Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes)

[1972] 1 All ER 681

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(Judgment by: Orr LJ)

Between: Odeon Associated Theatres Ltd
And: Jones (Inspector of Taxes)

Court:

Judges: Salmon LJ
Buckley LJ

Orr 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

Hearing date: 18-20 October 1971
Judgment date: 3 November 1971

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Judgment by:
Orr LJ

In this appeal it has been common ground that, although the expenditure in question, if incurred by the previous owners of the theatres, would have been deductible in computing their profits for income tax purposes, it would have fallen to be treated as capital if incurred by the taxpayer company immediately after acquisition of the theatres, and it has been simply and attractively argued for the Crown that delay by the taxpayer company in incurring the expenditure cannot alter its essential character. The proposition advanced for the Crown is that, where a capital asset acquired by a trader for use in his trade was at the time of its acquisition in need of repairs, any expenditure subsequently incurred by the trader which has the effect of improving the asset beyond the state in which it was at its acquisition is of necessity a capital expenditure. We are concerned with the application of this proposition, if it be correct, to the facts of the present case, but the proposition as formulated would, as I understand it, apply to expenditure incurred at whatever interval of time after the acquisition, and in whatever circumstances, and would apply not only, as in this case, to premises and their furnishings, but also to such capital assets of a trader as lorries and cars and items of plant of all kinds. In the present case the information and material necessary to support the Crown's argument became available to the Revenue in a convenient form as a result of a claim made by the taxpayer company under s 37 of the Finance Act 1946 which relates to 'terminal expenses' for the purpose of excess profits tax. In other cases the application of the Crown's proposition, if it be correct, would involve detailed investigation of the condition of the premises or other asset at the time of acquisition and thereafter a detailed comparison of that condition with items of expenditure subsequently incurred, and it seems to me that these difficulties would in many cases make it impossible to apply the proposition save perhaps on a very arbitrary basis, but the Crown are entitled to say that this is not an answer to their case if it is on principle and authority well founded.

It has been sought for the Crown to support the proposition, as applied to the expenditure in question in this case, on the three grounds, first, that the expenditure was by its nature capital; secondly, that its deduction is expressly prohibited by one or other of the paras (a), (d), (f) and (g) of s 137 of the Income Tax Act 1952; and thirdly, that it is not a 'proper debit item' for the purpose of computing the income tax profits of the trade; but in my judgment the Crown's case must stand or fall on the first of these grounds.

As to 137(a), there is clear authority in all the speeches in the House of Lords in British Insulated and Helsby Cables Ltd v Atherton (a case in which the expenditure in question was held to be capital by a majority of three to two) for the proposition that expenditure does not, by reason of its being capital, fall within the prohibition contained in that paragraph, and the same reasoning, in my judgment, applies equally to para (d). As to paras (f) and (g), the position plainly is that if the expenditure in question was on general principles capital the Crown does not need to rely on these paragraphs, and if it was not capital they do not help the Crown. In my judgment, therefore, the Crown's case cannot derive any assistance from the express prohibitions contained in s 137.

As to the third ground, it was argued for the Crown that, even if the expenditure was on general principles of a revenue nature, it is to be disallowed on the basis of the test laid down by Lord Sumner in Usher's Wiltshire Brewery Ltd v Bruce ([1915] AC 433 at 468) that a deduction-

'is to be made or not to be made according as it is or is not, on the facts of the case, a proper debit item to be charged against incomings of the trade ...'

But this reference to a 'proper debit item' was in the context of an issue between capital and revenue expenditure. In my judgment it means no more than that, to be deductible, the expenditure must be of a revenue nature, and the passage was so understood by Lord Cave in the Atherton case ([1926] AC at 211, [1925] All ER Rep at 628).

In support of this argument, however, the Crown also relied on a passage in the Law Shipping case ((1923) 12 Tax Cas at 625) in which Lord Clyde, before holding that the expenditure in question was by its nature capital, and alone amongst the members of the court, expressed the view that the expenditure appeared to be prohibited by what is now para (a) of s 137 of the Income Tax Act 1952; and reliance is further placed on certain passages in the judgments in Inland Revenue Comrs v Granite City Steamship Co Ltd, Jackson (Inspector of Taxes) v Laskers Home Furnishers Ltd, and Bidwell v Gardiner. But in all these cases, save the last, the expenditure in question was clearly of a capital nature, and in the last, which involved expenditure in the first year after acquisition, and in which the argument was mainly on the 'succession' point, the question for the judge was whether the commissioners were entitled, on their view of the facts, to hold the expenditure to have been in part capital. If the Crown's proposition in the present case cannot be derived from general principles, the passages in these cases relied on by the Crown seem to me to provide too slender a basis to support it. I would add that if, as seems possible, Lord Clyde in the Law Shipping case ((1923) 12 Tax Cas at 625) was taking the view that the expenditure was prohibited by what is now para (a) of s 137, on the ground that it was capital, his view was inconsistent with that taken in the House of Lords in the Atherton case.

Finally, as regards this argument, the Crown's case involves that there is some third test of deductibility, additional to that of capital or revenue expenditure, and additional to that of specific statutory prohibition, but in my judgment the existence of any such third test would be inconsistent with the proposition contained in more than one decided case, and most recently repeated by Lord Reid in BSC Footwear Ltd (formerly Freeman, Hardy & Willis Ltd) v Ridgway (Inspector of Taxes) ([1971] 2 All ER 534 at 536, [1971] 2 WLR 1313 at 1315), that in the framing of a profit and loss account for the purposes of income tax-

'it is well settled that the ordinary principles of commercial accounting must be used except insofar as any specific statutory provision requires otherwise.'

For all these reasons, I agree with the learned judge that there is no such third test.

If I am right in the above conclusions the question in this case is whether on general principles and on authority the expenditure in question was a capital or a revenue one. The Crown rely strongly on the Law Shipping case. Counsel for the taxpayer company accepts the validity of that decision on its own particular facts, but claims that the present facts are distinguishable. In my judgment, there are a number of important differences between that case and this. One is that in that case the purchaser knew at the time of acquisition of the ship that after one further voyage a Lloyd's survey would be required and would involve very substantial expenditure if the ship were to continue to be used in the trade, whereas here what was in the purchaser's contemplation was that the theatres could be used profitably (as in the event they were) without making good the deferred repairs, and that substantial expenditure in making them good could not be lawfully incurred for an indefinite period of time. A second difference is that in the Law Shipping case the court drew, and in my judgment correctly drew, the inference that if the Lloyd's survey had not been overdue the seller would have exacted and the buyer would have paid a larger price, whereas here it has been found as a fact that the dilapidated state of the theatres did not materially affect the price. A third difference is that there was not in the Law Shipping case any accountancy evidence, whereas in the present case there was such evidence which was accepted by the commissioners.

A fourth difference is that in the Law Shipping case the repairs or replacements necessary to satisfy the Lloyd's survey were carried out after the first voyage of the ship, whereas in the present case the repairs and replacements in question were carried out over a period beginning two years and ending ten years after the acquisition, and there is no evidence to indicate that (apart from inflation, which was taken into account in the percentage calculation or estimate) they cost any more than would have been incurred if the theatres had been acquired in good repair and subsequent dilapidations had been made good in the ordinary course of prudent maintenance. It has been pointed out to us, and is not in dispute, that the main items of the expenditure in question were carpets, decoration and upholstery, and that 60 per cent of the overall total of £17,000 represents carpets. In my judgment, it is a reasonable supposition that if dilapidations under these headings had been made good in 1945 they would in all probability have required further repair and replacement before the end of 1954. These facts pose the question why, if a trader has acquired capital assets for use in his trade and is commercially able, and desires, to continue to use these assets in a dilapidated state up to a time when, if he had acquired them new, they would in any event have required repair or replacement, he is to be deemed, when he does effect repair or replacement, to have done so by way of capital rather than revenue expenditure; and if, as here, the position is that the trader is prohibited by law from effecting the repairs or replacements, why he should be treated as if he had elected to carry them out immediately.

Because of these differences, which in my judgment are crucial and compelling, between the facts of the Law Shipping case and those of the present case, I would uphold the decision of the learned judge ([1971] 2 All ER 407, [1971] 1 WLR 442) as to the expenditure incurred in relation to the Odeon Theatre, Marble Arch.

Before this court additional points were taken on behalf of the taxpayer company as to the expenditure incurred in relation to retain other theatres on the ground that they were acquired from within the taxpayer company's group of companies, and/or that there was a succession to the trade carried on by the previous owner. These points do not arise in the light of the conclusion which this court has reached, but if that conclusion is wrong I would not have acceded to the argument of counsel for the taxpayer company on either of these points. As to the first, I cannot accept that the group accounts would present any insuperable difficulty. As to the second, counsel for the taxpayer company based his argument on a difference between the wording in r 11 of Cases I and II of Sch D to the Income Tax Act 1918, as amended by s 32 of the Finance Act 1926, and the wording in the subsequent s 19 of the Finance Act 1953; but in my judgment the wording of r 11 as amended:

'... the tax payable for all years of assessment by the person succeeding ... shall be computed as if he had set up and commenced the trade at that time ...'

is amply wide enough to exclude deduction of the expenditure in question if, contrary to our conclusion, the corresponding expenditure incurred in respect of the Odeon Theatre, Marble Arch, is not deductible. I consider that this point is covered, adversely to the taxpayer company, by the reasoning of the House of Lords in United Steel Cos Ltd v Cullington, although the particular subject-matter of that case was wear and tear allowances and the carry forward of losses, and not deduction of trade expenses.

For these reasons, and those given by Salmon and Buckley LJJ, I agree that this appeal should be dismissed.

Appeal dismissed. Leave to appeal to the House of Lords refused.

Solicitors: Solicitor of Inland Revenue; Richards, Butler & Co (for the taxpayer company).