Inland Revenue v West and Others
| Jurisdiction | Scotland |
| Judgment Date | 09 June 1950 |
| Date | 09 June 1950 |
| Docket Number | No. 56. |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
RevenueIncome taxProfits of tradeTrading receiptsFishing vessel requisitioned for war service under charter stipulating monthly hireAgreement by requisitioners to redeliver vessel in same good order as when deliveredPayment for purpose of reconditioning vessel substitutedWhether payment a trading receipt.
A fishing vessel was requisitioned for naval service during the war under a demise charter in terms of which the Ministry of War Transport accepted it as tight, strong, and in every way fit for service; agreed to pay a monthly hire; and undertook on the expiry of the charter to redeliver the vessel to its owners in the same good order as delivered to the charterers, fair wear and tear and depreciation excepted. On the expiry of the charter the Ministry, instead of carrying out the necessary repairs, agreed with the owners to return the vessel as it was, together with a payment to cover the cost of reconditioning. Part only of the sum paid by the Ministry was so expended.
The Inland Revenue having claimed that the whole of the sum paid by the Ministry was to be treated as a trading receipt for the purpose of income tax, held that the payment was not a trading receipt but was the monetary equivalent of the partial destruction of a capital asset and, as such, not subject to tax.
RevenueIncome taxBalancing chargePlantFishing enterprisePartners in enterprise selling their shares in boatWhether a sale of plant by persons carrying on a tradeWhether a sale before trade permanently discontinuedIncome Tax Act, 1945 (8 and 9 Geo. VI, cap. 32), sec. 17 (1).
Under sec. 17 (1) of the Income Tax Act, 1945, where a person carrying on a trade sells, before the trade is permanently discontinued, plant in respect of which he has received a deduction under Rule 6 of the Rules applicable to cases I and II of Schedule D, representing its diminished value by reason of tear and wear, a "balancing allowance" or a "balancing charge" must be made to or on the seller in the circumstances mentioned in the section.
The owners of the fishing vessels, "Guelder Rose," "Mistress Isa" and "Girl Eileen," each carried on herring fishing as a partnership enterprise, each vessel being owned in shares. The allowance or deduction referred to in sec. 17 (1) had been made in respect of each of these vessels. The owner of four of the sixteen shares in the "Guelder Rose" sold them to the other owners. The owner of sixteen of the sixty-four shares in the "Mistress Isa" sold them to a drifter company, and both vessels continued to be employed in fishing. The owners of the "Girl Eileen" sold all their shares to a third party, and retired from the business of fishing.
The Inland Revenue having claimed that balancing charges were payable in each case on the ground that plant had been sold within the meaning of sec. 17 (1), held (1) that in the cases of the "Guelder Rose" and the "Mistress Isa" there had been no sale of plant within the meaning of the Act, in respect that what had been sold was not in either case any part of the vessel but an interest in the partnership; (2) that in the case of the "Girl Eileen" there had been a sale of plant within the meaning of the Act, but that, simultaneously with the sale, the partners had permanently discontinued their trade; and (3) that, accordingly, in none of the cases was a balancing charge payable.
Four cases were stated for the opinion of the Court of Session at the instance of the Commissioners of Inland Revenue against (1) Francis West, senior, Mrs Martha M'Robbie, Francis West, junior, Alexander West, Mrs Jessie West's Executors and George Walker & Sons (Fraserburgh), Limited, owners of the fishing vessel "Laurel"; (2) Fred West, George West, John Biggart Lang, the Caledonian Fish Selling and Marine Stores Company, Limited and James Duthie, owners of the fishing vessel "Guelder Rose"; (3) Robert Forman, Alexander Stephen, Margaret Reid Baird, Robert Tait Milne and James Thomson, owners of the fishing vessel "Mistress Isa"; and (4) William Reid, George Stephen Reid, Albert Reid, Richard Reid and Richard Irvin & Sons, Limited, owners of the fishing vessel "Girl Eileen." The Commissioners for the Special Purposes of the Income Tax Acts had held (1) that in calculating for the purpose of income tax the profits of the owners of the "Laurel" and the "Guelder Rose" certain reconditioning monies paid to them in respect of their vessels were not trading receipts, and (2) that the owners of the "Guelder Rose," the "Mistress Isa" and the "Girl Eileen" were not liable to pay "balancing charges" under section 17 of the Income Tax Act, 1945,1 upon the sale of shares in the vessels.
Appeal No. 1"Laurel."
The case set forth that the following facts were admitted or proved:"(1) During the war the Laurel was requisitioned by the Minister of Shipping and a charter-party was entered into between the owners and the Minister of War Transport in the form known as T.98B. In e said charter-party the said
Minister undertook, inter alia, to pay monthly to the owners the hire provided for in the charter-party and to redeliver the vessel in the same good order as she was delivered to himfair wear and tear and depreciation excepted. (2) The sums received as hire were treated as trading receipts of the owners in assessing to income tax their profits from the said vessel. (3) On 24th December 1945 notice was given to the owners by the Sea Transport Officer that the vessel was no longer required for His Majesty's service and was to be redelivered and was to be at the disposal of the owners as from the following day. (4) An off survey of the vessel was held at Fraserburgh on the 17th December 1945, the report of which is dated 21st January 1946. The report shows the defects which were found in the vessel, and it was agreed that the estimated cost of restoring the vessel amounted to 3634, 15s. 6d. (5) On 15th April 1946 the owners accepted the sum of 3686, 11s. 5d. in full and final settlement of all claims appertaining to the release and redelivery of the vessel. (6) The owners expended the sum of 1959 on refitting the vessel for fishing purposes and making good some of the defects shown in the off survey report and then resumed fishing with the vessel. The balance of 1727 remained unexpended at the end of the trading year which was the basis for the assessment under appeal."The contentions of the parties were stated as follows:
"It was contended on behalf of the Commissioners of Inland Revenue that the said sum of 3686, 11s. 5d. was a receipt which arose out of a trading transaction, namely, the letting of the vessel on hire; that such receipt, like the periodic sums of hire, was a trading receipt to be taken into account in computing the profits chargeable to income tax; that the said sum was received in respect of and covered (like periodic receipts from hire) items, the expenditure upon which was an admissible deduction in computing profits chargeable to income tax; that in computing such profits a deduction was allowed under Rule 3 (d) of Cases I and II of Schedule D of the Income Tax Act, 1918, for sums actually spent on repairs and the mere fact that all the repairs had not been effected in the year in which the sum was received did not
prevent such sum from being regarded as a trading receipt of the year in which it was received"It was contended on behalf of the respondents that the reconditioning monies were not annual profits or gains and were not liable to be included as trading receipts for the purposes of income tax and that such monies were capital receiptsCommissioners of Inland Revenue v. Granite City Steamship Co.TAX, 1927 S. C. 705, 13 T. C. 1."
The decision of the Special Commissioners was stated as follows:"We, the Commissioners who heard the appeal, held that the unexpended reconditioning monies were not profits or trading receipts liable to income tax, and reduced the assessment accordingly."
The question of law for the opinion of the Court was:"Whether on the foregoing facts the said sum of 3686, 11s. 5d. fell to be regarded as a trading receipt in computing the profits from the vessel chargeable to income tax."
Appeal No. 2"Guelder Rose."
The case set forth that the following facts were admitted or proved:"(1) The Guelder Rose was built in June 1939 at a cost of 2512 and was owned from that date until 1st October 1946 by the following persons jointly in the following shares:
Shares |
|
Fred West |
4/16 |
George West |
4/16 |
John Biggart Lang |
1/16 |
The Caledonian Fish Selling and Marine Stores Company, Limited |
3/16 |
James Duthie |
4/16 |
During the war the vessel was requisitioned by the Minister of Shipping and a charter-party was entered into between the owners and the Minister of War Transport. [The charter-party was in the same terms as in the case of the Laurel.] The sums received as hire were treated as trading receipts of the owners in assessing to income tax their profits from the said vessel. (2) No partnership contract or other written agreement was entered into between the respondents. The use to which the vessel was put and the division of the profits which it earned were regulated by the custom of the Scottish herring fishing industry. (3) It is customary in the Scottish herring fishing industry for the vessel to be owned by a number of persons, who may or may not be also members of the crew. Each part owner holds a number of shares in the vessel, not necessarily equally, such shares usually amounting in the aggregate to sixty-four. The fishing gear is supplied by the net owners who may be but are not necessarily members of the crew. Those who are interested by way of ownership of the vessel or nets or both, and who are not members of the crew, are known as landsmen. The remaining persons interested financially in the fishing with the vessel are the members of the crew who provide the labour and who are known as share fishermen...
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