Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes)
[1972] 1 All ER 681(Judgment by: Buckley LJ)
Between: Odeon Associated Theatres Ltd
And: Jones (Inspector of Taxes)
Judges:
Salmon LJ
Buckley LJOrr LJ
Subject References:
TAXATION
INCOME TAX
Deduction in computing profits
Trade expenses
Repairs
Deferred repairs
Acquisition of cinema in poor repair
Cinema fully capable of commercial use
Vendor's failure to repair before acquisition
Vendor precluded by war time restrictions from carrying out repairs
No diminution in price in respect of disrepair
Deferred repairs begun two years after acquisition
Repairs spread over several years
No indication of extra cost over and above cost of ordinary repairs
Expenditure on deferred repairs charged to revenue account as separate item from expenditure on current repairs
Expert evidence on accountancy practice
Finding that charging to revenue according with accountancy practice
No conflict with statute
Conclusiveness of finding
Whether expenditure on deferred repairs capital or revenue expenditure for income tax purposes
Whether deductible in computing profits
Legislative References:
Income Tax Act 1952 - s 137
Case References:
Bidwell v Gardiner - (1960) 39 Tax Cas 31; 28(1) Digest (Reissue) 194, 603
British Insulated and Helsby Cables Ltd v Atherton - [1926] AC 205; [1925] All ER Rep 623; 95 LJKB 336; 134 LT 289; 10 Tax Cas 155; affg CA sub nom Atherton v British Insulated and Helsby Cables Ltd [1925] 1 KB 421; 28(1) Digest (Reissue) 211, 627
BSC Footwear Ltd (formerly Freeman, hardy & Willis Ltd) v Ridgway (Inspector of Taxes) - [1971] 2 All ER 534; [1971] 2 WLR 1313; Digest Supp
Comr of Taxes v Nchanga Consolidated Copper Mines Ltd - [1964] 1 All ER 208; [1964] AC 948; [1964] 2 WLR 339; 28(1) Digest (Reissue) 204, 677
Highland Railway Co v Balderston (Surveyor of Taxes) - (1889) 2 Tax Cas 485; 28(1) Digest (Reissue) 201, 652
Inland Revenue Comrs v Granite City Steamship Co Ltd - 1927 SC 705; 13 Tax Cas 1; 28(1) Digest (Reissue) 202, 658
Jackson (Inspector of Taxes) v Laskers Home Furnishers Ltd - [1956] 3 All ER 891; [1957] 1 WLR 69; 37 Tax Cas 69; 28(1) Digest (Reissue) 192, 594
Law Shipping Co Ltd v Inland Revenue Comrs - 1924 SC 74; (1923) 12 Tax Cas 621; 28(1) Digest (Reissue) 599, 1480
Lothian Chemical Co Ltd v Rogers (Inspector of Taxes) - (1926) 11 Tax Cas 508; 28(1) Digest (Reissue) 202, 657
Ostime (Inspector of Taxes) v Duple Motor Bodies Ltd - [1961] 2 All ER 167; [1961] 1 WLR 739; 39 Tax Cas 537; affg CA sub nom Duple Motor Bodies Ltd v Inland Revenue Comrs [1960] 2 All ER 110; [1960] 1 WLR 510; 28(1) Digest (Reissue) 125, 371
Regent Oil Co Ltd v Strick (Inspector of Taxes) - [1965] 3 All ER 174; [1966] AC 295; [1965] 3 WLR 636; 43 Tax Cas 1; affg CA sub nom strick (Inspector of Taxes) v Regent Oil Co Ltd [1964] 3 All ER 23; [1964] 1 WLR 116; 28(1) Digest (Reissue) 183, 552
Roebank Printing Co Ltd v Inland Revenue Comrs - [1928] SC 701; [1927] 13 Tax Cas 864; 28(1) Digest (Reissue) 207, 685
Royal Insurance Co v Watson - [1897] AC 1; 66 LJQB 1; 75 LT 334; 3 Tax Cas 500; 28(1) Digest (Reissue) 185, 562
Stott v Hoddinott - (1916) 7 Tax Cas 85; 28(1) Digest (Reissue) 180, 542
Sun Insurance Office v Clark - [1912] AC 443; [1911-13] All ER Rep 495; 81 LJKB 488; 106 LT 438; 6 Tax Cas 69; 28(1) Digest (Reissue) 134, 398
United Steel Cos Ltd v Cullington - [1940] 2 All ER 170; [1940] AC 812; 109 LJKB 342; 163 LT 42; 23 Tax Cas 91; 28(1) Digest (Reissue) 460, 1658
Usher's Wiltshire Brewery Ltd v Bruce - [1915] AC 433; 84 LJKB 417; 112 LT 651; 6 Tax Cas 418; 28(1) Digest (Reissue) 130, 383
Judgment date: 3 November 1971
Judgment by:
Buckley LJ
The question for decision in this case is whether substantial sums expended by the taxpayer company, Odeon Associated Theatres Ltd, in the accounting periods relevant to its assessment to income tax for the fiscal years 1946-47 to 1955-56, inclusive, which sums were expended in effecting repairs, redecoration and refurnishing of a number of cinema theatres acquired by the taxpayer company during and soon after the second world war, should, in computing for income tax purposes the profits of the taxpayer company for the relevant periods, be allowed as revenue expenditure, or whether so much of such expenditure as was attributable to dilapidations which occurred before the acquisition of those theatres respectively should be treated as capital expenditure.
I need not restate the facts, but these points need to be stressed. First, all the disputed expenditure was of a kind which, if the theatres had remained in the ownership of the owners from whom they were acquired by the taxpayer company and the expenditure had been incurred by those owners, would have been deductible as revenue expenditure. Secondly, the amount of dilapidation which occurred before the acquisition by the taxpayer company of a theatre (in the case stated called 'deferred repairs') did not in any case significantly affect the price paid by the taxpayer company for the theatre. Thirdly, the deferred repairs were not for the most part such as to require immediate remedy, and there was no question of danger to the public or of any theatre having to be closed for repairs. Fourthly, all cinema theatre owners were in a like position of being unable, on account of war time restrictions, to carry out any but the most urgent repairs, redecorations or refurnishing of their theatres; there was no competition in this respect; this state of affairs continued until the early 1950s.
The cost of acquiring or creating a physical capital asset for use in a trade or business is clearly capital expenditure. The cost of improving such an asset by adding to it or modifying it may well be capital expenditure. On the other hand, the cost of works of recurrent repair or maintenance of such an asset attributable to the wear and tear occurring in the course of use of the asset in his trade or business by the person carrying out the works is revenue expenditure, and so constitutes a proper debit item in the profit and loss account of the business. Whether, where there has been a change of ownership, the cost of works of repair or maintenance attributable to wear and tear which occurred before the change of ownership should be regarded as revenue expenditure or capital expenditure is a question the answer to which must, in my opinion, depend on the particular facts of each case. Counsel for the Crown has argued that any repair must improve the article repaired and, avoiding undue cynicism, I think that that proposition must be accepted. He says further that if the state of the article, when repaired, is better than its state was when it was acquired by the person carrying out the repairs, the cost of repairs should pro tanto be regarded as capital expenditure. A tradesman, for example, who acquires a dilapidated shop in which to carry on his business, and, either before he commences business or as soon thereafter as he can afford to do so, put the shop into a state of repair and decoration suitable for his business, has incurred the cost not only of acquiring the shop but also of repairing and decorating it in a suitable manner in order to provide himself with a capital asset of a character which he regards as appropriate to his business. The whole of this expenditure, it is said, is capital expenditure because it constitutes the cost of acquiring such a capital asset as the trader requires for the purpose of his business. The argument is an attractive one, but should not, in my opinion, be accepted without careful consideration.
Counsel for the Crown contends that the expenditure on deferred repairs was what he described as 'a once for all jacking-up of the value of the principal asset', and so was non-recurrent expenditure by the taxpayer company for the enduring benefit of its trade. He says that the fact that the prices paid for theatres took no account of the circumstance that at the dates of purchase repairs had already been deferred is of no importance. He contends that the cost of doing the deferred repairs was an additional cost to the taxpayer company of acquiring the capital assets, ie the theatres. Such expenditure, he says, should be regarded as capital expenditure. As Lord Reid observed in Regent Oil Co Ltd v Strick (Inspector of Taxes) ([1965] 3 All ER 174 at 179, [1966] AC 295 at 313):
'The question [whether a particular outlay can be set against income or must be regarded as a capital outlay] is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on a strict application of any single legal principle.'
In answering that question of law it is right that the court should pay regard to the ordinary principles of commercial accounting so far as applicable. Accountants are, after all, the persons best qualified by training and practical experience to suggest answers to the many difficult problems that can arise in this field. Nevertheless the question remains ultimately a question of law.
No one, I think, would dispute that the cost of ordinary current repairs in the normal course of maintenance of a fixed capital asset employed in a business is revenue expenditure. Such cost arises out of the wear and tear of the asset in the course of earning the profits of the business and so is a proper debit to be set against the revenue of the business in its profit and loss account. I would myself think that, save in exceptional circumstances, this is true even in the case of the first repairs in the normal course of maintenance of an asset acquired in a part worn condition. A tradesman who acquires a shop, the outside painting of which was last done two years before his purchase, will have to repaint the shop earlier than if it had been redecorated immediately before acquisition, but this, I think, is something which, as a commercial matter, he will take into account in considering the prospective profitability of the shop during the early years of his ownership. In other words, he will regard it as a revenue expense. He will not say to himself: 'When I have to repaint the outside of the shop perhaps three years hence, only three-fifths of the cost will be chargeable against revenue in my profit and loss account: the balance will be a capital investment in my business.' This view is, I think, borne out by the finding of fact contained in the supplemental case stated by the Special Commissioners in the present proceedings. Any other view would lead to great difficulty and confusion. Whenever a taxpayer made a capital investment in the acquisition of a part worn capital asset for the purposes of his business it would be necessary to record the state of dilapidation of the asset at the date of acquisition in order to determine, when repairs were carried out at a later date, what proportion of the cost should be attributed to improvement on the state of repair at the date of acquisition. Although maybe in practice such a principle would be applied for fiscal purpose in relatively few cases, logically it would apply to every case of the acquisition for business purposes of a part worn capital asset, however long or short the time before any repairs came to be done to it.
Such a principle should not, in my judgment, be accepted as of general application unless logic or law demand this. It is said that Law Shipping Co Ltd v Inland Revenue Comrs demonstrates that in Scotland the law has adopted and applied this principle. In my judgment, that case does not indicate that the Court of Session considered that there was any such principle of general application. The appellant company in that case had purchased a secondhand ship at a date when her periodical Lloyd's survey was overdue but had been deferred pending the completion of a voyage then in contemplation. On her return six months later the survey was made and the company was obliged to spend a large sum on repairs. The court held that except for such part of the cost of the repairs as was attributable to the period during which the ship was employed in the appellant company's trade the expenditure in question was in the nature of capital expenditure and was not an admissible deduction in computing the company's profits. In that case the capital asset which the appellant company acquired (ie the ship) was at the time of purchase burdened with the necessity for its owners to carry out at the earliest practicable moment the repairs required to satisfy the Lloyd's survey. Unless and until such repairs were done the ship could not be further used in the owner's business after the termination of the one voyage. It may be that those repairs could have been said to have been of a routine maintenance character, but, in my judgment, the case is clearly distinguishable on its facts from a case in which someone has acquired an asset which, although part worn at the date of acquisition, is not burdened with the necessity to carry out immediate or nearly immediate works of renovation. The Law Shipping case is, in my view, more nearly analogous to the case of a trader who has bought a capital asset which at the date of acquisition was not in working order and has to put it into working order before being able to use it in his business. When the Law Shipping Co Ltd bought the ship they knew that in order to be able to use her in their business beyond the one voyage they would need to spend not only the purchase price of the ship but also the cost of the necessary repairs. The facts of the present case are quite different. All the theatres acquired by the taxpayer company were, when they were acquired, in a condition fully suitable for immediate profitable use in the taxpayer company's business and capable of continuing to be so used in the conditions then existing for some years.
Jackson (Inspector of Taxes) v Laskers Home Furnishers Ltd is a case in which expenditure on repairs by a tenant of a building was, in my judgment, properly held to constitute capital expenditure. In that case the respondent company obtained a lease of the building which contained a covenant on their part to reinstate the demised property in a good state of repair. The cost of carrying out the repairs was part of the consideration for the grant of the lease; it was in truth part of the price paid by the company for the lease, notwithstanding that the expenditure was expenditure purely on repairs. Royal Insurance Co v Watson was another case in which the sum under consideration was held to be a capital expenditure on the ground that it formed part of the consideration for the acquisition of an asset. Of the other authorities relied on by the Crown on this appeal, it is perhaps sufficient if I say that Highland Railway Co v Balderston (Surveyor of Taxes) was a case in which the expentiture there under consideration was clearly incurred in making physical alterations to and improvements to the assets of the appellant company, and that Inland Revenue Comrs v Granite City Steamship Co Ltd was a case in which the expenditure there under consideration was incurred in making good damage suffered by a capital asset of the respondent company which had resulted during the respondent company's ownership from matters entirely foreign to the carrying on of that company's business. Neither of these cases appears to me to assist the Crown on this appeal.
In consequence of the state of affairs existing during and immediately following the war, the taxpayer company's theatres remained unrepaired and unredecorated for much longer than would have otherwise been the case, but the disputed expenditure, when it came to be made in the years 1947 to 1954, was all expenditure on works and matters of a kind which can properly be described as maintenance, and which would be bound to recur in later years. It seems to me to be misleading to describe this expenditure as 'once for all'. It was expenditure on maintenance which had then for the first time become possible and worthwhile for the taxpayer company to carry out. It was expenditure which, in the then existing altered conditions, was necessary to preserve the profitability of the theatres. There is no indication in the case that the cost was greater than it would have been, having regard to the passage of time, if the theatres had been in a good state of decoration and repair when the taxpayer company acquired them. The facts as found do not, in my judgment, establish that the taxpayer company was put to any greater expense in the way of repairs and redecoration by reason of the deferred repairs than would have been the case if there had been no deferred repairs.
The taxpayer company did not, as the result of some non-recurring payment, acquire some new asset or benefit, and the present case appears to me to be distinguishable from British Insulated and Helsby Cables Ltd v Atherton relied on by the Crown.
In my judgment, Pennycuick V-C ([1971] 2 All ER 407, [1971] 1 WLR 442) was right in reaching the conclusion that, apart from the statutory prohibitions contained in the Income Tax Act 1952, s 137, the disputed expenditure was proper to be taken into consideration as a debit against revenue in arriving at the taxpayer company's profits in the relevant years. In my judgment, there is nothing in that section which requires any of the disputed expenditure to be excluded in the computation of the taxpayer company's profits. The expenditure was incurred wholly and exclusively for the purposes of the taxpayer company's trade, so that s 137(a) and (d) do not apply. No capital was withdrawn from the taxpayer company's trade, nor, in my judgment, for reasons already indicated, was any part of the expenditure employed or intended to be employed as capital in the taxpayer company's trade, so that s 137(f) does not apply. Nor, in my judgment, for reasons already given, can any part of the expenditure be said to constitute capital employed in the improvement of any premises occupied for the purposes of the taxpayer company's trade, so that s 137(g) does not apply. It has not been suggested that any other paragraph could apply in the present case.
The Special Commissioners in their decision treated the disputed expenditure as expenses of operating the theatres which 'accrued' before the taxpayer company began to operate them. This is perhaps elliptical language. The deferred repairs-ie the pre-acquisition dilapidations-occurred before the taxpayer company acquired the theatres. No expenses were incurred or, in my opinion, can be accurately said to have accrued until the repairs were carried out. When those expenses were incurred, they were incurred by the taxpayer company in the course of carrying on its business and for the purposes of that business. The question whether they should be regarded as a proper charge against the taxpayer company's capital account or its revenue account cannot, in my judgment, be answered merely by saying that 'such expenses did not accrue in the process of earning the taxpayer company's profit or gain'. If this language means, as I think it must, that the expenditure was not occasioned by anything which happened in the process of earning the taxpayer company's profits, I would make two observations about this. First, this is not, I think, a satisfactory test. Many kinds of expenditure-for example, insurance premiums-are properly to be regarded as revenue expenditure without their having been occasioned by anything which has occurred in the process of earnings profits. Secondly, as I have already pointed out, the case does not establish that the expenditure was any greater in consequence of the deferred repairs than it would have been if there had been none.
I find no reason in law for dissenting from the finding of fact in the supplemental case that on the assumption made for the purposes of that finding, namely, that all the theatres were acquired from vendors outside the Odeon Group but that all other facts were as found in the case, the disputed expenditure would, in accordance with principles of sound commercial accounting, be dealt with as a charge to revenue in the taxpayer company's accounts. No distinction, I think, is to be drawn in this respect between transfers of theatres within the group and purchases from vendors outside the group. Accordingly, I am of opinion that all the disputed expenditure was properly deductible in computing the taxpayer company's profits for income tax purposes in the relevant years.
For these reasons, which make it unnecessary to consider the point referred to in the taxpayer company's cross-notice relating only to acquisitions which involved succession to a trade, I would dismiss this appeal.