TMI Blog1940 (5) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... also of 400,000 new ordinary shares of 5s. each, out of which 10,000 shares were to be reserved for issue to employees of the company at such time or times and upon such terms and conditions as the directors should determine. Six months later the directors passed a resolution authorising the chairman and vice-chairman of the company to allot and issue on such terms and conditions as they should determine up to a total of 6,000 ordinary shares to employees under the special resolution of December 6, 1933. Accordingly a letter was written on June 15, 1934, to certain members of the staff of the company in the following terms: The directors desire to show their appreciation of special services you have rendered to the company by giving you an opportunity to acquire a share interest in the company on favourable terms. If you will kindly fill up and return to the secretary the enclosed form of application forshares together with a remittance for ? being payment in full at par namely 5s. per share, you will in due course receive an allotment. In response to this invitation applications were made for the whole of the 6,000 shares so offered and payment was made in full. On July ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been made out of the ordinary resources of this prosperous company. If some special provision of funds to meet the payments were required, shares to the necessary amount could have been issued on the open market at the full price obtainable. This course would have allowed the company without question to treat the payments as trading expenses, and to deduct them from its gross receipts in making up its trading account. The company chose to take another course which did not involve any expenditure of its money, or realisation of any of its assets. It was perfectly entitled to take that course, even though the result might have been to divert into the pockets of its employees the equivalent of the cash profit, which it might otherwise have obtained. In fact, the company did not obtain the cash profit. It is none the less said on its behalf that it is entitled to make up its trading account as if it had expended a sum of money equivalent to the premium value of the shares in the remuneration of its employees. I find no guidance from the fact that the employees have had to pay income-tax on the premium value of their shares. The assessment on the employees was on the ground that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y more about the propositions contained in the passage I have quoted from Lord Sumner's speech than that they may require very careful examination if they are relied on as having the authority of your Lordships' House. The Master of the Rolls, however, did not refer to these observations for the purposes of supporting the argument which counsel for the company was at pains to disclaim. On the contrary, the Master of the Rolls expressly rejected the argument. I agree with him so far as I understand the argument, but in any case the word forgone as used by Lord Sumner was no more than an apt word to describe the result of a simple arithmetical calculation, namely, the deduction of amounts of the rent received by the brewery company from amounts of the annual value or of the rent paid by the brewery company in respect of premises used by the brewery company in selling its liquor. It is clear that any attempt to build upon the use of the expression rent forgone any such argument as was, apparently without justification, fathered by the Crown on the respondents' counsel must fail. It is said, however, that the decision in Usher's Case [1914] 84 L.J.K.B. 417; [1915 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes of the trade, though the annual value is not money expended in the ordinary sense of the word. Applying that construction your Lordships' House decided that the deduction claimed was properly made in ascertaining the balance of profits and gains. The brewery company was treated in the case both of its freehold and of its leasehold premises as incurring an outlay. The deduction of the outlay, once it had been decided to have been incurred, was not more than an application of the elementary principle stated by Lord Herschell in the case of Gresham Life Assurance Society v. Styles [1892] 62 L.J.Q.B. at p. 47; [1892] A.C. at p. 321: Profits are ascertained by setting against the income earned the cost of earning it . With the greatest respect to the Court of Appeal I am unable to find any principle laid down in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 which can be applied to the facts of the present case, even assuming that the view of those facts taken by the Master of the Rolls was the one which commended itself to me. I come back to the facts of this case, and I ask whether the issue of these shares in the manner adopted involved the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me financial advantage is not used. That, however, does not in any way affect or alter the view I take of this case on the facts. The plain fact as it appears to me is that the cost to the company of earning its trading receipts was not increased by the issue of these shares at less than their full market value. In my view this appeal should be allowed and I move accordingly. Viscount Maugham stated the material facts and continued: What we have in effect to consider is whether, since the company has not in fact received any part of the sum of ? 11,625, the premiums which the company might have got and expended, but never did get or expend, can be treated as an expense or deduction laid out or expended in some artificial but legitimate sense for the purpose of the trade of the company. This is a rather difficult proposition to establish in the affirmative. We are invited to consider something which did not take place; and it is to be remembered that in Blott v. Inland Revenue Commissioners [1921] 90 L.J.K.B. 1028; [1921] 2 A.C. 171 this House declined to be influenced by the argument that the case before it was the same as if the shareholders had received the bonus and paid it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be an item of profit of the trade. Indeed the issue of shares by a limited company is not a trading transaction at all. The corporate entity becomes pro tanto larger; but the receipts of the trade on the one hand and the amount of the costs and expenditure necessary for earning these receipts on the other remain unaltered; and it is the difference between these two sums which is taxable under Schedule D. It is well stated that profits and gains must be ascertained on ordinary commercial principles, and this fact must not be forgotten Gresham Life Assurance Society v. Styles [1892] 62 L.J.Q.B. at pp. 44, 47; [1892] A.C. at pp. 316, 321; Usher's Wiltshire Brewery v. Bruce [1914] 84 L.J.K.B. at p. 429; [1915] A.C. at p. 458. There is one other fact of importance which must be borne in mind. It is that the company was not discharging a debt or liability to the employees when it issued the 6,000 shares to them at par. The word remuneration has been more than once mentioned in this case as if it described the advantages which the employees were obtaining by the issue, and I think it has led to some confusion. If money or money's worth in any form, whether from capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases which have, as I think, led them to a wrong conclusion. I think it is clear that the premiums obtained on an issue of shares are not items of receipt in the account of profits and gains. It must then be asked, what is the event which is alleged in this case to entitle the respondents to treat the amount of these premiums as a disbursement or expense wholly and exclusively laid out or expended for the purposes of the trade (rule 3 of the Rules applicable to Cases I and II)? The contentions of the taxpayer are set out in para. 13 of the case stated. It is said in effect that the amount of the premiums is an amount forgone by the tax-payer because the shares were issued at less than their market value to the employees as remuneration for their services, or, alternatively, that if the company has issued the shares in the open market it could have utilised the premiums for the purpose of paying the aforesaid remuneration and could then have debited the amount for the purpose of computing its profits for income-tax purposes. There are, I think, quite distinct reasons. To the first I think the short answer is that an amount forgone is not (with one special exception) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expended for the purposes of the trade, does not preclude a deduction for the annual value of premises used wholly for the purposes of the trade, though such annual value is not money expended in the ordinary sense of the word (the italics are mine). The main reason for this decision, surprising as it is at first sight, is to be found in Lord Herschell's speech in Russell v. Town and County Bank [1888] 58 L.J.P.C. at p. 10; 13 App. Cas. at p. 425. It depends on the particular provisions of the Income Tax Acts. It is quite true, Lord Herschell said, that, strictly speaking, the annual value where the premises are owned and not rented is not money laid out or expended for the purposes of the trade; but it is admitted, and must, I think, have been admitted, that in either the one way or the other that deduction is to be made, because inasmuch as it is clear that even in the case of a dwelling-house a part of which is used for purposes wholly unconnected with the trade, the annual value of the portion which is used for the purposes of the trade is to be deducted , (that is, under rule 3(c), it is evident that it can never be contended that in the case of premises used not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees . The words to it's own financial prejudice do not, I think, advance the argument, for all they mean is that certain shares have been issued at par while they might have been issued at a higher price. How does that lead us to the conclusion that moneys have been laid out or expended for the purposes of the trade? For myself I do not think the premiums which might have been obtained are money's worth in the sense in which those words are generally used, that is, as an equivalent for cash paid by the company; and in my opinion that view is supported by the case I must next refer to. But whether or not that is so, I repeat that in this case the sum of ? 11, 625 which the company never obtained was not in any sense laid out or expended for the purposes of the trade. I think this House in the case of Hilder v. Dexter [1902] 71 L.J. Ch. 781; [1902] A.C. 474 decided by necessary inference that although a premium obtained by a company on an allotment of its shares is obviously money belonging to it and is prima facie part of the capital of the company, nevertheless the advantage which an allottee of shares at less than the market value of the shares obtains is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which compels a company to issue its shares above par because they are saleable at a premium in the market , and that the benefit to the shareholder from being above to sell his shares at a premium is not obtained by him at the expense of the company's capital . If this House had regarded the transaction as one in which the company was giving money's worth in the sense of an equivalent for cash in consideration of the promise to subscribe for shares the decision would have been the other way. The words directly or indirectly would have been in point. On the other hand there is no doubt at all that a man who gets a share standing in the market at ? 2, 3s. 9d. for the sum of 5s. is himself getting an advantage of considerable value. The point of Hilder v. Dexter [1902] 71 L.J. Ch. 781; [1902] A.C. 474 for the present purpose is that is not getting it in any true sense at the expense of the company, though no doubt the company has forgone the chance of making a profit, which, as I have pointed out above, would usually be treated as capital. The decision of this House in Weight v. Salmon [1935] 153 L.T. 55; 19 Tax Cas. 174; 51 T.L.R. 333 is also invoked by the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd Russell of Killowen. The respondents in this case claim that in computing the profits of their trade assessable to income-tax, there should be deducted a sum which they have not disbursed, and in respect of which they have incurred no liability. I will not recount all the facts, they have already been stated. I must, however, call attention to one important matter. The claim is made upon the footing that the sum in question represents remuneration paid by the respondents to their servants, but the transaction as evidenced by the documents does not, I think, warrant this terminology. the sum in truth represents the premium on certain shares which the respondents might have issued to the public at a price above par, but which they elected to offer to their servants at par, in order to induce them to become shareholders, and, therefore, servants directly interested in the welfare of the company. That is an accurate description of the transaction. The hope and intention were that the servants should kept the shares. No doubt the servants had it in their power to sell and obtain a premium from their purchasers. No doubt too they, or such of them as were liable to income-tax, would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany to issue and allot shares is not an asset of the company; it is only a power to increase its issued capital and, it may be, the number of the corporators. It is not bound to issue its shares for more that their nominal value. The words of Lord Davey in Hilder v. Dexter [1902] 71 L.J. Ch. at p. 784; [1902] A.C. at p. 480 may be quoted: ... the argument seems to be that the company, by engaging to allot shares at par to the shareholder at a future date, is applying or using its shares in such a manner as to give him a possible benefit at the expense of the company in this sense, that it forgoes the chance of issuing them at a premium. With regard to the latter point, it may or may not be at the expense of the company. I am not aware of any law which obliges a company to issue its shares above par because they are saleable at a premium in the market. It depends on the circumstances of each case whether it will be prudent or even possible to do so, and it is a question for the directors to decide. But the point which, in my opinion, is alone material for the present purpose is that the benefit to the shareholder from being able to sell his shares at a premium is not obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a potential rackrent) could be charged as an expense. It is in regard to the decision concerning the annual value of the freeholds that I propose to consider the case. This House decided that the annual value could properly be entered as an expense, or (to put it in other words) that the difference between the larger amount of the brewery's assessment under Schedule A and the smaller amount of the rent received from the tied tenant was deductible in ascertaining the brewery's profits for the purposes of income-tax. It is important to see how this result was achieved because it is upon the authority of Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 that the Court of Appeal has relied. Just as in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 rent forgone was held to be money wholly and exclusively expended by the brewers for the purpose of the trade, so it is said the premium here forgone by the respondents is money wholly or exclusively expended by them for a similar purpose. Such, as I read the judgment, is the view expressed. Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 when examined, will prove to be founded, and I think entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is true that the language used by Lord Sumner, and quoted by the Master of the Rolls, is far reaching and extends even to chattles; indeed if taken literally it would lead to some startling results. The other members of this House who took part in the debate use no such wide language and I, for one, and not prepared to extend the decision so as to cover the wholly different facts of the present case. Both these decisions relate to the annual value of land, to which peculiar considerations are applicable, and I am unable to see how the reasoning in either of these two decisions of your Lordships' House can be applied to a case like the present, in which the claim is to deduct a sum which never came into existence because the respondents, in order to achieve a desired result, elected to issue some shares at their nominal value. As a last argument, it was urged that apart from Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433, and the rules, the deduction was permissible on general commercial principles. I do not agree. If the respondents had issued the shares at a premium, no trace of the transaction would appear in the profit and loss account. I find difficulty in unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. No doubt in the former case the value attributable to the share is expressly liquidated on the footing of the amount of the debt. In the case of the bonus remuneration the amount of the bonus is only determined by ascertaining what is the value to the employee of the share which he receives, which in the present case is the market value less 5s. a share. But I see no difference. In fact, the recipient is taxed on precisely this basis, as in respect of profits of his office. This practice, which was followed in the present case, has the authority of this House in Weight v. Salmon, [1935] 153 L.T. 55; 19 Tax Cas. 174; 51 T.L.R. 333 where directors who had been allotted at par by way of remuneration fully paid shares which stood at a premium in the market, were taxed on the difference between the market value and the par value. The question from the point of view of the recipient who is taxed under Schedule E is obviously different from that of the company on its profits under Schedule D. But it is at least clear that the recipient does obtain a profit. In my opinion this profit so obtained was in the facts found at the expense of the respondents (if I may use the word in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued, just as a deed has no value or indeed existence until it is signed, sealed and delivered, or a negotiable instrument until it is issued. Unissued share capital was described by Lord Davey in Hilder v. Dexter [1902] 71 L.J. Ch. at p. 784; [1902] A.C. at p. 480 as potential capital. The power to issue further capital is only a potentiality. But the fact of issue makes it actual capital, and creates the fasciculus of rights and liabilities between the company and the shareholder which flow from the share when issued. If the share stands at a premium, the directors prima facie owe a duty to the company to obtain for it the full value which they are able to get. It is true that it is within their powers under the Companies Acts to issue it at par even in such a case, but their duty to the company is not to do so unless for good reason. Normally they would transfer the difference between the market value and the par value to a premium reserve or similar capital account. But they could justify issuing the share at par on the ground that the difference has been utilised to secure a benefit to the company, as here by paying the extra remuneration to the employees and it may be also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority of Russell v. Town and County Bank [1888] 58 L.J.P.C. 8; 13 App. Cas. 418, the full annual value of the house would have been deductible. But , Lord Atkinson proceeds, the balance of the profits and gains of the brewer's trade would, according to the methods of practical business men, be ascertained in the same way in both cases, that is, by deducting from the receipts what is cost to earn them. Part of the cost to the brewer is, in the manager's case, his salary, and possibly a discount on profits. In the case of the tenant it is the difference between the annual value of his, the brewer's freehold house and the rent he receives for it, and in his leasehold house the difference between the rent he receives for it and the rent he pays for it, if that be equal to the full annual value under Schedule A. For the purposes of striking the balance of profits and gains the two cases are in principle undistinguishable . I draw special attention to these last words as showing conclusively that nothing turned on any feature peculiar to landed interests in Schedule A. Earlier in his speech (84 L. J.K.B., at p. 426; [1915] A.C., at p. 452) Lord Atkinson said: If he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 417; [1915] A.C. 433 was of the rents, in the present case of the market value of the shares, less in either case the credits. The fact that Schedule A applies to property in land does not, in my opinion, affect the position, save that the annual value under Schedule A takes the place of market value. Lord Sumner puts this principle very cleary (84 L.J.K.B. at p. 435; [1915] A.C., at p. 469): [His Lordship read the passage already set out in the judgment of the Lord Chancellor.] If the expense of letting houses at an undervalue for purposes of the trade is a deductible expense under Schedule D, I cannot see why in principle the expense of allotting shares at an undervalue for purposes of the trade should not equally be deductible under Schedule D. But it was objected that Usher's Case, [1914] 84 L.J.K.B. 417; [1915] A.C. 433 like Russell's Case [1888] 58 L.J.P.C. 8; 13 App. Cas. 418 which, to a certain extent, it followed, related to rent and that the principle enunciated in these cases was not general, but was limited to deductions in respect of rent. It was sought to maintain this proposition by reference to the Rules applicable to Cases I and II of Schedule D. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 App. Cas. 418 where the whole rent was forgone, and of the rent in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 where only a part was forgone. The decision was in both cases that the money value of the rent forgone was deductible, and that in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 the partial payment made no difference, save that the amount deducible had to be reduced pro tanto. Lord Herschell in Russell's Case [1888] 58 L.J.P.C. at p. 10; 13 App. Cas at p. 425, after examining the rules, thus concludes: The annual value [of the premises occupied buy the bank manager] is, therefore, to be deducted somehow. It is to be deducted either by taking it as an element before arriving at the balance of profits and gains, or as included in a very broad construction of the provision relating to disbursements and expenses . Lord Herschell means in that phrase that there is a disbursement or expense within the rule though not in a literal sense, since money has not been expended. In Usher's Case, [1914] 84 L.J.K.B. 417; [1915] A.C. 433 Lord Parker arrives at a similar conclusion. He deals with the prohibition against any deduction for the rent or valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy or insurance premiums on particular houses such as are also authorised by the same decision . Lord Tomlin (101 L.J.K.B., at p. 279; [1932] A.C., at p. 419) said: In Usher's Wiltshire Brewery Ltd. v. Bruce, where tied houses of a brewery company were held by the tenants at rents below the Schedule A valuation, your Lordships' House, as I understand the case, treated the difference between the rent and the valuation in the case of each house as rent forgone, or money spent exclusively for the purpose of earning profits, and held that expense to be one which could be deducted for the purpose of ascertaining profits and gains under Schedule D . The other Lords who took part in the appeal spoke to the same effect. It is difficult to see what Schedule A has to do with this kind of question, except as fixing the limit of annual value. Schedule A deals with the assessment of the charge on the landholder. The deductions now being considered are deductions under Schedule D in respect not of landowning but of a trade or business. The two schedules are disparate and distinct. One other case I must refer to, that of Weight v. Salmon. I regard that case as the coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2] A.C., at p. 163) extends only to money payment or payments convertible into money , or in Lord Watson's words (61 L.J.P.C., at p. 15; [1892] A.C., at p. 159), Money or that which can be turned into pecuniary account . The decision of this House in Weight's Case# clearly involves that the acquisition by the recipient of the shares involved a benefit convertible into money, that is to the extent of the difference between the par value and the market value. It seems to follow that an equal sacrifice expressible in terms of money must have been suffered by the respondents. To that extent Weight's Case [1935] 153 L.T. 55; 19 Tax Cas. 174; 51 T.L.R. 333 directly supports the respondents' case. It was, however, contended that though the employee may profit, the company is at no expense and is not out of pocket when it issues shares at par, by way of remuneration or for a special purpose in the interest of its business, because the company is involved in no expense since to allot shares at par, instead of at their market value, costs the company nothing. It is true that the directors would not be breaking any provision of the Companies Acts if they allotted shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had taken up sharers did so in the terms of an agreement that he should have the option at a later date of taking up a certain number of shares at par. He exercised the option when the market price was above par. The company fulfilled its contract and it was held that the section was not contravened. Lord Davey (71 L.J. Ch., at p. 784; [1902] A.C., at p. 480) construed the words shares or capital money as meaning its capital, either in the form of shares before issue, when they may be described as potential capital, or in the form of money derived from the issue of its shares . He concluded, the point which, in my opinion, is alone material for the present purpose is that the benefit to the shareholder from being able to sell his shares at a premium is not obtained by him at the expense of the company's capital . This in my opinion is merely a decision on the particular words of the Act and afford no guidance in this appeal. Indeed, it seems clear that in the events which happened the capital was not being reduced nor had there been any outlay of money, capital or otherwise, by the company nor any application of shares or capital money to the payment of commissions and so f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket. The directors may, if they think fit, and if they act in good faith, issue the shares at par. In such a case they in effect voluntarily release the power of the company to acquire the premium. The company parts with none of its money, but it is nevertheless the poorer for the release. For not only does the company give up by the release the opportunity of adding to its assets a sum in cash, it also gives up the opportunity of utilising the possession of the power for the purpose of adding directly to its stock-in-trade, or for the purpose of preventing a diminution of its existing assets. Where a company issues its shares at a premium, the premium is a receipt on capital account. It is not a trading profit and it is not chargeable with income-tax. It can, nevertheless, be distributed as dividend among the shareholders, or spent in purchasing stock or machinery, or in any other way that the company thinks fit. But the company may equally well utilise its power of realising the premium by purchasing (say) stock-in-trade, or by discharging a liability without any cash passing through its hands at all. If a company, for example, whose ? 1 shares stand at 10 per cent. premium in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credited to its capital account. It may be convenient at this stage to say something about a passage in the judgment of the Master of the Rolls in the present case that has been the subject of much misunderstanding. The passage in question is as follows (108 L.J.K.B., at p. 376) [1939] 7 I.T.R. at p. 446: If an employer having two receptacles, one containing cash and the other containing goods, chooses to remunerate his employee by giving him goods out of the goods receptacle instead of cash out of the cash receptacle, the expenditure that he makes is the value of those goods, not their purchase price or anything else but their value, and that is the amount which he is entitled to deduct for income-tax purposes . It seems to have been thought that the Master of the Rolls was here suggesting that, for the purpose of ascertaining the profits of the employer's business made by the purchase and sale of such goods, the cost of the goods to the employer was to be treated as their sale value. The Master of the Rolls of course said nothing so absurd. If an employer having bought 100 tons of coal at 20s. per ton and having incurred no other expense than ? 10 10s. paid in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question is to be regarded as a disbursement or expense at all, it can only be done by treating the company by a stretch of the imagination as having received the sum and passed it on to the employees. In that case, however, the sum must be treated as money, and, as it would have been wholly and exclusively laid out or expended for the purposes of the trade, the deduction is not prohibited. I should therefore have arrived at the conclusion that the deduction in question is permissible, even if there were no authority to be found in the books to lend support to that conclusion. There are, however, at least two decisions of your Lordships' House which appear to me to be direct authorities in favour of the view that I have endeavoured to express. They are Russell v. Town and Country Bank [1888] 58 L.J.P.C. 8; 13 App. Cas. 418 and Usher's Wiltshire Brewery, Ltd. v. Bruce [1914] 84 L.J.K.B. 417; [1915] A.C. 433. The facts in the first of these two cases, decided under the Income-tax Act, 1842, were as follows. A company carrying on the business of banking were the owners of the premises upon which the business was carried on, and those premises contained certain accommodation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l value of the part occupied by the manager was also allowed as a deduction, it being held that the part so occupied was not a dwelling-house within the rule. Lord Fitzgerald also based his decision on general principles relating to the ascertainment of profits, and made on reference at all to the rule relating to dwelling-houses. He said this (58 L.J.P.C., at p. 12 ; 13 App. Cas., at p. 429): 'Profits' I read on authority to be the whole of the incomings of a concern after deducting the whole of the expenses of earning them that is that what is gained by the trade. The whole expenses of earning them must mean, according to the Schedule, the whole expenses incurred for the purposes of the business and nothing else. But I come, upon the statement of facts, to the conclusion that...the whole premises were used for the purposes of the business of the bank and the annual value of them forms a proper deduction in estimating the balance of profits............. That balance of profits is to be ascertained after deducting the whole of the necessary expenses save those which by negative provisions are excepted in the statute. Lord Macneghten said (58 L.J.P.C., at p. 12; 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brewery business and for precisely the same reason, namely, that both the rents paid for the leasehold properties and the rents that would have been received for the freeholds had they been let, instead of being used for the business, formed part of the costs incurred in earning the receipts of the business, and that the deduction of them was not prohibited by the Act. Lord Loreburn, referring to both classes of property together, said (84 L.J.K.B., at p. 423; [1915] A.C., at p. 446): On ordinary principles of commercial trading such loss arising from letting tied houses at reduced rents is obviously a sound commercial outlay. Lord Atkinson, in holding that it was immaterial whether a manager or a tied tenant was put into occupation of the houses, said (84 L.J.K.B., at p. 429; [1915] A.C., at p. 457): [His Lordship read the passage set out in Lord Wright's judgment.] Lord Parker said (84 L.J.K.B., at p. 432; [1915] A.C., at p. 463): The appellants claim to deduct, in the one case, the difference between the Schedule A assessment and the rent they receive, and in the other case the difference between the rent they pay and the rent they receive. In other words, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (84 L.J.K.B., at p. 430; [1915] A.C., at p. 460): Secondly, it decides that the rule refers only to a dwelling-house or domestic offices, or part of a dwelling-house or domestic offices, occupied by the person to be assessed; so that the fact that a bank manager resides in part of the bank premises does not bring that part of the premises within the prohibition or prevent the whole premises from being considered as used for the purposes of the trade. Observe what follows: In other words, the effect of the prohibition cannot be extended by implication to cover a deduction for rent or annual value which would otherwise be a proper deduction in ascertaining the balance of profits and gains. It is not that the rule permits the deduction by implication of the annual value or rent of a house that is not a dwelling-house. The point is that the rule does not prohibit that deduction, which is a proper one to be made on commercial principles. For these reasons I would dismiss this appeal. Appeal allowed by a majority. Solicitors:-- Solicitor of Inland Revenue for Inspector of Taxes ; Freshfileds, Leesa Munns, For respondent company. - - TaxTMI - TMITax - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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