TMI Blog1956 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant company made, under the laws of the Republic of Peru, to its employees on their retirement from their service with it. Shortly stated, the question was whether (as the respondent contended and the courts below had decided) the amounts to be deducted as outgoings in employee who had retired in that year, or whether (as the appellant company contended and the Special Commissioners had decided) the amounts to be deducted were a proportionate amount of each payment estimated as ultimately to be paid on retirement, on the basis of that proportionate amount having accrued at the end of each period of account, though the employee had not retired and was still in the service of the appellant company. The appellant company operated its railway under the obligations of a statutory scheme by virtue of which, generally speaking, its employees were entitled to receive from it a lump sum payment on the termination of their service. In effect entitlement did not depend on any prescribed length of service. An employee could forfeit his right by wrongful conduct, such as dishonesty or insubordination or by failure to give due notice of retirement. Employees on fixed term contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-eight months' salary. From 20 to 25 years' service time-10 months' salary. From 25 to 30 years' service time-12 months' salary. By article 2: In such cases where dismissal of a subordinate individual or employee is due to any of the reasons contemplated in article 294 of the Code of Commerce......he will not be entitled to receive either the prior notice of dismissal or the indemnity payment or benefit of any kind. By Law No. 5119 (modifying Law No. 4916), article 2: Provided that an employee leaves his work or pose giving 40 days' prior notice of his decision, as stipulated by articled 1 of the Law No. 4916, he will still be entitled to enjoy the benefits provided for by the said law. Only in the case of his leaving without prior notice and voluntarily will he lose the benefits provided for by the said law............... Law No. 6871 (Rules of Procedure under Laws 4916 and 5519) enacted by article 1: Payment such as the employer is required to make to his employee, in cases of dismissal provided for by Laws 4916 and 5119 will be calculated at the rate of half a month's salary......for every year's service.............. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision in the accounts for the sums in question in the circumstances of this case.........We further found that the sums in question being, according to Peruvian Law, deferred remuneration, there is nothing in rule 3 of the General Rules applicable to Cases I and II of Schedule D, Income-tax Act, 1918, to prohibit the deduction of the sums in question in computing the profits and gains of the [company] for the purposes of income-tax under Case I of Schedule D.........We held accordingly that the sums in question formed a proper deduction....... John Pennycuick Q.C., F.N. Bucher Q.C. and Michael Nolan for the appellant company. The social legislation gave the company's employees a right to the compensation thereby directed in the year of taxation. Since at any time an employee could give due notice and claim compensation on its expiry, the amount of compensation which would then be due was a sum which the company was entitled to charge against the profits of the year, even though the employee had given no such notice in fact. The authorities relied on by the Crown for its propositions are cases, not of remuneration, but of damages. No principle of law precludes a tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en Sons Ltd. v. Inland Revenue Commissioners [1924] 12 T.C. 768; Newcastle Breweries Ltd. v. Inland Revenue Commissioners . ; Harrison v. John Cronk Sons Ltd. [1937] A.C. 185; 53 T.L.R. 154; [1936] 3 All E.R. 747 and Absalom v. Talbot [1944] A.C. 204; 60 T.L.R. 434; [1944] 1 All E.R. 642. In deciding what contingencies should be taken into account one must consider whether they are liabilities which will in all human probability nature. One can put a value on something which is subject to a contingency. One must ask whether it is reasonably capable of approximate estimation. If so, it should be brought into the current accounts at the value so estimated. This company its therefore entitled to make a deduction each year in respect of its prospective lump sum liabilities, since they can be satisfactorily assessed. It can charge against each year's receipts the cost of making provision for the retirement payments which will ultimately accrue by reason of the fact that it has had the benefit of the employee's services during that year. As to discounting, even if this should by allowed for, it is easy to evaluate such factors as the age of each employee and the aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses any sum in respect of those pensions until they were actually paid. It could deduct the amount of the pension only when the liability arose : see Inland Revenue v. Western Steamship Co. Ltd. 1907 S.C. 1005 Johnson v. Try Ltd. [1946] 174 L.T. 399; 62 T.L.R. 355; [1946] All E.R. 532 shown that one cannot bring into account as a debit an amount not expended before the liability to expend it has arisen. The deductions here claimed are not similar to those in Vallambrosa Rubber Co. Ltd. v. Farmer (1910 S.C. 519; T.C. 529). Reliance is placed on Peter Merchant Ltd. v. Stedeford ([1948] 30 T.C. 496); James Spender Co. v. Inland Revenue Commissioners (1950 S.C. 345; 32 T.C. 111); Edward Collins Sons Ltd. v. Inland Revenue Commissioners (1925 S.C. 151; 12 T.C. 773); Whimster Co. v. Inland Revenue Commissioners (1926 S.C. 20; 12 T.C. 813); H. Ford Co. Ltd. v. Inland Revenue Commissioners ([1926] 12 T.C. 997), and Naval Colliery Co. (1897) Ltd. v. Inland Revenue Commissioners ([1926-7] 12 T.C. 1017, 1027; (H.L.) (1928) 138 L.T. 593, 595-596). In Albion Rovers Football Club Ltd. v. Inland Revenue Commissioners ([1952] 33 T.C. 331, 342) the speeches are in line with the cases cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. To ascertain its true profit in any year the company must ascertain the liability for compensation which accrued during that year. The House must find the right way of ascertaining those profits. There is no overriding principle of law that contingent liabilities must be disregarded. The question arises at what figure the value of the liability should be ascertained. It should be valued by reference to the elements of deferment and contingency. In the Oxford English Dictionary valuation is defined as The action of valuing; the process of assessing or fixing the value of a thing and estimated value; worth or price as determined by deliberate estimate. The amount of compensation which accrues in each year is relatively a very large sum, and the amount by which the company would be absolved from liability by the operation of the contingencies would be trifling, since very few members of its labour force would leave its service in such a way as to deprive themselves of the compensation. There is here no question of the company escaping tax. The only question is when and how the liability is to be dealt with. If there should have been a discounting, the matter should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, contingent upon the solvency of the debtor but the liability is not contingent. Similarly, the liability in the Sun Insurance case [1912] A.C. 443; 28 T.L.R. 303 was not, in my opinion, contingent but remained in force throughout the period of the insurance, though payment in pursuance of that liability might or might not have to be made. The circumstances in the present case may put an end to the liability altogether, but in the case of insurance for a period the circumstance of loss does not put an end to the liability but merely makes payment obligatory in pursuance of the liability. After all, the only question in the present case is whether the compensation should be deducted when it is in fact paid or should be deducted before it is paid and in circumstances in which it may never be paid. In my opinion, the reasoning and the judgments in the Court of Appeal are correct and should be affirmed. LORD MACDERMOTT. My Lords, in this appeal the appellant claims that, in the computation of its profits for each of the years of assessment under review, an allowance should be made in respect of its liability to pay to the employees then in its service in Peru certain lump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability contingent until the service was duly terminated; and (2) it was impossible, in the circumstances, to regard any part of lump sums as earned in or payable in respect of any particular year of services. The first of these arguments necessitates a reference to the effect of the relevant Peruvian legislation. This was summarized in the Court of Appeal by Jenkins, L.J., in two paragraphs which were accepted by both parties and which read as follows [1955] 34 A.T.C. 80, 82: (1) 'In the event of' that is 'upon' the determination of any service contract between the company and any employee, whether from the employee's death, expiry of the term, or notice of determination given on either side, the company is liable to pay compensation calculated as later appears to the employee or his representatives. (2) The above general proposition is subject to exceptions (a) in the case of fixed term contracts, where the contract has been determined by the employee before expiry of the term otherwise than on account of infringement by the company; and (b) in the case (apparently) of all contracts of service, where there has been wrongful conduct of certain ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains for the year in which the premiums were paid. Liability on each outstanding policy was, of course, highly contingent. But that there would be a loss on the collective risk was a matter of commercial certainty. On the facts, the situation in this appeal appears to me to be essentially the same. However one may describe the appellant's liability as respects the lump sum which may become payable to a single employee, its liability to make some payment at a future date on foot of the body of presently accruing lump sum rights cannot well be regarded s contingent within the world of ordinary business affairs. Whether this future liability can be quantified for the purposes of taxation is another matter ; but in the degree of its certainty it is not, in my opinion, to be distinguished in any material respect from the future liability which was taken into account in the Sun Insurance Office case [1912] A.C. 443. It was said that that decision related only the insurance business and had no application to the facts of this appeal. I see no reason for confining the scope of the decision in this way. Its ratio is much wider than that, and is, in my view, applicable to cases producin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat year beyond the actual figure and thus produce a corresponding error in the amount of the annual profits. This obstacle may not conclude the matter and the error it induces may have to be accepted if no better way of computing the true profits is open. But before that can be conceded a negative answer must be found to one or other of two questions. The first of these, which is that raised by the submission under consideration, comes to this can the amount of a lump sum payment properly be regarded as made up of parcels each of which is attributable to a particular year of service? And the second question is estimate can be made for each year of the provision required to meet the prospective liability. My Lords, the first of these questions would present little difficulty if each lump sum was simply the amount found by adding together a twelfth part of the remuneration actually paid in each year of service. In that event the method of computation, coupled with the circumstance that the lump sum is to be regarded as deferred remuneration, would seem to relate the payment to each year of service almost automatically. But that is not the scheme of the Peruvian legislation, the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, I would hold that the appellant was right in contending that in principle it was entitled to make a deduction each year in respect of its prospective lump sum liabilities, provided such deduction can be fairly estimated or otherwise satisfactorily assessed. There remains the question which this proviso raises and which I have already posed. The difficulty here is that the deduction sought by the appellant throughout has been the aggregate of the yearly increments by which the value of the future lump sum payments has been increased. That, I think, must be wrong as, apart, from any adjustment to be made on account of possible forfeitures, this deduction makes no attempt to reflect the present value of payments which may not have to be made for anything up to the span of a man's industrial life. If the position is that no fair estimate or satisfactory computation of the provision to be made as respects the appellant's prospective liabilities can be arrived at, then that is an end of the matter and the appeal must be dismissed. I am not disposed, however, to assume that that is the position or that it is beyond the power of those skilled in such matters to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's rate of salary or wage is reduced during the course of his service the reduction shall not impair in any way the rights acquired for services rendered...., as compensation should be calculated per years of service in accordance with the remuneration received until the time of the reduction. Following compensation will be calculated in accordance with the reduced remuneration (Law No. 9463). Thus, what is paid in the year of retirement is paid in respect of the whole period of service and is indeed declared to represent a remuneration which the employer pays for the work of his employee (Law No. 6871). On the other hand, it is a single sum and I do not think that it can be said that any particular part of what is paid is in law the earning of any particular year. It might be plausible to say so in the case of a salary that never varied : but such a description cannot really be made to fit the case of the salary that increases from time to time during the period of service. Now, the question is, how ought the effects of this statutory scheme to be reflected in the appellant's accounts of the annual profits arising from its trade ? One way, which is certainly the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily be one of fact, and of fact to be ascertained by the tests applied in ordinary business. Questions of law can only arise when (as was not the case here) some express statutory direction applies and excludes ordinary commercial practice, or where, by reason of its being impracticable to ascertain the facts sufficiently, some presumption has to be invoked to fill the gap. And our task is not made any easier by the knowledge that, though the law with its system of precedents may sometimes seem to stand still (I hope that is does not), it is quite certain that the techniques and practices of commercial accountancy are very far from static. What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employees' services during that year. As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can it bring against the receipts of the year the true cost of the services that it has used to earn those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of an earlier year, as in such cases as Isaac Holden Sons Ltd. v. Inland Revenue Commissioners [1924] 12 T.C. 768 and Newcastle Breweries Ltd. v. Inland Revenue Commissioners [1927] 96 L.J.K.B. 735; 43 T.L.R. 476, was just this, that the payment had been earned by services given in the earlier year and therefore a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt. The principle is clearly stated in the speech of Lord Simon in Gardner, Mountain D Ambrumenil Ltd. v. Inland Revenue Commissioners 177 L.T. 16, 19; [1947] 1 All E.R. 650, and I take leave to quote his words: In calculating the taxable profit of a business on income-tax principles...services completely rendered or goods supplied, which are not to be paid for till a subsequent year, cannot, generally speaking, be dealt with by treating the taxpayer's outlay as pure loss in the year in which it was incurred and bringing in the remuneration as pure profit in the subsequent year in which it is paid, or is due to be paid. In making an assessment to income-tax under Schedule D, the net result of the transaction, settin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. 399, 404; 62 T.L.R. 355; [1946] 1 All E.R. 532 The decision in the last-mentioned case is, I think, of value in illustrating the point that, however desirable it may be to bring in a valuation or estimate in order to give a better balance to a year's accounts, its cannot be right to do so if the figure which is to be inserted, hedged round...........with every kind of contingency and speculation, is too uncertain to be fairly treated as a receipt. What is true of receipts is true of liabilities. In my opinion, it is that point which constitutes the real difficulty of the present case. But there is no difficulty if we accept the main argument of the Crown. That argument is that, quite simply, there is a rule of law which forbids the introduction of any provision for future payments in or payments out, if the right to receive them or the liability to make them is in legal terms contingent at the closing of the relevant year. The rule, it seems, is absolute and must be adhered to whatever the current principles or practices of commercial accountancy may require as a method of ascertaining the year's profits. And this is the argument which hitherto has prevailed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he house purchaser default on his part might involve forfeiture or reduction of the trader's deposit. It was not money in the trader's hand, and, moreover, it might never be. Yet this House upheld the order of the Court of Appeal that the contingent rights ought to be brought in as receipts of the year in which they arose, though at a valuation (if feasible), not at their face value. I am satisfied by these decisions that there is no such rule of law as is suggested. The answer to the question what can or cannot be admitted into the annual account is not provided by any exact analysis of the legal form of the relevant obligation. In this case, as in the Sun Insurance Case [1912] A.C. 443 you get into a world of unreality if you try to solve your problem in that way, because, where you are dealing with a number of similar obligations that arise from trading, although it may be true to say of each separate one that it may never mature, it is the sum of the obligations that matters to the trader, and experience may show that, while each remains uncertain, the aggregate can be fixed with some precision. For the trader the practical question is always the same in these cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t correct, that annual profits properly determined are not to be treated as reduced by the circumstance that some part of them may be prudently reserved from distribution by the owner of the business to take case of an apprehended loss from future trading, offers no solution to the problem of the present case, in which the accountants who have given evidence would say, I suppose, that they were not advocating the making of a reserve, but seeking to evaluate a current cost of working. This brings me at last to the facts of the present case. I am bound to say that, but for what has been found by the Special Commissioners, I should have thought that the charges for retirement benefits which the appellant has claimed to make in the four relevant years were well on the wrong side of what was permissible. When account is taken of all the circumstances, I should have though that the sums charged were a very long way from affording a scientific appraisement of the additional burden arising in respect of the year's services; and were, therefore, in the nature of a rough reserve against the future rather than a measured provision. Because what the appellant has done is simply this. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main in service until that age. But then some will die and some will leave service before retiring age and these factors accelerate payment and so pro tanto increase the present value of each prospective payment. Well, it is said, given sufficient information, it will be possible to evaluate these factors by averages based on past experience and make adjustments of the discount accordingly. Perhaps it would, but the case stated gives us no information at all on the matter. And the average themselves may be falsified by events, so leading either to over provision or under-provision for the risks. If one is really going to formulate a water-tight scheme of providing for such a difficult problem, I should expect to find that is included an arrangement for periodical revision of the aggregate of the outstanding appropriations in the light of the current risks, so that anything over-provided could be brought back into taxation. Bearing these considerations mind, I find it impossible to give any conclusive weight to the finding of the Special Commissioners that the appellant's method of face value appropriations ought to be upheld, because it was a matter correct accountancy prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of income-tax. There is nothing in the evidence or the Special Commissioner's finding which supplies an answer to what I regard as the vital question relevant to these cases--is the sum provided an essential charge against the receipts of the trade in order to enable a true profit from that source to be stated for the year in question ? And, as I see it, such a question cannot be answered just by one man's opinion. It is important to know how far it is supported by accepted theory or established practice. In the absence of any light on all these points, I think that your Lordships are bound to use your own judgment, supported indeed, as it is, by the admissions made by the appellant's counsel during the course of the hearing and by the fact that an alternative, albeit a rough and ready, method is available which has, after all, been adopted in the past. My Lords, I feel bound to come to the conclusion that the appeal fails. I do not think that this is an occasion upon which the case should be remitted to the Special Commissioners to see whether a new and more satisfactory method of provision could be extracted from evidence. The appellant has stood throughout on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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