Odhams Press, Ltd v Cook (HM Inspector of Taxes)

JurisdictionEngland & Wales
Judgment Date08 May 1940
Date08 May 1940
CourtKing's Bench Division

NO. 1138-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-

COURT OF APPEAL-

HOUSE OF LORDS-

(1) ODHAMS PRESS, LTD.
and
COOK (H.M. INSPECTOR OF TAXES)

Income Tax, Schedule D - Profits of trade - Deduction - Debt due from subsidiary company written off - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Cases I and II, Rule 3.

The Appellant Company executed work for a subsidiary company in which it owned all the shares, and charged the cost at full trade prices to the subsidiary company. During the year ended 31st December, 1933, the subsidiary company made a loss, and the Appellant Company wrote off an equivalent amount of the sum owing to it on trading account.

On appeal against assessments to Income Tax under Schedule D the Appellant Company contended that the amount so written off was an admissible deduction in computing its profits for Income Tax purposes as being a reduction in the charges made by it to the subsidiary company or a bad debt or the extent to which a doubtful debt ought to be treated as bad. The Special Commissioners found that the sum written off by the Appellant Company was not written off wholly and exclusively for the purpose of the Company's trade or business and was inadmissible as a deduction for Income Tax purposes.

Held, that the question was one of fact for the Commissioners and that there was evidence upon which they could reach their conclusions.

CASE

Stated by the Commissioners for the Special Purposes of the Income Tax Acts under the Income Tax Act, 1918, Section 149, for the opinion of the King's Bench Division of the High Court of Justice.

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at York House, Kingsway, London, on 7th June, 1937, for the purpose of hearing appeals, Odhams Press, Ltd., hereinafter called "the Company", appealed against an additional assessment in the sum of £11,470 for the year 1930-31 and an estimated assessment in the sum of £500,000 for the year 1934-35 made upon it under Schedule D of the Income Tax Act, 1918. The facts relating to the year 1934-35 only were placed before us, but it was agreed that the principle involved was the same for both years under appeal.

2. The Company was incorporated on the 15th April, 1920, for the purpose of acquiring and amalgamating as from the 1st January, 1920, the businesses of Odhams, Ltd., and John Bull, Ltd. The business carried on by the Company includes that of newspaper and periodical proprietors, printers, publishers, engravers, advertising agents, etc.

The following publications, amongst others, are owned or controlled by Odhams Press, Ltd.:-

"Debrett's Peerage, Baronetage,

"Daily Herald"

&c."

"The People"

"Sporting Life and Sportsman"

"Picturegoer"

"Passing Show"

"Paper Makers Directory of

"Ideal Home"

all Nations"

"John Bull"

"Broadcaster"

"Dean's Toy Books"

"20 Story Magazine"

"Kinematograph Weekly"

"Melody Maker"

"Electrical Trading and Elec-

"Weekly Illustrated"

tricity"

"Everywoman's", incorporating "Coming Fashions".

The Company are official printers to the London Country Council.

The following businesses are owned by Odhams Press, Ltd.:-

Borough Billposting Co. (the largest outdoor publicity business in the United Kingdom).

Gosnay Advertising Co. (1919), Ltd.

Dean & Son, Ltd.

Coming Fashions, Ltd.

The Elm Press.

Press Printers, Ltd.

Wondersigns.

Wymans London Printing Co., Ltd.

3. The whole of the shareholding in Coming Fashions, Ltd., one of the businesses above referred to, was owned by the Company and up to 31st December, 1933, the Company had made advances to Coming Fashions totalling £36,050 and was also owed £7,191 by that Company on trading account, as shown by the following account:-

Coming Fashions, Ltd.-Current Account.

Advances

Trading

Total

£

£

£

To Additions

3,916

3,916

3916

3916

By Cash

4,015

4,015

By Balance, 31st December, 1923

99

99

To Additions

14,621

5,201

19,822

14,621

5102

19,723

By Cash

4,566

4,566

To Balance, 31st December, 1924

14,621

536

15,157

To Additions

3,572

7,088

10,660

18,193

7624

25,817

By Cash

5,683

5,683

To Balance, 31st December, 1925

18,193

1941

20,134

To Additions

3,571

4,506

8,077

21,764

6447

28,211

By Cash

3,197

3,197

To Balance, 31st December, 1926

21,764

3250

25,014

To Additions

3,572

3,099

6,671

25,336

6349

31,685

By Cash

2,013

2,013

To Balance, 31st December, 1927

25,336

4336

29,672

To Additions

3,571

4,525

8,096

28,907

8861

37,768

By Cash

5,253

5,253

Advances

Trading

Total

£

£

£

To Balance, 31st December, 1928

28,907

3608

32,515

To Additions

3,537

10,864

14,401

32,444

14,472

46,916

By Amount written off

6,252

6,252

To Balance, 31st December, 1929

32,444

8220

40,664

To Additions

3,606

7,204

10,810

36,050

15,424

51,474

By Cash

2,062

2,062

36,050

13,362

49,412

By Amount written off

6,449

6,449

To Balance, 31st December, 1930

36,050

6913

42,963

To Additions

5,100

5,100

36,050

12,013

48,063

By Cash

1,434

1,434

36,050

10,579

46,629

By Amount written off

177

177

To Balance, 31st December, 1931

36,050

10,402

46,452

To Additions

4,715

4,715

36,050

15,117

51,167

By Cash

7,265

7,265

To Balance, 31st December, 1932

36,050

7852

43,902

To Additions

7,916

7,916

36,050

15,768

51,818

By Cash

5,650

5,650

36,050

10,118

46,168

By Amount written off

2,927

2,927

To Balance, 31st December, 1933

£36,050

£7,191

£43,241

In the above account the trading additions represent charges for printing, engraving, publishing and other work done by the Company for Coming Fashions, Ltd., at full trade prices.

4. Coming Fashions, Ltd., made a net loss in the year to 31st December, 1933, of £2,927 5s. 8d. (before making the adjustment hereinafter referred to) as shown by its accounts. An amount equal to the amount of this loss was written off in the accounts of the Company from the amounts due to it by Coming Fashions, Ltd., on trading account and this amount is claimed in the present appeal as a deduction in arriving at the assessment on the Company for 1934-35. Coming Fashions, Ltd., was informed of the said writing off and the balance sheet of Coming Fashions, Ltd., as at 31st December, 1933, a copy of which is annexed to and forms part of this Case(1), showed the amount of £2,927 5s. 8d. as "transferred to "Odhams Press, Ltd." and showed no balance of profit or loss for the year ended 31st December, 1933, and contained a note as follows:-

CONTINGENT LIABILITY.

"The voluntary reduction by Odhams Press, Ltd., of their "credit balance by the amount of £15,805 12s. 5d. is liable "at any time to revocation.

The sum of £15,805 12s. 5d., referred to in this note, represents the amount equal to trading losses incurred by Coming Fashions, Ltd., written off in the accounts of the Company from time to time in the same manner as the said amount of £2,927 5s.8d., and includes the said amount of £2,927 5s.8d.

5. Mr. J.E. Ward, Director of the Company, stated that the sum of £2,927 5s. 8d. was written off for business reasons in accordance with the Company's practice in the case of subsidiaries which make trading losses; that the accounts of the Company would not have been correct if it had been treated as a profit; that although there had been no formal release of the amount it would never be claimed from Coming Fashions, Ltd.; that the Company had sixteen subsidiary companies which were charged by the Company proper trade prices for work done for them; that the Company could not for business reasons allow any one of its subsidiary companies to fall into such a position that it could not pay debts due to other persons; and that it was compelled by business reasons to write off losses sustained by its subsidiaries and did so by reducing the amounts which had been charged by it against the said subsidiaries for work done on trading account.

6. Mr. A.C. Duncan, Secretary of the Company, confirmed the above evidence; explained that the trade charges against Coming Fashions, Ltd., were in the first instance scientifically fixed in the costing department of the Company in accordance with the method adopted for fixing all other trade charges made by the Company; that Coming Fashions, Ltd., had made profits in the years before 1928, that it had been hit by the slump in the franc, but it was hoped that it would again become a paying concern; that it was the

practice of the Company to write off losses in trade incurred by its subsidiaries by reducing the amounts which had been charged by it against the said subsidiaries for work done on trading account, (although it had not always been possible to write off amounts equal to the losses in trade incurred by its subsidiaries by reason of the fact that in some cases the accounting periods of the subsidiary companies did not coincide with that of the Company); and that the deduction of £2,927 5s. 8d. would never be claimed as a debt from Coming Fashions, Ltd.

7. On behalf of the Company it was contended (inter alia):-

  1. (a) that the writing off or adjustment of £2,927 5s.8d. being a reduction in the charges made by the Company against Coming Fashions, Ltd., for work done reduced the amount received or to be received by the Company on trading account;

  2. (b) that in computing the amount of the Company's profits and gains to be charged to Income Tax the amount to be included as trading receipts in respect of work done for Coming Fashions, Ltd., ought to be arrived at after deducting (or without including) the said sum of £2,927 5s. 8d.;

  3. (c) that the said writing off or adjustment of £2,927 5s.8d. was made in the course of the Company's trade and was a trading transaction affecting the Company's income and was not a loss of capital withdrawn from or employed in the Company's trade;

  4. (d) that the said sum of £2,927 5s. 8d. represented money wholly and exclusively laid out or expended for the...

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