Rushden Heel Company, Ltd v Keene (Inspector of Taxes), Rushden Heel Company, Ltd v Inland Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 14 July 1948 |
| Date | 14 July 1948 |
| Court | House of Lords |
No. 1408-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D, and Excess Profits Tax - Deduction - Expenses in connection with Excess Profits Tax appeal to Commissioners - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Cases I and II, Rule 3(a); Finance (No. 2) Act, 1939 (2 & 3 Geo. VI, c. 109), Sections 14(1) and 18.
In August, 1943, the Appellant Company successfully appealed to the Special Commissioners against a direction made by the Commissioners of Inland Revenue, under the powers conferred on them by Section 35(1) of the Finance Act, 1941, relating to avoidance or reduction of Excess Profits Tax. In prosecuting their appeal the Company spent £142 on legal costs, accountancy fees and witnesses' travelling expenses.
On appeal to the General Commissioners against assessments to Income Tax under Case I of Schedule D and to Excess Profits Tax the Company contended that, since Excess Profits Tax was, by virtue of Section 18(1), Finance (No. 2) Act, 1939, allowed as a deduction in computing the profits for Income Tax purposes, the expenditure of £142, incurred in ascertaining the amount of Excess Profits Tax to be so allowed was itself allowable as a deduction in computing the profits for Income Tax purposes, and therefore also for Excess Profits Tax purposes by virtue of Section 14(1) of the Finance (No. 2) Act, 1939. The Crown contended that the deduction claimed was not authorised by Section 18 of the Finance (No. 2) Act, 1939, and that the expenditure in question was not money wholly and exclusively laid out for the purposes of the Appellant's trade within the meaning of Rule 3(a) of the Rules of Cases I and II of Schedule D. The General Commissioners dismissed the appeals.
Held, following the decision in the cases of Smith's Potato Estates, Ltd. v. Bolland and Smith's Potato Crisps (1929), Ltd. v. Commissioners of Inland Revenue, 30 T.C. 267, that the expenditure was not an allowable deduction for Income Tax and Excess Profits Tax purposes.
Stated by the Commissioners for the General Purposes of the Income Tax for the Division of Wellingborough in the County of Northampton
pursuant to the provisions of Section 149 of the Income Tax Act, 1918, for the opinion of the High Court of Justice.1. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of Wellingborough in the County of Northampton held at Wellingborough on 6th June, 1945, the Rushden Heel Co., Ltd. (hereinafter referred to as "the Appellant") appealed against assessments to Income Tax, Schedule D, and Excess Profits Tax as under:-
(i) Income Tax, Case I, Schedule D, for the year ended 5th April, 1945, in the estimated amount of £2,750, less £109 wear and tear allowance;
(ii) Excess Profits Tax for the chargeable accounting period ended 19th September, 1943, in the estimated amount of £198 11s.0d. (after allowance of £61 9s. 0d. for National Defence Contribution);
(iii) Excess Profits Tax for the chargeable accounting period ended 19th September, 1944, in the estimated amount of £100 0s.0d.
2. In computing their profits for both Income Tax and Excess Profits Tax purposes the Appellant sought to charge as a deduction from such profits the costs and expenses of a successful appeal, in respect of the incidence of Excess Profits Tax, to the Commissioners for the Special Purposes of the Income Tax Acts on 31st August, 1943, and the sole question for our determination was whether such costs and expenses were:-
(a) allowable as a deduction for Income Tax purposes;
(b) allowable as a deduction for Excess Profits Tax purposes.
3. The following agreed statement of facts was admitted and accepted by both parties as correctly summarising the facts upon which our decision was required:-
(2) The Rushden Heel Co., Ltd. (hereinafter called "the Company") carries on the business (inter alia) of manufacturers of heels for boots and shoes. The issued share capital of the Company was at all material times £2,000 divided into 2000 shares of £1 each.
-
(3) Prior to 20th January, 1941, the shareholding of the Company was as follows:-
William Childs senior
…
1971
…
Children of William Childs senior
William Childs junior
…
6
Eric Childs
…
6
Nellie Abington
…
6
Amy Sharpe
…
6
Ivy Whiteman
…
5
(4) On 20th January, 1941, William Childs senior transferred 100 of the shares held by him to each of his children, William Childs junior, Eric Childs, Nellie Abington and Amy Sharpe. He also transferred a further 101 of his shares to Ivy Whiteman and 106 shares to another daughter, Queenie Hobbs. All the six children then held 106 shares each, 1364 being held by William Childs senior. No consideration for the transfer passed to William Childs senior from the transferees.
(5) On 24th February, 1942, a claim was made on behalf of the Company to the Commissioners of Inland Revenue that William Childs senior, William Childs junior and Eric Childs were "working proprietors" in the business carried on by the Company, within the meaning of Section 13(2), Finance (No. 2) Act, 1939, and that the Company was pursuant to the said Section 13 entitled in computing its standard profits for the purposes of Excess Profits Tax liability to an allowance of £1,500 for each "working proprietor" claimed. The effect of this claim if successful would have been to reduce the amount of the Company's liability for Excess Profits Tax.
(6) On 26th March, 1943, the Commissioners of Inland Revenue having considered the transactions of 20th January, 1941, by which 100 shares each in the Company were transferred to William Childs junior and Eric Childs, and being of the opinion that the main purpose for which the transactions were effected was the avoidance or reduction of liability to Excess Profits Tax, directed by virtue of the powers conferred on them by Section 35(1), Finance Act, 1941, that the Excess Profits Tax liability of the Company for the chargeable accounting period ended 21st September, 1941, should be computed on the basis that William Childs junior and Eric Childs were not to be regarded as "working proprietors" for the purpose of computing the Company's standard profits, but that a deduction should be made in computing the profits of the said chargeable accounting period of the remuneration paid to them.
(7) The Commissioners also directed that the liability to Excess Profits Tax for chargeable accounting periods subsequent to 21st September, 1941, should be computed on the said basis so long as the circumstances remained the same and the remuneration paid to William Childs junior and Eric Childs continued to be reasonable in amount.
(8) By making the said directions the Commissioners were in effect refusing to admit the Company's said claim for a reduction of the amount of its liability for Excess Profits Tax.
(9) Accordingly, on 31st August, 1943, the Company appealed to the Commissioners for the Special Purposes of the Income Tax Acts pursuant to Section 35(3), Finance Act, 1941. The appeal was allowed on the ground that the avoidance or reduction of liability to Excess Profits Tax was not a purpose for which the transactions were effected, and the direction of the Commissioners of Inland Revenue was discharged. The Company's said claim for a reduction of the amount of its liability for Excess Profits Tax therefore succeeded.
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(10) In the accounts of the Company for the accounting periods 20th September, 1942, to 25th September, 1943, and 26th September, 1943, to 30th September, 1944, there were charged against the profits of the Company the following items, being expenses by the Company in connection with the above-mentioned successful appeal to the Special Commissioners:-
Accounting period 20th September, 1942, to25th September, 1943.
Messrs. Scott & Son. solicitors, legal costs, including
£
s.
d.
fees to Counsel
47
19
0
Mr. Victor Bayley, chartered accountant, fees for
consultations and advice
31
10
0
Travelling expenses of witnesses
14
10
0
93
19
0
-
(11)
Accounting period 26th September, 1943, to30th September, 1944.
Messrs. F. Roberts & Co. (accountants acting
generally for the Company), fees for professional
services specially in connection with the said
appeal
£48
0s.
0d.
4. The accounts for fees and charges rendered by the solicitors and accountants and charged in the Company's profit and loss accounts were handed to us. These accounts, in one bundle and marked "A", together with the Company's balance sheets and trading and profit and loss accounts for the period ended 25th September, 1943, and 30th September, 1944, marked "B" and "C" respectively, are annexed hereto and form part of this Case(1).
5. Counsel for the Appellant contended:-
(i) That since Excess Profits Tax was by Section 18(1), Finance (No. 2) Act, 1939, allowed as a deduction in computing the Company's profits for Income Tax purposes, the costs of ascertaining the quantum of tax as to be deducted must be a deductible expense of the Company's trade or business since (a) it satisfied the test laid down by Lord Davey in Strong and Company of Romsey, Ltd. v.Woodifield, 5 T.C. 215, at page 220, and (b) the deduction was not prohibited by Rule 3(a) of of the Rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918.
(ii) In support of these contentions the Appellant referred to:-
Strong and Company of Romsey, Ltd. v. Woodifield, 5 T.C. 215.
Usher's Wiltshire Brewery, Ltd. v. Bruce, 6 T.C. 399.
Commissioners of Inland Revenue v. E.C. Warnes & Co., Ltd., 12 T.C. 227.
Commissioners of Inland Revenue v. Alexander von Glehn & Co., Ltd., 12 T.C. 232.
Allen v. Farquharson Brothers and Company, 17 T.C. 59.
Worsley Brewery Co., Ltd. v. Commissioners of Inland Revenue, 17 T.C. 349.
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