Inland Revenue Commissioner v Mitsubishi Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 1995 |
| Date | 1995 |
| Year | 1995 |
| Court | Privy Council |
New Zealand - Revenue - Income tax - Deduction of expenditure - Taxpayer undertaking to indemnify car dealers against warranty claims by purchasers - Taxpayer making provision in income year for anticipated unexpired warranty costs in following year - Whether expenditure deductible in calculating taxpayer's assessable income in income year -
Under the Income Tax Act 1976F1 income tax was levied on assessable income, which by section 65(2)(a) was deemed to include all profits or gains derived from any business. By section 101 no deduction was to be made in respect of any expenditure or loss for the purposes of calculating the assessable income of any taxpayer except as expressly provided in the Act. Section 104 enabled, unless the Act otherwise provided, expenditure or loss incurred in gaining or producing the assessable income for any income year, or necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year, to be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss was incurred.
The taxpayer sold new motor vehicles to dealers undertaking to indemnify them against warranty claims. On selling a vehicle to a purchaser the dealer gave the purchaser a warranty in respect of defects in material or workmanship appearing within 12 months after delivery, subject to the purchaser returning the vehicle to the dealer with notification of the defect. Based on statistical information the taxpayer estimated that 63 per cent. of all vehicles sold would contain defects requiring repair under warranty. In calculating its assessable income for the year ending 31 December 1988 the taxpayer claimed as a deduction the amount of a reserve for its anticipated liabilities under unexpired warranties in respect of vehicles sold in that year. In assessing the taxpayer to income tax for the year ending 31 March 1989, based on the taxpayer's return of income furnished to 31 December 1988, the commissioner disallowed that deduction. The taxpayer objected to the assessment and the commissioner disallowed the objection. On a case being stated in the High Court of New Zealand the judge held that the warranty provision was deductible expenditure within section 104. The Court of Appeal of New Zealand held that it was not deductible under section 104 but dismissed the commissioner's appeal on other grounds.
On the commissioner's appeal to the Judicial Committee:—
Held, dismissing the appeal, that, although the taxpayer's liability under the warranty for each vehicle sold was contingent on a defect appearing and being notified to the dealer within the warranty period so that no liability was incurred by the taxpayer until those conditions were satisfied, regard could be had to its estimation of warranty claims based on statistical information, which showed that as a matter of existing fact not future contingency 63 per cent. of all vehicles sold by the taxpayer contained defects likely to be manifested within the warranty period and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payments under those warranties and, even though it might not be required to do so until the following year, it was definitively committed in the year of sale to that expenditure; and that, accordingly, in computing the profits or gains derived by the taxpayer from its business in the year in which the vehicles were sold, the taxpayer was entitled under section 104 to deduct from its total income the provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year (post, pp. 678C–D, H, 679B–C, E, H–670A).
Quaere. Whether “expenditure or loss” in section 104 of the Income Tax Act 1976 include all items of expenditure or loss which would be deductible on normal accounting principles (post, p. 677D, E–F).
The following cases are referred to in the judgment of their Lordships:
Bisley (A.M.) & Co. Ltd. v. Commissioner of Inland Revenue (
Coles Myer Finance Ltd. v. Federal Commissioner of Taxation (
Commercial Union Assurance Co. of Australia Ltd. v. Federal Commissioner of Taxation (
Commissioner of Inland Revenue v. Farmers' Trading Co. Ltd. [
Commissioner of Inland Revenue v. Glen Eden Metal Spinners Ltd. (
Commissioner of Taxes (South Australia) v. Executor Trustee and Agency Co. of South Australia Ltd. (
Federal Commissioner of Taxation v. James Flood Pty. Ltd. (
Nilsen Development Laboratories Pty. Ltd. v. Federal Commissioner of Taxation (
R.A.C.V. Insurance Pty. Ltd. v. Commissioner of Taxation [
Southern Railway of Peru Ltd. v. Owen [
The following additional cases were cited in argument:
Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation (
Australia and New Zealand Banking Group Ltd. v. Federal Commissioner of Taxation (
Beauchamp v. F.W. Woolworth Plc. [
Commissioner of Inland Revenue v. Banks [
Commissioner of Inland Revenue v. Lo and Lo [
Commissioner of Inland Revenue v. McDonald [
Commissioner of Taxation v. Manufacturers' Mutual Insurance Ltd. (
Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [
European Investment Trust Co. Ltd. v. Jackson (
Felt and Textiles of New Zealand Ltd. v. Commissioner of Inland Revenue [
Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. [
King v. Commissioner of Inland Revenue [
Morgan v. Tate & Lyle Ltd. [
New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (
Southern Pacific Insurance Co. (Fiji) Ltd. v. Commissioner of Inland Revenue (Fiji) [
Usher's Wiltshire Brewery Ltd. v. Bruce [
Ward & Co. Ltd. v. Commissioner of Taxes [
Appeal (No. 63 of 1994) with leave of the Court of Appeal of New Zealand by the Commissioner of Inland Revenue from the judgment of the Court of Appeal of New Zealand (Richardson, Gault and McKay JJ.) given on 17 March 1994 dismissing his appeal from the judgment of Doogue J. delivered on 1 June 1993 in the High Court of New Zealand, whereby in answer to the question in the case stated he decided that the taxpayer, Mitsubishi Motors New Zealand Ltd., was entitled to deduct the reasonably estimated costs of meeting its obligations in respect of inherent defects against the income in the tax year, and so a provision for expenditure anticipated to be required to meet claims under warranties given in respect of vehicles sold in the 1989 income year could be said to be incurred for the purposes of section 104 of the Income Tax Act 1976 in gaining or producing assessable income for that year.
The facts are stated in the judgment of their Lordships.
Andrew...
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