Luke v Commissioners of Inland Revenue

JurisdictionUK Non-devolved
JudgeLord Chancellor,Lord Reid,Lord Jenkins,Lord Guest,Lord Pearce
Judgment Date20 February 1963
Judgment citation (vLex)[1963] UKHL J0220-2
CourtHouse of Lords
Docket NumberNo. 6.
Date20 February 1963
Commissioners of Inland Revenue

[1963] UKHL J0220-2

Lord Chancellor

Lord Reid

Lord Jenkins

Lord Guest

Lord Pearce

House of Lords

After hearing Counsel, as well on Monday the 14th, as on Tuesday the 15th, days of January last, upon the Petition and Appeal of William E. Luke, of The Linen Thread Company Limited, 95 Bothwell Street, Glasgow, C.2, praying, That the matter of the Interlocutor set forth in the Schedule thereto, namely, an Interlocutor of the Lords of Session in Scotland, of the First Division of the 2d of May 1962, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Interlocutor might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Interlocutor of the 2d day of May 1962, complained of in the said Appeal, be, and the same is hereby, Recalled, and that the Determination of the Commissioners for the General Purposes of the Income Tax for the Division of the Lower Ward of the County of Lanark of the 17th day of April 1961, thereby Reserved, be, and the same is hereby, Restored: And it is further Ordered, That the said Cause be, and the same is hereby, remitted back to the Court of Session in Scotland to proceed as accords: And it is further Ordered, That the Respondents do pay, or cause to be paid, to the said Appellant the Costs of the Action in the Court of Session and also the Costs incurred by him in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered. That unless the Costs, certified as aforesaid, shall be paid to the party entitled to the same within one calendar month from the date of the certificate thereof, the Court of Session in Scotland, or the Judge acting as Vacation Judge, shall issue such summary process or diligence for the recovery of such Costs as shall be lawful and necessary.

Lord Chancellor

My Lords,


The Appellant, Mr. William Edgell Luke, was at all material times the managing director of the Linen Thread Company Limited, whose headquarters were in Glasgow. The Company had wanted him to live in Ayrshire, and in November, 1951, he bought the house "Deaseholm" at Troon of his own free choice for £10,000. In addition to this sum he spent about £4,000 on initial repairs and on upkeep in the next three years. In 1954 the Appellant advertised the house for sale as he had found it too big and expensive to keep up. The chairman of the Company saw the advertisement, but still wanted the Appellant to live there for the Company's benefit, and it was accordingly proposed that the Company should purchase the house and let it to the Appellant. This proposal, which the Appellant stated was spontaneous and unsolicited, was acted upon, and the Company bought the house for £12,000 and let it to the Appellant at a rent of £148 per year, which was the gross annual value.


Under the tenancy agreement the Appellant was responsible for all occupier's rates and charges, for all internal repairs and decorations, and for all upkeep and maintenance of the grounds and garden; and the Company was responsible for all repairs to the fabric of the house and other buildings, and for the fences and boundary walls.


There does not appear to be anything unusual in the tenancy agreement, and it was found as a fact by the General Commissioners that the transfer of the house from the Appellant to the Company was at arm's length, as was also the tenancy agreement, after a survey had been carried out by a professional surveyor usually employed by the Company in its acquisition of heritable properties.


On the 15th May, 1957, the Appellant gave up the tenancy. During the period of his occupation as tenant the Company "as owners and in terms of the tenancy agreement", so the Case states, incurred expenditure on the following items in relation to the house:—


The total expenditure on repairs amounted to £694 and on the rates (owners), insurance and the excess of feu duty over the annual value amounted to £256.


The Case does not distinguish between expenditure incurred by the Company as owners and that incurred under the terms of the tenancy agreement. As owners the Company would, I understand, be liable for owner's rates and feu duty and it would seem unlikely that the amount spent by it on insurance, namely, £19, was required to be spent under the terms of the tenancy agreement.


It was not disputed that the expenditure on repairs incurred by the Company was expenditure the Company were obliged to make under the terms of that agreement.


The Respondents contended that the excess of this expenditure over the rent paid is, by virtue of sections 160 and 161 of the Income Tax Act, 1952, to be treated as taxable income in the hands of the Appellant, and they accordingly assessed him to income tax under Schedule E in respect of emoluments from his office of managing director in the following terms:—








The Appellant appealed to the General Commissioners, who discharged the assessments, as they were of the opinion that the sums involved were not liable to tax. The Revenue then appealed to the Court of Session, who reversed the Commissioners, and now the Appellant before your Lordships seeks to restore the finding of the Commissioners.


The simple facts of this case necessitate a close examination of Chapter II of Part VI of the Income Tax Act, 1952. That chapter is headed "Expenses Allowances to Directors and Others" and contains provisions first enacted in 1948.


The material part of the first section in this chapter, section 160, reads as follows:—

"160.—(1) Subject to the provisions of this Chapter, any sum paid in respect of expenses by a body corporate to any of its directors or to any person employed by it in an employment to which this Chapter applies shall, if not otherwise chargeable to income tax as income of that director or employee, be treated for the purposes of paragraph 1 of the Ninth Schedule to this Act as a perquisite of the office or employment of that director or employee and included in the emoluments thereof assessable to income tax accordingly:

Provided that nothing in this subsection shall prevent a claim for a deduction being made under paragraph 7 of the said Ninth Schedule in respect of any money expended wholly, exclusively and necessarily in performing the duties of the office or employment."


The effect and object of this provision is clear. It was to prevent evasion of liability to tax by the payment of expenses to directors of bodies corporate and other persons employed to whom the chapter applies. Save and in so far as deductions might be made in respect of moneys expended wholly, exclusively and necessarily in performing the duties of the office or employment the amount paid as expenses was to be included in the emoluments of the office or employment and so made subject to tax.


It would not have sufficed to prevent evasion of liabilities to tax merely to have dealt with expenses. Section 161 was, as the marginal note to that section indicates, directed to benefits in kind.


Section 161 (1) reads as follows:—

"Subject to the following provisions of this Chapter, where a body corporate incurs expense in or in connection with the provision, for any of its directors or for any person employed by it in an employment to which this Chapter applies, of living or other accommodation, of entertainment, of domestic or other services or of other benefits or facilities of whatsoever nature, and, apart from this section, the expense would not be chargeable to income tax as income of the director or employee, paragraphs 1 and 7 of the Ninth Schedule to this Act, and section twenty-seven of this Act, shall have effect in relation to so much of the said expense as is not made good to the body corporate by the director or employee as if the expense had been incurred by the director or employee and the amount thereof had been refunded to him by the body corporate by means of a payment in respect of expenses."


As Lord Clyde observed in the course of his judgment in the Court of Session, the opening words of this subsection are very wide and the Revenue contend that the expenditure in question incurred by the Company was in or in connection with the provision of living accommodation, and so that that expenditure less the sum "made good" by the payment of rent is subject to tax.


The first question that falls for consideration is whether the sum which was spent by the Company in discharge of owners' rates, feu duty and for insurance can properly be regarded as expended in the provision of living accommodation for the Appellant or in connection therewith. In my opinion it cannot properly be so regarded. As owners of the property "Deaseholm" the Company had to pay owners' rates and feu duty and it was to their interest to see that the property was insured.


The Solicitor-General in the course of his clear and interesting argument contended that, as the purpose of the sale by the Appellant to the Company and of the letting to the Appellant was to relieve the Appellant of expenditure in relation to the property which he was unable to afford, any expenditure incurred by the Company in relation to "Deaseholm" was to be regarded as expenditure for living accommodation for him. He maintained that it was less...

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