Macsaga Investment Company Ltd v Lupton (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 15 March 1967 |
| Date | 15 March 1967 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income Tax - Capital allowances - Lessor of machinery or plant - Lifts, etc., in building let on full repairing lease - Tenant not a trader - Whether wear and tear allowance due to lessor - Meaning of "the burden of the wear and tear" - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c.10), ss. 298 and 299.
An office building containing heating equipment, lifts, sprinklers, incinerators, etc., was sublet as a whole by the Appellant Company to the Minister of Works on a repairing lease for 35 years from 24th June 1958. The Company was a property investment company and did not carry on a trade or business of letting machinery or plant. The Minister carried on no trade in the building. The repairing covenants contained no exception for "fair wear and tear", and the Minister expected to have to renew the lifts and boilers during the term of the sublease.
The Company claimed an allowance under s. 298, Income Tax Act 1952, for the year 1960-61 in respect of all the aforesaid installations on the grounds that they were machinery or plant and were let on such terms that the burden of the wear and tear fell directly on the Company. For the Crown it was contended (i) that "machinery or plant" in s. 298(1) meant machinery or plant used by the lessee in his trade or business, and (ii) that the burden of the wear and tear did not fall directly on the Company. The Special Commissioners upheld the Crown's contention on the first point, but considered that the burden of the wear and tear fell directly on the Company.
In the High Court and above the Company's contention on the burden of the wear and tear was put in the form that it meant deterioration occasioned by use in so far as that deterioration cannot be made good by maintenance in good and substantial repair. For the Crown it was contended (a) that on that basis the burden would fall on the Minister in respect of items with a life expected to end during the term of the sublease; alternatively, (b) that the burden of the wear and tear meant the burden of maintaining and restoring.
Held, in the Chancery Division, that the burden of the wear and tear of machinery or plant fell on a tenant who covenanted to maintain the same and deliver it over in good condition at the end of the lease. The Court of Appeal was divided on this point: Lord Denning M.R. (who declined to deal with point (2) below) considered (applying Boarland v. Pirie, Appleton & Co. Ltd. 23 T.C. 547;[1940] 1 K.B. 841; [1940] 2 K.B. 491) that "wear and tear" meant depreciation and the burden thereof fell on the Company; Salmon L. J. reached the same conclusion as the Chancery Division; Harman L. J. declined to decide the point.
Held, in the Court of Appeal,
(1) that s. 298 applied only to machinery and plant in use for the purpose of a trade;
(2) (by Harman and Salmon L.JJ.) that,
whatever the meaning of "the burden of the wear and tear", the burden fell on the Minister in the case of plant with a life expected to end during the term of the sublease.Stated under the Income Tax Act 1952, s. 324(2) (b) and (c) and s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 15th July 1964 Macsaga Investment Co. Ltd. (hereinafter called "the Company") brought before the Commissioners, under proviso (c) to s. 324(2) of the Income Tax Act 1952, a claim under s. 298 of that Act for an allowance in respect of wear and tear of machinery or plant for the year 1960-61, to which H.M. Inspector of Taxes had objected.
2. Shortly stated, the questions for our decision were (1) whether certain heating equipment, lifts, sprinklers, incinerators and fittings ("the disputed items") were machinery or plant within the meaning of s. 298(1) of the Income Tax Act 1952; (2) if the disputed items were such machinery or plant, whether they were let upon such terms that the burden of their wear and tear fell directly upon the Company as lessor, so as to entitle the Company to the allowance claimed under the said section.
(2) For the Company Mr. P. J. Garvey gave evidence before us. He is a building surveyor employed by Sir Robert McAlpine & Sons Ltd. ("McAlpines"), and had been concerned with the building of Southbridge House, the premises which contained the disputed items.
(3) For the Crown Mr. A. T. Chambers gave evidence before us. He is an estate surveyor employed in the Ministry of Public Buildings and Works, and was responsible for the estate management of Southbridge House.
4. The Company was incorporated on 16th October 1956, and it is what is commonly described as a property investment company.
5. The Company held a building lease of a site in Park Street, S.E.1, and entered into an agreement with McAlpines for the erection thereon of a building known as Southbridge House. When the building was completed the Company leased the whole of it to the Minister of Works for a period of 35 years from 24th June 1958 by an underlease of 11th December 1958. A copy of this underlease (without its annexed plans, which are of considerable bulk and irrelevant to the questions in issue) is annexed hereto and forms part of this Case, to which it is the only exhibit(1).
(2) Southbridge House is a normally constructed office block of reinforced concrete.
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(3) It has two passenger lifts and a fireman's lift, of the automatic opening type. In 1960 the Ministry of Public Buildings and Works had become dissatisfied with these lifts: they were too slow for the Ministry's standard, which required that a building must be cleared within 30 minutes, and they had given constant trouble from the outset; moreover, they were not of a type the Ministry would normally use. The Ministry in 1960 had therefore in mind to replace the two passenger lifts and to install a third passenger lift by building a further lift shaft. The consent of the Company to this work was asked for, as it was considered that this consent was necessary under the terms of the underlease. The Company was not asked to contribute to the cost of the
new installation. It was, however, asked to contribute to the cost of making the existing lifts more adequate to the needs of the building, because the Ministry felt aggrieved that with a new installation it was faced so soon with this expenditure, but the Company was not prepared to do this unless its contribution was "rentalised" at 10 per cent. This was not acceptable to the Ministry, and the alterations were eventually carried out at the lessee's sole expense. The life of the existing lifts is about 25 years. (4) Heating is by oil-fired burners, with circulating water pumped to the radiators by electric pumps. The boilers have an expected life of 25 years, and the Ministry anticipated that it would have to renew them within the 35-year term of the underlease.
7. The Company was not carrying on any business of letting machinery or plant, and the Ministry was not carrying on any trade or business in Southbridge House.
8. It was contended on behalf of the Appellant Company that:
(2) the disputed items were machinery or plant within the meaning of s. 298(1) of the Income Tax Act 1952;
(3) the disputed items were let upon such terms that the burden of their wear and tear fell directly upon the Appellant Company, and all of them were in use at the end of the year of assessment 1960-61.
9. It was contended on behalf of H.M. Inspector of Taxes that:
(2) the deeming provision of s. 298(2) only came into operation where there was a letting of machinery or plant within the meaning of s. 298(1);
(3) the disputed items were not "machinery or plant" within the meaning of s. 298(1), since in this subsection those words meant machinery or plant used by a lessee in his trade or business;
(4) even if the disputed items were machinery or plant within the meaning of the said subsection, they were not let upon such terms that the burden of their wear and tear fell directly on the Appellant Company, as required by s. 298(1).
(5) the Appellant's claim should therefore be refused.
10. The following cases were cited to us:
Holland v. Hodgson ELR(1872) L.R. 7 C.P. 328
Yarmouth v. France, ELR(1887) 19 Q.B.D. 647
Boarland v. Pirie, Appleton & Co. Ltd.ELRELR(1)
Hinton v. Maden & Ireland Ltd.WLR(2)
38 T.C. 391
Lurcott v. Wakeley & Wheeler ELR[1911] 1 K.B. 905
Haskell v. Marlow ELR[1928] 2 K.B. 45
Jarrold v. John Good & Sons Ltd.WLR(3)
Burnley Steamship Co. v. Aikin TAX(1894) 3 T.C. 275
11. We, the Commissioners who heard this appeal, reserved our decision and gave it in writing on 19th August 1964 as follows:
A
We are satisfied that the heating equipment, lifts, sprinklers, incinerators and fittings were let by the underlease of 11th December 1958. In our view the first question we must decide is whether these items were machinery or plant within the meaning of s. 298(1). S. 298 applies, as is the case here, when the lessor is not carrying on the trade of letting machinery or plant, and it is common ground that no trade was being carried on at Southbridge House. It is the Crown's contention that the items in dispute are not machinery or plant within the meaning of subs. (1) because they are not in use in the trade of the lessee. We think it must first be decided whether the conditions of subs. (1) are satisfied, and it is when it has been decided that they are that the deeming provision of subs. (2) comes into operation.
If this is the right approach, the position in the present case is that the items in dispute are not in use in any trade at all. Section 298 is in Chapter II of Part X of the Act, under a heading "Supplemental". It appears to us that the scheme of Chapter II (with the exception of the matters referred to in s. 302) is to provide...
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