Inland Revenue v Granite City Steamship Company
| Jurisdiction | Scotland |
| Judgment Date | 17 June 1927 |
| Date | 17 June 1927 |
| Docket Number | No. 81. |
| Court | Court of Session |
Lord Sands, Lord Blackburn, Lord Ashmore.
RevenueIncome taxMode of assessmentDeductionsCapital or revenue expenditureCompany owing one shipSeizure and use of ship by enemy Ship returned in dilapidated conditionExpenditure on reconditioning ship.
The only ship owned by a certain company was seized by the enemy on the outbreak of war and used by them during the war period. She was returned to her owners in December 1918 in a dilapidated condition, and had to undergo extensive reconditioning. The company made a claim against the German Government, one of the items being the sum expended on reconditioning. The claim was settled, and the amount so recovered, which was less than half of that claimed and was not apportioned among the different items, was not subjected to income tax. In arriving at their profits for income tax purposes, the company claimed the right to deduct the sum expended on reconditioning.
Held that the reconditioning expenses were not a proper deduction, in respect that they were not a recurring maintenance expenditure but were of the nature of capital outlay.
The Granite City Steamship Company, Limited, Aberdeen, appealed to the Commissioners for the General Purposes of the Income Tax Acts for the County of Aberdeen against assessments to income tax for the three years 19211922, 19221923, and 19231924, claiming the right to deduct in their accounts for the year ended 30th August 1920 (which was one of the years brought into average for the purposes of each of the assessments in question) a sum of 10,152. The General Commissioners having sustained the appeal, the Commissioners of Inland Revenue required a case to be stated 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 owns one steamship, the s.s. Rubislaw, which at the outbreak of the war was lying in Hamburg Harbour in the ordinary course of her trading voyages, and was then seized and interned by the German Government, and was not redelivered to the Company until 26th December 1918. (2) During the interval she was used by the German Government for its own purposes, and when restored to the Company was in a very dilapidated and damaged condition, no attention having been paid to keeping her in good repair. (3) The ship, on her return to this country, was surveyed and put into the hands of repairers. (4) Repairs were completed before the ship sailed on 28th March1919 on her first voyage following her recovery from the German Government. (5) The outlays in respect of these repairs paid to 31st August 1919 appear in the Company's balance-sheet at that date amongst the assets as follows:Suspense ItemAmount expended on restoration of s.s. Rubislaw for which a claim will be lodged against the German Government through the Claims Department of H. M. Foreign Office, 6534, 13s. 9d. (6) In the Company's profit and loss account for the year to 31st August1920 there is charged as a deduction from gross income the whole of the outlays on the reconditioning of the s.s. Rubislaw, which are included in the item appearing in that account under the headings.s. Rubislaw Recovery Account. Outlays to date, 11,174, 0s. 7d., but no sum appears in the balance-sheet at 31st August 1920 corresponding to the entry of 6534, 13s. 9d. in the balance-sheet at 31st August 1919that whole sum, together with the further sums paid, having been charged against profit and loss account, as explained in the directors' report to the Company. (7) Of the sum of 11,174, 0s. 7d., 1022 was not included in the Company's claim against the German Government, and is a proper deduction for the purposes of income tax. The balance, 10,152, forms part of the sum of 11,351, 9s. 6d., included in the Company's claim against the German Government. The total sum so claimed amounted to 103,167, 19s. 7d. (8) Following direct negotiations with the German Government and the agents for the Company,an agreement was drawn up under which an offer of 46,750, in full settlement of the claim was made by the representative of the German Government, and, the approval of the Mixed Arbitral Tribunal for compensation having been obtained, the said sum was paid to the Company through the Clearing Office in June 1925, under deduction of 21/2 per cent allowed to the Clearing Office in terms of statute.
The contentions of the Company before the Commissioners were stated in the case as follows:(1) That the expenses incurred by the Company in the reconditioning of their vessel on her recovery from the German Government in 1918 in order to fit her for the resumption of her ordinary trading were a proper charge against the subsequent profits earned by the vessel. (2) That, although the representative of the German Government and the Company's solicitor, in arriving at an agreed-on capital sum in name of damages, took into account, inter alia, a sum of 4000 as reconditioning expenses, this did not render the Company liable for income tax on that or any other sums taken into account in arriving at the total capital sum of 46,750 as compensation payable to the Company. That the method of computing the 46,750 did not affect the character of the sumthe whole of which was capitalGlen-boig Union Fireclay Co. v. Inland Revenue, 1921 S. C. 400, 1922 S. C. (H. L.) 112, Lord Buckmaster at p. 115; and Commissioners of Inland Revenue v. BallantineTAX, (1924) 8 T. C. 595, Lord President Clyde at p. 611. That, although the agent of the German Government and the agent of the Company took into account, inter alia, reconditioning expenses as a means of arriving at an agreed-on sum of damages, the whole of the 46,750 so arrived at was a capital receipt, and, as the cost of reconditioning is an admissible expense for income tax purposes, there was no authority for regarding such expense as covered in whole or in part by the compensation received. Further, that the expense of reconditioning the ship was a normal expense of trading, which, owing to circumstances over which the Company had no control, had been neglected for over four years; that a correspondingly large sum (rendered greater on account of the then increased cost of labour and materials) had therefore to be expended when the vessel was returned to the Company; and that the sum so expended was a proper charge against revenue, and, as such, admissible as a deduction for income tax purposes against the profits earned by the vessel.
The Crown's contentions were:(1) That the outlays were to make good the damage and deterioration caused by the use of the ship not by the Company but by the German Government, and were therefore not expenses incurred for the purposes of the Company's trade. (2) That the...
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