Commissioners of Inland Revenue v Fleming & Company (Machinery)Ltd
| Jurisdiction | Scotland |
| Judgment Date | 19 December 1951 |
| Date | 19 December 1951 |
| Court | Court of Session (Inner House - First Division) |
COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Profits of trade - Compensation received by agents for loss of agency.
The Company carried on business as manufacturers' agents and general merchants. Since before 1903 the Company and its predecessors had been sole selling agents in Scotland for certain products of a manufacturer but in 1948 at the instance of the manufacturer the agency was terminated by an agreement under which the Company received inter alia a payment as compensation for the loss of the agency.
On appeal before the General Commissioners it was contended for the Company that the compensation was a capital receipt and the Commissioners allowed the appeal.
Held, that the compensation was a trading receipt.
Kelsall Parsons & Co. v. Commissioners of Inland Revenue,21 T.C. 608, followed.
Stated for the opinion of the Court of Session, as the Court of Exchequer in Scotland, under the Income Tax Act, 1918, Section 149.
A a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of the City of Glasgow, held at 280 George Street, Glasgow, on 5th March, 1951, Fleming & Co. (Machinery), Ltd. of 31 Robertson Street, Glasgow, C.2 (hereinafter called "the Company") appealed against an estimated assessment to Income Tax under Schedule D of the Income Tax Act, 1918, for the year ended 5th April, 1950, on the sum of £4,000 in respect of profits arising from its business as agents and merchants.
The Commissioners who heard the appeal were informed by both parties that the amount of the liability to Income Tax had been agreed, subject to one point, namely the proper treatment for Income Tax purposes of a sum of £5,320 received by the Company during the year ended 31st December, 1948 as compencsation for loss of an agency for Imperial Chemical Industries, Ltd.
I. The following facts were admitted or proved:
(2) The Company was incorporated under the Companies Act, 1929, and has its registered office at 31, Robertson Street, Glasgow, C.2. The Company was formed on 7th February, 1941, inter alia to acquire the business formerly carried on by the firm of Fleming & Co. (hereinafter called "the Firm") at the said address.
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(3) The Company carries on the business of agents and merchants engaged in the sale of machinery, explosives, etc.
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(4) The agreed profits chargeable to Income Tax for the year ended 5th April, 1950 are as follows:
(a) if the sum of £5,320 is not assessable to tax, £204 less £81 wear and tear;
(b) if the sum of £5,320 is assessable to tax, £4,676 less £81 wear and tear.
(5) The Firm held the sole selling agency for Scotland for explosives from the Imperial Chemical Industries, Ltd. and its predecessors from 1903 or earlier. A letter dated 1st December, 1903 was produced re-appointing the Firm sole agents in Scotland, a copy of which (marked "A") is attached to and forms part of this Case(1) . This letter did not specify the period of appointment as agents and made no provision for compensation on cessation of the agency. The arrangement embodied in the letter, with slight immaterial modifications, continued until 31st May, 1948, when it terminated. The terms of the termination were incorporated in an agreement between the Company and its directors and Imperial Chemical Industries, Ltd. dated 18th June, 1948, under which the agency ceased on the following terms. A copy of this agreement (marked "B") is attached to and forms part of this Case(1).
(a) By clause 1 of the agreement, the agency was terminated as from 31st May, 1948, and the Company received a lump sum payment of £5,320 as compensation for the loss of the agency.
(b) By clause 2, the Company and its directors received the sum of £590. This payment was expressed to be in respect of a restrictive covenant under which the Company and the directors were barred for a period of ten years from 31st May, 1948 from entering the explosives industry in Great Britain, Northern Ireland, Isle of Man or in Eire as sellers or agents for the sale of explosives (other than sporting cartridges) or as manufacturers.
(c) By clause 3, the Company received the sum of £800 for an agreement to assign leases of certain premises which the Company occupied.
(6) The sum of £5,320 mentioned in paragraph (4) (a) was arrived at by taking twice the commission received by the Company from Imperial Chemical Industries, Ltd. in 1946, namely £2,955 (in all £5,910) and deducting £590 (or approximately 10 per cent.) being the sum paid for the restrictive covenant as aforesaid.
(7) A statement was submitted by the Company covering nine years from 1941 to 1949 inclusive as to which Mr. John Slater, managing director of the Company, gave evidence. This statement showed (a) that in addition to the agency for Imperial Chemical Industries, Ltd. the Company held during a part of the period eight other agencies and during part of the period seven other agencies; (b) that the gross commissions on agencies in each year throughout the period greatly exceeded the Company's gross profits from merchanting; (c) that the commission received by the Company from the agency of Imperial Chemical Industries, Ltd. constituted from 30 per cent. to 45 per cent. of the total agency commissions received by them; (d) that over the seven complete years to 31st December, 1947, the average commissions received from Imperial Chemical Industries, Ltd. amounted to £2,677 per annum. A copy of this statement (marked "C") is attached to and forms part of this Case(1).
(8) It was stated by Mr. Slater in evidence that the Imperial Chemical Industries, Ltd. agency was worked by all the directors of the Company, that no special sales organisation or staff was employed exclusively for it and that there was no reduction in staff following the loss of the agency.
(9) A statement was submitted by the Inspector of Taxes showing the Company's sales of goods and also other particulars extracted from the Company's accounts for the years 1941 to 1948. A copy of this statement (marked "D") is attached to and forms part of this Case(1).
(10) It was agreed between the parties that no part of the said sums of £590 and £800 received by the Company under the said Agreement, fell to be taken into account in computing the profits of the Company chargeable to Income Tax.
II. It was contended on behalf of the Company-
(2) That they had lost a very large part of their business as shown by the figures, and that in view of the restrictive covenant for ten years they were unable to replace it. This case, therefore, fell to be distinguished from the case where the loss of an agency was a mere incident in the ordinary course of business, and it was possible to replace it with some other agency. For practical purposes a substantial portion of the Company's business could be regarded as gone for good. The sum of £5,320 paid as consideration for termination of the agency was therefore properly to be regarded as capital.
(3) That the circumstances fell to be distinguished from those in the case of Kelsall Parsons & Co. v. Commissioners of Inland Revenue, 1938 S.C. 238; 21 T.C. 608, where the agency had one year to run, and the sum received by the agent was treated as being equivalent to that year's...
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