Inland Revenue v Falkirk Iron Company
| Jurisdiction | Scotland |
| Year | 1933 |
| Date | 1933 |
| Court | Sheriff Court |
NO. 872.-COURT OF SESSION, SCOTLAND (FIRST DIVISION).-
Income Tax, Schedule D - Profits of trade - Deduction - Annual rent of branch warehouse vacated prior to expiration of lease - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Cases I and II, Rule 3.
The Respondent Company leased premises at an annual rent for a period of ten years from June, 1927, (with a break in the Company's favour at the end of five years) and occupied them for the purposes of its business until 30th November, 1929, at which date it ceased to carry on any part of its business there. Portions of the premises were thereafter sub-let by the Company until June, 1932, when the lease was terminated under the right contained in the lease.
The Company claimed a deduction in computing its profits assessable to Income Tax for the year 1931-32 of an amount representing the difference between the rent paid by it under the lease and the rents received by it from the sub-tenants. The General Commissioners, on appeal, allowed the deduction.
Held, that the Company was entitled to the deduction.
At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Falkirk, in the County of Stirling, held at Falkirk, on 16th March, 1932, The Falkirk Iron Company, Limited (hereinafter referred to as "the Company"), appealed against an assessment on £50,000 in respect of the profits of its trade under the Rules applicable to Schedule D of the Income Tax Act, 1918, for the year 1931-32.
The ground of the appeal was that, in arriving at the profits of the Company in respect of the year of assessment under appeal, there should be allowed as a deduction the sum of £433 after-mentioned.
I. The following facts were admitted or proved:-
(2) 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 £5,130, 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."
(3) 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 31st 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 connection 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."
(4) 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 sub-let 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.
(5) The sub-rents 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 sub-rents 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.
II. It was contended on behalf of the Company:
(2) that the lease of the Bristol premises was an ordinary trading commitment;
(3) 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;
(4) that the rent the Company had to pay (less the sub-rents 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, Rule 3(a), or Rule 5 of Schedule D, Cases I and II;
(5) that the expenditure in question, being admittedly for rent, was revenue expenditure, without affecting capital assets in any way, and was therefore a proper deduction; and
(6) that the present case was distinguishable...
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