9911796707
TMI Blog1965 (7) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax purposes. The special CIT held that they could, but their decision was reversed by Pennycuick, J. and the Court of Appeal dismissed the appellants' appeal. It is necessary not only to consider the circumstances in which these payments were made but also to have regard to the manner in which the appellants had been and were conducting their business. It appears that for some time past almost the whole of the petrol sold in this country has been the product of three oil companies, and the appellants' share of the market has generally been in the neighbourhood of 13 or 14 per cent. During the last war petrol was not sold under brand names but after 1945 the three companies began to prepare for resumption of selling under the well-known brand names. It had been the custom for most garages to have pumps from which they supplied the petrol of more than one of these companies. But in 1950 one of the other companies started what has been called the exclusivity war. The appellants did not want to join in it, but they were forced to because within a few months a large proportion of garages had accepted a tie of some kind. There was intense competition between the oil comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emises for the period less three days, the consideration for the sublease being the same nominal rent of £ 1. But the sublease contains covenants or conditions whereby the garage owner is bound to buy the petrol which he needs for resale from that oil company and from no one else. The net result is that no money passes except the agreed lump sum and the oil company gets its tie. But this machinery is not a sham. There is no difference from the old form of a tie by agreement so long as all goes well : but if the garage owner defaults this new form of tie gives the oil company a better way of enforcing its rights by bringing the sublease to an end and standing on its rights under the lease. I should add that in two of these four cases the lump sums are expressly stated to be premiums while in the other two they are not, but I do not think that this makes any difference. Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been interpreted make that difficult where a wasting asset has been acquired. As explained in Kauri Timber Co. Ltd. vs. CIT (1913) AC 771 ; 29 TLR 671 PC, it had long been settled that if capital has been expended in acquiring or producing a wasting asset, it is not permissible to bring into the profit and loss account for tax purposes a part of that capital corresponding to the wasting or depreciation of the asset during the year ; no part of the expenditure can be set against income in any year. These old cases were dealing with expenditure made to acquire or improve tangible assets and as regards a great many of them, such as machinery, plant, buildings and mines, the severity of this rule has been relaxed by statutory provision for annual and other allowances. But the rule still stands as regards matters not particularly dealt with by the Act. If a trader acquires a rapidly wasting assets not covered by these statutory provisions he would not generally strike his balance of profits and gains without taking account of the annual wasting or diminution of value of that asset. But if his expenditure in acquiring it has to be regarded as capital expenditure he cannot do that for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arises whether the sum which he has paid for that advantage is a capital or revenue expense. As long ago as 1914 it was settled in Usher's Wiltshire Brewery Ltd vs. Bruce (1915) AC 433 : 31 TLR 104 : 6 TC 399 HL that in determining profit a deduction. "is to be made or not to be made according as it is or is not, on the facts of the case, a proper debit item to be charged against incomings of the trade when computing the balance of profits of it" (per Lord Sumner, (1915) AC 433. Where the wasting asset is a right to some benefit for a period of years and the consideration given for it is the payment of an annual sum during the continuance of the right there is generally no difficulty. Rent payable under a lease or under an agreement for the hire of a machine is treated as a proper debit against incomings and the same must, I think, apply to an annual (or quarterly or monthly) payment for a tie. The difficulty begins to arise when a lump sum is paid to cover several years. If that is so, then it is not so much the nature of the right acquired as the nature of the payment for it that matters. It was argued that a rent and a premium paid under a lease are paid for diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y constant conditions for so long a period, it would be only after 20 years that a fair result would be reached. That would seem to justify refusing to treat a payment covering so long a period as a revenue expense. And on more general grounds I must say that I would have great difficulty in regarding a payment to cover 20 years as anything other than a capital outlay. Ever since the Vallambrosa case (1910) SC 519 in 1910 recurrence as against a payment once and for all has been accepted as one of the criteria in a question of capital or income. I would regard a payment which has to be made every three years to retain an advantage as a recurrent payment, whereas for practical purposes I would not think that the fact that another payment will have to be made after 20 years if the situation does not change in that time would prevent the first payment from being regarded as made once and for all. If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay. And I do not see how it could matter that the payment was made by sums paid annually. But it appears to me that an asset which is nothing more than a righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might not do, and affected the whole conduct of their business." (1). I would think that the two most important of these considerations were that the contracts were not ordinary commercial contracts made in the course of carrying on the trade, and that, by defining what the company might do and might not do, they affected the whole conduct of the business. I think that in some later cases the metaphor of structure has been used with far less justification. Van den Berghs' case (1935) AC 431 : 3 ITR (Eng.Case) 17 can be contrasted with Anglo-Persian Oil Co. Ltd. vs. Dale (1932) 1 KB 124 : 47 TLR 487 : 16 TC 253. CA when the company paid a large sum to cancel an agency contract for a very wide area with the result that they were thereafter able to deal directly with their customers in that area. This certainly entailed an extensive change in the organisation of their business. But the payment was held to be a revenue expenses because the cancellation of the agreement "merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched" (per Lawrence L. J. (1932) 1 KB 124. It was argued that these ties had become part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m doing that thing : he simply waits for A to fulfil his obligation. He might be said to use his right if A fails to fulfil his obligation and he then sues for damages or seeks an injunction, but that is another matter. There may be many kinds of contract under which the company has taken an obligation that the other party shall do something or a series of things in a future year but that is no reason for saying that the company's chose in action is in addition to its capital structure. The distinction between a right and something done under it or in exercise of it no doubt exists in other kinds of cases and it may be of importance, but it does not seem to me to exist in cases like the present case. The case which is generally cited and relied on, often by both sides, is British Insulated and Helsby Cables vs. Atherton (1926) AC 205 ; 42 TLR 187 ; 10 Tax Cases 155. HL. In order to understand the passage in Viscount Cave L. C.'s speech, which is always quoted, it is essential to have the facts in mind. The company laid out a sum to assist in the setting up of a pension fund for its staff. It was intended that the fund would endure for the whole life of the company and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are concerned with whether it is constituted by a simple obligation or by covenants in a sublease. Lastly what is meant by "enduring" ? I think that Lord Cave intended to link that with once and for all. He was thinking of a single payment for an advantage which would last for an indefinite time. I do not think he had in mind an advantage of limited duration, and I think that any decision about such an advantage must be reached without reference to or reliance on what Lord Cave said. But it was argued that "enduring" has come to be interpreted so as to include any benefit which lasts for more than one year and that this was recognised in the Nchanga case (1964) AC 948 ; (1965) 58 ITR 241. If this is an interpretation of Lord Cave's words where "once and for all" is coupled with "enduring" then the supposed rule must be that any lump sum paid for a benefit enduring for more than one year must be treated as a capital outlaynot that any asset conferring an enduring benefit is intrinsically a capital asset. For if it were intrinsically a capital asset then any payment for it whether by a lump sum or by a series of periodic payments must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no such rule exists or could be supported. In the Nchnaga case (1965) 58 ITR 241 their Lordships sought to distinguish John Smith & Son vs. Moore (1921) 2 AC 13 ; 37 TLR 613 12 : Tax Cases 266 HL, and some of Lord Radcliffe's observations are said to support the supposed rule. I do not think they do. Smith's case (1921) 2 AC 13 ; 37 TLR 613 : 12 Tax Cases 266 HLwas not relied on by the respondent in this appeal but I must try to show why it does not affect this matter. A son bought the whole assets of his father's business at a valuation and continued to carry on business as a coal merchant. Those assets included contracts by which he was entitled to buy coal in future at a fixed price. As the price of coal had risen since the contracts were made the rights under the contracts had become very valuable-they were valued at £ 30,000. The trader claimed that this sum had been spent to acquire stock in trade but that claim failed. Lord Cave held that there was a continuing business and his reasons are not material in this connection. But Lord Haldane and Lord Sumner appear to have regarded the son as setting up a new business. Their reasoning is not always easy to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a distinction between assets which last less than a year or which come to an end during the current accounting period and assets which last longer. On the contrary if Smith's case (1921) 2 AC 13 had any application to the acquisition of short-lived assets by a going business it would require us to hold that even the cost of acquiring assets which cease to exist before the end of the current year is a capital outlay. I do not think it necessary to survey all the cases cited in argument. Many deal with matters in no respect analogous to this case. There is, for example, the group of cases where payments to obviate competition were held to be capital outlays. If you buy a business either to operate it or to close it down, if you pay a competitor to close down, or if you buy off a potential competitor the cost may well be a capital outlay. And so may certain preliminary expenses which you must incur before you can begin trading. In these and other cases cited I can find no established doctrine contradicting the observations which I have already made. But there are some cases on which I must comment. Both sides in this case argued that Bolam vs. Regent Oil Co. Ltd. (1956) 37 Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 CA and I need not consider whether they were sufficient to justify the decision. If and in so far as the ratio decidendi was based on any such general proposition I would not agree with it. There was reference in the judgments below to Rorke (H. J.) Ltd. vs. IRC (1962) 44 ITR 394 and earlier similar cases. But as counsel did not found on them before your Lordships I shall only say this. I think that the decision of my noble and learned friend Lord Upjohn in Knight (Inspector of Taxes) vs. Calder Grove Estates (1954) 35 Tax Cases 447 was right because there land was purchased. But there are expressions of opinion in other cases which appear to conflict to some extent with what I have already said. Again, I need not consider whether the decisions were right. In two of the four arrangements with which the present case is concerned (including much the largest transaction) the ties were for 21 years ; in one the tie was for 10 years ; and in the fourth it was for five years. I would have no doubt that the lump-sums paid for the 21-years ties could not be treated as revenue outgoings even if there were no lease and sub-lease. These ties were not obtained in order to facilitate plann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the concern of the appellants was to secure a purchaser for the petrol which they, as wholesalers, wished to sell, does not alter the fact that there was a real, and not a sham, transaction under which in return for the payment of a sum of money (it matters not whether it be called a lump-sum payment or a price or a premium) a lease of land for a period of years (at a nominal rent) was obtained. The leases were of considerable value to the appellants because they (the appellants) were as a result enabled to grant subleases containing the covenants which for trade reasons they were anxious to obtain. Provisions in regard to forfeiture gave a measure of security to the appellants. I agree with the view expressed by the learned judge and by the Court of Appeal that the appellants acquired interests in land and that such interests were of a capital nature : I agree also that in the circumstances of the present case the payments made to acquire those interests must be regarded as being payments of a capital nature. The fact that the payments were agreed upon after calculations made by reference to estimated gallonage does not alter the fact that they were lump sum payments in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion no recourse can be had to statutory definition, for such there is not. The decided cases, carefully marshalled in argument, show that in the diverse and varying sets of circumstances in which decision has been called for as to whether payments have been of capital or of revenue nature no all-embracing formula has been evolved. No touchstone has been devised. Where definition is lacking then description must do its best. In giving the judgment of the Privy Council in CIT of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 Viscount Radcliffe in referring to phrases used in earlier cases said that it had to be remembered that they were "essentially descriptive rather than definitive." The decided cases are to be scanned because they contain pointers and mention factors and give indications and provide descriptions. Care must, however, be taken not to take phrases which are uttered in relation to particular facts and then to promote them to be of universal application. In some cases payments can by general assent be recognised at once as being either of capital or of revenue nature. Where dispute arises a Court must do its best to assess the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence between a business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay. There is a difference between the profit yielding subject and the process of operating it. There is a difference between the instrument for earning profits and the continuous process of its use or employment for that purpose. These contrasts were noted in 1938 by Dixon, J. in his judgment in Sun Newspapers Ltd. vs. Federal CIT of Taxation (1938) 61 CLR 337. In much the same way in 1946 in his judgment in Hallstroms Property Ltd. vs. Federal CIT of Taxation (1946) 72 CLR 634, Dixon, J. distinguished between the acquisition of the means of production and the use of them : between establishing or extending a business organisation and carrying on the business : between the implements employed in work and the regular performance of the work in which they are employed : between the enterprise itself and the sustained effort of those engaged in it. In his judgment in that case Ibid 644 Starke, J., while emphasising that none of the so-called definitions or tests or any other de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?" The contrast so noted was referred to in deciding, the case of IRCs vs. Adam (1928) SC 738 ; 14 Tax Cases 34. In that case (1928) SC 738 ; 14 Tax Cases 34 a carting contractor found it expedient for the purposes of his business to acquire a site for the deposit of waste soil removed from building foundations. He achieved his purposes, without purchasing the site, by means of a contract with the owner of the site. He was given the right (and he undertook the obligation) to deposit soil on a defined area at a stated rate per annum for a period of eight years. For the right he agreed to pay the owner the sum of £ 3,200 payable in "instalments" ("to account thereof in advance") of £ 200 each in June and December of each year. It was held that the £ 3,200 was a payment for a capital asset and that no deduction by reference to it was admissible for income tax purposes. The lump sum of £ 3,200 though payable by instalments over a period of eight years was of a capital nature. In his judgment the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il Co. in the course of its trade in the making of its profits. Does it make a difference because in the circumstances of the case there has to be some lump sum fixed which is paid to secure the same result, and even if payment is made in advance for several years ?" In examining the nature of the payments which were made and which are in issue in this case it is important to consider not so much why the payments were made but for what they were made. If the motive in making payments is noted or becomes manifest the more relevant inquiry must be made as to whether some asset or advantage was acquired and, if so, what was its nature. It is said that the appellants, as a matter of hard business necessity, were forced, in the instances now being considered, to do what they did. Their rivals and competitors would or might have made "lease-sub-lease" arrangements with the particular garage owners had the appellants, somewhat reluctantly, not acted as they did. So also it is said that "tie" arrangements had become a necessity for the petrol selling companies and had become a regular and customary part of the pattern of business arrangements. Accordingly so the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are much needed so that a succession of them must be obtained there will be periodic or constantly recurring payments of money. Yet each of these payments will be of a capital nature. If the nature of what is acquired makes it a capital asset the payment for it will be a capital payment. If tangible assets (such as the knives or lasts in Hinton (Inspector of Taxes) vs. Maden & Ireland Ltd. (1959) 1 WLR 875; (1960) 39 ITR 357, are clearly capital assets then the payments for them are capital payments even if the useful life of the assets is shorter than the length of an accounting period. The fact that there are payments seemingly of the same nature which appear to be recurrent may be a circumstance to be examined in deciding as to the nature of the payments. If in a business a particular capital asset must be acquired then the fact that in a similar but larger business many of such capital assets will be needed will be an immaterial circumstance. So also will it be immaterial whether a number of such capital assets are bought all at one time or whether they are bought over a period of time. Their character as capital assets will not change if many are bought rather than few or if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit and loss account that is merely to voice a regret that there is no statutory provision which enables periodic allowances to be made. That however is not a matter for the Courts. If regard is had to the language of metaphor which is found in some of the cases a tie would seem to appertain to the "structure" of the selling organisation or income-earning machine of the appellants. If it is argued that a tie for a shorter period than a year may seem to possess the same nature as a tie for a longer period I think that it can be said that a tie for a period of less than a year (being a right which so to speak evaporates within the year) is so closely linked with the selling operations during that year that it becomes different in nature and does not qualify to attain "the dignity of a capital asset." (See Henriksen vs. Grafton Hotel Ltd. (1943) 11 ITR (Supp.) 10 In that case (1) it was held that payments in respect of the monopoly value payable upon the grant of a licence for a period of three years were of a capital nature. Du Parcq, L. J. said Ibid 196 that "the right to trade for three years as a licensed victualler must be regarded as attaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion where only a five-years period is involved. But they would probably have failed to do so in the two transactions which relate to periods of twenty-one years and which thereby acquire a more enduring and structural quality. But no such equation is possible. A lease-sub-lease transaction is materially different both in form and in substance. By it the wholesalers obtain for a premium an interest in the land from which their goods are retailed to the public. Admittedly they have bound themselves to sublet and therefore their right to possession, like that of any leaseholder who sublets for all save three days of his lease, will probably be minimal. Breaches of covenant, however, might put them into possession ; and in that case they would be in possession of land which they could sublet. And throughout the period of the lease, although not in possession, they have, not merely a personal covenant by a retailer, but an interest in land through which they can enforce its use in a way beneficial to themselves. The acquisition of such an interest in land points strongly to a capital expenditure and, on the facts of these cases, dominates other indications. This indication of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57-58 and 1960-61, this stage had been reached. The appellant company to whom I will refer as Regent were supplying petrol to rather over 4,500 stations of which some 90 per cent. were tied exclusively to Regent. Of this 90 per cent. or roughly speaking 4,000, there were but four dealers who were tied to take Regent's petrol exclusively by means of a transaction known as lease and sub-lease which I shall have to examine in a little detail later. All the rest were bound by what I may describe as long-term trading agreements, that is to say, Regent paid to the dealer a lump sum down upon the terms that he would buy his petrol requirements exclusively from Regent for a term of years. This term varied from three to ten or more years, but the average seems to have been about five years. These ties were no more than longterm trading agreements and Danckwerts, J. had decided in Bolam's case 37 Tax Cases 56 that the lump sums paid by Regent in respect of those agreements were trading expenses of a revenue nature which were deductible in ascertaining Regent's profits for the year. The correctness of the decision in Bolam's case 37 Tax Cases 56 was not challenged by the Crown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the extra amounts sold. It is only with the four lease-sub-lease transactions that this appeal is concerned and it will be convenient if I set them out. Company Lump-sum payable on executing the lease to Regent Term of the lease 1. Green Ace Motors 5,000 10 years 2. C. V. Clapp Ltd. 2,083 5 years 3. Stadium Motor Works, Belfast 10,416 21 years 4. Murphy 27,000 21 years There were differences of detail between these transactions which are examined fully in the case stated but these differences are immaterial ; the premium was in every case calculated according to gallonage anticipated to be sold during the period of the tie. The transaction with Mr. Murphy was a little different ; he owned a number of sites in South-east London where he was proposing to build petrol sites. He covenanted to build petrol stations on these sites ; this circumstance, however, has not been treated in argument as relevant to the question of capital or income. The Murphy case I have stated above was typical of a number (about a dozen) of lease-sublease transactions between Mr. Murphy and Regent which were carried out at about this time (1959) between a number of subsidiary companies pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to accept these submissions. No one has suggested that the transaction of lease and sub-lease was a sham. It was a real transaction representing the realities of the situation which, in this buyer's market, some tough dealers were able to impose upon Regent in its anxiety to maintain, and no doubt if possible to expand, its sales of petrol in this country. Pausing there, I may add parenthetically that I cannot see any conceivable difference for any relevant purpose from an anxiety merely to preserve and maintain Regent's share of sales of petrol in this country and an anxiety to increase their sales if possible. It is all part of the fight to remain in the market. These transactions were not a mere cloak for a trading operation. Of course, in a sense the whole operation was intended to promote trade because Regent realised that exclusivity was the only way of remaining in the market and they must give a corres ponding consideration to a dealer who was willing to buy exclusively the products of Regent for a period. So in the end both parties had their eyes solely upon trade. But that does not entitle the Court to disregard the agreements that the parties have made wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s part of the carrying on of the trade, and hence the premium although paid for a property of a wasting character is capital. If authority for that elementary proposition is required it is to be found in the Scottish case of MacTaggart (Inspector of Taxes) vs. Strump (1925) SC 599 ; 10 Tc 17. There is no magic in the use of the word "premium" ; it merely means a lump sum paid as a consideration for the acquisition of the lease. And so also, if the premium or lump sum is paid by instalments spread over the term of the lease it still remains of a capital nature. It may be very difficult as a practical matter in a particular case to ascertain whether, on the true construction of the documents, such periodical payments are rent or payment of a lump sum by instalments, but once that question has been answered the distinction is clear. If it is a premium, that is to say, a lump sum payable by instalments it is capital. If it is rent or royalty it is an outgoing deductible for the purposes of tax. My Lords, having stated those elemental propositions which it is not possible to doubt then the problem in this case is clearly answered. It is plain that the premium or lump sum paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 or 21 years. That payment, the Master of the Rolls thought, would be clearly capital and he thought it could make no difference if the payment was for exclusivity by the dealer. My Lords, in view of that statement and of the elaborate arguments that have been addressed to your Lordships I propose now to examine the situation upon the footing that there was no transaction of lease and sub-lease in these four cases, but they were ordinary trading contracts for the considerations and for the term of years which I have set out earlier in this judgment, the dealer agreeing to buy all his petrol requirement during the term from Regent and no other. Would such payments be lump sum payments of a capital nature, as the Master of the Rolls clearly thought they would be, or would they be trading expenses having regard to the custom of the trade to enter into these long-term contracts to preserve and maintain their trading position and to the fact that the lump sums were arithmetically calculated by reference to anticipated gallonage ? I suppose that no part of our law of taxation presents such almost insoluble conundrums as the decision whether a receipt or outgoing is capital or income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as probably the most illuminating line of demarcation between the cost of creating, acquiring or enlarging the permanent structure of which income was to be the fruit and the cost of earning that income itself. This brings me at once to the argument addressed to your Lordships on behalf of the Crown, when it was submitted that the contract for the exclusive supply of petrol for a term of years was a chose in action creating a right which, provided it lasted for more than an annual accounting period, was necessarily part of the permanent profit-making structure and, therefore, capital, while the exercise of the right thereby granted to supply petrol was part of the income-earning activities of Regent. When dealing with tangible assets the distinction between the profit-earning structure and the cost of earning the income may not be difficult to draw. It becomes very difficult when dealing with a purely commercial contract and I do not think it useful to endeavour to dissect such a contract in this manner for the purpose of tax ; that is too artificial an operation and is divorced from the realities of the situation. I do not for one moment think that these long-term trading con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el on both sides on the one hand that a lump sum payment for a tie for more than an annual accounting period is necessarily capital and, on the other, that it is a trading expense and the length of the tie is utterly immaterial save as a factor in calculating the anticipated gallonage and so the amount of the lump sum payment. The lump sum payments here are large. But one must not attribute to that too much importance because after all the lump sum payment is calculated on the basis that it represents no more than one penny per gallon on the expected sales over the length of the tie. So I approach this matter as one of judicial common sense and I start with the case of Murphy ; it seems to me that to pay substantial sums for a tie for as long as 21 years is quite plainly, as a matter of common sense, a tie which must be described as of a capital nature, so that the sums paid under the Murphy agreements must be regarded as capital. So, too, must be the sum of £10,416 paid under the agreement for the Stadium Motor Works, Belfast, for a tie of a similar length. On the other hand, one has the agreement with C. V. Clapp Ltd. for a payment of a sum for five years. The sum, of cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in one case the term was 10 years and in another five years. It is the nature of the sum or premium (the name does not matter) paid for the lease that is in question, Regent seeking to establish that this is revenue expenditure and so deductible before arriving at net or taxable profits. The nature, capital or revenue, of the expenditure is primarily to be determined from a consideration of the transactions in respect of which it was made, but it is right to look at these against the general commercial background of Regent's trading business. These are explained in considerable detail in the case stated. The general features of the "exclusivity" war which developed in the early part of the decade 1950-60 between the major oil companies are by now well known. The lease-sub-lease transaction was a stage in the intense competition to gain or maintain retail outlets which put retailers in the position of being able to demand from the companies payments or concessions of varying kinds as the price of tying their sites to a single supplier ; in the particular case of Regent it represented a development from the granting of rebates-first paid periodically and later in lu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." I start, then, with a consideration of the nature of the relevant payments made by Regent in the light of the criteria stated by Dixon, J. under paragraph (c). This formulation is useful in pointing the distinction (as to which much discussion arose in the argument) between a premium paid for a lease-which produces an asset for future use-and rent paid under a lease-which is for current use ; the first being a capital and the latter a revenue payment. I find it helpful here. The distinction is clear and intelligible, and though a complication may arise where a premium or payment for an asset is made payable periodically by instalments or when a single payment is made which is, or is described as, of rent in advance, that need not concern us here, for the payments were neither described as, nor were they of, this latter nature. They were lump sums, paid at the start of the transactions to procure the immediate emergence of an asset or advantage, enjoyment of which was secured for a period. They were not, and did not represent the aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 357 ; , and mere repetition of capital expenditure cannot turn it into revenue expenditure. There may be an intermediate situation in which the nature of the expenditure is not clear, or near the borderline, or where the possibility of recurrence may tip the scales : whether this is such a case must await an appraisal of the other factors. Subject only to this point, in my opinion at this stage the character of the payment points to capital. Next, as regards the nature of the asset or advantage gained. There are possibly two ways of regarding this. The first is to treat the payment as made for a lease of from five years to 21 years, i. e., for a legal estate in land ; the second, which I prefer, and which fits most closely to what Dixon, J. said in the Hallstroms case 72, CLR 634 is to treat it as made for the granting of a lease which was (as part of the single bargain) to be subject to a sub lease containing an exclusivity covenant by the sublessee with provisions making that covenant effective. So regarded, the payment was for a solid recognisable asset, evidently (to my mind) of a capital nature. It was transferable, in a limited market no doubt, but in that market it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e durability of the advantage acquired. As Dixon, J. said 61, CLR 337 when considering the nature of the advantage sought, "its lasting qualities may play a part." In English law the term most commonly employed in this part of the argument is "enduring"-ever since Viscount Cave L. C. in the Atherton case (1926) AC 205 spoke, without intending to lay down a test, of "the enduring benefit of a trade." It might be enough to decide this case in favour of the Revenue to say that in relation to an "asset" of so concrete a character as a lease, or as a lease accompanied by a sub-lease, at any rate when the term of the lease amounts to five years or more, the test of durability is satisfied, but I do not wish to rest on this narrow ground ; indeed, I do not think that it is sound reasoning to do so. I agree entirely with Lord Denning M. R., that if one considers the business reality here or, in the words of Dixon, J. 72, CLR 634 what the expenditure is calculated to effect from a practical and business point of view, the payments were made for rights (reinforced by the lease- sub-lease method) of exclusive supply of petrol to certain filling stations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a premium paid for renewal of a lease for five years-this was held a capital expense-which the trader would probably make good out of his profits when earned. IRCs vs. Adam (1928) SC 788 was concerned with a right for eight years to deposit earth and slag on another's land : the right was held to be a capital asset, Lord President Clyde considering it as equivalent to any other capital asset of a "relatively permanent character." John Smith & Son vs. Moore (1921) 2 AC 13 is a delusive case : it appears to involve precisely the critical area which we must consider here-namely, very short term contracts but no clear conclusions can be drawn from the decision. The difficulties inherent in it have been so fully analysed by the Judicial Committee in the Nchanga case (1965) 58 ITR 241 and by others of your Lordships that I shall not take up time by a further discussion of them. More comprehensible is Henriksen vs. Grafton Hotel Ltd. (1943) 11 ITR (Supp.) 10, where it was held in the Court of Appeal that a payment in respect of so-called monopoly value on the renewal for three years of a licence was a capital payment. The subject-matter of the payment there though o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Conversely, I can see no basis upon which such assets can be given such a character that payments for them can be treated as revenue payments, whether as stock or as circulating capital or by any other description. To say, as the company does, that it has become the custom of the trade to make them, appears to me as indecisive as to say that the vast size of modern industrial enterprises, and particularly of oil companies, forces them to engage in long-term contracts. All this may be true, but it is still necessary to look at the actual means adopted to conform with the custom or to secure the long-term trading advantages before it is possible to attribute a capital or a revenue character to the payments. The two obvious alternatives are to offer rebates as orders are given or to offer lump sums in exchange for security for a period : the one-like rent-qualifies as revenue, the other- like a premium-as capital. As to the critical period. I can see no logical basis for saying, for example, that 21 or 10 years, is good enough but five or three years is too short, or for saying that five years or three years may be long enough when there is a lease and not long enough where there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability for tax. Then, more particularly, it was said that accountancy evidence given in this actual case supported the charge against revenue. But all that the CITs say is this : "Auditors and accountancy advisers of Regent who gave evidence before us took the view that such payments were made to preserve turnover, that no fresh asset was acquired as a result of such payment and that accordingly such payments were properly chargeable to revenue." This is either irrelevant or wrong : it is irrelevant that the expenditure was made to preserve rather than to create turnover : wrong to say that no fresh asset was created ; the contrary is clearly the cast : this evidence does not deal with the question of transience at all. So I cannot obtain any guidance from accountancy considerations. I would add that in Bolam's case (supra) also some reliance was placed on accountancy evidence but that evidence was inconclusive and, as I read the judgment of Danckwerts, J., he did not rely upon it. I come, therefore, to the conclusion that the indications derived from the nature of the payments, the commercial and legal nature of the advantage gained, and the use to be made of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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