Creed v H. & M. Levinson Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 06 March 1981 |
| Date | 06 March 1981 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Corporation tax - Schedule D Case I - Computation of trading profits - Payment of lump sum to taxpayer company after termination of supply contract - Whether trading receipt.
The taxpayer Company made hats. It supplied a substantial part of its total production to a major chain store (M). In April 1961 M told the Company that it intended to stop selling hats at the end of the 1961 winter season, but asked it to go on making hats in the meanwhile so that the millinery trade should not get wind of M's intentions. In May 1961 the directors of the Company met M's representatives and expressed their willingness to continue making hats. M's representatives offered to assist the Company with new forms of production in the field of light clothing which the Company had not previously undertaken. The Company accepted and, subsequently, purchased and installed machinery and engaged a manager and other staff approved by M.
After a year or so, M decided not to purchase further goods from the Company. The Company in 1965 issued a writ claiming damages for breach of contract by M in failing to purchase sufficient light goods to make up for the loss of the millinery contract. The action was eventually settled in January 1969 after amendment of the claim upon payment of £22,500 to the Company by M expressed to be for loss of goodwill.
Before the General Commissioners the Company claimed that the payment was either for the loss of goodwill of the millinery business and therefore a capital receipt or, alternatively, ex gratia. The Inspector contended that in the circumstances the payment, made after contested legal proceedings, could not possibly be regarded as an ex gratia payment and was a revenue receipt as a payment in respect of the cancellation of an ordinary trade contract.
The Commissioners held that the payment was a capital receipt. The Crown appealed.
Held, in the Chancery Division, allowing the Crown's appeal,
1 the payment was a settlement by way of compromise of a genuinely disputed claim and, accordingly, could not be an ex gratia receipt:
2 the payment was not made by way of compensation for the cancellation of an existing business but was made to compensate for the loss of opportunity to extend its business. Accordingly, the Commissioners were wrong in deciding that the payment was a capital receipt. Van Den Berghs, Ltd. v. Clark 19 TC 390; [1935] AC 431, Barr, Crombie & Co., Ltd. v. Commissioners of Inland Revenue26 TC 406; 1945 SC 271, John Mills Productions Ltd. v. Mathias 44 TC 441 applied.
Stated by the Commissioners for the General Purposes of the Income Tax for the Division of St. Pancras in the Greater London Borough of Camden under the Taxes Management Act 1970, s 56, for the opinion of the High Court of Justice.
(2) At a meeting held by the said Commissioners on 21 and 22 October 1976 and 28 January 1977 at Friends House, Euston Road, London N.W.1, H. & M. Levinson Ltd. whose registered office is at 29/31 Euston Road, N.W.1, hereinafter called "the company" appealed against an assessment to corporation tax for the accounting period ended 31 August 1969 made in the amount of £1,000.
(3) The question for our determination was whether a payment of £22,500 received by the company from Marks & Spencer Ltd. (hereinafter called M & S) was a capital receipt or, alternatively, that the £22,500 was an ex gratia payment by M & S outside the scope of corporation tax.
(4) The company was represented at the hearing of the appeal by Mr. S.R. Gaynor of the firm of B & E Backhouse-chartered accountants, accountants to the company. The Inspector of Taxes hereinafter called "the Inspector" appeared on his own behalf.
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(5) No oral evidence was given at the hearing of the appeal. The following documents were produced and admitted:
(i) Agreed statement of facts (exhibit A).
(ii) The writ issued on 12 August 1965.
(iii) Statement of claim dated 12 August 1965 (exhibit B).
(iv) Request for further and better particulars of the statement of claim.
(v) Further and better particulars of the statement of claim (exhibit C).
(vi) Defence and counterclaim (exhibit D).
(vii) Reply and defence to counterclaim.
(viii) Order for directions.
(ix) Consent order dated 31 January 1969 (exhibit E).
(x) Amended statement of claim (exhibit F).
(xi) A copy of the company's accounts for the year ended 31 August 1969 (exhibit G).
(xii) An analysis of the company's turnover based on figures prepared by the company's auditors (exhibit H).
(xiii) A bundle of correspondence (exhibit I).
(6) Such of the above documents as are not made exhibits to this case are available for the use of the Court if so desired.
(7) The facts found by us were as follows:
(a) The company was incorporated on 4 July 1952 and on 1 September 1952 succeeded to the millinery trade previously carried on in partnership by Messrs. H. & M. Levinson and at all material times was a manufacturer and finisher of millinery. For three years it produced articles of light clothing. M & S are, and at all material times were, a chain store selling articles of clothing which formerly included millinery.
(b) Some time after commencing trade the company began to manufacture and/or finish articles of millinery for M & S and continued to do so until November 1961. Throughout this period M & S took a significant proportion of the company's total production as appears from the analysis (exhibit H) which is based upon figures supplied to the Inspector by the company's previous accountants.
(c) At about the beginning of April 1961 the company was informed by M & S that they intended to cease the sale of millinery and that as a consequence, they would not be making further purchases of millinery from the company after the winter season of 1961.
(d) M & S requested the company to keep as confidential the proposed cessation of millinery sales and requested the company to continue production of millinery for M & S so as to keep the proposed cessation of sales from the notice of the millinery trade.
(e) On or about 18 May 1961, the directors of the company met representatives of M & S and expressed their willingness to continue to manufacture millinery for M & S. The M & S representatives offered to assist the company with new forms of production in the field of light clothing which the company had not previously undertaken. The company accepted, and purchased and installed machinery and engaged a manager and other staff approved by M & S. Thereafter, the company continued to manufacture millinery for M & S and kept to themselves M & S's intentions regarding the millinery trade.
(f) It was alleged by the company that M & S in breach of contract, failed to provide the company with sufficient work on light clothing to utilise the full capacity of the machines and staff obtained as aforesaid and the said machinery and staff could not be maintained by the company.
(8) It was contended on behalf of the Inspector of Taxes that:
(2) the payment was not a voluntary payment by M & S to the company. There had been a contested action in which M & S had denied the company's allegations, but eventually compromised by making a payment in settlement;
(3) the payment by M & S to the company should be seen as being a revenue receipt in the company's hands for the following reasons: (a) the only evidence before the Commissioners as to the nature and amount of the company's dealings with M & S was the former's assertions as set out in the statement of claim (exhibit B). Further and better particulars (exhibit C) and the amended statement of claim (exhibit F) which last had in any event not been delivered until after the action had been settled. Further the assertions made while the case had been under way had been denied by M & S in their defence (exhibit D); (b) the making of contracts, such as that with M & S was part of the business of the company, and the cancellation of the M & S contract in...
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Creed (HM Inspector of Taxes) v H. & M. Levinson Ltd
...capital receipt. I must therefore allow this appeal. Appeal allowed, with costs. [Solicitor:-Solicitor of the Inland Revenue.] 1 Reported [1981] STC 486. 1 [1935] AC 1 1945 SC 271. 2 [1965] 1 WLR 873. ...