Kilmarnock Equitable Co-operative Society Ltd v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 1963 |
| Date | 1963 |
| Court | Court of Session |
COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Profits Tax - Capital allowances - Industrial building or structure - Building for screening and packing coal - Whether coal subjected to a process - Whether building used for purpose ancillary to a retail shop - Income Tax Act, 1952 (15 & 16 Geo. VI & 1 Eliz. II, c. 10), Section 271.
The Appellant Society, which carried on business as general merchants, did a substantial trade inter alia in the sale of coal in bulk. It also sold coal in 28-lb. paper packets retail through its grocery branches and in its selfservice stores and wholesale to other co-operative societies; it had hoped to develop a substantial wholesale business in these packets but at the material times the retail sales were the larger. In the year to March, 1962, the Society incurred capital expenditure on the erection of a building at its coal depot to house machinery to pre-pack coal. The coal was conveyed by conveyor belt from wagons in the yard into a hopper near the roof, fed down a chute through a vibratory screen where dross was removed, passed by conveyor belt to the weighing point, packed into 28-lb. bags, and deposited at floor level to await disposal.
On appeal against assessments to Income Tax under Case I of Schedule D for the year 1963-64 and to Profits Tax for the chargeable accounting period of twelve months to 9th March, 1963, the Society claimed that it was entitled to capital allowances in respect of expenditure on the building as an industrial building within Section 271, Income Tax Act, 1952. The General Commissioners found that the screening and packing of the coal was not a process within Section 271 and that the building was used for a purpose ancillary to those of a retail shop.
Held, that the Society was entitled to the allowances claimed.
(1) Kilmarnock Equitable Co-operative Society, Ltd. v.Commissioners of Inland Revenue
CASE
Stated by the Commissioners for the General Purposes of the Income Tax for the Division of Cuninghame in the County of Ayr under Section 64 of the Income Tax Act, 1952, for the opinion of the Court of Session as the Court of Exchequer in Scotland.
1. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Cuninghame in the County of Ayr held at Royal Bank Buildings, The Cross, Kilmarnock, on 7th September, 1964, Kilmarnock
Equitable Co-operative Society, Ltd. (hereinafter called "the Society"), appealed against an assessment made upon it under Case I of Schedule D for the year 1963-64 in the sum of £100,000 less capital allowances of £13,500.2. The question for our decision was whether the Society, under Part X, Chapter I, Sections 265, 266 and 271 of the Income Tax Act, 1952, and Section 16 and 2nd Schedule to the Finance Act, 1954, was entitled to deduct from its assessable profits initial, annual and investment allowances amounting to £97 in respect of certain expenditure incurred by it on a building at its coal depot in Forge Road, Kilmarnock.
3. Evidence was given before us on behalf of the Society by Mr. Stewart James Wallace, its managing secretary, and Mr. Robert Niven, its transport and fuel department manager.
4. The following facts were proved or admitted:
(a) The Society carries on business as general merchants in Kilmarnock and district and its objects include manufacturing of all kinds.
(b) The Society's annual turnover exceeds £2,500,000 of which not more than £40,000 is wholesale business.
(c) The Society does a substantial trade in the sale of coal in 1-cwt. bags and in bulk. This coal is distributed to its customers by lorry from the Society's coal yard or depot.
(d) The Society also sells coal in 28-lb. paper packets retail through its grocery branches and in its self-service stores and wholesale to other co-operative societies.
(e) In introducing the sale of 28-lb. paper packets of coal the Society had hoped to develop a substantial wholesale business but in fact their hopes have not thus far been fulfilled. For the year to March, 1963, the Society sold rather more packeted coal in its shops or stores than it did wholesale, and for the year to March, 1964, it sold twice as much coal retail in shops as it did wholesale
(f) During the year to March, 1962, expenditure amounting to £1,533 18s. was incurred by the Society on the erection of a building at its coal depot at Forge Road, Kilmarnock, to house machinery to pre-pack coal. No claim for allowances was made for the year 1962-63 as the Society had not then thought that the expenditure might qualify for the allowances now claimed. In the year to March, 1963, further expenditure totalling £391 15s.6d. was incurred on the building making in total the sum of £1,926 13s. 6d. spent on building. Machinery costing £1,760 was installed in the building. Coal sold in 1-cwt. bags or in bulk was not handled in this building.
(g) What happens in the building is that the coal, which is bagged from wagons in the coal yard or depot, is conveyed by conveyor belt and is deposited in a hopper near the roof of the building. It is then fed down a shute through a vibratory screen where dross is removed. The coal is then passed by conveyor belt to the weighing point where it is filled into paper packets. Immediately the set weight of 28 lbs. is registered on the weighing machine the machinery is cut off and the filled packet is removed from the machine and is closed by stitching. The packet is then placed on a gravity conveyor to floor level where it awaits disposal.
5. Mr. Wallace, the managing secretary of the Society, explained that the purpose of erecting the building and installing the machinery was not only to provide packeted coal to the members of the Society but also to endeavour to develop a trade in packeted coal with other coal merchants in the Kilmarnock area and possibly with other neighbouring co-operative societies. Packeted coal was on sale in thirty of the Society's shops.
6. Mr. Niven, the transport and fuel department manager of the Society, explained that customers did not resort to the coal depot but that the normal practice was for customers who bought packeted coal to take delivery personally at the retail shop at which they normally trade. There were no facilities for receiving customers at the coal depot nor was it sited in a district where there were other retail shops.
7. Mr. William K. Geddes, chartered accountant, made reference on behalf of the Society to Section 271 Sub-sections (1)(c), (2), (3) and (5) of the Income Tax Act, 1952, and contended that the coal was being subjected to a process, i.e. the breaking of bulk, separating of dross and packeting. He pointed out that the subjection to any process was a wider term than manufacturing and while he did not contend that the whole of the trade qualified for an allowance under the said Section he claimed that the Society was entitled to an allowance for that part of its trade which consisted of subjecting the goods to a process. He contended that the coal depot was not a retail shop, that there was no display and that there were no customers present and that the extent of the trade in packeted coal was not relevant. He summarised his contentions by stating that the Society was entitled to an allowance under the said Section, (1) because the operations in the coal depot were carried on by machinery and the goods were subjected to a process, and (2) because the building was not a retail shop.
8. It was agreed between the Society and the Inland Revenue that if we allowed the Society's appeal the revised amount of the assessment would be £99,531 less capital allowances of £13,871, whereas if we dismissed the appeal and refused the allowances totalling £97 as aforesaid the revised amount of the assessment would be £99,531 less capital allowances of £13,774.
9. Mr. J. Rankin, H.M. Inspector of Taxes, contended on behalf of the Crown (inter alia):
(2) that the coal packeting building was not an industrial building or structure within the definition contained in Section 271, Income Tax Act, 1952;
(3) that the building was not in use for the purposes of a trade which consisted in the manufacture of goods or materials or the subjection of goods or materials to any process;
(4) that the building was in use for a purpose ancillary to the purposes of a retail shop;
(5) that no allowances were due in respect of the expenditure on the coal packeting building.
10. We, the Commissioners who heard the appeal, decided as follows:
(2) that on the evidence we were not satisfied that the separation of the coal from the dross and the filling of the coal into paper bags was a process as envisaged by Section 271;
(3) that on the evidence we were satisfied that even if this were to be regarded as a process the building was being used for a purpose ancillary to the purposes of a retail shop.
Consequently we dismissed the appeal and determined the assessment in the sum of £99,531 less capital allowances of £13,774.
11. The Society immediately after the determination of the appeal declared its dissatisfaction therewith as being erroneous in point of law and in due course requested us to state a Case for the opinion of the Court of Session pursuant to Section 64 of the Income Tax Act, 1952. This we now do.
12. The question of law for the opinion of the Court is whether, on the facts stated, we were right in dismissing the appeal on the ground that the Society's expenditure on the coal packeting building did not qualify for any allowance under Chapter I of Part X of the Income Tax Act, 1952.
R.W. Blackwood, MacAndrew, J.N. Howie, M. Lamont, Wm. Neil Commissioners for the General Purposes of the Income Tax for the Cuninghame Division of the County of Ayr.
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