Collins & Sons v Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 28 November 1924 |
| Date | 28 November 1924 |
| Docket Number | No. 19. |
| Court | Court of Session |
Lord President (Clyde), Lord Skerrington, Lord Cullen, Lord Sands.
RevenueIncome taxExcess profits dutyComputation of profitsDeductionsLossesFall in value of purchases of raw materialsEstimated future lossFinance (No. 2) Act, 1915 (5 and 6 Geo. V. cap. 89), sec. 40 (1), Fourth Schedule, Part I., Paragraph 1.
In calculating the profits of an ordinary commercial undertaking for the purpose of income tax or excess profits duty it is not permissible to make a deduction in respect of loss which has not actually been incurred during the accounting period but which is apprehended in the future, even if the loss appears to be inevitable and the circumstances are such that a prudent man of business would set aside a sum to reserve in order to meet the anticipated loss when incurred.
In estimating the amount of their profits for the purposes of excess profits duty a firm of papermakers claimed to be entitled to deduct as a loss the difference between the contract prices at which they had purchased supplies of esparto grass and sulphite pulp for future delivery and the market prices ruling on the last day of the accounting period, on the ground that, owing to depression of trade and an unprecedented fall in the price of these commodities, the firm were faced with inevitable loss upon their purchases. The purchases amounted in all to 3500 tons, and of these only some 350 tons had been delivered during the accounting period.
Held that the deduction was inadmissible, in respect that it was an attempt to set against the ascertained profits for the accounting period a loss which, even if inevitable and such as a prudent man of business would provide against by an appropriation to reserve, was uncertain in amount and had not been actually incurred during the accounting period.
Sun Insurance Office v. ClarkELR, [1912] A. C. 443, distinguished.
At a meeting of the Commissioners for the Special Purposes of the income Tax Acts, held at Glasgow on 16th November 1923, Edward Collins & Sons, Limited, Kelvindale, Maryhill, Glasgow, appealed, under the Finance Act, 1922, section 35, against a determination of the Commissioners of Inland Revenue as to the amount of the deficiency or loss in respect of which the Company was entitled to repayment of excess profits duty for the accounting period of four months ended 30th April 1921.*
The Commissioners refused the appeal, and, at the request of the Company, stated a case for appeal.
The case set forth:
I. The following facts were admitted or proved:(1) The accounting period in question is the last accounting period of the Company. (2) On 5th January 1921 the Company, which is a paper manufacturing company, entered into a contract with La Socit Commerciale de l'Afrique du Nord, Tunis, for a supply of 2000 tons of esparto grass. The deliveries of the grass under this contract were to take place during the year 1921 as mutually arranged. The price was 10, 15s. a ton. The contract is hereinafter referred to as contract A. (3) On 16th February 1920 the Company entered into a contract with
Messrs Greaker of Christiania, Norway, for a supply of 1000 tons of bleaching sulphite pulp. The deliveries of the pulp were to take place between November 1920 and June 1921. The price was 775 Norwegian kroner a ton. This contract is hereinafter referred to as contract B. (4) On 17th March 1920 the Company entered into a contract with the same Messrs Greaker for a supply of 500 tons of Swan brand bleaching sulphite pulp, deliveries to take place between May and December 1921, at a price of 950 kroner per ton. This contract is hereinafter referred to as contract C. (5) Messrs Andrews & Co., Limited, of Queen Victoria Street, London, were the agents employed by the foreign firms in each case to negotiate and make the said contracts A, B, and C. (6) Before and in the course of the accounting period it became clear to the Company that, owing to the great depression in trade and fall in prices, it had contracted for the above supplies of esparto grass and sulphite at prices far in excess of the prices ruling or likely to be ruling during the periods fixed for delivery and in excess of its requirements owing to the said depression in trade. (7) In the case of contract A the Company did not arrange to take nor did it take any actual delivery of the esparto grass during the accounting period. The Company entered into correspondence with Andrews & Co., Limited, refusing from time to time to take any of the grass in, and endeavouring to obtain some concession. On or about the 21st April 1921 the Company received upon its own request a document which is called a pro forma invoice for the whole of the esparto grass at the full contract price. (8) In the case of contract B, 350 tons of sulphite had actually been delivered before the end of the accounting period and 650 tons remained undelivered. In the case of contract C, no goods were delivered or contracted to be delivered before the end of the accounting period. In both cases upon the request of the Company pro forma invoices were received from Messrs Greaker sometime after 30th April 1921, but dated 30th April 1921 and marked pro forma. (10) The books of the Company were made up some time after 30th April 1921 to show the pro forma invoices issued under contracts A, B, and C as follows:[The entries and figures were set forth]. The effect of these entries was to charge as a loss the sum of 18,320, 9s. 5d., being the difference between the prices entered in the invoices and the current market values of the goods. (11) The fall in the value of esparto grass and sulphite between the dates of the making of the contracts A, B, and C and 30th April 1921 was quite exceptional and unusual as compared with ordinary fluctuations over similar periods in the value of those commodities.
The case also stated:
II. It was contended on behalf of the Company:(1) That the 2000 tons of esparto and 1150 tons of sulphite must be treated as stocks of goods belonging to the Company on 30th April 1921; and (2) that, alternatively, the Company was entitled to charge as a loss the estimated loss on the contracts. Reference was made to the case of J. P. Hall & Co. v. Commissioners of Inland RevenueELRUNK, [1921] 3 K. B. 152, 125 L. T. R. 720.
III. The Inspector of Taxes on behalf of the Commissioners of Inland Revenue admitted that in commercial practice it was right for the Company to make a reserve against contingent loss on the contracts, but claimed that no allowance therefor could be made in calculating the profits of the accounting period.
The case further set forth:
IV. We, the Commissioners who heard the appeal, gave our determination in the following terms:We have no hesitation in deciding against the...
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