TMI Blog1954 (11) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as an expense any sums laid out by them during the year in buying the stock-in-trade in which they dealt, namely, sand or gravel; but in fact when the matter is examined it is not quite so simple, for the alleged purchase of gravel represents what the taxpayers obtained under an agreement, made in October, 1947, not with them, but with a predecessor in title. The Commissioners for the General Purposes of the Income Tax were of opinion that these claims to make deductions were not admissible, but Harman, J. was of opinion that the deductions were admissible. I have myself reached a different conclusion from that reached by Harman, J., and I have reached it, I confess, with some slight feelings of regret and misgiving on two grounds : first, I think the result bears a little hardly on the taxpayers for reasons which will, I think, emerge without any necessity for emphasis as I recite the facts; second, I am not for my own part satisfied that if close investigation were made of the method whereby the taxpayers and others in the same line of business carry on their businesses, it might not emerge--I say no more than that the commissioners would find as a fact that, notwithstandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or be lying on the land, such as potatoes, truffles, a crop of apples, or the leaves of a tree, on the other hand. It is also to be noted that once the purchaser has paid the ? 2,000, he is under no particular obligation to work this gravel. Allowing for the period covered by the option, the term of this agreement might extend for about ten years; but, on the face of the document, there is no doubt that it purports to be a sale of the gravel and sand as such, and the terms of the final clause, clause 8, can be said to emphasise the fact that no other interests are created than those which are essential for the main purpose of the sale of gravel and sand. Before I comment further upon the agreement, I must make one or two references to the case in which the facts are stated. I have already said that the practice of businesses of this kind is not really discussed. As a matter of fact, the only finding seems to be in paragraph 3(e), where the commissioners state: On acquiring the benefit of the said agreement in writing, the appellant company proceeded to excavate the deposit of sand and gravel hereinbefore referred to, and sold the same in the course of trade. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detached from the soil, but something which has to be worked as if it were in a mine or a quarry; and that all that was bought under this contract was a capital asset, namely, the right to go on the land and win the gravel and the sand and to carry it away. I venture to think that in his recital of the argument of the Crown he might be said to be restating his own conclusion of the rights given by the agreement of 1947. The judge, however, next referred to a case to which I must also presently allude, Golden Horse Shoe (New) Ltd. v. Thurgood [1934] 1 K.B. 548; 18 T.C. 280, which admittedly on the facts is the closest authority to the present case. He then came back to the present case, and stated his conclusions thus [1954] 1 W.L.R. 1058, 1062; 26 I.T.R. 371: It is said here that the opposite conclusion --that is, opposite to the Golden Horse Shoe case (1)- should be reached, and the reason in substance is because this gravel had never been raked off the soil on which it was lying. This is not a case where the gravel is in any true sense 'won' from the soil; nor is any process applied to it. It is not even suggested that a riddle or sieve is used; it is merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of mines of coal ...and other mines, the annual value shall be understood to be the average amount for one year of the profits of the five preceding years: Provided that--(a) If any such mine has...so decreased and is so decreasing in annual value that an average of five years will not give a fair estimate...the general commissioners...may...compute the annual value on the actual amount of profits of the last preceding year... In the Alianza case [1906] A.C. 18; 22 T.L.R. 94; 5 T.C. 172 also the business operation was that of turning to account a caliche mine in South America. But in that case, since the mine was out of the jurisdiction, the business, which was managed and controlled in the United Kingdom, could not be treated for tax purposes on the same footing as that of the owner of a mine situated in England. None the less the court held that the same principles applied. Those cases laid down the principle that in all cases truly analogous thereto the costs of acquiring a mine, or the depreciation of a mine once acquired (which for accounting purposes is another way of saying the same thing), were not legitimate deductions as being expenses wholly and exclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with the sum by which the value of his mine has depreciated in consequence of the extraction of that coal. For the mine is regarded as being fixed capital: There follows a reference to Coltness Iron Co. v. Black [1881] 6 App. Cas. 315 and Alianza Co. v. Bell [1906] A.C. 18. If, on the other hand, instead of buying the mine, the gas manufacturer had bought a quantity of coal already extracted from the mine and stacked on the surface, the price of the coal would have been regarded as part of the circulating capital. The reason for this distinction is not at first sight very easy to discover. It must, as it seems to me, be found in this: that in the former case the purchase of the mine is not a purchase of coal but a purchase of land with the right of extracting coal from it. The land is regarded merely as one of the means provided by the manufacturer for causing coal to be brought in his gasworks, and therefore as much part of his fixed capital as would be any railway trucks or lorries provided by him for the same purpose. Then, after a citation, Romer, L.J. said [1934] 1 K.B. 548, 565; 18 T.C. 280, 301: It seems to follow from these considerations that the questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioners of Inland Revenue, [1951] 32 T.C. 238 where a Mr. Murray, having bought certain standing timber for about ? 1,000, was fortunately able to sell it later, still standing, for ? 14,000. The Inner House of the Court of Session decided the case, as I read their judgment, on this simple ground: that there was evidence justifying the commissioners' finding that the purchase and sale of that growing timber were transactions within the scope of the business activities of Mr. Murray as a timber merchant, and, therefore, that the difference between the two figures was taxable profit in his hands. On the other side of the line was Kauri Timber Co. Ltd. v. New Zealand Commissioner of Taxes [1913] A.C. 771; 29 T. L.R. 671, which came to the Judicial Committee of the Privy Council from New Zealand. The appellant company had, like Mr. Murray in Murray v. Commissioners of Inland Revenue [1951] 32 T.C. 238, entered into a number of contracts or similar documents for acquiring rights over standing timber. The nature of the transactions which the Kauri Company entered into may be said to have been far more comprehensive in scope than Mr. Murray's transactions, but still I think th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary rights to go and take them away. In their Lordships' opinion said Lord Greene [1949] A.C. 521, 528; 17 I.T.R. 473, the High Court [from which the appeal came] has adopted an approach to the question which has diverted its view from the real point and has attached too much importance to cases decided on quite different facts. Cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber, etc., referred to in the judgment and relied on in the argument before the Board do not appear to their Lordships to be of assistance. It is obvious from the contrasted examples that the decision rested upon the particular circumstances of the case and upon the fact that the Board was able to say that from the moment the contract was entered into and before the leaves had actually been picked the tendu leaves were part of the raw material of the appellant. But I cannot say the same of the sand and gravel, part of the earth itself, which was the subject of the contract in the present case and which I think could only become part of the stock-in-trade of this gravel merchants' business when it had, in the true sense, been won, bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the nature of quarrying or excavation. On that footing, how does the matter stand? One starts with the wellknown provisions of Schedule D and the rules applicable to Cases I and II. [His Lordship read rule 3 and continued:] The two sums paid by the taxpayers under the agreement of October 29, 1947, that is to say, the initial sum of ? 2,000 which was paid by them to the original parties to the agreement from whom they took an assignment and the further sum of ? 2,250 paid by them on the partial exercise of the first of the two options, were clearly sums laid out wholly and exclusively for the purposes of their trade. It remains to consider whether these two sums were in the nature of capital outlay or were expenditure on revenue account; for in order to be expenses properly deductible they must be of the latter description. To arrive at an answer, it is necessary to consider the nature of the rights taken by the taxpayers under the agreement of October 29, 1947. The agreement by clause I purports to effect a sale upon the deposit of gravel under the defined 8 acres of land. The agreement then provides by clause 2 for the necessary access to the land by the taxpayer, their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld become the owners of any gravel excavated by them from this area of land. Certain features of the agreement require special notice. First of all, it is unlimited in time, so that the taxpayers are allowed the right to excavate the gravel over an indefinite period. The taxpayers are under no obligation to work the gravel at all, and if any work is done it is for the taxpayers to decide at what rate excavation shall proceed. Secondly, the price in no way depends on the amount of gravel excavated or available. Thirdly, the taxpayers are given options of securing further reserves of gravel to be exercised during a period which may extend for as long as ten years from the date of the agreement. Those reserves, in the event of the option being fully exercised, would have comprised, I think, another 10 acres in addition to the 8 acres to which the right originally extended. Such being the nature of the rights, it remains to consider whether the money laid out by the taxpayers in purchasing those rights, in purchasing the rights originally granted and in purchasing part of the further rights comprised in the first option, was laid out by way of capital expenditure or by way of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 934] 1 K.B. 548, should be regarded as a purchase of raw material or stock-in-trade, whereas the sums expended in acquiring a quantity of caliche or nitrates embedded in a quarry, as in the Alianza case [1906] A.C. 18, should be a capital expense ; or again, which I think is the result in the present case, that the right to obtain or win gravel lying in the soil should be a capital expense. But these matters of taxation must depend on the rules laid down by the relevant legislation by reference to which income for tax purposes is to be measured and under which capital expenditure is not deductible. In my view, when all the authorities are looked at, it is reasonably plain that an asset such as that acquired by the taxpayers, in the present case must be regarded as a capital asset and not as so much stock-in-trade purchased by the taxpayers for the purposes of their trade. Mr. Magnus invited us to distinguish the Alianza case [1906] A.C. 18 and the Coltness case [1881] 6 App. Cas. 315 and other cases of that kind on the ground that these were either cases where there was a question of assessing the owner of a mine under No. III of Schedule A, or else cases in which, as in the Ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be extracted from certain documents. For example, in the case stated, in paragraph 3(e), it is said: On acquiring the benefit of the said agreement in writing, the appellant company proceeded to excavate the deposit of sand and gravel, but the agreement itself, by clause 4, states: The purchaser shall have the right to take upon the said land any portable machinery and haulage equipment which may be required for the purpose of excavating and carrying away the said gravel and sand ballast. In clause 6, which is of some importance, it is provided: For the period of 5 years from the date hereof the purchaser shall have the option to purchase the additional deposit of gravel and sand ballast in and upon the adjoining 5 acres of land coloured blue on the plan annexed hereto at the price of ? 1,000 per acre where the deposit shall be of a depth of 9 feet or more, provided that where the deposit shall be found to be of a lesser depth than 9 feet the purchase price shall be adjusted. Those matters are in striking contrast with some of the expressions which are to be found in the judgment of Harman, J. [1954] 1 W.L.R. 1058, 1062; 26 I.T.R. 371, to which Jenkin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellants' business or do they merely provide the means of obtaining that raw material? His answer to that question was that they were the raw material itself. That was a decision on the facts of that case. After listening carefully to the arguments that have been addressed to this court and applying the test which Romer, L.J., laid down as the test which is to be applied, I think that although the first clause of the agreement states that the taxpayers purchased the deposit of sand and gravel, the true view is that they purchased the means of obtaining that raw material for the trade which they carried on, namely, the sale of gravel. Finally, I observe that Harman, J., said in his judgment that the appellants were buying their stock-in-trade when they bought the gravel. If this company unfortunately had gone into liquidation, and if the contract had not been performed, it might have been difficult to say that one asset, the stock-in-trade, lay below the surface of the ground on that particular plot of land. I should have thought that to describe that property as stock-in-trade would be quite inappropriate. For these reasons, I feel that it is impossible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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