Inland Revenue v Falkirk Iron Company
| Jurisdiction | Scotland |
| Judgment Date | 10 March 1933 |
| Date | 10 March 1933 |
| Docket Number | No. 49. |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
RevenueIncome taxMode of assessmentDeductionsMoney wholly expended for purposes of tradeRent paid by company for premises no longer usedIncome Tax Act, 1918 (8 and 9 Geo. V. cap. 40), Sched. D, Rule 3 of the Rules applicable to Cases I. and II.
An iron foundry company, which had leased warehouse premises for the purposes of its business, discontinued doing business in them during the currency of the lease, and sublet parts of the premises for the remainder of the lease. In computing its profits for assessment to income tax the company claimed to be entitled to deduct the rent paid for the premises, less the subrents received.
Held that, as the company had leased the premises in question in the ordinary course of business, the net outlay for rent represented expenditure necessary for the purposes of its trade even though the premises were no longer used, and was therefore a proper deduction in computing its profits for the purposes of income tax.
At a meeting of the Commissioners for the General Purposes of the Income Tax Acts for the Division of Falkirk, held at Falkirk on 16th March 1932, the Falkirk Iron Company, Limited, appealed against an assessment under Schedule D on 50,000 in respect of the profits of its trade for the year 19311932, and claimed to be allowed a deduction of 433 representing necessary expenditure for the purposes of its business. The Commissioners allowed the appeal, and, at the request of the Inspector of Taxes, stated a case for the opinion of the Court of Session as the Court of Exchequer in Scotland.
The case set forth that the following facts were admitted or proved:"(1) The Company is a company incorporated under the Companies Acts and has its registered office in Falkirk, where its principal foundry, assessed to income tax Schedule A at 5130, is situated. The Company has also a small foundry at Sandiacre in the County of Nottingham, and has warehouses in Liverpool, Glasgow, and Edinburgh, which are used for the storage and distribution of the Company's goods in these particular areas. Under its memorandum of association the Company is authorised To establish branches in the United Kingdom or abroad and to regulate and discontinue the same.To lease any offices and other buildings. (2) Between June 1922 and 30th November 1929 the Company occupied under lease premises at 43 and 45 Queen Square, Bristol, which were used for the same purposes as the aforesaid premises at Liverpool, Glasgow, and Edinburgh. The lease of these premises with which this case is concerned is dated 3rd August 1927 (being a continuation of the first lease, dated 21st June 1922) and was for a term of ten years from 24th June 1927 at an annual rent of 775 with a break in favour of the company at the end of five years. The Company produced a copy of the said lease, which contained the following provision: nor to permit the same premises to be used as the residence or sleeping place of any person other than a caretaker but to use each of the demised premises only as an office and warehouse in connexion with the business tenants (sic) or such other trade or business as shall be approved in writing by the lessors, which approval shall not be unreasonably withheld. (3) The Bristol premises were occupied by the Company for the purposes above stated up to 30th November 1929, at which date the Company ceased to carry on any part of its business therein. Certain portions of the premises were sublet as from 1st December 1929, and notice of determination of the lease at the date of the break at 24th June 1932 was duly given by the Company in terms of the lease. (4) The subrents received were credited by the Company in its accounts, and the net charge for rent,i.e., the difference between the rent paid by the Company and the subrents received, relating to the period from 1st December 1929 to 31st March 1930, was 121. The net charge for rent for the year ended 31st March 1931 was 433. The said sum of 433 was disallowed as a deduction in arriving at the profits for the purposes of assessment to income tax for the year ended 5th April 1932."
It was contended on behalf of the Company:"(1) That the lease of the Bristol premises was an ordinary trading commitment. (2) That the premises had to be taken on lease, as it was inadvisable, even if possible, to obtain premises of such a type on a year-to-year tenancy. (3) That the rent the Company had to pay (less the subrents received) was an expense exclusively laid out for the purposes of the trade, and that the expenditure in question was not prohibited by the Income Tax Act, 1918,1 Rule 3 (a), or Rule 5 of Schedule D, Cases I. and II. (4) That the expenditure in question, being admittedly for rents, was revenue expenditure, without affecting capital assets in any way, and was therefore a proper deduction; and (5) That the present case was distinguishable from Cowcher v. Richard Mills & Co.TAX, (1927) 13 T. C. 216, on the grounds (a) that the expenditure in that case was a lump sum due under a debenture granted to secure a sum payable for breaking a lease, the Crown contending, inter alia, that the lump sum payment was
not paid in respect of any liability of the Company for the rent, but was paid in respect of the liability of the Company under the debenture which it had issued, and was not therefore expended for the purpose of the Company's trade, and (b) that in that case a complete branch of a business was discontinued, while in the present case the sales which were made through the Bristol warehouse were, both before its establishment and after its discontinuance, carried on from Falkirk direct."1It was contended on behalf of the Commissioners...
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...Lord Justice Upjohn at page 174. 56 The Crown seeks to distinguish that case and rely for their part on two cases, Inland Revenue Commissioners v. The Falkirk Iron Co. Ltd. 17 Tax Cases 625, and Hyett v. Lennard (1940) 2 King's Bench Division, page 180. In the first case a company, having t......
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Commissioners of Inland Revenue v William Sharp & Son
...standing and had continued to pay the minimum quarterly charge (see Commissioners of Inland Revenue v. Falkirk Iron Co., Ltd.(3), 1933 S.C. 546); but this they did not do. In my opinion therefore the £600 is not money wholly and exclusively laid out or expended for the purposes of the trade......
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Commissioners of Inland Revenue v William Sharp & Son
...standing and had continued to pay the minimum quarterly charge (see Commissioners of Inland Revenue v. Falkirk Iron Co., Ltd.(3), 1933 S.C. 546); but this they did not do. In my opinion therefore the £600 is not money wholly and exclusively laid out or expended for the purposes of the trade......