have, as I think, been misunderstood and relied on. I need say no more than that I wholly agree with the explanation of this case given by the Master of the Rolls and Morton LJ, in the Rushden Heel case ([1947] 1 All ER 699, 702, 703).
It remains to consider the special reason advanced in this case for allowing the deduction of expenditure incurred in contesting a tax claim. Here, again, I am so fully in agreement with the learned Master of the Rolls that I need say little. If the expense of contesting a tax claim is not per se a deductible expense, I cannot accept the proposition that some special ulterior motive makes it deductible. I see that money has been laid out for the purpose of contesting a tax claim. I know, for I assume that to have now been decided, that money so laid out is not laid out wholly and exclusively for the purposes of trade. I do not understand by what process of reasoning the contrary result is reached and it is found to be wholly and exclusively laid out for the purposes of trade because there was an ulterior motive. This is to confuse motive with purpose. Finally, on the income tax appeal it was urged that, since under s 18(1) of the Finance (No 2) Act, 1939, the excess profits tax that has been paid may for income tax purposes be deducted as an expense, so also should the cost of ascertaining the amount of the excess profits tax be deductible. I have felt a good deal of sympathy for this argument, but have come to the conclusion that its attractiveness lies rather in its suggestion of what the legislature might, subject to proper limits, have reasonably done than in its correct interpretation of the section. It is clear that, but for the section, the excess profits tax itself could not be deducted. Making express provision for that deduction, it is silent about the cost of ascertainment. I do not feel at liberty as a matter of construction to say that by implication the one is included in the other. I would dismiss both these appeals.