TMI Blog1948 (7) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of prosecuting an appeal (in this instance, a successful appeal) to the Board of Referees against a decision of the Commissioners of Inland Revenue under Section 32 of the Finance Act, 1940, incurred by a taxpayer with a view to reducing the assessment made upon him as a trader for excess profits tax, can be deducted as being a disbursement wholly and exclusively laid out or expended for the purposes of the trade. (Rule 3(a) of the Rules applicable to Cases I and II of Schedule D). The Commissioners had fixed the proper figure for an item of disbursement at ? 3,500: the result of prosecuting the appeal, at a cost of 622 10s. 11d., was to establish that the proper figure was 5,800. Atkinson, J., held that the expense of ? 622 10s. 11d. was an admissible deduction on the ground that the cost of the litigation was incurred for the purpose of ascertaining the true figure of profits on which the trader must bear excess profits tax. The Court of Appeal (Lord Greene, M.R., Morton and Somervell, L.JJ.), reversed this decision, holding that the disbursement was not wholly and exclusively incurred for the purposes of the trade, but was at any rate in part incurred in an endeav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te enterprise) to make its legitimate profit. Viewed in this light, I do not see why the expenditure here in question is not wholly and exclusively laid out for the purposes of the trade--if it had not been incurred, the trade would be less profitable. Lord Davey's gloss on the words of the statute in Strong Co. of Romsey v. Woodifield [1906] A.C. 448; 75 L.J.K.B. 864 is well known, but I think it is better to concentrate on the statutory words themselves. Rightly understood, however, I do not find that Lord Davey's words contradict the view I am disposed to take. Strong Co. of Romsey v. Woodifield was a case in which the taxpayer sought to deduct a loss not connected with or arising out of his trade. Lord Loreburn said (75 L.J.K.B. at p. 866; [1906] A.C. at p. 452): I think only such losses can be deducted as are connected with, in the sense that they are really incidental to, the trade itself. Lord Davey's test was that the purpose of the expenditure must be the purpose of enabling a person to carry on and earn profits in the trade (at pp. 867 and 453 of the two reports). Here, the expenditure was, in my view, incurred for the purpose of carrying on and earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 6, 1940, and thereafter until determined by six months' notice on either side. Under this agreement he received an increased remuneration amounting in 1940 to 3,550, in 1941 to 6,486, in 1942 to 6,198, in 1943 to ? 5,334, in 1944 to 5,747 and in 1945 to 2,416. On August 15, 1942, the Commissioners for Inland Revenue issued to the secretary of the first appellants a notice stating that under Section 32 of the Finance Act, 1940, they had decided that in computing for the purposes of excess profits tax the profits of that company's trade or business for the accounting period ending March 31, 1941, no deduction should be allowed in respect of Mr. Young's remuneration in excess of ? 3,500. From this decision both companies appealed to the Board of Referees and that body held that 5,800 was allowable. From and after that period the Inland Revenue authorities have not challenged the allowance of the full amount actually paid and the sum now in dispute represents the costs incurred in prosecuting this appeal. Under Schedule D tax is charged in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom, and the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h I should have arrived from a study of the wording of the section itself. The widest meaning attributed to it and that for which the appellants contend is perhaps best expressed by saying that it includes every expense to which the trader is put because he carries on the trade. Were he not a trader, it is contended, he would not have to pay excess profits tax and, therefore, any expense to which he is put in arriving at its correct figure is wholly and exclusively laid out for the purpose of the trade. Similarly, it is maintained that as the law obliges him to pay income-tax, his expenses of calculating the balance of profits and gains for income-tax purposes are incurred wholly and exclusively for the purpose of his trade, more particularly where the taxpayer is a company which by law is compelled to publish its accounts. In support of this argument it is urged that even the amount available to be put aside as reserve or for distribution in dividends cannot be ascertained until it is known what sum must be provided for excess profits and income-tax purposes. The argument, so far, extends only to expenditure incurred for the purpose of finding out what the balance of profits or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom profits as is the cost of making up the strictly business accounts of the trade, but this is not a matter of principle but of expediency. The two duties overlap and in practice are almost indivisible. Moreover, it is of advantage to the-Revenue to have the figures required for their purposes carefully and accurately made up. Strictly, however, I think the expenses should be divided and any additional cost of making up Revenue accounts should be disallowed in determining the allowable deduction for income tax purposes, but the advantages of allowing both to be deducted as a practical measure outweigh the disadvantages, though the result may not be strictly logical. But no such illogicality has to be faced when the sum which is alleged to be deductible is not the cost of accountants' work in ascertaining trading profits, but the expense of an appeal to the Board of Referees for the purpose of discovering the true measure of profits for tax purposes only. Such expenditure is incurred directly for tax purposes and for nothing else, though it may indirectly affect both the amount available for distribution to the proprietors of the business and that proper to be put to reserve. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressly prohibited and if not, whether it is of such a nature as to be proper to be charged against incomings in a computation of the balance of profits and gains. He goes on to state that: a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade. This statement was obiter only as the actual decision was merely that the expenditure was capital expenditure and therefore not deductible, but the language does require careful consideration. In that case the question actually in issue was whether subscriptions by a company towards a pension fund were to be deducted in ascertaining the balance of profits and gains of its trade, and it is true that the expenditure did not at once affect its revenue, but it was a method of ensuring the better and more contented service of its employees, and in that sense it did directly affect the success of its enterprise. It was exclusively laid out to enable the company to be more successful: no part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and, in these circumstances, this is not a matter in which your Lordships would interfere. I should dismiss both appeals. LORD SIMONDS (read by Lord Normand).-These consolidated appeals, the one by Smith's Potato Estates, Ltd., which I will call the estates company , and the other by Smith's Potato Crisps (1929), Ltd., which I will call the parent company , since the estates company is its subsidiary, raise questions of income-tax and excess profits tax upon which Atkinson, J., and the Court of Appeal have come to different conclusions. In the income-tax appeal the question is whether certain expenses amounting to ? 622 10s. 11d. incurred by the estates company in promoting an appeal to the Board of Referees under a statutory provision in respect of liability to excess profits tax ought to be deducted in computing the profits of the business of the company for purposes of income-tax under Case I of Schedule D of the Income Tax Act, 1918. In the excess profits tax appeal the question is whether the same expenses ought to be deducted in computing the profits of that business for the purposes of excess profits tax under Part III of the Finance (No. 2) Act, 1939, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged no sum shall be deducted in respect of (a) any disbursements or expenses not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation. These are the words round which the main argument has ranged. It has been contended as a general proposition that the expenses of disputing an assessment to income-tax and litigating it to the utmost permissible extent are deductible for the purposes of computing the amount of profits of the trade to be charged. But a subsidiary argument also was developed upon the facts of the particular case on which I must say a few explanatory words. The manager of the estates company, whose remuneration had been the subject of the disallowance by the Inland Revenue Commissioners, and of the appeal to the Board of Referees, was a Mr. Young. His services were regarded as of great importance by the estates company, who feared that they might be lost, if in the year under review and in future years any part of his remuneration should be disallowed. It was therefore contended that there was in the exceptional circumstances of the case a special business motive for incurring the expenses of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of enabling a person to carry on and earn profits in the trade. These familiar words I cite from Lord Davey's speech in Strong Co. of Romsey v. Woodifield [1906] A.C. 448; 75 L.J.K.B. 864. They have been cited and applied over and over again, and, if they are kept firmly in mind, they dispose in limine of the argument which prevailed with Atkinson, J., and has been urged before your Lordships. A consideration of the numerous cases that were cited shows that it is not always easy to decide whether it can be said of a particular expenditure that it satisfies Lord Davey's test. But it is significant that counsel were not able to call to the attention of the House any case in which the appellant's present contention had been put forward. For a long period of years large sums of money have been devoted to the litigation of income-tax claims : the most acute minds of the legal and accountancy professions have been at the service of the taxpayer: yet the claim that such money was expended wholly or exclusively for the purpose of the trade appears never to have reached a court of law. The reason is not far to seek: it is that neither the cost of ascertaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1932] 17 Tax Cas. 59, certain observations of Finlay, J., were relied on by the appellants. I would question whether that learned judge intended to say anything that would support their contention. I do not doubt that as a practical matter the Revenue authorities allow accountancy charges as a deduction in computing profits, both because such charges are necessary for trading as well as tax purposes, and it would be vexatious to distinguish between them, and because they must find their own task an easier one if they are dealing with professional men who speak their language and understand their art. I do not think it necessary to decide how far in this direction the Revenue authorities are bound to go. But, if Finlay, J., meant that an expense incurred solely for the purpose of dispute with the Crown could be deducted, then I must join with the Master of the Rolls in expressing my respectful dissent. In Worsley Brewery Co. v. Inland Revenue Commissioners [1932] 17 Tax Cas. 349 certain observations of Romer, L.J., have, as I think, been misunderstood and relied on. I need say no more than that I wholly agree with the explanation given by the Master of the Rolls and Morton, L.J., of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed on income-tax principles, and, though excess profits tax is under Section 18 of the Finance (No. 2) Act, 1939, allowed to be deducted in computing profits for the purposes of income-tax, this express allowance, which does not extend to the costs and expenses of appeals, is, in my opinion, directed to limiting the total taxation of trade profits and distributing it between the two taxes in accordance with the intention of Parliament. Apart from the provisions of Section 18 of the Finance (No. 2) Act of 1939, excess profits tax would not be deductible any more than incometax itself is deductible in computing profits for income-tax purposes. The reason why income-tax is not deductible in computing profits for income-tax purposes is not merely the logical difficulty pointed out by counsel for the appellants that, if it were, the computation would inevitably drift through the repetition of the deduction into the eddy of an indefinite process. There is the more substantial reason, that incometax is an impost made upon profits after they have been earned, and that unless the observations of Lord Davey in Strong Co. of Romsey v. Woodifield [1906] A.C. 448; 75 L.J.K.B. 864, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was that the costs and expenses of appeal proceedings before the Commissioners of Inland Revenue or the Board of Referees, and from them to the courts, are not laid out exclusively for the purposes of the trade and are, therefore, not permissible deductions. The line drawn by the Inland Revenue would allow deduction of the costs incurred in negotiations with their officers before an appeal is taken or where no appeal is taken, either as a concession to the taxpayer or as a practical and convenient settlement of a disputable point. The costs of an appeal against an assessment are incurred at least in part, if not exclusively, for the purpose of reducing the payment which the taxpayer will have to make if he acquiesces in the assessment. The purpose of the appeal is not limited to correcting the assessment itself, for if the assessment involved no liability to pay no one would go to the trouble and expense of appealing against it. So, even if the correction of the assessment is within the purposes of the trade, the expenses and costs of the appeal are nevertheless laid out at least partly for a purpose which is not one of the purposes of the trade; they are accessory to the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avey in Strong Co. of Romsey v. Woodifield [1906] A.C. 448; 75 L.J.K.B. 864, which has frequently been cited with approval in other cases, but it is to be observed that Lord Davey did not say earning the profits by the operations of the trade and, in my opinion, the words the purposes of the trade ought not to be construed in this way. A trader does not expend money in an action brought for or against him for negligence or breach of contract in the course of his trade for the purpose of earning the profits of the trade in this sense, for it is not an operation of his trade to engage in litigation. It is, of course, an incident which he may think reasonably necessary for the purposes of his trade to bring or defend actions. But so it is an incident which he may think reasonably necessary for the purposes of his trade to engage in litigation as to the amount of his taxes. If he succeeds in either case he increases the profits arising from his trade, and it appears to me to be no straining of language to say that a trader who increases his profits by incurring a certain expense incurs that expense for the purpose of earning the profits. In my opinion, the real question which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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