TMI Blog1956 (12) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ery great difficulty. One reason is that on either view of it the conclusion inevitably produces, or is capable of producing, anomalies. If, for example, the view of the Crown is correct, then the following might be the consequence. Suppose a case in which a property owned by a property company and of a value of pounds 5,000 is wholly destroyed by enemy action. Suppose that the sum of pounds 5,000 is in due course paid by the War Damages Commission as a value payments in respect of that property. Suppose, finally, that the company, though it is under no obligation so to do in the case of value payments elects to reconstruct or rebuild the premises and spends pounds 5,000 in doing so. As Mr. Senter for the company demonstrated, the result of the various relevant provisions of the War Damage Acts, and again on the hypothesis that the Crowns argument should prevail, would be that the company on the one hand could not deduct as a legitimate expense for income tax purpose the pounds 5,000 expended by it on reconstruction, but yet it would have to pay income tax in respect of the pounds 5,000 which it received from the commission. Thus, assuming for simplicity that income tax be taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the case of cost of works payments. The scheme of the war damage legislation, particularly to be found in section 6, and 7 of the Act of 1943, provides, on the one hand, that value payments are appropriate in cases of total loss, and I have already indicated that they do not proceed upon the footing that the payee, the recipient, will rebuild or reconstruct the damaged property. In the case, however, of cost of works payments which are payable in cases other than those of total loss, the payments are made in practice, and are contemplated plainly by the language of the statute as payable, only when work of reconstruction is done and by way, so far as they go, to recoupment of cost. It was a point made by Mr. Senter that, if the Crown is right in its contention, it would appear also to follow that cost of works payments would be liable to tax. For my part I am inclined to think that the answer to that particular criticism it to be found in the illustrative figures which Mr. Cross gave us, showing what in practice would happen in such a case. Without undue elaboration those figures indicate that the cost of repair, which as I have already said cannot be deducted, as such, for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall come back presently to refer more fully to the judgment but I think it right that I should say at once that, for my part, I have reached the contrary conclusion. I confess that I do so not only with diffidence, because I part company from Upjohn J., but also with some reluctance, because although there are undoubtedly anomalies either way, I think the hardship of the decision to which I have felt compelled to come is the greater of the two anomalies. That again, however, must be a matter for legislation - subject only to this, that in assessing this company and other companies similar placed no doubt the revenue authorities can properly exercise a certain discretion. I return to the basis of the arguments put forward on both sides, which proceed from this. Since there is here a property company and since its properties are its liquid or circulating capital or its stock-in-trade, then, as is urged strongly by Mr. Cross, prima facie a sum of money received by way of compensation for the loss or destruction of part of the circulating capital or of the stock-in-trade is something received by the company which comes to it arises to it, from its trade. Mr. Senter in the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is quite true, as Mr. Senter has pointed out, that in a number of passages in the judgments in the Court of Appeal, as well as in the speeches in the House, it is observed that the insurance of these stocks would be itself a natural business operation; but I do not thing that that circumstances is vital to the principle of the conclusion. That much I think is shown clearly enough from the case of the Newcastle Breweries. In that case the stock-in-trade in question consisted of rum, and under war-time legislation the Admiralty compulsorily acquired stocks of rum for which, after a good deal of protracted battling, a considerable sum of compensation was paid. Again I think Mr. Senter is justly entitled to say that the sum of money was received as though it had been the proceeds of a sale. The compulsory acquisition was treated for the purposes in hands as analogous to a sale. But the point of my reference to the Newcastle Breweries case is to show that the circumstance in the Gliksten case that insurance was a natural business operation cannot have been vital, since it could not possibly be suggested that the result of Government compulsory acquisition of your stock-in-trade co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rents received by a company, owner of a large building of flats, were excluded from the computation of profits and gains of a business carried on in connection with the same premises on the ground that they were received by the company in their capacity as land owners and not as traders. The facts in Fry v. Salisbury House Estates Ltd so far as a material l were these. The taxpayer company owned the considerable edifice known as Salisbury House. They carried on upon and in respect of those premises a trade or business of providing services to the people to whom they sublet parts of the building, and out of the supply of those services they made profits for which they were taxed under schedule D. But as regards the premises themselves they were taxed or had been taxed under schedule A. Their lettings of the rooms or offices in the building were not part of their business. That is to say, they were not carrying on the business of letting and managing flats. The Crown sought to tax them under schedule D in respect of the profits made from such lettings, submitting to deduct what the taxpayer company had paid, or what they were liable to pay, under schedule A. The Crowns fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . l go back at this stage to what the judge says, and I pick up the judgment were I left it. But, as I say, I have to consider the nature of the receipt having regard to the War Damage Act. We start, then, with this. There is nothing in the nature of a premium here. A capital payment has to be made in five instalments, and it is to be made by the owner of every acre of land in England and Wales. It seems to me quite clear on the construction of section 28, that, if and when a payment is received, no part of that payment, even if it be expended in restoring the property to its former state, can be brought into account when the property is sold and the net profit is realized as it otherwise admittedly would have been apart from the section. I think those two factors are indications that the legislature was not considering the trading aspect of the matter at all, but was imposing on an owner of land throughout the country the obligation to contribute, with the corresponding benefit, if disaster happened, of receiving a sum of money, a value payment. I think the legislature considered that that would be altogether outside the area of trading operations. It would be very remarkable, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital nature ; from which it follows, as I fully agree and as the judge said, that the contributions paid over a period of years were capital outgoings so far as the company was concerned and had to bed treated as such in its accounts. Section 113 of the Act of 1943 dealt with expenses and other matters, but it has been replaced by section 28 of the Act of 1949 upon which, as will be recalled from the judges judgment, the real basis of the argument for the taxpayer is founded. I turn, therefore, to section 28 of the Act of 1949. Subsection (1) : In computing the amount of the profits or gains, or of the income from any source, of any person for any purpose of the Income Tax Acts... -and then there is a reference to profit s tax - ...no sum shall be deducted in respect of any payment or expenditure to which this section applies is - (a) any expenditure on repairing or otherwise making good war damage to land in so far as any person has received or is entitled to a payment in respect of the damage go by virtue of any of the provisions of the Principal Act - that is the War Damage Act, 1943 - (whether alone or as applied or modified by or under any provision of this Act). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in every case the sums received would be capital sums. My difficulty is that parliament has not said so. What is worse to my mind is that this section, as Sir Reginald Hills observed in the course of his address to the court, and as Mr. Cross emphasized in his reply, is a section which in terms directed to a modification of the ordinary fiscal results, which would otherwise be applicable to these war damage contributions and payments. The section is, as Sir Reginald pointed out, in effect an addition or a modification to the fiscal code. By providing that the expenditure mentioned in sub-section (4) should not be deducted for income tax purposes, it is accepting the proposition that, were it not for the subsection, such would be an ordinary fiscal consequence in such a case as that with which we are dealing. Parliament has said that, notwithstanding the prima facie result, this other result will apply. But unhappily, it has for one to go on to say and any sums receive by a property dealer or by any trader in respect of loss of stock shall in his hands not be brought in as part of his profit or gains but shall be capital. Where Parliament has directed its attention expressl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on that topic. I think the essential point always to be kept in mind is that the company in this case were dealer s in property. In the case stated it is put in this way : The appellant company is a property dealing company. Then it goes on to relate certain of their trade transactions during the war, and the receipt of the value payments to which my Lord the Master of the Rolls has already referred and to which i need not refer again. This is also stated quite plainly in the case stated 1 : The question for determination in this appeal is whether value payments arising under the provisions of the War Damage Acts, 1941, and 1943, and paid to the appellant company, who carry on the trade of property dealing, are receipts of the appellant companys trade to be brought into account in computing the balance of profits and gains of the appellant company for taxation purposes...... During the last few days the whole of the controversy has ranged round this point. Upjohn J., in this most careful judgment, reviewing all the arguments and the cases, put the whole matter in one simple, single sentence when he said of the value payment : It was a contribution made and a paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is nothing in the nature of a premium here. A capital payment has to be made in five instalments, and it is to be made by the owner of every acre of land in England and Wales. It seems to me quite clear on the construction of section 28 that, if and when a payment is received, no part of that payment, even if it be expended in restoring the property to its former state, can be brought into account when the property is sold and the net property is realized as it otherwise admittedly would have been apart from the section. Then he deals with the trading aspect. Now, on the contention, Mr. Senter is saying : This is received not as a trader at all. It is quite wrong to consider a value payment in that capacity, even though it does so happen that the company. I represent admittedly trades in property and in land. That factor must be entirely disregarded, and you must consider the company exactly as you consider any other land owner who was not a trader and who was compelled, as this company was compelled, to pay the five sums and to receive the statutory benefit in case their property was damaged. That is the argument. As against that it was said : You cannot ignore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this appeal ought to be allowed. ROMER L. J. I agree, and I only wish to add a very few words because we a re differing from Upjohn J., who has considerable experience of tax matters, and to whose judgments one always and naturally attributes considerable weight. I think there is only one point really on which we do differ from him. Where a trader sells or disposes of part of his circulating capital it is a well settled principle that the proceeds, for tax purposes, are treated as a trading receipt, and it is not confined to cases where the circulating capital, be it timber or other property, is actually sold, because, as Lord Reid said in the case of John Hudson Co. Ltd. v. Kirkness (Inspector of Taxes) A sum may be well be a trading receipt although it does not come to the trader as the price of goods sold. The Gliksten case was not a case of a sale but a case of a loss of cumulative capital, which was timber, by fire; and it was there held that the insurance money which was recovered was to be treated as a trade receipt. Nor is it relevant that the transaction, which led to the loss or the disposal of the asset, is a compulsory transaction enforced upon the owner; that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premiums out of revenue and would be entitled to bring them in as deductions from their taxable profits. He finally pointed out that the amounts of the instalments they paid as contributions had no reference, apart altogether from being capital payments, to trading receipts or the trading position at all. They simply paid on the basis of the schedule A valuation of the property. That is an attractive way of presenting the case, especially when one bears in mind that hardship falls upon the traders in some circumstances if the Crowns contention is right, hardships to which the Master of the Rolls has referred, but I do not think myself that the argument, although it commended itself to the judge, is one which can really be accepted. Of course, generally speaking, it is perfectly true to say that value payments made under the act would be, in the hands of the recipients, capital. For example, if they were paid to trustees of a settlement, to trustees who held property under a trust for sale, then as between the tenant for life (unless there was some unexpected and unusual provision in the settlement) and the remaindermen, the sums in the hands of the trustees would be capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
