Emmerson v Computer Time International Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE BUCKLEY,LORD JUSTICE ORR,LORD JUSTICE GOFF |
| Judgment Date | 11 February 1977 |
| Judgment citation (vLex) | [1977] EWCA Civ J0211-2 |
| Docket Number | 1974 No. 67 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 February 1977 |
[1977] EWCA Civ J0211-2
In The Supreme Court of Judicature
Court of Appeal
On Appeal from The High Court of Justice
Chancery Division
(Revenue Paper)
(Mr. Justice Fox)
Lord Justice Buckley
Lord Justice Orr
and
Lord Justice Goff
MR. P.G. WHITEMAN (instructed by Messrs. Kingsley, Napley & Co., Solicitors. London) appeared on behalf of the Respondent (Appellant).
MR. P.L. GIBSON (instructed by the Solicitor of Inland Revenue, London) appeared on behalf of the Appellant (Respondent).
I have asked Lord Justice Orr to deliver the first judgment.
This is an appeal by a company in liquidation against an order made by Mr. Justice Fox on 18th December 1975, whereby, on a Case Stated by the Special Commissioners and reversing their determination, he held that certain payments made by the appellant company are not deductible in computing the company's chargeable gains arising on a disposal of certain leaseholds.
The company, Computer Time International Limited, was incorporated in 1969 and carried on a business of hiring computer time, but that business was not successful and on 24th April 1970 the company ceased trading and went into voluntary liquidation.
By an underlease dated 23rd June 1969 the company had become tenant of certain suites of rooms on the second floor of 214, Oxford Street, London, for a term of 21 years from 25th March 1969 at a yearly rental of £19,000 payable quarterly in advance, together with certain additional payments in respect of costs of insurance, heating of the premises and the provision of services; the underlease also containing a covenant by the company not to assign without the written consent of the landlord and reserving to the landlord a right of re-entry if the company should enter into liquidation, whether voluntary or compulsory, except for the purposes of amalgamation or reconstruction, or if the rent should be in arrears for 21 days, whether legally demanded or not.
The company had also entered into occupation of suites on the first floor of the same premises under an agreement with the same landlord that they should pay a rent of £16,000 a year from 8th March 1970 for a 21 year term, and with the consent of the landlord they had spent considerable sums in making alterations to those suites.
It is common ground that up to the date of liquidation no payments had been made by the appellants in respect of the rents due in March 1970 of both sets of suites; and although no lease of the first floor had been granted, it is agreed between the appellants and the Revenue that payments subsequently made by the liquidator in respect of the first floor suites should be treated for the purposes of this case in the same way as the payments made by them in respect of the second floor suites.
The Statement of Affairs of the company as at 31st March 1970 showed unsecured creditors with debts totalling some £144,000 and an estimated surplus of only some £53,000 available for those creditors.
On 30th April 1970 the liquidator wrote to the landlord asking for a licence to assign the tenancies on both floors, for which he expected to be able to obtain some £90,000, and the landlord replied on 4th May, 1970, pointing out that the proposed tenancy of the first floor suites had been subject to completion of a formal lease, but continuing as follows: "Having said this however we must hasten to assure you that we do not seek to profit by the misfortunes of this company and intend only to avoid any loss to ourselves as a result thereof. We would thus be quite prepared to grant a lease of the first floor suites to a sound tenant nominated by you on exactly the same terms negotiated with Computer Time with of course the same rent commencement date. Similarly we would be prepared to agree an assignment of the second floor lease, to either the same party or another approved assignee, subject to all outstanding arrears being discharged".
As a result of this letter it was agreed between the landlord and the liquidator that an underlease of the first floor suites should be granted directly by the landlord to a company named Diners Club Limited, found by the liquidator as a prospectivepurchaser of the company's interest in those premises; and by a licence dated 1st July 1970 the landlords also authorised the liquidator to assign the company's interest in the second floor suites to the British Oxygen Company Limited.
In consequence an assignment of the lease of the second floor suites to the British Oxygen Company Limited was completed on 24th June 1970, when the liquidator received from that company a consideration of £71,155 and paid to the landlord by way of rent, insurance and heating and service charges from 25th March 1970, a sum of some £9,141; and on 3rd July 1970 the liquidator received in respect of the first floor suites £22,000 from the Diners Club Limited, and on the same date paid to the landlord by way of rent, insurance and heating and service charges from 8th March 1970 a sum of £5,548.
On a time apportionment of these sums calculated by the liquidator, £6,131 was calculated as attributable to rent, insurance and heating and service charges for the period from the date of the liquidation to the respective dates of disposal of the premises.
The issue which arises in the present proceedings is whether, as the appellant claims, but the Inland Revenue dispute, this sum of £6,131 is under the relevant fiscal provisions an allowable deduction in computing the appellants' capital gains arising from the disposal of their interests in the two premises.
The relevant fiscal provisions are contained in paragraphs 4 and 5 of the Sixth Schedule to the Finance Act 1965 and, so far as material, provide as follows: Paragraph 4, (1): "Subject to the following provisions of this Schedule, the sums allowable as a deduction from the consideration in the computation under this Schedule of the gain accruing to a person on the disposal of an asset shall be restricted to" (- I omit (a) -) "(b) The amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of theasset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset".
Paragraph 5 reads: "(1) There shall be excluded from the sums allowable under the last foregoing paragraph as a deduction in the computation under this Schedule any expenditure allowable as a deduction in computing the profits or gains or losses of a trade, profession or vocation for the purposes of income tax or allowable as a deduction in computing any other income or profits or gains or losses for the purposes of the Income Tax Acts and any expenditure which, although not so allowable as a deduction in computing any losses, would be so allowable but for an insufficiency of income or profits or gains; and this sub-paragraph applies irrespective of whether effect is or would be given to the deduction in computing the amount of tax chargeable or by discharge of repayment of tax or in any other way.
"(2) Without prejudice to the provisions of sub-paragraph (1) above there shall be excluded from the sums allowable under the last foregoing paragraph as a deduction in the computation under this Schedule any expenditure which, if the assets, or all the assets to which the computation relates, were, and had at all times been, held or used as part of the fixed capital of a trade the profits or gains of which were (irrespective of whether the person making the disposal is a company or not) chargeable to income tax would be allowable as a deduction in computing the profits or gains or losses of the trade for the purposes of income tax".
It is clear, and has not been in dispute, that the effect of these provisions is that the determination whether a given expenditure constitutes an allowable deduction may involve two stages. The first question is whether it falls withinsubparagraph 4 (1) (b). If it does not, it fails to qualify, but if it does it is necessary to decide whether it is disqualified as a deduction either by subparagraph (1) or subparagraph (2) of paragraph 5, each of which has the effect that certain categories of expenditure falling within subparagraph 4 (1) (b) are to be excluded as allowable deductions.
It is also to be noted that to qualify under subparagraph 4 (1) (b) an expenditure must have been wholly and exclusively incurred by or on behalf of a person on an asset either for the purpose of enhancing the value of the asset or in establishing, preserving or defending his title to, or a right over, the asset.
In the present case, as to the question arising under subparagraph 4 (1) (b), the Special Commissioners, on the evidence which I have summarised, were satisfied that the liquidator's purpose in entering into an agreement with the landlord as respects each of the premises was to obtain the right to assign the company's interest freed from the threat of re-entry by the landlord, and they concluded that in each case the benefits obtained by the liquidator enhanced the value of the company's interests in the premises. As to the second stage of the enquiry, involving subparagraphs (1) and (2) of paragraph 5, the Crown had advanced no argument under subparagraph (1); and as respects subparagraph (2) the Commissioners concluded that as respects both premises the payment made by the liquidator was a capital payment inasmuch as in each case it enhanced the value of the company's holding, and was not therefore a...
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Emmerson (HM Inspector of Taxes) v Computer Time International Ltd ((in Liquidation))
...Revenue; Kingsley, Napley & Co.] 1 Reported (Ch.D.) [1976] 1 W.L.R. 749; [1976] 2 All E.R. 131; [1976] S.T.C. 111; 120 S.J. 99; (C.A.) [1977] 1 W.L.R. 734; [1977] 2 All E.R. 545; [1977] S.T.C. 170; 121 S.J. 224. 1 Not included in the present print. 1 [1969] 1 W.L.R. 1241. 45 T.C. 519 2 [196......