Commissioners of Inland Revenue v Warnes and Company

CASE stated under the Taxes Management Act, 1880 (43 & 44 Vict.c. 19), s. 59, and the Finance (No. 2) Act, 1915 (5 & 6 Geo. 5,c. 89), s. 45, sub.-s. 5, by the commissioners for the general purposes of the Income Tax Acts for the division of Hull.

At a meeting of the commissioners on May 14, 1917, the respondents, Messrs. E. C. Warnes & Co., Ld., appealed against two several assessments to excess profits duty amounting to 973l. for the accounting period ending June 30. 1915, and to 592l. 4s. for the accounting period ending June 30, 1916, made on them by the Commissioners of Inland Revenue in respect of their profits from the business of oil merchants carried on by them at Hull and elsewhere.

The ground of appeal was that in arriving at the profits of the business for the purpose of the assessments a penalty of 2,000l., imposed upon the respondents in Attorney-General v. E. C. Warnes & Co., Ld., heard in the King's Bench Division on April 10, 1916, and costs amounting to 560l. 18s. 10d. incurred by them in relation thereto, should be deducted under Rule 3, Case 1, Sched. (D) of the Income Tax Act, 1842, s. 100, on the ground that the penalty and costs were a loss arising out of and incidental to the trade of the respondents and, therefore, deductible.

The respondents, who carried on the business of oil exporters, were sued for a penalty in the King's Bench Division on an information exhibited by the Attorney-General under the provisions of the Customs Consolidation Act, 1876 (39 & 40 Vict.c. 36), s. 139, as extended by the Customs (War Powers) Act, 1915, s. 5, sub.-s. 1^F1, for an offence alleged against them in breach of certain orders and proclamations relating to the requirements of the Board of Customs and Excise with respect to a consignment of oil shipped by the respondents to Norway. The action was settled in court by consent on the agreement by the respondents to pay a mitigated penalty of 2000l., that sum to cover the costs of the Crown and on all imputations as to the respondents' moral culpability being withdrawn, and on it being made clear to the public that there was no intention on the part of the respondents from the beginning to the end of the transaction to trade with the enemy, nor had they by connivance or consent been taking part in trading with the enemy, but had only been culpable of carelessness. Judgment in favour of the Crown was accordingly entered against the respondents in the mitigated penalty of 2000l. to cover the costs of the Crown. The penalty of 2000l. was in due course paid to the Crown.

In defending the proceedings, the respondents incurred legal costs amounting to 560l. 18s. 10d. The assessments appealed against were based on the profits made by the respondents without deduction of the sums of 2000l. and 560l. 18s. 10d. The transaction in respect of which this penalty was imposed took place in the first-mentioned accounting period, but the penalty and costs were debited as an expense in the respondent's accounts in arriving at the profits of the second accounting period when the action had been heard and determined.

The surveyor of taxes, on behalf of the Crown, contended that:—

(a) This was not a loss connected with or arising out of the trade or business of the respondents within the meaning of the 3rd Rule, Case 1, Sched. (D) of the Income Tax Act, 1842, s. 100.

(b) The amounts paid as penalty and costs could not be regarded as necessary expenses of carrying on the trade or business of the respondents, and were not proper deductions in arriving at the profits of the respondents' trade or business for the purpose of excess profits duty.

He cited the Customs (War Powers) Act, 1915, s. 5, sub.-s. 1, and Strong & Co. v. Woodifield^F2 in support of his case.

On behalf of the...