MANN CROSSMAN & AULIN, Ltd v COMPTON (HM INSPECTOR of TAXES)
| Jurisdiction | England & Wales |
| Judgment Date | 31 March 1947 |
| Date | 31 March 1947 |
| Court | King's Bench Division |
NO. 1385-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
Income Tax, Schedule D, and National Defence Contribution - Expenditure on rehabilitation of licensed houses - Whether extra expenditure on alterations and improvements incurred by keeping houses open during rehabilitation allowable as a deduction in computing profits.
The Appellant Company carried on the trade of brewers and owned a large number of licensed houses. In 1938 the Company decided upon extensive works to rehabilitate 238 of the licensed houses, which had fallen into decay. In the interests of the Company's trade these houses were kept open while the work was proceeding, and in consequence greater expenditure on the alterations and improvements was necessary than if the houses had been closed. The Company contended that the extra expenditure incurred was revenue expenditure and accordingly an allowable deduction in computing profits.
The Special Commissioners decided on appeal that the extra expenditure was capital expenditure and not an allowable deduction.
Held, that if the question was one of fact, there was ample evidence to support the Commissioners' decision; alternatively, if the question was one of law, that the extra expenditure was capital expenditure.
(1) Mann Crossman &Paulin, Ltd. v. Compton (H.M. Inspector of Taxes)
CASE
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts, for the opinion of the King's Bench Division of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 23rd December, 1942, and 27th September, 1943, Mann Crossman &Paulin, Ltd. (hereinafter called "the "Company") appealed against an assessment to Income Tax made upon the Company for the year 1940-41 under Case I of Schedule D of the Income Tax Act, 1918, in the estimated sum of £250,000 less wear and tear £19,000.
At a further meeting held on 15th February, 1945, the Company appealed against further assessments under Case I for the years, and in the estimated amounts, set out below:-
1937-38 |
£4,000 |
(additional assessment) |
1938-39 |
£11,212 |
( ,, ,, ) |
1939-40 |
£12,587 |
( ,, ,, ) |
1941-42 |
£250,000 |
|
1942-43 |
£225,000, |
less wear and tear £10,000 |
2. The Company, which carries on the trade of brewers, owns a large number of licensed houses, about a thousand in all. Over a
period of years some 238 of these houses fell into decay, with adverse effects on the Company's trade, and in 1938 the Company decided to carry out a large scheme for their rehabilitation; this scheme involved alterations to meet the up-to-date demands of the public, which had grown more exacting.3. The primary question for the Company to consider was whether a house should be shut down or kept open during its rehabilitation. As a matter of policy the Company had always aimed at getting houses near the licensed premises of some other brewer or as far from one of its own as possible. If, therefore, one of its houses was shut down during rehabilitation, no beer would be sold there, and the competitive brewer would consequently gain an advantage. Against this had to be balanced the obvious fact that to keep the house open during the work upon it would add considerably to the cost of the work, which had to be arranged (and very often stopped entirely) so as not to interfere with the trade. If the houses had not been kept open for trade in this way the additional cost would not have been incurred.
4. The Company decided it was to the best advantage of its trade to keep its houses open. The consequence was that the houses were in due course rehabilitated at a greater cost than would otherwise have been incurred.
The question of principle for our determination was whether the difference or excess cost represented expenditure of a revenue nature for the purpose of maintaining the Company's trade, as was contended for the Company, or whether it was expenditure of a capital nature for the purpose of improving the houses, as was contended for the Crown. The Crown did not contest that the money was laid out wholly and exclusively for the purpose of the Company's trade.
5. As a first step in the execution of its scheme, the Company caused each licensed house requiring extensive reconstruction to be surveyed by its estate department. The staff surveyor then laid his report before the Company's architect, who in turn got out a specification which involved either rebuilding or heavy reconstruction, full provision being made in the said specification for keeping the house open and in a condition to maintain trade meanwhile. The quantity surveyors employed by the Company then prepared the bills relating to the house, and put them out to the building trade on tender. In due course a builder was selected and given the contract, and the rehabilitation was carried out. Very large expenditure was incurred in the execution of the scheme.
6. As and when parts of the work were done, the Company's architect allocated the expenditure between capital and revenue, and his allocation was accepted by the directors of the Company, the sums allocated to capital being charged by the Company to improvements of properties and capitalized.
7. The Inland Revenue authorities requested that, in order to enable them to satisfy themselves as to the amounts which could properly be allowed as deductions for Income Tax purposes, the actual details of expenditure should be provided. This was found not to be possible: the architect originally employed on the work had died, and the details of costing and basis of allocation between capital and revenue could not be ascertained.
In these circumstances it was eventually agreed that the expenditure on nine selected houses should be got out and analysed, the items being estimated as closely as possible where actual figures were not available. From these analyses the question of principle stated in paragraph 4 of this Case emerged.
8. A summarised "Analysis of Builders' Accounts", giving figures for the said nine houses under the headings:-
Total expenditure
Cost of new work
Repairs
Cost of keeping house open to maintain trade
Number of barrels sold during renovations
is annexed, marked "A", and forms part of this Case(1).
There is also annexed, marked "B", and forming part of this Case(1) a detailed analysis for each of the nine houses, of the expenditure on repairs, and of the extra cost of the work due to the premises being kept open for trade. The facts and, as nearly as possible, the figures contained in these analyses were accepted by the Respondent as accurate.
9. The facts and figures relating to one of the aforesaid nine houses, viz., the "Lord Nelson", were agreed by both parties to be representative, so far as concerns the question of principle at issue. They were therefore taken as a basis for the purpose of presenting the case before us.
10. The work on the "Lord Nelson" lasted for about fifteen months, and the house was kept open during all this time. The total amount expended thereon was £9,023 13s., of which £6,833 15s. is agreed by the Company to be capital expenditure.
The items making up the difference between these two sums of £9,023 13s. 0d., and £6,833 15s. 0d.,namely £2,189 17s. 0d., are set out in the said analysis marked "B" annexed to this Case and fall therein under the following headings:-
(a) Repair items.
(b) These items amount in all to £1,213 9s. 2d., and are agreed by the Crown to represent revenue expenditure.
(c) Extra cost incurred in maintaining trade during the course of the carrying out of the alterations.
These items amount in all to £976 8s. 5d., and are claimed by the Company to be revenue expenses as representing the extra cost of the work of rehabilitation due to keeping the "Lord "Nelson" open for trade during the progress of the work. Trade was in fact maintained, 612 barrels of beer being sold during this time, as...
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