Inland Revenue v Carron Company
| Jurisdiction | UK Non-devolved |
| Judge | Lord Reid,Lord Morris of Borth-y-Gest,Lord Guest,Lord Upjohn,Lord Wilberforce |
| Judgment Date | 29 May 1968 |
| Judgment citation (vLex) | [1968] UKHL J0529-3 |
| Docket Number | No. 3. |
| Court | House of Lords |
| Date | 29 May 1968 |
[1968] UKHL J0529-3
House of Lords
Lord Reid
Lord Morris of Borth-y-Gest
Lord Guest
Lord Upjohn
Lord Wilberforce
Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against Carron Company, that the Committee had heard Counsel, as well on Wednesday the 24th as on Thursday the 25th, days of April last, upon the Petition and Appeal of the Commissioners of Inland Revenue, of Somerset House, Strand, London, W.C.2, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland of the First Division, sitting as the Court of Exchequer, of the 10th of March 1967, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Interlocutor might be reversed, varied or altered, or that the Petitioners 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 Case of Carron Company, 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 Interlocutor of the 10th day of March 1967, 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 Appellants 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: And it is also further Ordered, That unless the Costs, certified as aforesaid, shall be paid to the parties entitled to the same within one calendar month from the date of the Certificate thereof, the Cause shall be, and the same is hereby, remitted back to the Court of Session in Scotland, or to the Judge acting as Vacation Judge, to issue such Summary Process or Diligence for the recovery of such Costs as shall be lawful and necessary.
My Lords,
The Respondent Company was incorporated by Royal Charter in 1773, its business having previously been carried on by a partnership. There were 600 shares of £250 each and the only provision for management was a General Court of voting partners. To become a voting partner a shareholder had to own at least ten shares and to be elected by the other voting partners. The Company's borrowing power was limited to £25,000.
"… imposed insurmountable obstacles to the profitable development of Carron's business in contemporary economic and commercial conditions. The most significant disadvantages, for the purpose of the matters in issue, were as follows:—
( a) The limitation of borrowing powers to £25,000 made it impossible for Carron legally to finance any large-scale commercial project, except by selling its investments or other assets.
( b) The restrictions on transfer of shares coupled with the stringent qualifications for voting had confined the voting strength to a small number of voting partners, none of whom possessed any qualifications for the management of Carron's business on the technical side, while the practice of delegating the technical side of management to a salaried official who did not enjoy a status equivalent to that of a Managing Director—a practice which was in itself an inevitable product of these aspects of Carron's constitution—made it more difficult in changing social and economic conditions to obtain the services of persons of sufficient calibre successfully to carry out the onerous and responsible duties of Manager, and contained in itself the seeds of conflict between the Manager and the Standing Committee to which he was responsible. These difficulties became increasingly apparent during the tenure of the last Manager, Mr. Leaver, who occupied that post from 1954 to 1962."
In 1954 it was decided that application should be made for a Supplementary Royal Charter. But two shareholders were conducting a series of litigation against the Company and it appeared that they had it in their power to delay indefinitely the possibility of obtaining such a charter. Accordingly the Company negotiated a settlement with them at a total cost of some £88,000. Then in 1963 they obtained a Supplementary Royal Charter which removed those parts of the old Constitution which had been preventing profitable trading. As a result they have enjoyed very much improved trading results. The cost of obtaining this Charter was £3,107.
This case arises out of an appeal against an assessment on the Company to income tax for the year 1964-65 in the sum of £400,000. The Company claimed that the sums which I have mentioned ought to be allowed as deductions. The Appellant disputed this on the grounds that none of these sums was incurred wholly and exclusively for the purposes of the Company's trade, or alternatively that these sums were incurred on capital account. The Special Commissioners decided in favour of the Respondent Company and their determination was affirmed by an Interlocutor of the First Division of 10th March 1967.
Although the cost of reaching a settlement with the dissident shareholders was so very much greater than the cost of obtaining the new Charter, I need not consider the circumstances in which this settlement was made, because it has been admitted by the Appellant that, if the Respondents are entitled to deduction of the cost of obtaining the Charter, they are also entitled to deduct the cost of making this settlement.
Accordingly the first question for decision is whether the sum spent in obtaining the Charter was incurred wholly and exclusively for the purposes of the Company's trade. The finding of the Special Commissioners was:—
"On the evidence the object of the supplementary charter was not to acquire a framework within which the business could be carried on; the framework was already there. Nor was it to extend the framework to carry on a new sort of business, but to repair the old framework and maintain it against time and circumstances. The provisions of the new Charter covered a number of points which had little to do with the trade but it seemed to us on the evidence that the really significant points of the supplementary charter and the objects of Carron were (i) to remove the limitation on the borrowing power and (ii) to deal with the restriction on the shares and the qualification for voting which were obstacles to the proper management and conduct of the business. Those were the really significant objects and were concerned with the management and conduct of the business. We found that the cost was wholly and exclusively for the purposes of Carron's business. We could not see any new capital asset and concluded that it was revenue expenditure and allowable."
At that stage it had not been agreed that the sums paid to settle with the dissident shareholders must be treated in the same way as the cost of obtaining the new charter. Now that that has been agreed I need not set out the Commissioners' findings about the former sums. But in the course of those findings the Commissioners said that they "found that Carron really got nothing more or less than the removal of the obstruction to the new Charter. Predominantly it got up-to-date borrowing powers and the ability to secure proper management. Those considerations prompted Carron to pay the sums which it did."
It was argued for the Appellants that no sum spent in obtaining an alteration of a Company's Constitution, of its Memorandum or Articles, can in law be regarded as having been expended for the purposes of its trade. No doubt there are many cases where such an alteration is not made wholly and exclusively for the purpose of facilitating the company's trading operations. But where an alteration is made for that purpose I can see no reason why its cost cannot be regarded as a proper deduction.
So the question is whether in this case that was the sole purpose of obtaining the new Charter. The Appellants say that this Charter, in addition to provisions bearing directly on the Company's trading, contained other provisions which had no relation to trading. To that I think there are two answers. In the first place far reaching changes had to be made in order to give to the Manager or Managing Director a status necessary to attract a first class man. It appears to me that such changes, made in this case for that purpose, were just as much connected with facilitating trading operations as the removal of the restriction on borrowing. And secondly, if there is anything in the new Charter going beyond that (which I doubt) then it can properly be disregarded as coming within the principle of de minimis. So I would reject the first contention of the Appellants.
I turn now to the more difficult question whether this expenditure ought to be charged to income or capital account. The case for charging it to capital might appear to be strengthened by the magnitude of the sums involved, but again I do not think it would be right to take into account the sums paid to the dissident shareholders, in deciding what should be done with the cost of obtaining the new Charter. If this, taken by itself, is a proper charge against income, it cannot become chargeable to capital because it was first necessary to buy off these shareholders. And if the smaller sum is chargeable against income it is not suggested that the larger sum could be chargeable against capital.
I shall not repeat what I said in Strick v. Regent Oil Co. [1966] A.C. 295 at page 313 with regard to the general manner of approach to this question, nor shall I...
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