TMI Blog1966 (12) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... damaged. Its repair cost ? 83,167, and it was out of use for 380 days. The company consequently suffered damage which exceeded ? 83,167 by the amount of the loss resulting from the fact that the jetty was out of use for 380 days. I shall refer to the damage suffered by loss of use as consequential damage. This consequential damage was agreed by the company and its insurers (to whom I will refer as the underwriters) to amount to ? 32,450. The total amount of the damage suffered by the company, as agreed between the company and the underwriters, was accordingly ? 115,617. The owners of the ship were entitled under the Merchant Shipping Act, 1894, s. 503, as extended by the Merchant Shipping (Liability of Shipowners and Others) Act, 1900, s. 1, to limit, and did limit, their liability to a sum of ? 77,875--a sum less than the cost of repairing the physical damage to the jetty. The company was insured with the underwriters against physical damage to the company's property, but not against consequential damage. The underwriters agreed that, for the purpose of ascertaining the extent of their liability to indemnify the company in respect of physical damage to the jetty, the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it cannot be a profit arising from the company's trade. In the further alternative, it has been submitted on behalf of the company that, in so far as the ? 21,404 is attributable to depreciation, it can only be a capital expense. I can dispose of this last argument briefly. for I think it is untenable. No part of any claim by the company for loss of profit could, as I think, consist of depreciation, which could never be a credit item in an account of the company's profits. The rate of depreciation adopted by the company in its accounts figures in the present case merely as an element in arriving, by what seems to me to be a very arbitrary method of calculation, at an estimate of the profitability of the jetty. The resulting figure of ? 32,450 has been accepted, and must for present purposes be accepted, as an estimate of the profit which the company might reasonably be expected to have made by the use of the jetty, if it had not been damaged, during the 380 days when it was in fact out of use. The method of calculation is, I think, irrelevant. Another alternative contention before the commissioners, which is recorded in paragraph (d) of the company's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons Ltd. v. Mathias.( 1964] 43 A.T.C. 262)) Those contracts which fall within the former category can perhaps be equated with fixed physical capital assets as forming part of the basic and enduring structure within or by means of which the business is carried on, whereas contracts of the latter kind can appropriately be equated with the circulating capital or stock-in-trade of the business as belonging to a class of things, not being capital assets, by the exploitation of which, or by the turning of which to account, the profit of the business is made. But not every case can be classified as analogous to the sale of a capital asset on the one hand or a sale of stock-in-trade or some other transaction in the course of the recipient's business on the other. Judges have from time to time been careful to say that no clear and comprehensive rule can be formulated and no clear line of demarcation can be drawn by reference to which it can be determined in every case whether the sum received should be regarded as a capital receipt or as a revenue receipt to be taken into account in arriving at the profits or gains of the recipient's trade. Each case must be considered on its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken out again); they merely could not sail for a certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit-earning capacity during those days, in lieu of that receipt, this money was paid to the owners, although they were not requisitioned, as if requisitioned. Now under those special circumstances I do not think I can treat this as being a sum paid by way of compensation for the temporary interruption of the trade. I think I ought to regard this sum, as the Commissioners have obviously regarded it, as a sum paid which to the shipowners stands in lieu of the receipts of the ship during the time of the interruption. In the Court of Appeal, Lord Hanworth M.R. approved this view of the matter. 12 Tax Cas. 1169, 1180 In Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners 1931] S.C. 156; 16 Tax Cas. 67 two shipping companies, acting jointly, bought a ship in need of repair and immediately placed it in the hands of repairers for overhaul. The time stipulated for the completion of the overhaul was exceeded, and the owners claimed damages calculated by reference to the estimated profit which the ship would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lord Morison viewed the matter in a similar way. Lord Sands found more difficulty in doing so, but did not dissent. The company having in that case suffered no damage on capital account, the amount recovered could not sensibly have been carried to capital account. The present case appears to me to involve a question of the kind which Rowlatt J. said in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners.12 Tax Cas. 1169 would result in embarking on a wide and difficult field of inquiry; a question of the kind which Lord Clyde in Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioner 1931] S.C. 156, 159, 160 found to be irrelevant to the decision of that case. The damage to the taxpayers' jetty was undoubtedly damage to a capital asset. That damage occasioned not only the need to incur expense in repairing the physical damage but also an interruption in the profitable use of the jetty. Both these consequences of the physical damage were natural and direct results of that physical damage. The taxpayers had but one cause of action against the owners of the ship which caused the damage, but the damages recoverable in respect of that cause of action involved two distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Revenue Commissioners 1922 S.C. (H.L.) 112, 115, the measure that is used for the purposes of a calculation does not determine the quality of the figure that is arrived at. The questions are: what was the nature of the taxpayers' claim against the shipowners, and what was the quality of any sum recovered by them in respect of that claim? The taxpayers' claim did not arise out of any involuntary disposition of stock-in-trade of their business or of any involuntary rendering of any services or provision of any facilities in the course of their business. It did not arise out of any contract entered into in the course of their business or out of any abrogation, breach or modification of any such contract. Nor is it the result merely of the loss of trading opportunities. I can see no ground for treating any part of the damages received by the taxpayers as a receipt in the course of their trade or so connected with their trade as to make it proper to be treated as a revenue receipt of the trade. On the contrary, it seems to me that the ? 21,404 received by the taxpayers in respect of the consequential damage is compensation for a capital asset the jetty, having been ster ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the argument, and the judgment itself is briefly reported. It does not appear why the judge held that the damages for loss of profit would have to be entered into the plaintiff's profit and loss account. It seems to me probable that this view was perfectly correct upon the ground that the risk of accidents of this kind is an inherent feature of a car-hire business, so that any resulting loss should be brought into the trading profit and loss account of the business, with the consequence that any receipt to be set against any such loss should likewise be brought into that account. Had the plaintiff in that case insured against loss of profits resulting from such accidents, it might have been very difficult to contend that the cost of so insuring was not an expense which ought to be brought into the profit and loss account. If this would have been so, this might well have provided support for an argument that the loss of profit which was in fact incurred ought to be similarly treated. Similar reasoning might well have applied in Morahan v. Archer [1957] N.I. 61. A risk of that kind, however, seems to me very different in character and degree from such risk as the taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fying this damage; it may well be that it was adopted for the reason that the jetty had been only newly built, so that no figures were available to show what rate of profit would ordinarily be expected to accrue from the use of the jetty. It will be seen from the figures I have given that the taxpayer company's total loss was ? 115,618. The owners of the tanker admitted liability; but they were able to limit their liability in pursuance of the Merchant Shipping Acts to a sum of ? 77,875, which sum they duly paid together with the appropriate interest thereon. The taxpayers were insured against physical damage to their property, but were not insured against consequential damage. In these circumstances they reached an agreement with their underwriters to the effect that the sum recovered from the owners of the tanker should be apportioned rateably as between the physical damage and the consequential damage, and that the underwriters should pay to them the unrecovered balance in respect of the physical damage. The final result of it all was as follows. The respondents recovered in full the physical damage to their jetty, amounting to ? 83,167. They recovered by way of contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llision, the profits which the taxpayer company would have earned by the use of the jetty would plainly have been taxable as a trading receipt. Why, it may be asked, should not the same apply to the sum of money recovered from the wrongdoer in partial replacement of those profits? In that connection we were referred to the report of The Argentino 1889] 14 App. Cas. 519, H.L in the House of Lords. I should explain that that was a case where the owners of a ship damaged in collision were held to be entitled to recover the loss of profit which they would have made out of a charterparty which had been fixed, and which was lost in consequence of the collision. But in the House of Lords, Lord Herschell pointed out Ibid. 524. that, if the owners got back their ship from the repairers before the date when the charterparty voyage (if it had taken place) would have been completed, they would have to give credit for any profits that they could have earned during the unexpired period. Any such profits would clearly, I think, have constituted a revenue receipt; and it might be thought to follow from that that the damages for loss of the charterparty, against which any such actual earnings wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payers became entitled in consequence of that injury, subject only to the owners' statutory right to limit their liability. Although some part of that amount related to the loss of use of the jetty for 380 days, this fact does not, in my judgment, make that part of the damages proper to be brought into account as a revenue receipt of the business. It seems to me that in this passage, particularly where the judge referred to the relief, whole and indivisible, to which the taxpayers became entitled , he was forgetting what he had said (in my view quite correctly) earlier, namely, that the damages recoverable in respect of the cause of action involved two distinct elements requiring two distinct inquiries and calculations. Moreover, it appears to me, with all respect to the view of Buckley J., that there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing lost is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eventually went to the House of Lords, taking three years to get there, and in the event was decided in favour of the fireclay company. But the railway company thereupon exercised its statutory power to require that the part of the fireclay bed which lay under their line should be left unworked on payment of compensation. The compensation was duly paid to the fireclay company. The company, however, presented an additional claim for damages against the railway company, the damages consisting of the expenses to which the company had been put during the three years' litigation in keeping open the fireclay field, and in due course the company received a sum of money by way of damages in addition to the compensation. The question then arose whether the compensation and the damages recovered, or either of them, constituted trading receipts which rendered the company liable to tax, or whether, on the other hand, the constituted capital receipts. It was decided in the result that both the compensation and the damages were capital receipts, the compensation because it was a payment made (to use the words used in the case) for the sterilisation of a capital asset, and the damages beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure would be shown to form a proper trading expenditure, and to be a legitimate deduction from gross profit in estimating the 'profit arising or accruing from the company's trade'. In the latter case, it would be shown to be money spent without the possibility of return, and would therefore constitute just a loss of so much capital. Once that case is fully understood, I am bound to say that I find it difficult to see how it really helps the taxpayer company in the present case. Most of the other cases to which we have been referred seem to me to be wholly favourable to the Crown's contention. I certainly do not find it necessary to refer to all the cases cited, but some of them I think I should mention. There are, for instance, the two cases referred to in the judgment, namely, Enasign Shipping Co. Ltd. v. Inland Revenue Commissioners*** and Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners 1931] S.C. 156; 16 T.C. 67.. Buckley J. himself quoted at some length from the judgment in both these cases, and I do not find it necessary to set out the quotations again. Neither of these cases is by any means on all fours with the present, but in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be treated as a capital or a revenue receipt. The matter eventually found its way to the Privy Council, where it was decided that the sum recovered was to be treated as a revenue receipt. I think that the ratio of the decision is really summarised in the judgment of the Board delivered by Lord Blanesburgh, where he said(Ibid. 450): In view of the nature and origin of the receipt, as they have traced these, their Lordships have reached the conclusion that within the meaning even of the interpretation clause this receipt was 'income from a business', and that in ordinary parlance it was income or gain derived from the business of the respondents which had necessarily to be brought into receipt as such in the profit and loss account of the business referred to in the section of the statute. That decision was referred to and followed by this court in Williams' Executors v. Inland Revenue Commissioners 1943] 59 T.L. R. 204; [1943] 1 All E.R. 318; 26 Tax Cas. 23, C.A, which again was a case of money recovered under an assurance policy (in that case a life policy). Lord Greene M.R., in delivering the leading judgment, referred to the British Columbia Lumber case 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consequently, because of the time occupied in effecting the repairs, it had only a depreciated value at the end of the repair period. It was submitted that it was quite irrelevant that this part of the damages recovered was quantified by reference to loss of use, for the way in which a loss is quantified cannot affect the quality of the loss. What was said was that the sums recovered, whether from the insurers or from the wrongdoer, should be regarded, as one whole, amounting in total to compensation for the physical injury to the jetty. It was said, to use the phrase that was used in the Glenboig case 1922 S.C. (H.L.) 112, 115, that during the period of repairs the jetty was a sterilised asset, just like the fireclay in that case. As I understood the argument, it was conceded that, if there had been no collision, and therefore no physical damage to the jetty, but the tanker had sunk just outside it so as to block access to it and prevent its use, a different result might be arrived at. It seems to me that it would be strange indeed if the quality of the damages recovered for loss of use should be held to depend upon the accidental circumstance whether or not there happened also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecipient's trade. Each case must be considered on its own facts. As my lord says Supra p. 478, this is in the end a question of fact. How then do the facts stand ? There is no doubt that the ? 21,000-odd, which is the subject of the controversy here, was arrived at between the parties by a highly arbitrary' process based on the estimated loss of profit during the time in which the jetty was out of use. But that does not carry one much further, for as Lord Buckmaster said in the course of his judgment in the Glenboig case#: There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. He then goes on to say that he is unable to regard the sum of money recovered in that case as anything but capital money, and that it was erroneously entered in the balance-sheet of the company concerned as a profit. So that so far one is not advanced any further forward by finding out how the sum has been arrived at, or in relation to what. The taxpayer company's case here, as I have understood it, is that the total sum recovered is damages for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ison(Ibid. 164). In the British Columbia Fir and Cedar Lumber Co. case(1932] A.C. 441 in the Privy Council, the receipts were receipts under a fire insurance policy; and, as was pointed out(Ibid. 444), in so far as they were receipts for destruction of assets by fire, they were, of course, capital receipts but in so far as they were related to loss of profit for those assets if they had not been burned, they were revenue receipts. Crabb v. Blue Star Line [1961] 1 W.L.R. 1322; [1961] 2 All E.R. 424; 39 T.C. 482.related to an insurance against late delivery of ships, and this was similar to diminution in the price of capital asset. Lastly, there is Short Bros. Ltd. v. Inland Revenue Commissioners([1927] 12 T.C. 955) where the sum received was compensation for the cancellation of a contract to build a ship, and that was held to be an ordinary trading receipt of the company's business. On the whole, therefore, such attention as I have been able to give to the cases seems to me to show them holding a fairly consistent result when looked at in the light of the particular circumstances of each case when those are borne in mind individually. In my opinion Buckley J. mistook the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation is irrelevant to the second problem. The method by which the compensation has been assessed in the particular case does not identify what it was paid for; it is no more than a factor which may assist in the solution of the problem of identification. I will not again traverse the cases. They seem to me to be directed to the solution of one or other of these two problems, which are not always distinguished in the judgments. In the course of these judgments different metaphors and similes (appropriate, no doubt, to the particular facts of the case) have been used. But I do not think that any of these conflict with the rule as I have expressed it. In the present case the source of the legal right of the respondent trader was his right to recover from the owners of the tanker damages for the loss caused to him by the negligent navigation of the tanker. Damages for negligence are compensatory. His right was to recover by way of damages a sum of money which would place him, so far as money could do so, in the same position as he would have been in if the negligent act had not taken place. The negligent act had two consequences: (1) it caused physical damage to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, for example, if the tanker had sunk alongside the jetty, so preventing its use. I do not see how the identity of what the ? 21,000 was paid for can be affected by whether or not the loss of use was accompanied by physical damage. An alternative way in which Mr. Monroe puts it is that the ? 21,000 compensation was paid to the taxpayers for not using their capital asset, the jetty. But I think that this is no more than ingenious semantics designed to bring this case within some of the words used in the Glenboig case.* It was paid for the loss which they suffered because, owing to the wrongful act of the tanker-owners, they were unable to use the jetty, just as the taxpayer in the Ensign case 12 Tax Cas. 1169 was unable to use his ship by reason of the exercise of paramount power of the Crown, in the Burmah case 1931 S.C. 156 by the ship repairers' breach of contract, and in the British Columbia Fir and Cedar Lumber Co. case [1932] A.C. 441 because the taxpayer was unable to use his premises because of the occurrence of the risk insured against. These cases are to be contrasted with cases where compensation is paid for the destruction or permanent deprivation of the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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