Aylmer (HM Inspector of Taxes) v Mahaffy
| Jurisdiction | Northern Ireland |
| Judgment Date | 11 May 1925 |
| Date | 11 May 1925 |
| Court | King's Bench Division (Northern Ireland) |
No. 563.-HIGH COURT OF JUSTICE, NORTHERN IRELAND (KING'S BENCH DIVISION).-
COURT OF APPEAL, NORTHERN IRELAND.-
Income Tax, Schedule D - Deduction - Payment under guarantee of customer's bank loan - Res judicata - Effect of decision of Recorder (Northern Ireland) - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Sections 149, 195 and 196.
The Respondent, who was a manufacturer's agent paid by commission, guaranteed, up to £1,000, a banker's loan to one of his customers in view of a promise of large orders. The customer was not restricted in any way as to the use of the loan.
In consequence of the customer's failure the Respondent was obliged to pay the £1,000 to the bank under his guarantee in the year ended the 31st March, 1921, and he claimed to deduct the £1,000 in computing his profits for that year for the purposes of Income Tax assessments (on the average basis) for subsequent years.
He first raised the question on appeal against the 1921-22 assessment, when the Special Commissioners decided that the deduction was inadmissible, but the Recorder of Belfast, on a re-hearing of the appeal under Section 196 of the Income Tax Act, 1918, allowed the deduction sought.
The Respondent appealed against the 1922-23 assessment on the same ground, and the Special Commissioners, while holding that the Recorder's decision on the re-hearing of the 1921-22 appeal did not prevent the question from being raised on the 1922-23 appeal, and while agreeing with their colleagues who heard the 1921-22 appeal that the £1,000 was not an admissible deduction, allowed the deduction in deference to the Recorder's decision for 1921-22.
On the hearing of a Case stated for the High Court on the demand of the Crown, the King's Bench Division of Northern Ireland, without expressing an opinion on the main point at issue, held that, in view of the findings of the Special Commissioners, they should have disallowed the deduction, and the Court accordingly remitted the Case to the Commissioners for determination pursuant to their findings.
The Crown entered an appeal against the Order of the King's Bench Division.
Held, in the Court of Appeal of Northern Ireland, that, in view of the decision of the Recorder for the year 1921-22, the matter was res judicata.
The Case was accordingly remitted to the Special Commissioners to amend the 1922-23 assessment on the basis of the allowance of the deduction claimed, but the Court did not itself express any opinion on the admissibility of the deduction.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice in Northern Ireland.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 23rd November, 1922, at Belfast, for the purpose of hearing appeals, W.J. Mahaffy (hereinafter called "the Respondent") appealed against an assessment to Income Tax (Schedule D) in the sum of £458 for the year ending 5th April, 1923, made upon him under the provisions of the Income Tax Acts in respect of his profits as a manufacturer's agent.
2. The assessment of £458 was computed on an average of 3 years as follows:-
£ |
|||
Year to 31st March, 1920, Profit |
…… |
916 |
|
Year to 31st March, 1921, Profit |
…… |
618 |
|
Year to 31st March, 1922, Loss |
…… |
158 |
|
3)1,376 |
|||
Average |
… |
£458 |
as |
assessed |
The only point for the decision of the Court is whether a sum of £1,000 paid by the Respondent in the year to 31st March, 1921, in the circumstances set out below, is a proper deduction in computing the profits of that year. If that £1,000 is a proper deduction the liability is agreed to be £125, arrived at as follows:-
£ |
||
Year to 31st March, 1920, Profit |
…… |
916 |
Year to 31st March, 1921, Loss |
…… |
382 |
Year to 31st March, 1922, Loss |
…… |
158 |
3)376 |
||
Average |
… |
£125 |
If, on the other hand, the £1,000 is not a proper deduction it is agreed that the assessment of £458 is correct.
3. The Respondent is an agent seeking orders for his principals and paid by commission. One of his customers promised him large orders if he would guarantee up to a maximum of £1,000 the customer's loan from his bankers. The Respondent gave this security, the customer failed, and the Respondent was obliged to pay the sum of £1,000 to the bank under his guarantee in the year ended 31st March, 1921. He stated that his sales to this customer did increase considerably for several months after he gave the guarantee, but there was no written agreement which bound the customer in any way to use his bank loan solely or mainly to purchase goods from the Respondent.
4. It was contended on behalf of the Respondent that this payment of £1,000 was a proper deduction from his profits as an agent for the year ended 31st March, 1921, that it was "money wholly and exclusively laid out or expended for the purposes of the trade, etc.," within the terms of Rule 3 of the Rules applicable to Cases I and II of Schedule D, and that the assessment for the year 1922-23 should therefore be reduced from £458 to £125. The following cases were cited in support of these contentions:-
Moore v. Stewarts and Lloyds, Ltd., 6 T.C. 501
Guest, Keen & Nettlefolds, Ltd. v. Fowler, 5 T.C. 511
Reid's Brewery Company, Ltd. v. Male, 3 T.C. 279; and
Stevens v. Durban-Roodepoort Gold Mining Company, Ltd., 5 T.C. 402
5. The Inspector of Taxes cited the cases of the English Crown Spelter Co., Ltd. v. Baker, 5 T.C. 327, and Stottv. Hoddinott, 7 T.C. 85, and contended that the payment of £1,000 under the guarantee given to the bank was not an expense incurred by the Respondent in earning his profits as an agent.
6. The point which is the subject of this Case was raised by the Respondent in an appeal to the Special Commissioners against the assessment made upon him for the year 1921-22, and the Special Commissioners who heard the appeal for that year decided that the £1,000 was not a proper deduction. The appeal against the assessment for 1921-22 was then re-heard by the Recorder of Belfast, under the provisions of Section 196 of the Income Tax Act, 1918; the Recorder reversed the decision of the Special Commissioners and allowed the Respondent the deduction he claimed. At the hearing of the appeal against the assessment for 1922-23-to which year alone the present Case relates-it was argued for the Respondent that by the Recorder's decision given in connection with the 1921-22 assessment the sum of £1,000 in question was allowed as a deduction from the profits of the year ended 31st March, 1921, with the result that the trading for that year showed a loss of £382, and that it was not competent for the Inspector of Taxes in making the assessment for a subsequent year to bring into average in respect of the year to 31st March, 1921, an alleged profit of £618 or any figure other than a loss of £382. The Inspector of Taxes contended that the Crown was entitled to raise the question of the admissibility of the said sum of £1,000 as a deduction upon the assessment for the year ended 5th April, 1923, and for that purpose to disallow the said sum of £1,000 in computing the amount of the said assessment.
7. We, the Special Commissioners who heard the appeal, held that the Recorder's decision on the re-hearing of the 1921-22 appeal did not prevent the question from being raised in connection with the appeal against the assessment for 1922-23. We agreed with our colleagues who had heard the 1921-22 appeal that the £1,000 was not an allowable deduction, but in deference to the decision of the Recorder for 1921-22 we allowed the deduction claimed and reduced the 1922-23 assessment from £458 to £125.
8. The Appellant immediately upon the determination of the appeal declared to us his dissatisfaction therewith as being erroneous in point of law and in due course required us to state a Case for the opinion of the High Court pursuant to the Income Tax Act, 1918, Section 149, which Case we have stated and do sign accordingly.
H.M. SANDERS, N. ANDERSON Commissioners for the Special Purposes of the Income Tax Acts.
York House,
23, Kingsway,
London, W.C.2.
8th January, 1924.
The Case came before the King's Bench Division of Northern Ireland (Henry, C.J., and Brown, J.) on the 3rd March, 1925, when the Court, without expressing an opinion on the main point at issue, decided that the Special Commissioners, in view of their findings should have disallowed the deduction sought, and remitted the Case to those Commissioners for determination pursuant to their findings.
Henry, C.J., delivered the judgment of the Court as follows:-
This was a Case stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts. The only point for decision is stated to be whether a sum of £1,000 paid by the Respondent in the year to 31st March, 1921, under the circumstances set out in the Case is an allowable deduction. If so, the liability is agreed to be £125; if not, £458 as assessed.
The Respondent is an agent seeking orders for his principals and paid by commission. One of his customers promised him large orders if he would...
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