European Investment Trust Company Ltd v Jackson

JurisdictionEngland & Wales
Judgment Date16 November 1932
Year1931
Date16 November 1932
CourtCourt of Appeal

NO. 881.-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).-

COURT OF APPEAL.-

THE EUROPEAN INVESTMENT TRUST COMPANY
LIMITED
and
JACKSON (H.M. INSPECTOR OF TAXES)

Income Tax, Schedule D - Deduction - Company financing hirepurchase transactions - Interest on advances from American finance company - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Rules applicable to Cases I and II of Schedule D, Rule 3.

The Appellant Company was incorporated for the purpose of carrying on the business of finance in all its branches with a capital of £1,000, of which £904 was paid up, £900 of the capital being held by an American finance company. Its main business was the advancing of money for the acquisition of motor cars on the hire purchase system. The Company bought the car in the first instance. The customer paid a deposit and entered into an agreement to hire the car from the Company, paying instalments which, in the aggregate, amounted to the balance of the purchase money plus an additional sum which represented the Company's gross profit on the transaction.

In order to finance the earlier transactions of the Appellant Company, the American company advanced an initial sum upon which interest was payable at a fixed rate per cent. per annum; as to this interest, no question arose. Further advances were made by the American company, as and when required, to finance fresh hire purchase transactions and interest on these advances was paid by reference to the amounts outstanding from day to day at rates fluctuating with the American bank rate. The advances were repaid from an account into which customers' instalments were paid.

The Appellant Company claimed that the interest on the additional advances was an admissible deduction in computing its profits for Income Tax purposes. The General Commissioners, on appeal, refused the deduction, holding that the monies advanced by the American company were monies employed or intended to be employed as capital in the trade.

Held, that there was evidence upon which the Commissioners could arrive at their conclusion of fact and that they had not misdirected themselves in law.

CASE

Stated by the Commissioners for the General Purposes of the Income Tax Acts for the Parish of St. James, in the City of Westminster, under Section 149 of the Income Tax Act, 1918, for the opinion of the King's Bench Division of the High Court of Justice.

1. At meetings of the Commissioners for the General Purposes of the Income Tax Acts for the Parish of St. James, in the City of Westminster, held at 187, Piccadilly, in the City of Westminster, on the 20th day of December, 1929, and the 21st day of January, 1930, the European Investment Trust Company, Limited (herein-after called "the Company"), appealed against an assessment under Schedule D of the Income Tax Acts for the year 1927-28 in the sum of £1,835 in respect of the business of financiers carried on by the Company.

2. At a meeting of the said Commissioners held at 187, Piccadilly, in the City of Westminster, on the 14th day of March, 1930, the Company appealed against assessments to Income Tax under Schedule D of the Income Tax Acts for the years 1928-29 and 1929-30 in the respective amounts of £13,814, less £20 wear and tear allowance, and £55,984, less £36 wear and tear allowance, in order that these assessments could be included in the Case for the opinion of the High Court relating to the assessment for the year 1927-28. It was agreed that, apart altogether from the question in dispute, the assessments for the years 1928-29 and 1929-30 should be reduced respectively to £7,426 and £49,020.

3. The question for the determination of the Commissioners for General Purposes upon these appeals was whether certain payments of interest by the Company to the Finance Corporation of America, included in the accounts of the Company for the years ended 31st December, 1926, 31st December, 1927, and 31st December, 1928, respectively, were allowable deductions in arriving at the profits of the Company for the purposes of Income Tax for the years of assessment under appeal.

4. The Company was incorporated on the 21st day of December, 1925, for the purposes of carrying on the business of finance in all its branches, including the advancement of money on securities. Its main business is the advancing of moneys for the acquisition of motor cars on the hire purchase system. The capital of the Company during the periods in question was £1,000, of which £904 was paid up. £900 of the capital was held by the Finance Corporation of America.

5. The method of business was as follows: when a customer desired to acquire a car, the Company purchased the car, and the customer paid to the Company a minimum of one-fourth of the purchase price in the case of a new car, and one-third in the case of a second-hand car. The customer entered into an agreement to hire the car, paying over a period, usually of twelve months, a monthly rental; and the total of the monthly rental payments amounted to the balance of the purchase money, plus an additional sum, which usually worked out at about 71/2 per cent. on the purchase price, and which was the Company's gross profit on the transaction.

Under the terms of the arrangement with a purchaser, the car remained the property of the Company, but an option was given to the customer to purchase the car for the sum of five shillings when all the instalments had been duly paid.

6. In order to finance the earlier transactions of the Company, the Finance Corporation of America made an initial advance to the Company of £10,296, upon which interest is paid at the fixed rate of 6 per cent. per annum. No question arises in this case with regard to this interest.

7. Additional advances were made to the Company by the Finance Corporation of America as and when required.

As each transaction was entered into between the Company and a purchaser, a cheque was drawn by the Company, in payment of the purchase price of the motor car, on its account with the London branch of the Equitable Trust Company of New York (hereinafter called "the Company's bank"), and the cheque was honoured by the bank upon deposit with it of the hire purchase agreement.

The Company notified the Finance Corporation of America from time to time of its transactions and of its consequent cash requirements, and the Finance Corporation of America remitted funds to the credit of the Company's deposit account with the Company's bank. These remittances roughly corresponded to the amounts from time to time paid out by the Company in respect of its hire purchase transactions.

Interest was charged to the Company by the Finance Corporation of America on these advances at a rate fluctuating in accordance with the American bank rate. In the monthly accounts between the Company and the Finance Corporation of America, the interest on these advances, which were alleged by the Company to be short loans, was, for convenience, calculated at the rate of 51/4 per cent., but it was adjusted later and was ultimately calculated and paid on the amounts outstanding from day to day.

As each customer of the Company paid his instalments in accordance with the terms of his hire purchase agreement with the Company, the amounts were paid into a "Matured Note Account" with the Company's bank and, out of this account, the Company's bank repaid the advances (other than the initial advance referred to in paragraph 6 hereof) made by the Finance Corporation of America to the Company.

The amounts owing by the Company to the Finance Corporation of America in respect of these advances at the 31st December, 1926, 1927, and 1928, totalled, respectively, £95,273, £347,575 and £447,965.

8. Copies of the accounts of the Company for the three years ended the 31st December, 1926, 31st December, 1927, and 31st December, 1928, respectively, were put in and are annexed hereto and form part of this Case(1).

9. The Finance Corporation of America borrowed the money which it advanced to the Company from American banks, and it paid interest on the advances in the same way as on an ordinary overdraft.

10. It was contended on behalf of the Company (inter alia):

  1. (a) that the Company was a finance company and dealt in money;

  2. (b) that the interest paid by the Company to the Finance Corporation of America was deductible as an outgoing for the purposes of the business in computing the liability of the Company to assessment under Schedule D;

  3. (c) that the advances by the Finance Corporation of America were short loans;

  4. (d) that the sums shewn in the accounts as advanced by the Finance Corporation of America were not sums employed as capital within the meaning of the 3rd Rule of Cases I and II of the Rules applicable to Schedule D of the Income Tax Act, 1918.

11. It was contended on behalf of the Crown (inter alia):

  1. (a) that the sums shewn in the accounts as advanced by the Finance Corporation of America to the Company were permanent financial resources in the nature of capital employed in the business within the meaning of the 3rd Rule of Cases I and II of Schedule D of the Income Tax Act, 1918;

  2. (b) that the relations between the Company and the Finance Corporation of America were not those of a banker and customer;

  3. (c) that the payments sought to be deducted were payments of annual interest out of the profits or gains of the Company;

  4. (d) that the interest paid to the Finance Corporation of America was not an admissible deduction in arriving at the profits of the Company.

12. The following cases were referred to:-

Goslings & Sharpe v. Blake, TAX2 T.C. 450

The Anglo-Continental Guano Works v. Bell, TAX3 T.C. 239

The Scottish North American Trust, Ltd. v. Farmer, TAX5 T.C. 693

Muller (W.H.) and Company (London), Limited v. Lethem, TAX14 T.C. 116

Commissioners of Inland Revenue v. Hay, TAX8 T.C. 636

13. We, the Commissioners, considered that the interest paid to the Finance Corporation of America was not an admissible deduction for Income Tax purposes, as...

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