Barr, Crombie & Company Ltd v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 27 February 1945 |
| Date | 27 February 1945 |
| Court | Sheriff Court |
No. 1316-COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Excess Profits Tax - Ship-managers - Profits of trade - Company's business consisting almost entirely of managing ships for particular shipping company under agreement - Shipping company going into liquidation and paying sum to ship-managing company under terms of agreement - Whether sum received a trading receipt.
From the formation of a shipping company in 1924 the Appellant Company managed its ships under certain agreements, the latest of which (dated 25th May, 1937) provided that the Appellant Company should continue to act as managers of the company for a period of 15 years from 1st January, 1936, and should receive as remuneration a management fee of £500 per annum for each vessel, a commission of 1 per cent. on the price of any vessel built, purchased or sold, and a commission of 5 per cent. on the profits of the shipping company, with a minimum remuneration of £2,000 per annum. In the event of the shipping company going into liquidation or ceasing to carry on business, the "remuneration" to be paid in respect of the period from the date of liquidation until the date of expiry of the agreement was to become immediately due to the Appellant Company. The shipping company went into liquidation on 5th November, 1942, and the sum of £16,306 16s. 11d. was duly paid to the Appellant Company in respect of the period of about 8 years still to run to the date of expiry of the agreement. Over the period from 1924 to 1940 only 2 per cent. of the Appellant Company's income was derived from other managements, and on the liquidation of the shipping company the Appellant Company lost its entire business except for the abnormal and temporary business of managing four ships for the Ministry of War Transport which it had obtained in 1940, and was compelled to effect reductions of its staff and salaries and move to smaller premises.
On appeal to the Special Commissioners against assessments to Income Tax under Case I of Schedule D and to Excess Profits Tax, the Appellant Company contended that the sum of £16,000 odd was compensation for the loss of an agency which was fundamental to its business, and that the agreement represented a capital asset fundamental to its business, or, alternatively, that the said sum was damages for breach of an agreement, and that in either case it was not a trading receipt. The Special Commissioners held that the said sum was remuneration under a service agreement and was a trading receipt.
Held, that the sum in question was a capital payment, and was not a trading receipt of the Appellant Company to be included in its profits for the purposes of Income Tax or Excess Profits Tax.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 10th March, 1944, Barr, Crombie & Co., Ltd. (hereinafter called "the Company") appealed against an assessment to Income Tax for the year ending 5th April, 1944, in the sum of £1,578 based upon the profits of the Company for the Company's accounting year ending 31st March, 1943.
I. The following facts were admitted or proved:-
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(2) The Company was incorporated as a private limited company on 3rd November, 1916, and carries on the business of shipowners, shipping managers and agents. The issued capital was £5,000
divided into 5000 shares of £1 each, which were originally held as to 3000 shares by Mr. Robert Barr and as to 2000 shares by Mr. Crombie. (3) The Barr Shipping Co., Ltd., hereinafter referred to as "the shipping "company", was formed on 7th August, 1924, and carried on the business of shipowners until its liquidation as aftermentioned on 5th November, 1942. In terms of the articles of association of the shipping company the Company was appointed managers of its ships.
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(4) From the inception of the shipping company the Company acted as their manager, and by minute of agreement dated 25th May, 1937 (a copy of which is attached hereto, marked "A", and forms part of this Case(1) ), varying a previous minute of agreement, the Company was to continue to act as managers of the shipping company, and its contract was extended for a period of fifteen years from 1st January, 1936. Under article third the remuneration was to be:-
(a) a management fee of £500 per annum for each vessel;
(b) a commission of one per centum on the price of any vessel built, purchased or sold, and
(c) a commission of five per centum on the profits of the shipping company as therein defined.
(5) By article fourth of the said minute of agreement it was agreed:-
"The remuneration to be afforded to the Third "Parties" (that is the Company) "by the First Parties" (that is the shipping company) "in terms of Article Third "hereof, until the termination of this Agreement, shall not "be less than Two Thousand Pounds per annum. Should "the First Parties go into liquidation either voluntary or "compulsory or cease to carry on business for any other "cause then the remuneration to be paid by the First "Parties to the Third Parties in respect of the period from "the date of such liquidation until the date of expiry of "this Agreement will become immediately due to the "Third Parties."
(6) On 5th November, 1942 (i.e., 81/2 years before the expiry of the agreement), the shipping company went into voluntary liquidation, and in terms of the said article fourth the sum of £16,306 16s. 11d. was duly paid to the Company.
(7) For the sixteen years from 1924 to 31st March, 1940, 88.23 per cent. of the Company's income was derived from managing the shipping company, 1.78 per cent. from other managements, and 9.99 per cent. from sundry sources such as interest on loans. For the next three years the Company obtained from the Ministry of War Transport the management of one British and three Norwegian ships: this was abnormal and temporary business which will cease if the ships are sunk (and one has been) or the war ends. Over the whole nineteen years to 31st March, 1943, the respective proportions are 84.32 per cent., 7.65 per cent. and 8.02 per cent. Upon the liquidation of the shipping company the Company lost its entire business apart from the abnormal business above referred
to. In consequence of the said liquidation...To continue reading
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