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United Kingdom House of Lords Decisions |
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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Glenboig Union Fireclay Co. v. Inland Revenue [1922] UKHL 162_1 (23 February 1922) URL: http://www.bailii.org/uk/cases/UKHL/1922/59SLR0162_1.html Cite as: 59 ScotLR 162_1, [1922] UKHL 162_1 |
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Page: 162↓
(Before
(In the Court of Session, February 5, 1921, S.C. 400, 58 S.L.R. 376.)
Subject_Revenue — Excess Profits Duty — Profits of Trade — Capitalor Income — Compensation Paid by Railway Company in respect of Minerals Left Unworked — Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), sec. 40 (1) (2), and Schedule IV, Parti, par. 1, Part II, par. 1.
In 1913, one of the two pre-war trade years, payment was made to the Glenboig Union Fireclay Company of £15,316, 11s. 4d. by a railway company as compensation in terms of the Railways Clauses Act 1845 for minerals left unworked for support of their line. The sum was entered in the revenue account of the Glenboig Company for the year in which it was paid, and on it the company paid income tax, A question
Page: 163↓
having arisen as to whether this sum fell to be included in computing the “amount of the profits arising from the trade or business” of the company in the pre-war year 1913, held ( aff. judgment of the Court of Session) that the sum in question was not profits within the meaning of the Finance (No. 2) Act 1915, it not being of the nature of an annual profit arising from trade, but money paid in respect of an asset of the company which had to that extent been sterilised and destroyed, and that accordingly it could not be included as profit in the company's balance-sheet for the year 1913.
The case is reported ante ut supra.
The Glenboig Company appealed to the House of Lords.
At delivering judgment—
The appellant company here, the Glenboig Union Fireclay Company, Limited, in making their return for the purpose of this statute included as one of the two pre-war years the year that ended the 31st August 1913, and into the accounts of that year they brought as items of profit a sum of £15,316 received from the Caledonian Railway Company on the 9th April 1913, and a further sum of £4500 received from the same company on the 29th August 1913. The question that is raised upon this appeal is whether or no the Company is entitled to increase the amount of their pre-war profits by these two sums, and thereby reduce the amount of the excess profits duty payable under the statute. There is no question whatever about the bonafides of the appellants in this case. Both these sums had been included in their balance-sheet as profit for the year 1913, and upon them they had paid income tax without demur.
The circumstances in which these moneys were paid may be shortly stated. The appellants the Glenboig Union Fireclay Company carry on business as manufacturers of fireclay goods and as merchants of raw fireclay. Part of their property consisted of mining rights over certain beds of fireclay at Gartverrie, Glenboig, and in the course of working these fields they were at the end of 1907 approaching the line of the Caledonian Railway, and due notice was given on the 25th January 1908 to the Railway Company of the intended extension of their working. The Railway Company being apprehensive as to the result, required the Fireclay Company to desist from working. A dispute arose as to whether or no the fireclay in question was a mineral, and litigation ensued during which the Railway Company were able to obtain against the Fireclay Company interdicts which operated for two periods—one from the 29th February 1908 to the 15th April 1910, and the second from the 12th November 1910 to the 28th April 1911, when the interdict was finally recalled. Upon the recall of the interdict the Railway Company accordingly became liable to pay the Fireclay Company the damages that had been caused to them by the order, and the sum of £4500 to which I have made reference was the sum that was paid under that head. The Railway Company now proceeded to treat with the Fireclay Company for the purpose of preventing any further working of this fireclay adjacent to their railway, and arbitration proceedings ensued for the purpose of determining what sum the Railway Company were bound to pay for this privilege, and ultimately the sum of £15,316 was fixed as the sum payable by the Railway Company, and this was accordingly paid on the 9th April 1913.
These two sums require some different consideration for the purposes of this appeal, but your Lordships are relieved with regard to the second sum of £4500, because the parties to this appeal have very wisely made an arrangement upon the point with the terms of which it is unnecessary to trouble your Lordships. The sum of £4500 is therefore removed from your consideration.
It therefore only remains to consider whether the sum of £15,316 was properly included as a profit in the appellants' balance-sheet for the year ending 31st August 1913. The argument in support of its inclusion can only be well founded if the sum be regarded as profits or a sum in the nature of profits earned in the course of their trade or business. I am quite unable to see that the sum represents anything of the kind. It is said, and it is not disputed, that the amount in fact was assessed by considering that the fireclay to which it related could only be worked for some two and a-half years before it would be exhausted, and it is consequently urged that the amount therefore represents nothing but the actual profit for two and a-half years received in one lump sum. I regard that argument as fallacious. In truth the sum of money is the sum paid to prevent the Fireclay Company obtaining the full benefit of the capital value of that part of the mines which they were prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of £15,316 was paid. It is unsound to consider the fact that the measure adopted for the purpose of seeing what the total amount should be was based on considering what are the profits that would have been earned. That
Page: 164↓
It has been stated before your Lordships that the income tax which was paid upon that sum will be returned by the Crown with interest, but that consideration forms no part of the matter that is now before this House, and I have only to ask your Lordships to dismiss this appeal with costs.
The question now is as to excess profits duty. The year 1913 is one of the two years upon the average of which the pre-war standard of profits is to be ascertained. It is to the interest of the appellants to contend that the profits in the pre-war years were large, for the excess profits would be to that extent less. They therefore contend that these sums were profits of the year 1913 and that they rightly paid income tax upon them. The Inland Revenue, however, finding that it is to their interest so to do, contend that these sums were not profit although they have accepted and retained income tax upon them on the footing that they were. The question to be determined is whether they or either of them were in the whole or in part profits of the appellants' business.
In the case stated by the Commissioners for Special Purposes it appears that the appellant company contended before them that the Inland Revenue by accepting income tax upon the sums in question were barred from now maintaining that they were not revenue under income tax principles. It is unnecessary for your Lordships to express any opinion whether as a matter of honest administration by the Inland Revenue Authorities or as a matter of law the Inland Revenue could have maintained the contention that they could take and retain income tax and then claim excess profits duty on the ground that the sum was not income. For in the course of the proceedings the appellants abandoned this plea upon the Commissioners of Inland Revenue giving an undertaking that in the event of their recovering from the appellants excess profits duty on the basis that these sums were not profits the income tax should be repaid with interest at five per cent. The only question before your Lord-ships is therefore, as before stated, whether those sums or either of them were in whole or in part profits of the year in which they were received.
First as to the £15,316, this was compensation for being precluded from working part of the demised area which otherwise the appellants might have worked and thereby made profit. Was that compensation profit? The answer may be supplied, I think, by the answer to the following question—Is a sum profit which is paid to an owner of property on the terms that he shall not use his property so as to make a profit? The answer must be in the negative. The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit. The matter may be regarded from another point of view—The right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area all subsequent profit by working would of course have been impossible, but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part. Again, a further point of view is this—Had the working not been interfered with the profit by the working would have extended over, say, three years. It would have been an annual sum. The payment may be regarded as a redemption of that annuity. Is the redemption of an annuity itself an annuity? If the currency of the annuity had been,
Page: 165↓
In my opinion it has been rightly held that the £15,316 was not, nor was any part of it, income of 1913 or of any other year. The income tax was wrongly assessed and paid and received, and must be repaid as agreed with interest, and the pre-war standard must be calculated upon the footing that the sum was not profit.
As regards the £4500, it is unnecessary for me to state the opinion which I had formed. The parties have come to an agreement as regards that sum—an agreement which very fairly gives effect, I think, to the rights of the parties.
Their Lordships ordered that the judgment appealed from be affirmed and the appeal dismissed with costs.
Counsel for Appellants— Hon. Sir William Finlay, K.C.— Morrice Mackay, K.C.— Edmunds. Agents— Craig & Henderson, Glasgow— R. S. Miller, W.S., Edinburgh— John Bransbury, London.
Counsel for Respondents—Attorney-General ( Sir Gordon Hewart, K.C.)—Lord Advocate ( Morison, K.C.)— Hills— Skelton. Agents— Stair A. Gillon (Solicitor of Inland Revenue for Scotland)— H. Bertram Cox, C.B. (Solicitor of Inland Revenue for England).
