Odeon Associated Theatres Ltd v Jones (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 03 November 1971 |
| Date | 03 November 1971 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income tax, Schedule D - Trade - Deduction - Expenses - Repair of fixed assets - Attributable to dilapidation prior to acquisition - Whether chargeable against capital or income.
The Appellant Company carried on the trade of proprietors of cinematograph film theatres, as did other companies in the same group. In order to expand during and immediately after the war of 1939-45 it purchased a number of theatres from other proprietors both within and outside the group. The purchase price paid for any theatre was not affected by its state of repair. From the beginning of the war until the early 1950s the building of theatres was prohibited, as was decorating and repair work except for a small amount of essential maintenance, which was inadequate to keep theatres in a proper state of repair. If a theatre was in a poor state of repair on acquisition the effect on public attendance was minimal, since all competing theatres were in a similar state. The type of work necessary to put the Company's theatres into a proper state of repair was maintenance and repair work, which in normal times is carried out continuously. Such repairs were carried out by the Company in due course, and were charged in their entirety to trading account, whether attributable to current user or ranking as deferred repairs which could be related back for the purposes of excess profits tax to periods for which that tax was chargeable.
Evidence was accepted that, in accordance with the standard practice of commercial accounting in relation to groups of companies, where a theatre with outstanding deferred repairs was transferred from one member of a group to another the best method was to take it out of the transferor's and into the transferee's balance sheet at book value irrespective of the amount of the deferred repairs, so that the consolidated group balance sheet showed no increase in total assets, and to charge the deferred repairs in the transferee's profit and loss account and the group's consolidated profit and loss account. If the deferred repairs were capitalised in the transferee's accounts the consolidated accounts would give an incorrect view of the state of the group's affairs unless a compensating adjustment were made in the consolidated accounts.
On appeal against assessments to income tax under Schedule D for the years 1946-47 to 1955-56, the Company contended that there should be allowed as an expense sums expended on repairs to cinemas owned by it notwithstanding that the expenditure could be related to their condition when it acquired them. For the Crown it was contended that no allowance fell to be made for expenditure on repairs to cinemas relating to user prior to their acquisition by the Company. The Special Commissioners held, following Law Shipping Co. Ltd. v. Commissioners of Inland Revenue12 T.C. 621, that the said expenses did not accrue in the process of earning the Company's profits or gains and were therefore capital expenses.
On a remission, the Commissioners found that, if all the theatres had been acquired from vendors outside the group, the disputed expenditure would, in accordance with current principles of sound commercial accounting, have been dealt with as a charge to revenue in the purchasers' accounts.
Held, that the Company was entitled to the deductions claimed.
Stated under the Income Tax Management Act 1964, s. 12(5), and the Income Tax Act 1952, 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 20th, 21st and 22nd November 1967, Odeon Associated Theatres Ltd. (hereinafter referred to as "the Appellant") appealed against the undermentioned assessments to income tax made upon it under the provisions of Schedule D of the Income Tax Acts 1918 and 1952.
£ |
||
1946-47 |
Cinema proprietors |
75,000 |
1947-48 |
Cinema proprietors |
150,000 |
1948-49 |
Cinema proprietors |
328,000 |
1949-50 |
Cinema proprietors |
587,600 |
1950-51 |
Cinema proprietors |
370,000 |
1951-52 |
Cinema proprietors |
510,000 |
1952-53 |
Cinema proprietors |
340,000 |
1953-54 |
Cinema proprietors |
350,000 |
1954-55 |
Cinema proprietors |
375,000 |
1955-56 |
Cinema proprietors |
400,000 |
The grounds of the appeal were that, in computing for income tax purposes the profits or gains of the Appellant for the accounting periods relevant to the assessments under appeal, there should be allowed as an expense sums expended by the Appellant on repairs to certain cinemas owned by it which could be related to the condition of the cinemas at the time of their acquisition by the Appellant.
2. Evidence was given at the hearing of the appeal by John Davis (hereinafter referred to as "Mr. Davis"), the chairman and chief executive of the Rank Organisation Ltd.; John Cecil Edward Ashby Rolls F.C.A., the chief accountant of the Rank Organisation Ltd.; Walter Basil Scarlett Walker F.C.A., a partner in the firm of Peat, Marwick, Mitchell & Co., chartered accountants; Derek Oswald Bailey F.C.A., a partner in the firm of Price, Waterhouse & Co., chartered accountants; and (inter alia) the following documents, which were produced and admitted or proved, are annexed to and form part of this Case(1):
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(i) an agreed statement of facts relating to the Odeon Cinema, Bedminster (exhibit A);
(ii) an agreed statement of facts relating to the Hippodrome Cinema, Putney (exhibit B);
(iii) an agreed statement of facts relating to the Odeon Cinema, Accrington (exhibit C);
(iv) an agreed statement of facts relating to the Odeon Cinema, Marble Arch (exhibit D).
The facts found by us on the evidence adduced at the hearing of the appeal are set forth in the following paragraphs.
3. In 1938 the sole business carried on by Odeon Theatres Ltd. was that of an exhibitor of films. Although Odeon Theatres Ltd. itself had no direct interest in other aspects of the film industry, it was controlled by a private company, Odeon Cinema Holdings Ltd., in which United Artists Corporation, a substantial United States film production and distribution company, had a 50 per cent. interest but not voting control. Control of Odeon Cinema Holdings Ltd. was then in the hands of a Mr. Oscar Deutsch, who had founded the Odeon circuit. In 1940 the controlling interest was transferred to Foy Investments Ltd., a company formed by Lord Rank (then Mr. J. Arthur Rank) with Mr. Deutsch and his associates. Lord Rank's interest was held through a further company, Manorfield Investments Ltd. In 1942, after the death of Mr. Deutsch, Manorfield Investments Ltd. acquired Mr. Deutsch's shares in Foy Investments Ltd., thereby gaining control of Foy Investments Ltd. and thus of Odeon Cinema Holdings Ltd. and Odeon Theatres Ltd. Manorfield Investments Ltd. already had over a 40 per cent. interest in General Cinema Finance Corporation Ltd., the company which controlled the Gaumont group, and had further interests in both the production and distribution of films. Thus in 1942 Odeon Theatres Ltd., although itself an exhibiting company, was associated with interests operating in all aspects of the film industry. By April 1944 Manorfield Investments Ltd. and its subsidiary Foy Investments Ltd. had acquired sufficient further shares to give them control over General Cinema Finance Corporation Ltd.
4. In the late 1930s the number of theatres being built in the United Kingdom showed a considerable increase and a tendency, at least as regards the larger theatres, to be concentrated in the ownership of a few companies. By 1938 the main circuits were those owned and operated by Associated British Picture Corporation Ltd., with rather more than 400, Gaumont British Ltd., with about 300, and Odeon Theatres Ltd., with about 250 theatres. This gave a total number of theatres controlled by the three main circuits of around 950, almost one-fifth of the total number of theatres in the country. The importance of these circuits was greater than this fraction would suggest. Firstly, the three main circuits had a disproportionate number of pre-release and large first-run theatres in London and other principal cities. Secondly, it was common practice for a number of non-circuit theatres to follow automatically one or other of the major circuits in selecting films for exhibition. Both factors increased the booking importance of the major circuits.
5. Odeon Theatres Ltd. had achieved its position as the third largest circuit during the 1930s both by building new theatres and by buying existing theatres and theatre-owning companies. Wartime restrictions put an end to building, and the only way the circuit could be expanded was by buying theatres and theatre-owning companies. Expansion was desirable for the following reasons:
(a) Booking strength. A film exhibitor with greater booking strength (that is, a circuit of theatres likely to provide larger film hire on a film than competitors) is in a stronger position to secure the best films from a distributor who is responsible for achieving the maximum exploitation of a film after production is completed. A circuit's booking strength is not dependent on its number of theatres alone. Other relevant factors include the proportion of pre-release and first-run theatres. A pre-release theatre is a large prestige theatre which is used to bring a film to the public's attention before it goes on general release. On general release a film is normally shown more than once in a district. It is first shown in the largest or most important theatre available. Such a theatre is known as a first-run theatre. It is normally situated in an area of high population or in the centre of a community and yields greater film hire than a second-run theatre or a theatre in a rural area. It was essential to increase the circuit's booking...
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