TMI Blog1940 (5) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant Company was ? 10,118. In the Appellant Company's accounts the amount of the loss of Coming Fashions Ltd., namely ? 2,927 was written off, and the question is whether that sum of ? 2,927 is admissible as a deduction from the profits of the Appellant Company for the year in question for Income-tax purposes. It was contended on behalf of the Appellant Company that it was deductible because it was in truth and in fact a reduction made by the Appellant Company to Coming Fashions Ltd., of the sum of ? 10,118 charged to it, and that therefore the receipt which the Appellant Company had from Coming Fashions, Ltd., was not ? 10,118, but was ? 10,118 less ? 2,927. It was therefore contended that the sum of ? 2,927 was not a loss of capital withdrawn from the Appellant Company's trade, that it was wholly and exclusively laid out for the purposes of the Appellant Company's trade in so far as it could properly be said to be a disbursement, and, lastly, that if the debt of Coming Fashions Ltd., was to be regarded as a debt, it was a bad debt to the extent of ? 2,927. The primary argument which was presented on behalf of the Appellant Company by Mr. Tucker was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was put into a subsidiary company as an advance or as capital, it could not be deducted, and my attention was drawn by Mr. Tucker to a number of cases, Noble v. Mitchell [1927] 11 Tax Cas. 372, the Crown Spelter Case [1908] 5 Tax Cas. 327, the Marsden Case [1919] 12 Tax Cas. 217, and the Huntley and Palmers Case#. The Huntley and Palmers Case [1928] 12 Tax Cas. 1209 was relied upon by the Attorney General as being in point in the present case, and what Rowlatt, J., held there was that although the form of the transaction was a purchase by Huntley and Palmers from its subsidiary company of tin boxes and tin plates at the figure which had been paid for the goods by the subsidiary company, and a subsequent writing off by Huntley and Palmers of the difference between that figure and the market value at that date of the goods, the reality of the transaction was that Huntley and Palmers had put that difference into the subsidiary company for the purpose of supporting it; and the Attorney-General contended that that case was closely analogous to the present, and that the Commissioners were perfectly entitled to decide that in this case the reality of the transaction was that the ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not an admissible deduction for Income-tax purposes . That finding was consistent with the view that the Commissioners, while holding that the money was wholly and exclusively laid out for the purposes of the trade, nevertheless considered the sum in question to be of a capital nature. It was also consistent with the view that, while holding it to be not of a capital but of a revenue nature, they considered that it was not wholly and exclusively laid out for the purposes of the trade. In the course of the argument, it became manifest that this Court was in a great difficulty in the absence of specific findings on those two matters, one of which, at any rate (that of wholly and exclusively ), has been treated always as a question of fact for the Commissioners, the other one (the question of capital) being perhaps a mixed question of fact and law. Accordingly, we took a course which I think commended itself to both sides, and we sent the matter back to the Commissioners with instructions to add further findings by way of answers to two questions stated in the order as follows: (a) whether the sum written off was so written off wholly and exclusively for the purposes of the trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old controlling interests in a number of subsidiary companies who are largely connected with the newspaper trade. One of those subsidiary companies, being one in which the Appellants own all the shares, is a company called Coming Fashions Ltd. The business of Coming Fashions, Ltd., is the business of compiling and issuing for sale a periodical entitled Everywoman's , incorporating Coming Fashions . The production of that paper, of course, requires printing and publishing, and for some years those two operations were carried out by the Appellants. They have now given up the printing and transferred it to another subsidiary company in which they are interested, but they still continue to publish, although this case, I think, relates to the period when they were actually printing. As the result of the Appellants performing those services for Coming Fashions, Ltd., which were performed upon a commercial basis, Coming Fashions Ltd., incurred liabilities to the Appellants on trading account. In addition to those liabilities, the Appellants from time to time made large advances to Coming Fashions, Ltd. There is set out in the Case an account differentiating between those classes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cede into the background, that limited companies who carry on business are separate taxable persons, and the profits of their respective businesses are separate taxable profits. Companies who, if I may use a convenient expression, choose to carry on their businesses with the assistance of subsidiaries not infrequently find that for taxation purposes certain inconveniences result, owing to the fact that their subsidiary is a separate taxable entity from themselves. For instance, if the holding company, the parent company, is carrying on a business and makes a profit, and the subsidiary is carrying on a business which perhaps originally formed part of the parent company's business but which for convenience has been transferred to the subsidiary, and in that business the subsidiary makes a loss, obvious difficulties appear in the way of treating the loss made by the subsidiary as a trading loss of the parent company. One result of the present claim, if it were successful, would be to transfer into the accounts of the holding company a trading loss of the subsidiary. I am not suggesting for a moment that this particular method of accountancy has been adopted with Income- tax in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y hope to obtain profits. Indeed, as appears in the paragraph I have just read, one of the considerations which influence them in obtaining control of such a company is to enable them to make such trading profits. But I am quite unable to read this Case as meaning that that is the only consideration. Indeed, so to read it would be to fly in the face of what is manifest and apparent, namely, the existence of that other relationship. The next matter in the Supplemental Case which is particularly relied upon is that The commercial community who have dealings with Appellants do not generally distinguish between Appellants and any of it subsidiaries, and they would so far regard Coming Fashions Ltd., as being a part of Appellants' business as to attribute to Appellants any discredit resulting if Coming Fashions, Ltd., were to default to its creditors. That, no doubt, is good business sense, but it is worth observing that there is no finding that the payment in question was made for the purpose of preventing Coming Fashions, Ltd., defaulting to its creditors. There is no finding to that effect, and, therefore, I myself do not see that very much comfort is to be gained by the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the argument that the business for the benefit of which the payment was made was the business exclusively of Odhams. If that be the true construction of the finding (and, in my opinion, it is the true construction), the only question that remains is: are there to be found in the two Cases facts sufficient to justify that conclusion? That conclusion is, of course, itself a conclusion of fact, but it is based, as the Commissioner himself says, on other facts which I may call primary facts, and, therefore, it is legitimate to examine those facts and to see whether they are sufficient to support that conclusion. I may say in passing that the phrase: On these facts at the beginning of paragraph 2 cannot be construed as confining the material used by the Commissioner to those actually stated in the Case, but must, I think, be read as including the facts found in the original Case, and indeed Mr. Tucker very properly acceded to that view. When one looks at the facts as stated in the two Cases (and I do not propose to go through them again), it emerges, in my view, quite clearly that, there being these two relationships between the Appellants and their subsidiary, it is from that ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits upon which they pay income tax, and without the said premises and their use as aforesaid, the Appellants' profits if there were any at all would be less in amount. I am not sure whether I am right in saying all, but certainly some of the opinions delivered in the House of Lords-I have not been through them all-place essential reliance upon the fact that the premises were acquired really as a business asset of the company, and for that purpose alone. I observe, for instance, that Lord Parker, at page 431, says: It is clear that not only were the tied houses acquired and let solely for the purposes of the trade, but that the repairs were necessary to maintain the houses in such a condition that they could be used for the purposes for which they were acquired and let. It seems to me that really at the outset Usher's case [1914] 6 Tax Cas. 399 is ruled out as an authority which assists the Appellants. They are unable to show that they acquired the shares in question for the sole purpose of obtaining printing orders; in fact, the Case makes it clear that that was not so. That that was one of their purposes in unquestioned. It may be that they made this payment partly wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rule which deals with deductions for bad debts. It, therefore, stands as prima facie a good book debt, and the only way of getting an allowance against it is by writing it off on some such grounds as are here suggested to be available. I only mention the matter of book debts in order that it may not be thought that I had forgotton it. In the result, the appeal is dismissed with costs. SCOTT, L.J.--I agree. CLAUSON, L.J.--I agree. The company appealed to the House of Lords. VISCOUNT CALDECOTE, L.C.- My Lords, this seems to me to be a hopeless appeal. The Special Commissioner, to whom, by agreement of the parties, the matter was remitted by the Court of Appeal for further findings, arrived at a finding of fact which must be fatal to the Appellants unless they can show that there was no evidence to support it. After hearing a very clear argument by Mr. Tucker, on behalf of the Appellants, I can find no ground for any such suggestion. The Appellants claim to deduct, in making up an account of their profits for the year of assessment, a sum of ? 2,927 5s. 8d., either by way of an adjustment reducing the amount received or to be received by the Appellants on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Master of the Rolls points out, the two companies are separate taxable persons. The trade or business of one company, even though it may affect very closely the trade or business of another, is not the same as that other's trade or business. Rule 3(a) of the Rules applicable to Cases I and II of Schedule D prohibits the deduction of any disbursements or expenses, not being money wholly and exclusively laid out or ex pended for the purposes of the trade , that is to say, the trade of the person whose profits or gains are being computed. The Appellants were computing their profits and gains, and it is their trade which is to be regarded. The Special Commissioner finds, on evidence of which there is abundance, that the sum written off was not so written off wholly and exclusively for the purpose of the trade or business of the Appellants . That is enough to shut out the Appellants' right to deduct the amount. It was suggested, though I think not very strenuously, by the Appellants' counsel that Rule 3(a) was not germane to the facts of this case, because the writing off of the sum in question was not a disbursement or expense, but was in the nature of a tradesman&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sale a periodical called Everywoman's . The Appellants publish this periodical for Coming Fashions, Ltd., upon a commercial basis, and from time to time have advanced on loan large sums to that company. In addition to the amounts advanced, the Appellants were owed by the company at the 31st December, 1933, a sum of ? 10,118 on trading accounts representing charges for work done at full trade prices. For the trading year ending the 31st December, 1933, Coming Fashions, Ltd., made a net trading loss of ? 2,927 5s. 8d. The Appellants wrote off in their own accounts an amount equal to this loss from the amounts due to them by Coming Fashions Ltd., on trading account. It is this sum so written off that the Appellants allege that they are entitled to deduct in computing the profits and gains of their trade for the year ending the 31st December, 1933. They rely on Case I, Schedule D, of the Income-tax Act, 1918. It may be mentioned that a similar question arises under another year of assessment. It is necessary, at this point, to state that in the course of the first hearing before the Court of Appeal, the Court made an Order remitting the matter to the Special Commissioners for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e periodical 'Everywoman's, and that, therefore, the sum written off was not so written off wholly and exclusively for the purpose of the trade or business of the Appellants . My Lords, there can be no doubt that limited companies who carry on business are separate taxable persons, and the profits and gains of their several businesses are separate profits and gains for the purposes of the Income-tax Acts. This is none the less true if one of the companies should be the parent company, and the other or others may be its subsidiaries of which the shares are held or owned by the parent company. It is equally plain that the Appellants stood towards Coming Fashions, Ltd., in a two-fold relationship. They were, in a sense, proprietors of that concern, in so far as they held all the shares in it. Its dividends, if any, came to the Appellants, and on a winding up of Coming Fashions, Ltd., its assets after payments of debts, liabilities, and costs would be the property of the Appellants. On the other hand, there was also another and a quite different relationship between the two companies, that of tradesman and customer. It should be added that there is no suggestion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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