Commissioners of Inland Revenue v Titaghur Jute Factory Company Ltd
| Jurisdiction | Scotland |
| Judgment Date | 30 December 1977 |
| Docket Number | No. 9 |
| Date | 30 December 1977 |
| Court | Court of Session (Inner House - First Division) |
FIRST DIVISION.
Exchequer Cause.
Revenue—Corporation Tax—Deduction against profits—Deduction of accrued amount from single year's profits in respect of liability to pay gratuities on retirement to existing employees—Liability only arising upon statutory provision coming into force—Whether deduction allowable—Income and Corporation Taxes Act 1970 (cap. 10) secs. 108, 109 and 130.1
A limited liability company was incorporated in Scotland and had its registered office there. It carried on business substantially in the State of West Bengal in India and was subject to the laws of that state and of that country. As a result of the coming into force of a statutory provision in West Bengal with effect from 14th June 1971 the company became obliged to pay retirement gratuity upon the retirement of any employee with more than five years' service based upon his length of service and remuneration. In order to provide for its liability the company in the course of preparing its accounts for 1971 obtained an actuarial valuation of its accrued liability to pay retirement gratuity as a result of the effect of the statutory provision and deducted this valuation from its profits in that year. The Commissioners of Inland Revenue assessed the company for Corporation Tax and refused to allow the deduction as a proper one against profits. The company
appealed to the Special Commissioners who allowed the appeal. The Commissioners appealed to the Court of Session.Held that the amount of the provision was no more than the measure of the liability which had emerged in 1971 and had accrued by the end of that year and that was the measure of the additional liability under which the company had traded in 1971, and thus it was permissible for the company to charge the whole provision against 1971 profits. Owen v. Southern Railway of Peru LimitedELRTAX[1957] A.C. 334; 36 T.C. 602, and Atherton v. British Insulated and Helsby Cables LimitedTAX, 10 T.C. 155, discussed.
The Titaghur Jute Factory Company Limited was incorporated in Scotland in 1883 and had its registered office in Scotland. It was subject to United Kingdom Corporation Tax. The company operated substantially in West Bengal in India and owned several establishments there for the manufacture of jute products. It employed in excess of 6,000 people in West Bengal. It was subject to the laws of the State of West Bengal and of India. On 14th June 1971, following an ordinance of the Governor of West Bengal, an enactment entitled "The West Bengal Employees' Payment of Compulsory Gratuity Act 1971" came into force. The provisions of that Act were subsequently replaced without relevant modification by the "Payment of Gratuities Act 1972." The effect of these provisions was to render the company liable to pay to every employee of not less than five years' continuous service on his superannuation, retirement or resignation or death or total disablement due to accident or disease a gratuity payable at the rate of 15 days' wages for every completed year of service subject to a maximum of 15 months' wages. Prior to the passing of the Act the company had no scheme or agreement in operation in terms of which its employees in West Bengal were entitled to receive any retirement gratuity. Upon being faced with this new liability, the company decided that the best way to deal with it from a commercial point of view was to make an annual provision to meet accruing liability, rather than to charge the actual liability in the company's accounts for the year in which payment was made. There was a heavy liability already accrued the moment the Act came into force, and the company decided to make an initial provision in respect of it as at 31st December 1971. The company instructed an actuary to carry out a valuation of the accrued liability as at 31st December 1971 in respect of the persons in its employ at that date who fell within the provisions of the Act. The actuary was also instructed to make a notional valuation as at 31st December 1970 as if the Act had then been in force, and the difference between the two valuations would indicate the notional accrual during 1971. The actuary submitted a report which assessed the total accrued liability as at 31st December 1971 at £221,619 and the notional accrual during 1971 at £23,547. In framing its profit and loss account for the financial year ended 31st December 1971 the company showed as one of the items to be deducted from its trading profits for the year under "Current Liabilities" a provision for retirement gratuities which was the actuarial valuation of the total accrued liability as at 31st December 1971.
The Commissioners of Inland Revenue assessed the company as liable for Corporation Tax and refused to allow the provision for retirement gratuities as a proper charge against its profits in the year to 31st December 1971.
The company appealed to the commissioners for the special purposes of the Income Taxes Act at a meeting held on 15th March 1976. The decision of the Special Commissioners was in the following terms:—"(1) In its accounts for the year ended 31st December 1971 the company made a provision out of its profits of £221,619, which figured in its balance sheet as at that date as “Current Liabilities … Provision for Retirement Gratuities,” and the question before us is whether or not such sum is a proper charge against the company's profits in computing them for the purpose of corporation tax. The occasion for this provision was (shortly) the coming into force, in August 1971, of the West Bengal Employee's Payment of Compulsory Gratuity Act 1971, and an ordinance of June 1971 of the Governor of West Bengal, which it replaced. (2) Under these laws the company was placed under obligation to pay gratuities to all members of its work-force earning below a certain figure (involving, in 1971, over 6,000 people) on their leaving the company's employ for any reason other than gross misconduct, the amounts of which would depend, inter alia, on salary at date of leaving and on length of service, service prior to 1971 being taken into account. (3) The company's directors thought it prudent to make provision annually to meet this and took advice of an actuary conversant with local conditions as to the proper amount to provide as at 31st December 1971 (gratuities becoming due for payment between June and 31st December being dealt with on a cash basis), and the sum the actuary advised as the total accrued liability as at that date was Rs 42,03,592 (£221,619). The detailed schedules and calculations which the actuary made were not available and the parties reserved for future discussion whether the actuary's final figure might or might not require some adjustment, but we are satisfied on the evidence before us that the basis upon which the actuary arrived at his conclusion does (in the words of Lord Radcliffe in Owen v. Southern Railway of PeruTAX, 36 T.C. 602 at p. 644) “make it possible to supply a figure reliable enough for the purpose” of determining what is the proper charge against profits, if any charge is allowable as a matter of law. (4) The provision which the company made is heavily weighted by the factor of past service of the individual employees, and the Crown contended that a large part of it (conveniently identifiable because of the way the actuary's report was drawn) was a capital provision; we were referred to theAtherton v. British Insulated and Helsby CablesTAX (10 T.C. 155) line of cases. To our minds this is not a correct conclusion on the facts. In 1971 the company was confronted by a liability, which it could not escape and which might crystallise at any time, to make to each employee a payment to be calculated by reference (inter alia) to salary and past service. Once the relevant law became effective the liability arose because, and only because, it employed him and paid him his current salary at the critical time in 1971, and it employed him, of course, as part of the work-force engaged in the every-day operation of its trade. It employed a work-force in 1971 and for reasons beyond its control the cost of employing it, in 1971, was heavily increased. The company did not, as we see it, provide any asset or advantage of enduring benefit; it made a provision for a liability which came into being as a result of that year's trading. If the law permits a provision on an accruals basis to be charged against profits at all, then it...
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