Ben-Odeco Ltd v Powlson

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Wilberforce,Lord Hailsham of St. Marylebone,Lord Salmon,Lord Russell of Killowen,Lord Scarman
Judgment Date27 July 1978
Judgment citation (vLex)[1978] UKHL J0727-1
Date27 July 1978

[1978] UKHL J0727-1

House of Lords

Lord Wilberforce

Lord Hailsham of St. Marylebone

Lord Salmon

Lord Russell of Killowen

Lord Scarman

Ben-Odeco Limited
(Appellants)
and
Powlson (Inspector of Taxes)
(Respondent)

Upon Report from the Appellate Committee to whom was referred the Cause Ben-Odeco Limited against Powlson (Inspector of Taxes), That the Committee had heard Counsel as well on Thursday the 29th day of June last as on Monday the 3rd day of this instant July upon the Petition and Appeal of Ben-Odeco Limited whose registered office is at 17 Grosvenor Hill, London, W1X 9HG praying that the matter of the Order set forth in the Schedule thereto, namely an Order of the Chancery Division of Her Majesty's High Court of Justice of the 18th day of November 1977 might be reviewed before Her Majesty the Queen in Her Court of Parliament and that the said Order might be reversed, varied or altered and that the Petitioners might have the relief prayed for in the Appeal or such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament might seem meet; as also upon the Case of Barrie Powlson (one of Her Majesty's Inspectors of Taxes) lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of the Chancery Division of Her Majesty's High Court of Justice of the 18th day of November 1977 complained of in the said Appeal be, and the same is hereby, Affirmed and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay or cause to be paid to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments if not agreed between the parties.

Lord Wilberforce

My Lords,

1

This appeal is concerned with a claim by the appellant company to a first-year capital allowance in respect of expenditure incurred in connection with the construction of an oil rig, 'Ocean Tide'. The claim arises under section 41(1)(a) of the Finance Act 1971 and its validity depends upon the construction of the four words 'on the provision of'. Are interest and commitment fees paid in respect of a loan contracted in order to finance the provision of machinery or plant capital expenditure incurred on the provision of machinery or plant? That is the whole of the question.

2

The appellant company was incorporated on 2 December 1968. Its only trade at all material times consisted in hiring out the rig 'Ocean Tide' on time charter. It had an authorised and issued share capital of £5,000. The contract for the construction of 'Ocean Tide' was placed in 1969. In order to pay for it, the appellant entered into five loan agreements, one of them secured by a debenture. Interest was payable on the money borrowed, and commitment fees had to be paid in order to maintain a right to draw the money. The amounts of interest and commitment fees paid by the appellant until it started to trade (in July 1971) were capitalised in its accounts. It was common ground (and so recorded by the Special Commissioners) that as a matter of commercial accounting these amounts were properly so charged to capital. The total cost of the completed rig as shown in the appellant's balance sheet on 31 December 1971 was £5,691,123 of which the capitalised interest and commitment fees represented £435,988 and £59,002 respectively. It is not disputed that the price of the 'Ocean Tide' was capital expenditure which qualified for the statutory capital allowance. It is agreed that the loans were obtained in order to finance the purchase of 'Ocean Tide' and were exclusively so applied. It is also agreed that the appellant, in order to obtain the loans, was obliged to pay interest and commitment fees.

3

The appellant's argument in favour of the allowance is, basically, twofold. First it is said that the interest and commitment fees are, in a real sense, part of the cost of the rig, or, at least, part of the cost to the appellant of the rig. They ought, consistently with the statutory purposes (viz., to encourage investment) to be treated in exactly the same way as the other elements of the cost. Secondly it is contended that what in a particular case is cost, and what is capital expenditure, has to be determined according to accepted methods of commercial accounting, and that, since the interest and commitment fees up to the date when trading commenced were, in accordance with these methods, treated as capital expenditure, that is sufficient to bring these sums within the statutory provision.

4

The contention of the Revenue is simpler. They point to the relevant words 'capital expenditure on the provision of machinery or plant'; the only question is whether the amounts in question fall within this phrase. It is not sufficient for the relevant expenditure to attain the status of capital expenditure: nor for it to be described, in popular language, as part of the cost. Capital expenditure in order to qualify must be on the provision of plant or machinery, and it does not follow that, because a trader treats expenditure as part of the cost of the rig, the expenditure qualifies under the statute. Here the interest and commitment fees were expended not in order to provide the plant, but in order to obtain, or on, the loans. They represented money spent on providing the means to acquire the rig and not on the provision of the rig itself.

5

I must first refer to such authority as was cited, though in the end it provides no decisive assistance. It falls into three groups. First, the appellant referred to the series of cases which establish that sound principles of commercial accounting may be invoked in order to determine such questions of internal accounting as what is profit, how profit is to be calculated, what, on the other hand, is capital; ( Whimster & Co. v. I.R.C. [1926] S.C.20, Ryan v. Asia Mill, Ltd 32 T.C. 275, Duple Motor Bodies, Ltd v. I.R.C. [1961] 1 W.L.R. 739, B.S.C. Footwear, Ltd v. Ridgway [1972] A.C. 544). I shall not discuss these authorities because there is no occasion here to dispute them, nor were they disputed by the Revenue. They establish no more than, as is conceded in the present case, the amounts in question were, during the pretrading period, properly charged to capital account. To establish this however is not enough for the appellants; in order to succeed they must show that they represented 'capital expenditure on the provision of machinery or 'plant' and the task of the court is to interpret these words. Accounting methods adopted by a particular company (and other companies might treat similar expenditure differently) cannot determine the construction of statutory words.

6

Secondly, reliance was placed on the Chancery Lane case ( Chancery Lane Safe Deposit and Offices Co. Ltd. v. C.I.R. [1966] A.C.85) and in particular the observations of Lord Upjohn and Lord Pearson to the effect that capitalised items might be shown in the balance sheet as part of the total capital cost of a particular asset. But I do not understand them to be saying more than that interest, if capitalised, can be shown as a capital cost: the question of relating it to the acquired asset did not arise.

7

Thirdly, through the diligent researches of counsel, we were referred to two Commonwealth cases, said to support the appellants. The first was B.P. Refinery (Kwinana) Ltd. v. Federal Commissioner of Taxation [1961]. A.L.R. 52 decided by Kitto J. as single judge in the High Court of Australia. The appellant company entered into a contract for the construction of a refinery for a fee which included an amount equal to the expenditure of the contractor in carrying out the work. The contractor incurred expenditure in the erection of temporary buildings for (inter alia) the accommodation of workmen. The company paid to the contractor a sum equal to this expenditure. The question in this case was how this sum ought to be allocated as between depreciable and non-depreciable assets – whether by a direct cost method, or one based upon labour costs, and the decision was that the method adopted by the taxpayer company, though not the only possible method, was appropriate. In the course of his judgment Kitto J. said: 'I am satisfied that this amount' (the net cost of the temporary buildings) 'was paid by the appellant to [the contractor] and accordingly formed part of the cost of the refinery to the appellant.' But his Honour was in that passage only concerned to arrive at the quantum of the payment, and not with relating it, in its nature, to any statutory formula. The actual decision was purely as to the method of allocation.

8

The second case is much more in point; indeed it bears, on its facts, much resemblance to the present. In Sherritt Gordon Mines Ltd. v. The Minister of National Revenue [1968] 2 Ex. C.R. 459, the Exchequer Court of Canada decided that commitment fees paid in respect of development properties during the construction period were part of the capital cost of those properties within section 11(1)(a) of the Income Tax Act and therefore subject to capital cost allowances. In that case interest and the commitment fees were capitalised until the mine, or the refinery, were operating and thereafter charged against operating. His Honour referred in detail to accountancy evidence, some of which supported such capitalisation as accepted practice, some of which did not, and to the arguments of counsel, which were close to those used in the present appeal. Reference was made to U.K. authorities, including Whimster & Co. v. C.I.R. and the Chancery Lane case. His judgment contains this passage:

'However, even if it is found as a fact, as...

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