TMI Blog1964 (1) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... hairman of the Anglo-American Corporation of South Africa Ltd., was deputy-chairman of each company. Anglo-American acted as secretary and technical adviser to the group. There was also a common sales department for handling the disposal of their output, which was marketed through the British Metal Corporation. It was, apparently, the practice that the corporation should sell the copper forward on the basis of production estimates supplied by each of the members of the group. The sales were not at prices fixed in advance: they were commitments to supply, but only at the market price current when the copper was actually made available. Each company was expected to meet the corporation's commitments to the extent of its production estimates, but the copper itself was not sold as the specific product of any one of the three mines. In the year 1957 the price of copper on the world market was falling steeply. Supply was in excess of demand, and during the year a number of the large producers in different parts of the world imposed upon themselves voluntary cuts in production. There was no binding agreement between them to effect this, but the individual decisions must have bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s share of this compensation sum, 2,165,000 in all, was the 1,384,569 which was in dispute in the appeal, the balance being found by Rhokana. The basis upon which the compensation was calculated was that Bancroft should receive enough to cover (a) the interest charges on its outstanding loans and notes, (b) the cost of the development work necessary to bring the mine into a position to produce at its full rated capacity, and (c) the cost of pumping operations at its No. 1 shaft. At the end of the 12 months Bancroft was to be free to resume full production, with, it was hoped, the benefit of the lower cost per ton resulting from the further development work. The terms of the arrangement set out above were recorded in a letter dated January 27, 1958, from Nchanga to Bancroft. It was not in dispute that that letter did accurately record what the arrangement was and state the consideration for which the 1,384,569 was paid. The question in this appeal was whether that sum was properly chargeable to income or to capital for the purposes of determining the respondent company's taxable income. The Federal Supreme Court, reversing the decision of the High Court of Southe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract in the present case had no more durability than those before the courts in that case. In Atherton's case(1) the Vallambrosa case(2) is described as a valuable guide, but was not intended to be decisive in every case. It does not mean that the asset must necessarily be durable; it certainly can endure for a very short time on certain occasions. Though the actual decision in Commissioner for Inland Revenue v. George Forest Timber Co. Ltd.(3) is immaterial here, the Chief Justice's observations there support the submissions for this appellant. In United Steel Companies Ltd. v. Cullington(4) the payments were held to be of a capital nature. Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation(5) appears to show that where a payment was not for a recurrent expenditure it should be added to fixed assets. In that case Dixon J. said(6) that the real test is between expenditure which is made to meet a continuous demand as opposed to an expenditure which is made once and for all. [Mann, Crossman Paulin Ltd. v. Compton(7) was also referred to.] There appears to be nothing in New State Areas Ltd. v. Commissioner for Inland Revenue(8) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but none of them establishing a universally applicable criterion. In John Smith Son v. Moore** the payment in question was consideration for the acquisition of a business; and an examination of the speeches of Lord Haldane and Lord Sumner (Viscount Finlay having dissented and Lord Cave having based his conclusion on the character of the excess profits duty) shows that this fact constituted the ground of the decision. Coming to the facts of the present case, which are of critical importance, in accordance with the principles of sound commercial accounting approved by the law the payment by Nchanga to Bancroft was one of the incidents of a commercial arrangement of short duration designed to benefit all three companies; they wanted to arrange matters in a way least detrimental to the three of them by taking measures considered necessary to reverse the downward trend of copper prices. It was a short term arrangement. There was no acquisition of a business of a competitor, for it was intended that Bancroft should be invigorated. Nchanga acquired an opportunity of increasing its own production for one year only by 6.4 per cent. The trial judge's finding that the payment of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Federal Supreme Court of the Federation of Rhodesia and Nyasaland concerning the income tax assessment of the respondent for the year ending March 31, 1959. The respondent in computing its profit had claimed to charge against its trading receipts a sum of 1,384,569 paid away during the year in circumstances that will later be mentioned: the appellant disallowed this claim, and on the respondent's appeal to the High Court of Southern Rhodesia the appellant had been upheld by the judgment of Young J. given on May 9, 1961. This judgment was, in its turn, reversed by the unanimous judgment of the Supreme Court, who held the respondent to be entitled to the deduction claimed, and it is from that judgment, which was delivered on November 7, 1961, that the appellant has appealed to this Board. The argument before the Board was confined to the single issue whether the sum of 1,384,569 was properly chargeable to income or to capital for the purpose of determining the company's assessable profit. That, indeed, appears to have been the only issue of substance that could divide the parties, once the facts of the case had been sufficiently ascertained. Before coming to those fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts own planned quota. The sales, as has been said, were not at fixed prices. There was no question therefore of Nchanga and Rhokana taking over or paying to take over the benefit of advantageous price arrangements. No element of such a consideration seems to have contributed to the terms ultimately agreed upon. In its operating account for the year ended March 31, 1959, the balance on which was carried to the profit and loss account, Nchanga entered the 1,384,569 as a deduction from the figure of 26,290,987 representing sales of metals and concentrates and thus attributed 24,906,418 to that item for the year. The appellant, on the other hand, disallowed the 1,384,569 as an admissible item in the computation of taxable profit for the same period. He objected to it on two separate grounds. One was that the expenditure was not wholly and exclusively incurred by Nchanga for the purpose of its trade or in the production of its income, since it was made in the interests of Bancroft's trade. This contention was rejected by Young J. after investigating the evidence produced at the hearing in the High Court, and it has disappeared from the case. The alternative ground was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoidable in any legal system that governs itself by appeal to precedent. Nevertheless, it has to be remembered that all these phrases, as, for instance, enduring benefit or capital structure are essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it. For example, while it is certainly important that in Atherton's case* expenditure that did secure an enduring benefit for a company's business was spoken of as being for that reason a capital expenditure, it would be a misuse of that authority to suppose that it gives any warrant for the idea that securing a benefit for the business is prima facie capital expenditure, so long as the benefit is not so transitory as to have no endurance at all. The present case is one in which the advantage obtained was conditioned to last for not more than 12 months, the very period adopted for the ascertainment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of income, as the appellant says here, unless one is clear that some forms of circulating capital itself, e.g., labour, raw material, stock-in-trade, are not themselves to be regarded as such a source. With these considerations in mind their Lordships must address themselves to Nchanga's challenged expenditure. It bought one right only, the right to have Bancroft out of production for 12 months. While, no doubt, money paid to acquire a business or to shut a business down for good or to acquire some contractual right to last for years may well be capital expenditure, it seems a contradiction in terms to speak of what Nchanga thus acquired, which exhausted itself and was created to exhaust itself within the 12 months' period within which profits are ascertained, as constituting an enduring benefit or as an accretion to the capital or income earning structure of the business. If the expenditure is to be treated as capital expenditure at all, it cannot be for any reason such as that. It is not the fact, as their Lordships understand the evidence, that the expenditure bought for Nchanga a right to produce any part of whatever its annual production for March, 1958/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Moore. It would perhaps be more accurate to say that it relied on the speeches of Lord Haldane and Lord Sumner in that case, for of the four Lords who took part in the decision Viscount Finlay dissented and Lord Cave took a line of approach which is not relevant to the present dispute. In their Lordships' opinion the John Smith case* determines nothing that could govern Nchanga's case. The facts were that the taxpayer, a coal merchant, had taken over his deceased father's business under powers given by the father's trust disposition and settlement. By the terms of that disposition he succeeded to the business under the obligation of paying for its net value, excluding goodwill from the assets for the purpose of valuation. The business assets included contracts giving a call on the output of certain collieries at what had become very favourable prices, none of the contracts having longer than nine months to run at the date of the father's death. A value of 30,000 was put upon the benefit of these contracts as an item of a coal merchant's business, although in fact the total sum that had to be paid for the business came out at less than 28,000. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business; the sum was not paid as an outlay in a business already acquired, in order to carry it on and to earn a profit out of this expense as an expense of carrying it on. The John Smith decision### therefore turned upon the combination of two elements as the facts of the case: an aggregate price paid as the net value of a business taken over, and the inclusion in the assets of that business of the benefit of short-term supply contracts which were not in a form allowing them to be treated as analogous to stock-in-trade. But for the combination of those elements it is not to be assumed that the decision would have been the same, for it is difficult to accept as a sound general proposition that if a man acquires and pays for stock-in-trade for his own business on the taking over of another he is not entitled to set off against the gross proceeds of realising the stock the identifiable cost of acquiring it. However that may be, neither of the determining elements in the John Smith case* is present here. Nchanga did not pay for Bancroft's business nor did it pay f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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