TMI Blog1959 (6) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... in expenditure incurred by the respondents on knives and lasts in the material period qualified for an investment allowance under the provisions of section 16(3) of the Finance Act, 1954. The sole question in dispute in the appeal was whether the said expenditure did so qualify and this question involved the following issues, namely: (i) whether the knives and lasts constituted machinery or plant for the purposes of section 16(3) of the Act of 1954; and if so (ii) whether the expenditure incurred thereon by the respondents was of a capital or a revenue nature. The case stated on the appeal from the commissioners, so far as material, was as follows: 1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on April 2 and 3, 1957, the respondents appealed against an assessment made upon them for the year 1955/56 in the sum of 8,290 less capital allowances 4,836 in respect of their profits as shoe and slipper manufacturers. The sole question for our determination was whether certain expenditure incurred by the respondents on knives and lasts in the material period qualified for an investments allowance under the provisions of section 16( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is the Pounding Machine which, simulating the cobbler's action of hammering the leather flat, performs this function on the back lasted shoe, which must be secured during the process on a last of the required size and pattern. (v) The next process, that of attaching the prepared soles by chain stitching (Blake Sewing), requires no last, but in all the operations up to this stage the machines could not be used without either knives or making lasts. (vi) after chain stitching (Blake Sewing), the stitching channels on the sole are closed and the sole is levelled to the correct shape on a levelling machine. On this machine metal feet and forms being exact replicas of the shape of the making last are used in conjunction with the hydraulic pressure of the machine to mould the sole to the correct shape. The shoe then gores to the finishing room, where the heel is attached on a finishing last inserted. The sole and heel edges are pared and then set. If such an operation were performed without a last the shoe would lose its shape. So the different type of last, known as a finishing last , is used in conjunction with the machines, e.g., an Edge Trimming Machine. (vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure on new knives and lasts was a fair estimate. The actual expenditure on new knives and lasts and the amount so charged against profits in the two half years' accounts ending respectively on April 3 and October 2, 1954. Forming the basis of the facturing units of the respondents' business. Thus the figure of 8,022 5s. appearing in the balance sheet at October 2, 1954, is the balance after crediting total additions in the half year of 1,856 8s. 5d. and after debiting to profit and loss account a sum of 3,542 19s. 1d., being the writing off at 25 per cent. of expenditure on knives and lasts in the preceding four half years. 5. The expenditure on knives and lasts during the basis year and the six years immediately preceding the basis year were as follows: Half Year to March, 1948 2,075 ,,,,,, September, 1948 1,451 ,,,,,, March, 1949 3,706 ,,,,,, September, 1949 3,868 ,,,,,, March 1950 4,659 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he variation of that method adopted by the Revenue and accepted by the respondents for income tax purposes, affects the issue on which we were called upon to give our determination. 7. The question for our determination was whether knives and lasts, or in the alternative whether either knives or lasts, were on the evidence before us machinery or plant within the meaning of sections 279 and 280, Income Tax Act, 1952, and section 16(3), Finance Act, 1954. No issue arose before us with regard to the annual allowance on account of the wear and tear of the machinery or plant which belonged to the respondents and was used for the purposes of the respondents' trade, for, whether the expenditure on knives or lasts was properly described as expenditure on plant and machinery or not, the Revenue had allowed and the company had accepted deductions in computing their profits arrived at by the method described in paragraph 6 above, so that in any event any claim for annual allowances would be excluded by section 330(1)(a) of the Income Tax Act, 1952. The sole issue before us was whether in addition to the said deductions the respondents were entitled for the said year 1955/56 to an inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment allowance in respect of the said expenditure on knives and lasts for the said year 1955/56. The Commissioners who heard the appeal, decided to allow it in the following terms: 10.--(i) We held that the words 'machinery or plant' as used in sections 279 and 280, Income Tax Act, 1952, and section 16(3), Finance Act, 1954, were not words of art, but on a proper construction of the sections were to be given their ordinary meaning. So directing ourselves, we did not doubt that there might be trades employing knives and lasts in circumstances which would make it inappropriate to describe them as machinery or plant. But in the case before us we thought we should give weight to the facts (1) that the knives and lasts performed an indispensable function in the process of manufacture, (2) that in performing that function they were used (and could only be used) in conjunction with machines, which themselves could perform no useful function in the said process unless used in conjunction with the lasts and knives, and (3) that (as was not disputed) the said machines themselves were machinery or plant within the meaning of the relevant sections. (ii) We found as a fact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fmachinery or plant for the purposes of the trade, an allowance (in this chapter referredto as an annual allowance') shall be made to him for that year of assessment onaccount of the wear and tear of any of the machinery or plant which belongs to him and is in use for the purposes of the trade at the end of the basis period for that year ofassessment. S. 330 : (1) References in this Part of this Act to capital expenditure andcapital sums-(a) in relation to the person incurring any expenditure or paying the sums,do not include any expenditure or sum which is allowed to be deducted in computing, forthe purposes of income tax, the profits or gains of a trade, profession, office, employmentor vocation carried on or held by him ; ... Finance Act, 1954. s. 16: (1) In the cases provided for by this section, anallowance (in this Act referred to as an ' investment allowance ') shall be made in respectof capital expenditure on new assets incurred after April 6, 1954 ... (3) An investmentallowance equal to one-fifth of the expenditure shall be made instead of an initialallowance under Chapter II of the said Part X in respect of expenditure on the provisionof new machinery or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on April 2 and 3, 1957, the respondents appealed against an assessment made upon them for the year 1955/56 in the sum of ? 8,290 less capital allowances ? 4,836 in respect of their profits as shoe and slipper manufacturers. The sole question for our determination was whether certain expenditure incurred by the respondents on knives and lasts in the material period qualified for an investments allowance under the provisions of section 16(3), Finance Act, 1954... 3. The respondents use a number of machines in the course of carrying on their business of shoe and slipper manufacturers: (i) An Ideal Clicking Press for cutting upper components, fittings, etc., from leather, plastic, fabric, or other materials. The cost of this machine at the material time was ? 423, exclusive of the cost of any knives. Its sole function is to be cut the leather or other fabric to the size required for shoes or slippers and it can only function when provided with knives of the shape required for the several parts of the particular shoe. Different knives are required for uppers from those used for cutting soles, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct replicas of the shape of the making last are used in conjunction with the hydraulic pressure of the machine to mould the sole to the correct shape. The shoe then gores to the finishing room, where the heel is attached on a finishing last inserted. The sole and heel edges are pared and then set. If such an operation were performed without a last the shoe would lose its shape. So the different type of last, known as a finishing last , is used in conjunction with the machines, e.g., an Edge Trimming Machine. (vii) The next processes of edge setting and heel burnishing are performed on a machine, and as good pressure is required a last to hold the shoe steady is still essential. (viii) The shoe bottom is then scoured, pointed and polished, on machines and the shoe remains on the last for these processes, only leaving it after the final finishing processes. (ix) The lasts described above thus fall into two classes, the making and the finishing lasts, the former having a metal base to enables tacks to be clenched over. Lasts are made of maple, beach or hornbeam. The respondents attempt to use their lasts as long as possible, but fashions change and every change of fashion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on knives and lasts during the basis year and the six years immediately preceding the basis year were as follows: Half Year to March, 1948 2,075 ,,,,,, September, 1948 1,451 ,,,,,, March, 1949 3,706 ,,,,,, September, 1949 3,868 ,,,,,, March 1950 4,659 ,,,,,, September, 1950 1,151 ,,,,,, March, 1951 3,527 ,,,,,, September, 1951 1,026 ,,,,,, March, 1952 5,195 ,,,,,, October, 1952 1,404 ,,,,,, March, 1953 5,131 ,,,,,, October, 1953 3,476 ,,,,,, April, 1954 4,160 ,,,,,, October, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , for, whether the expenditure on knives or lasts was properly described as expenditure on plant and machinery or not, the Revenue had allowed and the company had accepted deductions in computing their profits arrived at by the method described in paragraph 6 above, so that in any event any claim for annual allowances would be excluded by section 330(1)(a) of the Income Tax Act, 1952. The sole issue before us was whether in addition to the said deductions the respondents were entitled for the said year 1955/56 to an investment allowance under the provisions of section 16(3), Finance Act, 1954, equal to one-fifth of the expenditure on knives and lasts, on the view that such expenditure was for the provision of new machinery or plant. 8. It was contended on behalf of the appellant-- (i) that the expenditure on knives and lasts incurred by the respondents in carrying on their trade was not expenditure on capital account but on revenue account; (ii) that on the evidence the said knives and lasts were not parts of the machines which operated them, but were separate chattels; (iii) that on the evidence the said knives and lasts were implements, utensils or articles employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we thought we should give weight to the facts (1) that the knives and lasts performed an indispensable function in the process of manufacture, (2) that in performing that function they were used (and could only be used) in conjunction with machines, which themselves could perform no useful function in the said process unless used in conjunction with the lasts and knives, and (3) that (as was not disputed) the said machines themselves were machinery or plant within the meaning of the relevant sections. (ii) We found as a fact on the evidence that the knives and lasts were machinery or plant within the meaning of the said sections and we held that the [respondents were] entitled to the investment allowance claimed. (iii) In coming to this conclusion we did not consider it material to decide whether the knives and lasts were 'implements, utensils or articles' within section 137(d). Income Tax Act, 1952, or whether the allowances referred to in paragraph 6 of this case were or were not made under and by virtue of that section. In our view, even if the said allowances were made, and properly made, by virtue of section 137(d), nevertheless, having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cut out by pressing a knife on to the leather. The machine which does this is a press: the lower part of it is a flat table on which the sheet of leather is laid. Each piece is cut out by a single knife : in the case of an upper the cutting edge is heartshaped, in the case of a sole the cutting edge is the shape of the sole. The cutting edge is the lower part of a ring of metal of the same shape. A number of these knives are arranged by hand on the sheet of leather so that as little as possible of the leather shall be wasted. Then the upper part of the machine is pressed down on them and the leather is thus cut. The knives are not parts of the machine: each knife is a separate tool or implement designed to be used in conjunction with the machine. It is stated in the case that as many as fourteen different knives may be used in producing the pieces of leather to be made up into one shoe. As different knives are required for right and left shoes and each size and type of shoe may require a different set of knives, it is obvious that the respondents must have available a very large assortment of knives. It appears that each knife costs about ? 1. Two types of machine are used: one co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this was capital expenditure. They only deal with the question whether the knives and lasts are plant. They say: (ii) We found as a fact on the evidence that the knives and lasts were machinery or plant within the meaning of the said section, and we held that the (respondents were) entitled to the investment allowance claimed. We do not know whether they thought that the expenditure being capital expenditure was so clear as not to require special mention or whether they omitted to mention it owing to some oversight. But before reaching their decision I think they must have decided in their own minds that this was capital expenditure: I find it difficult to suppose that they could have entirely overlooked the leading requirement of the section after the point had been argued. It is unfortunate that we do not have the commissioner's reasons for deciding that this was capital expenditure. It is not argued that this expression is used in the Act as a term of art with some technical meaning, and I accept the position that this expression capital expenditure must be considered as an ordinary expression in untechnical English. So treating it, my first inquiry would be: What wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of any specialty in this case I am inclined to approach this case in that way. If that is a correct approach, then the salient facts in this case are that on the average these implements have a life of several years, that their cost has been treated by the respondents as capital expenditure to be written off in two years, and that the Revenue has acted on the view that their average life is three years, and in allowing deduction for income tax purposes has spread the expenditure in each year over a period of three years. The case is complicated by the fact that deductions in respect of this expenditure have been made under section 137(d) of the Income Tax Act, 1952. This is a provision which, primarily at least, applies to revenue expenditure, and it would appear to be applicable to this expenditure because these knives and lasts were, I think, implements or articles supplied for the purposes of the respondent's trade. But I do not think that this is at all conclusive, for three reasons. First, it is not at all clear that this provision was intended only to be available in the case of revenue expenditure. Secondly, section 16(3)(c) appears to recognise at least the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under section 137(d) in respect of capital expenditure, and to entitle the respondents to an investment allowance if this was capital expenditure on plant notwithstanding the fact that they have already received deductions under section 137(d). The result of getting an investment allowance is that the taxpayer gets by means of allowances or deductions more than 100 per cent. of such capital expenditure as qualifies under section 16. In the normal cases he gets investment allowance in addition to the usual allowances in respect of capital expenditure. It appears to me that the meaning and effect of subsection (3)(c) is to entitle and enable him to get more than 100 per cent. if he receives deductions under section 137(d) instead of the usual allowances. My third reason is, I think, less important, section 137(d) prohibits the deduction of any sum expended for the purposes mentioned beyond the sum actually expended for those purposes. If this means actually expended during the according year, then the method adopted in this case was not in accord with the provisions of the section, because the sums deducted were arrived at by taking into account expenditure in three consecutiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... think that in a business of the kind supposed, the costs of such supply are a proper charge against revenue in the books, and a proper deduction from gross profits in terms of subhead (d) or rule 3 for purposes of income tax. But -since such relatively permanent things as shop fitting must be taken to form a species of the genus 'implements, utensils or articles employed for the purposes of the trade'--it is plain that there are some kinds of 'implements, utensils or articles' the supply of which is not a usual incident (one year with another) of the conduct of the business, and in respect of which there is no sum which can be said to be 'usually expended.' As there is no longer any reference in section 137 to sums usually expanded, the Lord President's precise ground of judgment is no longer applicable, but this is a decision that certain expenditure (apparently capital expenditure) which does not recur annually should not be allowed as a deduction under this provision. But I cannot regard this reasoning as a satisfactory criterion of whether expenditure is or is not capital expenditure. Let me suppose that a large business has 20 machines each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Act in which it appears is a rating Act. I propose to assume that no such limitation should be placed...Confining my attention to trade plant I am content to accept the general description in Yarmouth v. France that plant includes whatever apparatus or instruments are used by a business man in carrying on his business. The term does not include stock-in-trade nor does it include the place in which the business is carried on. Whether any particular article more properly falls within 'plant' as thus understood, or in some other category, depends on all the circumstances of the case. Subject to one point, I have no doubt that these knives and lasts are plant in the ordinary sense of the word. It is true that they are numerous, small and cheap. But one trader may have to use a few large articles while another may have to use a large number of small articles, and I see no good ground for distinguishing between them as regards investment allowance. The one point is the durability of these articles. When Lindley L.J. used the phrase permanent employment in the business he was using it in contrast to stock-in-trade which comes and goes, and I do not think that he mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1952, requires consideration in relation to section 16(3) of the Finance Act, 1954. Section 330(1) of the former Act is, so far as material, as follows: References in this Part of this Act to capital expenditure and capital sums-- (a) in relation to the person incurring the expenditure or paying the sums, do not include any expenditure or sum which is allowed to be deducted in computing, for the purpose of income tax, the profits or gains of a trade, profession, office, employment or vocation carried on or held by him... Section 16(3) of the Act of 1954 has already been set out in the opinion of my noble and learned friend, Lord Reid, and I need not repeat it. The facts material for this part of the case are to be found in paragraphs 4-6 of the case stated and have also already been set out The joint effect of section 330 of the Income Tax Act, 1952, and section 16(3) of the Finance Act, 1954, is, I think, to remove the disqualification for inclusion in capital expenditure attaching to sums which have been allowed by way of deduction for income tax in computing the profits or gains of a trade, etc., this leaves the expenditure in question to be judged free from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to say that they cease to be plant or machinery when replaced or renewed. But it does not follow that the expenditure on their provision, if capital expenditure at the outset, is likewise capital expenditure on replacement. Little, if any, attention seems to have been given to the accountancy aspect of the case before the Commissioners apart from production of the company's accounts, nor do the special Commissioners expressly deal with the matter. What has been called sound accounting and commercial practice has frequently been made the basis of decision by the courts but the treatment by a company or individual of a particular item of expenditure in its accounts may not conform to such practice and there are cases where the courts have found that it does not do so. In any case, as is well known, accounts for trading purposes do not necessarily correspond to accounts for income tax purposes. In this case, while the views of accounts might be interesting, I doubt whether they could be conclusive, for the matter must, I think, be determined on a consideration of the statutory provisions in relation to the nature of the operations carried on by the company. We had a displa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to say that the reasons which moved the commissioners to find that they were machinery or plant were not equally applicable to knives and lasts functioning as described to your Lordships. They would, I think, quite properly be described as among the plant to be provided for similar business set up for the first time and their replacements must, I think, continue to be plant. At the same time they are, I consider, implements or articles employed for the purposes of the trade, expenditure on which, in the course of trade, can properly be chargeable as a deduction in computing profits and gains, and that, in my opinion, is of some importance in considering whether the money spent in replacing them is capital or revenue expenditure. I have come to the view that in this case the expenditure on replacement should properly be treated as revenue expenditure. More upper knives are required than sole knives and we are told that the average life of an upper knife is 12 months. The limit of the life for sole knives and lasts would appear, with possible exceptions, to average three years. The company itself in its own accounts treated its whole stock of knives and lasts as having a lif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when a large quantity has to be bought at one time the multiplication of what would be a revenue expense results in a capital expenditure. For the same reasons I find difficult in supposing that Parliament intended the machinery of initial, or investment, allowances and annual allowances to be applied to such articles. The detailed and somewhat complex procedure prescribed by sections 281 and 282 of the Income Tax Act, 1952, would seems quite inappropriate to such a case. It is equally unreal to look at the matter from the purely annual point of view. The year is no doubt a convenient period and in some cases a statutory period for the making up of accounts, but there is no reason in principle why expenditure exhausted in a year should alone be treated as revenue expenditure. There must be many occasions on which it is prudent and sound commercial policy to lay in supplies of things, other than raw material of manufacture, used in a manufacturing process in quantities sufficient to last for longer than a year and other cases where expenditure on single items which are going to endure for perhaps many years is accepted and properly accepted as revenue expenditure. Expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achines--each mechanical cobbler--is part of the plant. The knives and lasts, too, are part of the plant. When the manufacturers buy new machines, with the knives and lasts to go with them, they undoubtedly incur capital expenditure on the provision of new plant. But what is the position when the knives and lasts fall to be renewed? The manufacturers use hundreds of knives and thousands of lasts. These have a short life. They are continually having to be renewed as they wear out of fashions change. Some knives have an average life of one year. Others three years. The lasts have an average life of three years. They are quite cheap. The knives cost about ? 1 Is. each. The lasts cost about ? 1 2s. a pair. The manufacturers spend about ? 6,000 a year on renewing them, year in and year out. What is the nature of this expenditure? Is it capital expenditure on the provision of new plant so as to qualify for an investment allowance? The special Commissioners said nothing in particular on this point. Nor did Vaisey J. The Court of Appeal found it difficult. Your Lordships are, I believe, divided in opinion. My Lords, I cannot think that this ? 6,000 a year is the sort of expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se a firm of builders has a carpenter's shop fitted with woodworking machines but also hand saws and chisels for the men to use. The initial cost of the machines and the tools is capital expenditure. The machines have a long life and the cost of renewing them is a capital expenditure. But the tools have a short life and the cost of renewing them is revenue expenditure. I do not think that much guidance is to be obtained from the way the accounts were kept in the past. Accepting that the actual cost in each year of the knives and lasts is a revenue expense and can properly be deducted from the profits for the year, nevertheless it might well be convenient to even it out by averaging the cost over the last three years. Alternatively, if the cost was to be regarded as capital expenditure, it might well be convenient to make an annual allowance on the basis of a straight-line writing down on an estimated three years' life. The only thing that is perhaps significant is that there was never any claim made for an initial allowance. My Lords, I am of opinion that the expenditure of the company on renewing knives and lasts was not a capital expenditure so as to qualify far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the expenditure on the provision of the lasts and knives was capital expenditure) presents more difficulty, but broadly speaking I think that subject to the requisite degree of permanence an appliance which satisfies Lindley L.J.'s definition of plant is well on its way to attaining the status of a capital asset, the cost of providing which may be properly regarded as capital expenditure. Mr. Heyworth Talbot in his argument for the company submitted that all expenditure on the acquisition of assets to be retained by a manufacturer for use again and again in his manufacturing operations is capital expenditure; and that his holds good whether the assets in question are acquired by way of addition to or in replacement of existing stocks. It will be seen that the definition of capital assets implicit in Mr. Heyworth Talbot's submission is closely akin to Lindley L.J.'s definition of plant. Both postulate that the assets in question should possess some degree of permanence, Lindley L.J., speaks of goods and chattels kept by the business man for permanent employment in his business, while Mr. Heyworth Talbot speaks of assets retained by a manufacturer for use again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the end on the question of permanence, which is largely a question of degree. I think the element of permanence looms larger in the conception of a capital asset than it does in the conception of plant. Nevertheless, I see no reason for holding that the average life of three years possessed by sole knives and making and finishing lasts is too short to justify their acceptance as capital assets, the average life of only 12 months possessed by upper knives seems to me be near the line, but no attempt has been made to separate these knives and the other appliances, and I do not know whether it would have been practicable to do so. In point of function there is no distinction, so far as I can see, between the upper knives and the rest. I would therefore give the upper knives the benefit of the doubt and for the present purpose treat them as possessing the requisite degree of longevity. This accords with the arrangements between the Revenue and the company referred to in paragraph 6 of the case, which allowed all the knives and lasts an average life of three years. So far as the question is one of fact and degree, I think the special Commissioners must be taken to have held by im ..... X X X X Extracts X X X X X X X X Extracts X X X X
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