Bank Line Ltd v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 05 March 1974 |
| Date | 05 March 1974 |
| Court | Court of Session |
COURT OF SESSION (FIRST DIVISION)-
Corporation tax, Schedule D-Shipowner-Losses forward-Income available for set-off-Income of investments in ship replacement fund-Whether "trading income"-Finance Act 1965 (c. 25), s. 58(1) and (7).
The Appellant Company carried on the trade of owning and operating ships. It had always been its policy to finance the replacement of its ships from its own generated funds. Sums not required for immediate use in the business were set aside out of the profits and invested in Government securities and short-term deposits with local authorities so as to be available to meet the Company's requirements for such replacements. The normal economic life of the vessels was considered to be 20 years. The average age of the fleet at 31st December 1969 was 9 years, and the invested funds then available amounted to under 25 per cent. of the estimated net cost of replacement, leaving the balance to be found over the ensuing 11 years. It then numbered 56 ships, as compared with 49 at 31st December 1950, 41 at 31st December 1961 and 53 at 31st December 1966. Between 1951 and 1969 51 ships were sold and 58 added.
The Company claimed that the income of the ship replacement fund for the accounting periods to 31st December 1967, 1968 and 1969 constituted trading receipts which would have fallen to be taken into account as such but for being subject to tax under provisions other than Case I of Schedule D, and were accordingly trading income available to be set against trading losses carried forward from earlier years. On appeal, it contended, in reliance on Liverpool and London and Globe Insurance Co. v. Bennett 6 T.C. 327; [1913] A.C. 610, that the funds in question were employed in its trade, inasmuch as without replacement of the fleet the trade could not continue. For the Crown it was contended that there was a distinction between the investment of trading receipts of a trade for the purpose of meeting claims arising from that trade, as in the case of an insurance company or a bank, and the investment of the profits of the trade for the purpose of replacing a capital asset. The Special Commissioners upheld the Crown's contention and held that the income in question was not trading income
Held, that the ship replacement fund was a reserve fund which was not currently employed and risked in the accounting periods 1967, 1968 and 1969 in the Company's trade of owning and operating ships, and accordingly the income thereof was not trading income.
Liverpool and London and Globe Insurance Co. v. Bennett 6 T.C. 327; [1913] A.C. 610 distinguished; dicta of Rowlatt J. in Liberty & Co. Ltd. v. Commissioners of Inland Revenue 12 T.C. 630, at page 638, followed.
Stated for the opinion of the Court of Session as the Court of Exchequer in Scotland under the Taxes Management Act 1970, s. 56.
I. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Turnstile House, High Holborn, London WCIV 6LQ on 27th and 28th July 1971 for the purpose of hearing appeals. The Bank Line Ltd., 102 Hope Street, Glasgow C.2 (hereinafter referred to as "the Appellant") appealed against the refusal of H.M. Inspector of Taxes, Glasgow 5th District, acting on behalf of the Commissioners of Inland Revenue to include interest and dividends in the trading income of the Appellant under the provisions of the Finance Act 1965, s. 58(7), for the purposes of a claim by the Appellant for relief for trading losses under the provisions of the Finance Act 1965, s. 58(1), for the accounting periods ended 31st December 1967, 31st December 1968 and 31st December 1969. The grounds of the appeal were that the investments which gave rise to dividends and interest as hereinafter appeareth were funds employed in the trade of the Appellant so that the income that arose therefrom fell to be treated as trading income within the meaning of the Finance Act 1965, s. 58(7).
II. Evidence was given at the hearing of the appeal by Robert Fawcett M.B.E., T.D., F.C.A., senior partner in the firm of Jackson, Taylor, Abernethy & Co., chartered accountants, and James Goddard Young C.B.E., D.S.C., F.C.A., a director and the secretary of the Appellant, and the following documents were produced and admitted or proved:
(i) Memorandum of association and the articles of association of the Appellant.
(ii) A copy of the profit and loss account for the year ended 31st December 1969 and balance sheet at that date and the report of the directors of the Appellant for the said year.
(iii) A bundle comprising schedules 1 to 7 inclusive supplemental to the accounts of the Appellant and the computation of corporation tax for the three years ended 31st December 1967, 1968 and 1969 and the fleet turnover during the period 1951 to 1969 inclusive (exhibit A).
(iv) A schedule relating to the fleet replacement (exhibit B).
The provisions of the said documents so far as relevant to this Case have been incorporated herein; but copies of the said documents, with the exception of (iii) and (iv) above(1), do not form part of this Case and are not incorporated herein.
III. We found the facts set forth in the following paragraphs admitted or proved at the hearing of the appeal.
IV. The Appellant was incorporated on 20th October 1905 with the objects, inter alia, stated in the memorandum of association in the following terms:
The objects for which the Company is established are: (1) To purchase, charter, hire, or otherwise acquire, build, equip, and maintain steam or other ships, and vessels of any description, and to purchase or otherwise acquire shares of ships or vessels of any kind. (2) To adopt and carry into effect, with or without modification, an agreement entered into between Andrew Weir, Shipowner, Glasgow, of the first part, and Henry Bowie Fyfe, Writer, Glasgow, as trustee for the Company (then in course of formation), of the second part, dated 4th October, 1905.
(3) To carry on the business of shipowners, shipbrokers, merchants, and carriers in all their branches, including the carrying of passengers, goods, merchandise, mails, troops, live stock, and treasure, whether belonging to the members of the Company or others, to and from such places as the Managers of the Company may determine; to purchase coal, iron, or other metals or minerals, wares, goods, timber, grain, sugar, meat, live stock, or any other kind of produce or merchandise, for the purpose of supplying cargo or ballast for the ships, or for other ships, and to prepare for market and sell or otherwise dispose of the same; also to charter or hire, sell or let, work, exchange, or otherwise employ or dispose of the said ships; to enter into trade and working arrangements, partnerships, price or freight agreements, or mutual arrangements for the benefit of interests with any company, corporation, or person carrying on or about to carry on the same or any similar business; to take, hold, and dispose of any property and effects heritable or moveable, real or personal, whether acquired in security or absolutely, either in name of the Company itself or in the names of trustees, who may be either individuals or corporations; to borrow money and grant bonds, mortgages, debentures, or other securities therefor on all or any of the property, assets, undertaking, or credit of the Company, to purchase or otherwise acquire, hold, and dispose of shares, bonds, mortgages, debentures, or other securities of the Company, or of or affecting any of the Company's ships; to draw, accept, make, indorse, and execute, and to discount and sell promissory notes, bills of exchange, and other negotiable instruments; to sell the undertaking of the Company or any part thereof for cash, or for shares, debentures, or securities of any company, or for other consideration; to amalgamate with any other company established for objects similar to any of those for which the Company is established, and to acquire, hold, and dispose of the shares, stock, bonds, debentures, mortgages, or securities of any such company; to increase or reduce the capital of the Company, to sub-divide or consolidate the shares, to convert the paid-up shares into stock, and also to determine what preference or priority (if any) the holders of new shares, or any of them, shall have over existing share-holders, or what preference or priority existing shareholders shall have over new shareholders; and to provide surplus or reserve funds, and to invest the same in such way as the Managers of the Company may consider proper. To promote any company the promotion of which shall be considered to be calculated to advance directly or indirectly the objects of this Company or the interests of its members; to lend money to and guarantee the performance of the obligations of any company, firm, or person in any case in which such loan or guarantee may be considered likely directly or indirectly to further the objects of this Company or the interests of its members.V. The articles of association of the Appellant contained,inter alia, the following clauses:
(45) The firm of Messrs. Andrew Weir & Company, of Glasgow and London, shall be the Managers of the Company (except as hereinafter mentioned). The Managers shall carry on the business of the Company. They shall have power to appoint and employ brokers and agents at home and abroad under them, [and] shall exercise all the powers and duties incumbent upon directors of companies under the Companies Acts. (49) The Managers may exercise all such powers of the Company as are not by the Companies Acts or by these presents required to be exercised by the Company in General Meeting, subject nevertheless to any regulations contained in these presents, to the provisions of the Companies Acts, and to such regulations (being not inconsistent with the aforesaid regulations and provisions) as may be prescribed by the Company in General Meeting; but no...
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