TMI Blog1969 (1) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is due in respect of the excavation and concreting. The Special Commissioners held that the larger allowance was due in respect of the concreting but not the excavation. The First Division held that the larger allowance was due for both. I can summarise the facts found by the Commissioners. The dock had to be made at the right level adjacent to the Clyde and some 200,000 tons of earth had to be removed to make room for it. The walls and bottom of the dock had to be strong and impervious to water so that some 100,000 tons of concrete had to be used. The gate, included in the ancillary plant, is of a falling leaf type. It is opened and when the dock is full of water at high tide the ship to be inspected or repaired is caused to enter the dock. The gate is then closed, the water pumped out, and the ship properly supported so that work can proceed on the outside of the hull. When the work is finished the process is reversed and the ship can at high tide re-enter the river. From the findings of fact I need only quote the following : The function of a dry dock is to lower ships into a position where they can be securely held exposed out of the water and inspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : ' In its application for income tax purposes this definition is subject to the qualification laid down by Uthwatt J. in J. Lyons Co. Ltd. v. Attorney-General [1944] Ch. 281, 287, that plant does not include ' the place in which the business is carried on ' ; that is the setting. In the case of Jarrold v. John Good Sons Ltd. [1959] 1 W. L. R. 875, 889 ; [1960] 39 Pennycuick J. said that he did not regard the two conceptions of ' setting ' and ' plant ' as being mutually exclusive and Ormerod L. J. # said he ' would be inclined to agree with him, although it would appear that in a large number of cases the part of the equipment which can properly be regarded as ' setting ' is not likely to be regarded as ' plant '. In Hinton v. Maden Ireland Ltd. [1962] 1 W. L. R. 1101 (Ch. D.).I. T. R. 357 (H. L.) Lord Reid in adopting the definition of Lindley L. J., in Yarmouth v. France*, said that it ' is not disputed that plant is also used in the [Income Tax] Act as an ordinary English word. ' It was suggested to us that one test to apply was whether the ordinary man in the street would regard the company's No. 3 dry dock a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functioning of the dock than did the water-tower in the provision of water to Lowestoft. Moreover, the dry dock was subject to wear and tear. On these findings we held that the sum of 500,380 was expended on the provision of machinery or plant which attracted allowances under Chapter II of Part X of the Income Tax Act, 1952. As regards the expenditure of 186,928 for the excavation of No. 3 dry dock we found that this was not expenditure on the provision of machinery or plant. In our view this expenditure was too remote from the provision of the dry dock. It was expenditure on the preparation of land to receive machinery or plant and as such attracted allowances only under Chapter I of Part X. The respondents say that the whole dock was part of their plant used by them for the purposes of their trade. Plant is nowhere defined in the Act and they rely chiefly on what was said by Lindley L. J., in Yarmouth v. France [1887] 19 Q. B. D. 658 and on the statement of the question by Pearson L. J. in Jarrold's ** case : . . . . . . . whether the partitioning is part of the premises in which the business is carried on, or part of the plant with which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . And a dam is generally simply an improvement of the loch giving a better supply. But I could imagine circumstances in which a dam would be such an integral part of the means required for a trading operation that it should be regarded as plant. I find no error of law in the Commissioners' determination of the first question. The appellants rely on Margrett v. Lowestoft Water Gas Co. [1935] 19 T. C. 481 There the company required to have a tank at some height above ground level to give the necessary head of water, and the question was whether the structure which supported the tank was plant. Finlay J. appears to have decided it was not, largely on the ground that, being a structure, it could not be plant. The tank certainly was plant and if the cost of the foundations necessary to support plant at ground level is part of the cost of the plant, then I think that this tower must be treated in the same way as foundations below ground level. That leads me to the second question in this case. The question whether the cost of excavation necessary to make room for plant is part of the cost of the plant depends on the proper construction of section 279 (1) of the Act which is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he new machinery or plant may serve its proper purpose. Where that is the case this section enables the cost of additional alterations to be included. If this section meant that no preliminary expenditure is within the scope of section 279 there would be an anomalous and unreasonable difference between the provision of plant in a new building or in the open, and the provision of plant in an existing building. So I do not regard this section as supporting the appellants' argument. The appellants also rely on section 16(3) of the Finance Act, 1956. But that section only applies where apart from it no allowance could be made either under Chapter I or under Chapter II. I do not see how it can have any application to the present case because here it is admitted that allowance must be made under Chapter I if it is not made under Chapter II. And I find nothing in it to cause me to alter my view with regard to the proper interpretation of section 279. Finally it is said : if the cost of excavation is included why not also the cost of acquiring the land ? But the draftsman thought of that. Section 278(1)(a) provides that expenditure incurred on the construction of a building is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of, . . . or of expenditure on, a building or structure if . . . an allowance is or can be made under any of the provisions of Chapter II . . . of this part of this Act in respect of, or of expenditure on, that building or structure. Section 279 (1) of the Act under which the respondents claim an initial allowance at the higher rate reads, as far as material, as follows : . . . where a person carrying on a trade incurs capital expenditure on the provision of machinery or plant for the purposes of the trade, there shall be made to him . . . . . . an allowance . . . . . . equal to three-tenths of the expenditure. The appeal of the Commissioners relates, in the first place, to the concrete lining of the respondents, dry dock and the question whether or not this was plant within the meaning of the section was found in their favour by the Special Commissioners. The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. This equipment admittedly qualifies for the initial allowance appropriate to expenditure on plant. It includes a dock gate and operating gear, cast iron keel blocks, elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-concrete except for certain auxiliary apparatus comprising pumps, valves and pipes. It was used for increasing the pressure of the water supply and replaced a gas engine and pumps previously used for that purpose. Finlay J. held that the water tower ( apart from the auxiliary apparatus ) was not plant within the meaning of rule 6. In my opinion, he was right in so deciding. He rejected the argument based on function, saying, at pages 486-487 : You have to examine what the thing is. It is not enough to say it was used in a particular way. Clearly, if one takes the case of a factory with machinery inside it, the machinery in all probability would be plant, but equally clearly the factory, the bricks and mortar, would not be plant. One would anticipate, I think that the same principle would apply here that the pipes and so forth would be plant, but the actual structure, made in this case of ferro-concrete ( although of course it does not matter what it is made of ), would not be plant. The object of the water tower is to raise the water up to a particular height from which, by gravity or otherwise, it will be able to flow over the district. He concluded by holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld seem that all purpose-built premises would likewise qualify as plant. The guidance afforded by judicial decisions following the statement of Lindley L. J. in Yarmouth v. France appears to me to support the appellants. To regard the dock as apparatus seems to me to be wrong and I regard it as being something quite different from the generally accepted conception of plant. The impermeable quality of the dock points to its being covered by the words building or structure rather than the word plant. It has the characteristic of a building which is constructed so as to be able to contain the elements, like a sea wall or a dam in a hydro-electric scheme. Accordingly, it is eligible, as the appellants concede, for an allowance under Chapter I as an industrial building or structure in use for the purposes of a trade within the definition in section 271(1) of the Act. It is said on behalf of the respondents that, unlike a factory, which would probably be capable of use without the plant contained in it, the dock depends on the equipment for its utility. This may well be true, but I do not feel compelled to treat the whole complex as plant for that reason. The dock is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pipes, pumps and valves after a ship was floated into the basin the water was withdrawn and the ship allowed to settle on keel blocks. It was thereafter kept in position by various contrivances. The consequent exposure of the bottom and sides of the ship enabled inspection and/or repairs to be done. When this was completed the water was returned to the basin, the dock gates were thereupon opened and the ship sailed away into the river. The Special Commissioners found : The function of a dry dock is to lower ships into a position where they can be securely held exposed out of the water and inspected and repaired and to raise them again to a level where they are free to sail away. In the agreed figure of ? 243,288 which qualified for an initial allowance for machinery and plant under Chapter II was included the cost of inter alia dock gates, operating gear, keel blocks, pipeworks, electrical works, steel trestles, pumping installation, side shores and winches. The dispute only concerns the cost of concrete work and the cost of excavation. To qualify for the allowance of three-tenths under Chapter II the expenditure must be incurred on the provision of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pumps. To effect this purpose excavation and concrete work were necessary. It is said that the dry dock is similar to premises like a factory building in which the trade is carried on. But this comparison is not, in my view, accurate. The factory is by itself a building or structure in which trade can be carried on. But the excavation and concrete work is useless for any trade purpose unless used in conjunction with the rest of the equipment. As Pearson L. J. (as he then was) said, the subject is part of the plant with which the business is carried on as distinct from the premises in which the business is carried on. ( Jarrold v. John Good Sons Ltd.* ) Indeed, the contention of the revenue that the concrete work must be isolated from the rest of the dry dock would lead to the conclusion that this expenditure would not qualify under section 265 for a Chapter I allowance because it would not be an industrial building or structure occupied for the purposes of a trade within section 265(1). As I have already said, in its uncompleted state it would be useless for any trade purpose. We were referred to a number of cases in which various subject have been held to be or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, as I have already said, the excavation expenditure is included in the provision of plant under that section. Section 16(3), in my view, has no application. I therefore consider the First Division were right in reversing the commissioners' decision on this point. I would for these reasons dismiss the appeal. LORD UPJOHN. My Lords, the respondents are ship repairers carrying on business at their ship repairing yard at Elderslie on the River Clyde. They had two dry docks there and in 1962 were minded to build a third (No. 3 dry dock ) which they did at a total cost of about ? 1,000,000. The question is whether two sums of costs involved in this projects qualify for capital allowances under Chapter II of Part X of the Income Tax Act, 1952, that Part of the Act dealing with reliefs for certain capital expenditure These two sums are : (a) cost of excavation of land for No. 3 dry dock? 186,928 ; (b) cost of concrete work etc. used in constructing that dock? 500,380. Chapter II is headed Machinery and Plant and the first section in that Chapter ( section 279 ), provides that . . . where a person carrying on a trade incurs capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f some land contiguous to the sea estuary or tidal river, the greater the range of the tide the better, and the basin is (nowadays) constructed of strong concrete side walls to contain the water within the dock and the bottom is of strong concrete construction with special reinforcement down the centre to take the keel of the ship entering the dock. At high tide the ship is nosed into the dock by tugs, by winches on the sides of the docks or even under its own power. Then a sea gate is provided at the outer end of the dock to prevent the ingress of the sea, but valves in the gate are provided so that as the tide recedes the water in the dock flows out and the ship settles on the reinforcement down the centre of the dock and remains there ; but as very few ships are flat enough in their hull construction to sit on dry land on their keels, provision is made by bilge blocks and side struts and shores to keep the ship upright when not surrounded by water. Then when the tide has receded pumps pump out the rest of the water and the ship is left on dry land ready for the work of the respondents, who are essentially ship repairers, to begin though, of course, it may be only a matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing them and then returning them. We accepted this and found further that the dock acted like a large vice for holding ships in position while they were repaired or cleaned. The dry dock was in our view not the mere setting or premises in which ships were repaired. It was different from a factory which housed machinery, for in the operation of the dock, the dock itself played a part in the control of water and enabled the valves, pumps and electricity generator, which were an integral part of its construction, to perform their functions. The dock was not a mere shelter or home but itself played an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river. This was accepted by the judges of the First Division and both the Lord President and Lord Guthrie considered that the dry dock was not merely the setting but was properly described as apparatus ( a word clearly borrowed from Lindley L. J. ) performing a function in the work. My Lords, I regret that I cannot agree that the dry dock itself is properly described as plant which, as Lord Reid has pointed out in Hinton v. Maden Ireland Ltd. [1959] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the factory would be useless, makes the walls of a factory part of the plant. No doubt the question of function is an element, and it may be an important element, in determining whether the object of some expenditure is or is not plant ; machinery may usually be more easily recognised. But let me consider two illustrations which show that function is no more than an element. The first is the case of Margrett v. Lowestoft Water and Gas Co.*, where, in my opinion, Finlay J. rightly held that a water tower whose sole function was to produce water under pressure and which replaced plant or machinery (a gas engine and pumps) whose sole function was to do the same thing did not thereby become plant. The learned judge looked at the matter as a whole and, as I think, rightly came to the conclusion that a water tower could not be described as plant. Then in argument counsel for the appellants gave what I thought was a simple and useful illustration. In the old days the garage proprietor would have an inspection pit where his men could examine and repair the under side of a motor-car. Nowadays he has a platform on to which the car is run and is then lifted up by mechanical means so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to the respondents in their trade. It would not be an industrial building or structure in use for the purposes of a trade, as it must be to qualify for an allowance under Chapter I of Part X of the Income Tax Act, 1952. Yet this allowance ( which is lower than the allowance for plant and machinery ) the revenue is willing to concede. Furthermore, I regard the piecemeal approach as unreal. The dry dock ought, I think, for present purposes to be regarded as a whole with all its appurtenances of operating machinery, power installations, keel blocks, tubular side shores, and so on. So regarded, is it plant or not ? There is no statutory definition of the word. But it is at least clear from section 276 of the Income Tax Act of 1952 that the terms plant and building or structure are not mutually exclusive. There may, in other words, be some buildings or structures which can also properly be called plant. What, however, are the tests which enable one to recognise any such case ? These have been left to the courts to formulate. Lindley L. J. did it in Yarmouth v. France * in language which despite the great technological advances since his day is still of gre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards the cost of the necessary excavation, I think this comes within the words expenditure on the provision of the machinery or plant in section 279 (1), again regarding the dry dock as a whole. Similar expenditure incurred in relation to a building or structure is now regarded as expenditure on the construction of such building or structure for the purposes of section 265(1) without any further or more express provision, and I think rightly so. The appellants say that if a comparable construction be given to the relevant words in section 279 (1) relating to plant and machinery, then section 300 of the same Income Tax Act, 1952, would be unnecessary. But that section relates to alterations to an existing building incidental to the installation of machinery or plant ; and its wording suggests that it was enacted simply as an assurance to remove doubts about a particular kind of case. Section 16 (3) of the Finance Act of 1956, which is also relied upon by the appellant, I do not find of help, for it refers to expenditure on (among other thingh) preparing and cutting land for which no allowance could be made under Chapter II of Part X of the Act of 1952, which Chapte ..... 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