John Smith and Son v Moore (HM Inspector of Taxes)
| Jurisdiction | Scotland |
| Judgment Date | 12 April 1921 |
| Date | 12 April 1921 |
| Court | Court of Session (Inner House - Second Division) |
NO. 23*.-COURT OF SESSION, SCOTLAND (SECOND DIVISION).-
HOUSE OF LORDS.-
Excess Profits Duty - Profits of trade - Deductions - Purchase price of unexecuted coal contracts - Remuneration of manager of business - Discretion of Commissioners of Inland Revenue - Finality of decision - Finance (No. 2) Act, 1915 (5 & 6 Geo. V, c. 89), Section 40 (1) and (2), and Fourth Schedule, Part I, Rules 1, 3 and 5, and Part III, Rule 1 (a) - Income Tax Act, 1842 (5 & 6 Vict., c. 35), Section 100, Schedule D, First Case, Rule 3.
Two questions were involved in this case:-(1) The sole proprietor of a coal merchant's business died on the 7th March, 1915, and under the terms of his trust disposition and settlement his son took over the business at a valuation, in which nothing was charged for goodwill. The price paid included a sum of £30,000, representing the value of certain unexpired contracts with colliery owners for the supply of coal at fixed prices, all of which contracts expired on or before the 31st December, 1915. (2) The son paid one-third of the profits of the business as remuneration to a relative who, it was admitted, was a person concerned in the management of the business. This relative was not employed in the business prior to the war, nor were any expenses incurred in respect of manager's remuneration in the last pre-war trade year. The Commissioners of Inland Revenue refused to allow the deduction of the whole of the remuneration in question and the General Commissioners, on appeal, held that they (the General Commissioners) had no jurisdiction in the matter.
Held, (1) by the House of Lords (Viscount Finlay dissenting), that the sum of £30,000 paid in respect of the unexpired coal contracts was not an admissible deduction in computing the profits of the business for the purposes of Excess Profits Duty for the accounting period from the 7th March, 1915, to the 31st December, 1915-by Viscount Haldane and Lord Sumner, on the ground that it was capital expenditure; by Viscount Cave, on the ground that the Excess Profits Duty was a tax on a continuing business, and that for the purposes of the question at issue the change of ownership should be disregarded
City of London Contract Corporation v. Styles, 2 T.C. 239, applied;
and
(2) in the Second Division of the Court of Session, that there was no appeal from the decision of the Commissioners of Inland Revenue on the question of the amount to be allowed as a deduction in respect of manager's remuneration.
Rex v. Commissioners of Inland Revenue (ex parte W. France, Fenwick and Co., Ltd.), [1918] 1 K.B. 143; Williamson Film Printing Co. v. Commissioners of Inland Revenue, [1918] 2 K.B. 720; and Commissioners of Inland Revenue v. Auld and Pemberton, [1919] 2 I.R. 66, followed.
At a meeting of the Commissioners for the General Purposes of the Income Tax Acts, and for executing the Acts relating to the Inhabited House Duties, for the Division of the City of Glasgow in the County of Lanark, held at Glasgow on the 25th June, 1917, John Smith & Son (hereinafter referred to as the Appellants) appealed against an assessment under Schedule D of the Income Tax Acts, for the year ending 5th April, 1917, on the sum of £27,745, in respect of the profits on an average of the three preceding years of the business of shipping and coal agents carried on by them at 5 Dixon Street, Glasgow, and claimed as a deduction from profits for the year ending 31st December, 1915, which entered into the average, the sum of £30,000 paid during the course of that year to the trustees of the late John Smith, junior, for unexpired coal contracts.
The Appellants also appealed against an assessment for Excess Profits Duty made under Section 38 of the Finance (No. 2) Act, 1915, in the sum of £52,081 for the accounting period from 7th March, 1915, to 31st December, 1915, computed as follows:-
Gross profit on coal account, |
£98,897 |
Sundry discounts and allowances, |
419 |
£99,316 |
|
Expenses, other than management salary to Thomas K. Fair, |
7468 |
£91,848 |
|
Portion of remuneration to Thomas K. Fair, authorised by the Commissioners of Inland Revenue to be allowed, £2,000 per annum for 300 days, |
1644 |
Carried forward |
£90,204 |
Brought forward |
£90,204 |
Add |
|
|
Adjustment for decreased capital under Sub-section (2) of Section 41 of the |
162 |
£90,366 |
|
Pre-war standard of profits, |
£4,137 |
Statutory allowance, |
200 |
£4,337 |
|
Proportion thereof for 300 days, |
3564 |
Excess profits charged to duty, |
£86,802 |
Duty thereon at 60 per cent., |
£52,081 |
The Appellants claimed that in arriving at the excess profits the following deductions should be made:-
(2) £30,000 paid to the trustees of the late John Smith, junior, for unexpired coal contracts; and
(3) £20,615 17s. 9d. described in the profit and loss account as management salary to Thomas Keith Fair, instead of £1,644 authorised by the Commissioners of Inland Revenue to be allowed.
I. The following facts were proved or admitted, viz.-
(2) The business of John Smith & Son has been carried on for many years, and John Smith, junior, was sole partner up to 7th March, 1915, the date of his death.
(3) By trust disposition and settlement, dated 17th October, 1908, and codicil, dated 7th January, 1909, the said John Smith, junior, left the business after his death to his son John Ross Smith, declaring that "the "whole assets of the said business shall be taken "over at the value which may be ascertained from a "balance sheet made up, as at the date of my death, "by a chartered accountant, but nothing shall be "charged for goodwill," and left the capital of his estate in trust for his children, and their issue. Excerpts from the said trust disposition and settlement, and codicil, are appended hereto, and form part of this Case.(1)
-
(4) The acting trustees under the aforementioned trust disposition and settlement are:-Mrs. Mary Ross Dron or Smith, wife of testator, Mr. Thomas Keith Fair, son-in-law of testator, and Mr. Alfred William Smith, son of testator.
(5) John Ross Smith became sole partner of the business from 7th March, 1915, and has since carried it on as a continuing business under the name of John Smith & Son.
(6) A balance sheet was prepared by Aikman & Glen, C.A., dated 27th October, 1915, giving the assets and liabilities of the business as at 6th March, 1915. In this a sum of £30,000 is entered for "coal contracts- "amount to be paid as value of same." On this entry the accountants report as follows:-
With reference to the value placed upon the coal contracts "current at the date of the truster's death, we "have to report that in view of the many contingencies "as at that date, viz., 6th March, 1915, "inter alia, the duration of the war, Government "export restrictions, freight difficulties, the terms of "the contracts as to deliveries, etc., and in view, "further, that any sale of the contracts to outsiders "might not have been recognised by the colliery "owners, we consider that the value (£30,000) placed "on same, which we understand has been agreed to "by Mr. John R. Smith and the trustees, is in all the "circumstances a fair and equitable one. It appears "to us very doubtful if, in view of all the above contingencies, "such a large sum would have been given "at the date of the truster's death by any outside "party taking over the business, and all the risks and "responsibilities under the contracts.
(7) A copy of this balance sheet was produced, is appended hereto, and forms part of this Case.(1) The amount £27,927 18s. 1d. entered in the balance sheet as payable to the trustees by J.R. Smith, was brought out as shown in the statement annexed thereto, which forms part of this Case.(1)
(8) The said coal contracts were entered into by the late John Smith, junior, and several colliery owners, and by the contracts the latter agreed to deliver to the former certain quantities of coal at fixed prices. The said contracts had various terms of duration, but none extended beyond 31st December, 1915.
(9) A profit and loss account for the period from 7th March, 1915, to 31st December, 1915, prepared by Thomas Kelly, C.A., and dated 23rd August, 1916, shows a profit of £71,231 15s. 7d., from which is deducted £30,000 as "sum paid to the trustees of the late John "Smith, being agreed on value of current contracts "taken over by the new firm." A copy of this profit and loss account was produced, is appended hereto, and forms part of this Case.(1)
(10) The Appellants admitted that the said Thomas Keith Fair was son-in-law of the late John Smith, junior, and brother-in-law of John Ross Smith; that he signed cheques on behalf of the Appellants; that, together with John Ross Smith, he managed the business of the Appellants, and was a manager or a person concerned in the management of the business; that the said sum of £20,615 17s. 9d. paid to him was not calculated by reference to the profits of any section of the business, but consisted of one-third of the profits of the firm; that he was not an employee of the business before the outbreak of the present war; and that in the last pre-war trade year no sums were allowed or paid for remuneration of managers.
II. Mr. J. Condie S. Sandeman, K.C., Advocate, attended on behalf of the Appellants and withdrew the claim to have the £30,000 paid for unexpired coal contracts deducted for Income Tax purposes from the profits of the year ending 31st December, 1915.
In support of the Excess Profits Duty appeal he contended:-
(2) That the contracts to secure certain quantities of coal at fixed prices made by John Smith, junior, with several colliery owners were, in so far as not completed at the date of his death, taken over by his son John Ross Smith on succeeding to the business, who paid £30,000 for them to John Smith, junior's trustees, after arranging verbally with the colliery owners that the contracts would...
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