Hinton (Inspector of Taxes) v Maden & Ireland Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Reid,Lord Tucker,Lord Keith of Avonholm,Lord Denning,Lord Jenkins |
| Judgment Date | 16 July 1959 |
| Judgment citation (vLex) | [1959] UKHL J0716-1 |
| Date | 16 July 1959 |
| Court | House of Lords |
[1959] UKHL J0716-1
House of Lords
Lord Reid
Lord Tucker
Lord Keith of Avonholm
Lord Denning
Lord Jenkins
Upon Report from the Appellate Committee, to whom was referred the Cause Hinton (Inspector of Taxes) against Maden & Ireland Limited, that the Committee had heard Counsel, as well on Tuesday the 23d, as on Wednesday the 24th and Thursday the 25th, days of June last, upon the Petition and Appeal of Reginald William Charles Hinton, of Rawtenstall, Rossendale, Lancashire, one of Her Majesty's Inspectors of Taxes, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 9th of October 1958, so far as therein stated to be appealed against, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the printed Case of Maden & Ireland Limited, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 9th day of October 1958, in part complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellant do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
The Respondents are shoe and slipper manufacturers. They were assessed to income tax for the years 1955-56 in respect of profits of £8,290 less capital allowances of £4,836. The question in this case is whether the capital allowances should be increased to £5,148 because of expenditure which the Respondents maintain qualified for investment allowance under section 16 of the Finance Act, 1954. The Special Commissioners decided in favour of the Respondents. Their decision was reversed by Vaisey, J. but restored by the Court of Appeal.
The Respondents' method of manufacture is described in the Case Stated by the Commissioners. There are at least nine stages in the manufacture of a shoe, each performed by a different machine in conjunction with the knives and lasts which are the subject of this appeal. The first stage is cutting out from large pieces of different kinds of leather pieces of the correct shapes for the uppers, soles and other parts of the shoes. In the course of the argument it appeared that the description of this stage in the case is somewhat misleading and no objection was taken to our being given further information about it. Pieces of the correct shape are cut out by pressing a knife on to the leather. The machine which does this is a press: the lower part of it is a flat table on which the sheet of leather is laid. Each piece is cut out by a single knife: in the case of an upper the cutting edge is heart shaped, in the case of a sole the cutting edge is the shape of the scale. The cutting edge is the lower part of a ring of metal of the same shape. A number of these knives are arranged by hand on the sheet of leather so that as little as possible of the leather shall be wasted. Then the upper part of the machine is pressed down on them and the leather is thus cut. The knives are not parts of the machine: each knife is a separate tool or implement designed to be used in conjunction with the machine. It is stated in the Case that as many as fourteen different knives may be used in producing the pieces of leather to be made up into one shoe. As different knives are required for right and left shoes and each size and type of shoe may require a different set of knives, it is obvious that the Respondents must have available a very large assortment of knives. It appears that each knife costs about £1. Two types of machine are used: one costs over £400 and the other over £1,000.
In most of the further stages of manufacture lasts are used. These cost about £1 2s. 0d. per pair. For the earlier stages making lasts are used, and for the later stages finishing lasts. These lasts, too, are not parts of the machines. For each process a last with the pieces of leather which go to make the shoe is fed into the appropriate machine. Again, not only are different lasts necessary for right and left shoes and for different sizes but different types of shoes require different lasts. It is stated in the Case that every change of fashion involves a change of last. It appears that about 12,000 pairs of making lasts and 24,000 pairs of finishing lasts are required for a production of 1,200 dozen pairs of shoes a week.
The life of each last is about three years, though some may be used for four or five years: it is not stated whether they mostly wear out or become obsolete through change of fashion. The life of the sole knives is about the same, but upper knives only have a life of about a year.
The facts set out in the Case with regard to the Respondents' expenditure in buying knives and lasts and the way in which that expenditure has been treated for income tax purposes are as follows:
"4. Owing to the large number of lasts and knives employed in the Respondents' business no physical stock taking at the half yearly dates to which its accounts are made up was possible. The Respondent therefore charged all expenditure on new knives and lasts to capital and charged against profits one-quarter of the total cost in the four succeeding half yearly accounts, on the view that an average life of two years for the combined total expenditure on knives and lasts was a fair estimate. The actual expenditure on new knives and lasts and the amount so charged against profits in the two half years' accounts ending respectively on 3rd April and 2nd October, 1954, forming the basis of the material year 1955/56 are set out in Exhibit 3 under the headings of the five manufacturing units of the Respondent's business. Thus the figure of £8,022 5s. appearing in the balance sheet at 2nd October, 1954 (Exhibit 2B), is the balance after crediting total additions in the half year of £1,856 8s. 5d. and after debiting to profit and loss account a sum of £3,542 19s. 1d., being the writing off at 25 per cent, of expenditure on knives and lasts in the preceding four half years.
5. The expenditure on knives and lasts during the basis year and the six years immediately preceding the basis year were as follow:
No dissection of the figures of expenditure between knives and lasts had been attempted by the Respondent and we were satisfied that such a dissection, if not actually impossible, was not reasonably practicable.
6. The Revenue had taken the view that for Income Tax purposes the Respondent's estimate of the life of knives and lasts was too conservative, but had agreed that an average life of three years instead of two years was reasonable. The Respondent had accepted the Revenue's contention for Income Tax purposes, and in the result a sum equal to one-sixth of the total expenditure on knives and lasts has been, for a number of years, allowed as a deduction in the following six half years, as such accounts came into the computation of the Respondent's profits for Income Tax purposes. This deduction was regarded by the Revenue as the nearest practicable and just estimate of the sum expended by the Respondent 'for the supply, repairs or alteration of any implements, utensils or articles employed for the purposes of the Respondent's trade,' within the meaning of Section 137 ( d), Income Tax Act, 1952. It was common ground between the parties in this appeal that the amount so allowed for Income Tax purposes was not the sum 'actually expended' since (i) it related to expenditure incurred in the preceding six half yearly periods and (ii) it was the result of a 'straight line writing down' on the basis of the Revenue's contention of an estimated three years' life. For the reasons hereinafter set out in paragraph 10 below, we do not consider that either the method adopted by the Respondent in making up its accounts, or the variation of that method adopted by the Revenue and accepted by the Respondent for Income Tax purposes, affects the issue on which we were called upon to give our determination."
In addition to this deduction from their profits the Respondents claim an investment allowance equal to one-fifth of their expenditure on knives and lasts under the provisions of section 16 of the Finance Act, 1954. The relevant provisions of that section are:
"16. —(1) In the cases provided for by this section, an allowance (in this Act referred to as an 'investment allowance') shall be made in respect of capital expenditure on new assets incurred after the sixth day of April, nineteen hundred and fifty-four.
. . . . . .
(3) An investment allowance equal to one-fifth of the expenditure shall be made instead of an initial allowance under Chapter II of the said Part X in respect of expenditure on the provision of new machinery or plant, and any provision of the Income Tax Acts applicable to initial allowances under that Chapter, so far as it is applicable in relation to allowances for new assets, shall apply also to investment allowances under this subsection, except that—
. . . . . .
( c) where the expenditure on new machinery or plant is allowed to be deducted in computing profits or gains for the purposes of income tax, it shall nevertheless be treated as capital expenditure for the purposes of this sub-section, if it would be so...
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