Smith's Potato Estates, Ltd v Bolland (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 14 July 1948 |
| Date | 14 July 1948 |
| Court | King's Bench Division |
NO. 1407-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 Board of Referees - 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.
The Appellant Company in the first case (the Estates Company) was a wholly owned subsidiary of the Appellant Company in the second case (the Parent Company) and was formed to purchase and work an estate. In computing the Estate Company's profits for Excess Profits Tax purposes for the chargeable accounting period ended 31st March, 1941, the Commissioners of Inland Revenue decided that only £3,500 of the remuneration of £6,486 14s. of the manager of the estate should be allowed. The Appellants were of opinion that if this decision were upheld, similar decisions, which it would then be almost impossible to resist, would be made for subsequent chargeable accounting periods. For these subsequent periods there would be a right to recover from the manager the additional Excess Profits Tax resulting from the decisions and it was thought that the Parent Company, being a public company, might be bound to exercise this right. Such action might seriously prejudice the Company's future by causing the loss of the services of the manager. The Appellants therefore appealed against the decision of the Commissioners of Inland Revenue to the Board of Referees, who held that £5,800 of the manager's remuneration was allowable. In prosecuting the appeal the Estates Company incurred expenditure of £622 on legal costs and accountancy fees.
On appeals to the Special Commissioners against an assessment to Income Tax under Case I of Schedule D on the Estates Company and an assessment to Excess Profits Tax on the Parent Company in respect of its subsidiary's profits, the Appellants contended that the said expenditure of £622 was allowable as a deduction in computing
profits for Income Tax and Excess Profits Tax purposes. The Crown contended that the case was indistinguishable in principle from Allen v. Farquharson Brothers & Co., 17 T.C. 59, and that the Appellants' motive in prosecuting the appeal was irrelevant. The Special Commissioners dismissed the appealsHeld, (Viscount Simon and Lord Oaksey dissenting), that the expenditure was not an allowable deduction for Income Tax and Excess Profits Tax purposes.
(1) Smith's Potato Estates, Ltd, v. Bolland (H.M. Inspector of Taxes)
CASE
Stated by the Commissioners for the Special Purposes of the Income Tax Acts under Section 149 of the Income Tax Act, 1918, 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 on 22nd June, 1945, Smith's Potato Estates, Ltd. (hereinafter called "the Estates Company") appealed against an assessment to Income Tax under Case I of Schedule D in the estimated sum of £50,000 for the year 1944-45 (based upon the profits of the Estates Company's trading year ended 31st March, 1944).
2. The Estates Company is a subsidiary company of Smith's Potato Crisps (1929), Ltd. (hereinafter called "the Parent Company"), and for the chargeable accounting period of twelve months ended 31st March, 1941, the Parent Company was assessable to Excess Profits Tax in respect of the profits of the Estates Company.
Section 32 of the Finance Act, 1940 (which relates to Excess Profits Tax), provides:-
(2) In computing the profits of any trade or business for any "accounting period, no deduction shall be allowed in respect of "expenses in excess of the amount which the Commissioners "(i.e., the Commissioners of Inland Revenue) consider reasonable "and necessary, having regard to the requirements of the trade "or business, and, in the case of directors' fees or other payments "for services, to the actual services rendered by the person concerned
(3) "Any person who is dissatisfied with a decision of the Commissioners "under this section may appeal to the Board of "Referees.
The general manager of the Estates Company is Mr. George Frederick Young (hereinafter called "Mr. Young"). He is not a director of either Company.
In the said year ended 31st March, 1941, Mr. Young's remuneration from the Estates Company totalled £6,486 14s. 0d.
In computing the profits of the Estates Company for assessment to Excess Profits Tax for the said chargeable accounting period ended 31st March, 1941, the Commissioners of Inland Revenue, acting under Section 32 of the Finance Act, 1940, decided that no deduction should be allowed in respect of Mr. Young's said remuneration in excess of £3,500, being the amount which the Commissioners considered reasonable and necessary, having regard to the requirements of the trade or business and to the actual services rendered by Mr. Young.
The Parent Company and the Estates Company appealed to the Board of Referees against this decision, and that Board held that £5,800 out of the said sum of £6,486 14s. 0d. was deductible.
The Estates Company incurred legal and accountancy costs of £622 10s. 11d. in the preparation and prosecution of that appeal.
The sole question at issue in the present appeal is whether these costs are an admissible deduction in computing the profits of the Estates Company for the purpose of assessment to Income Tax.
The circumstances of Mr. Young's association with the Estates Company, the nature of his services and the events antecedent to the prosecution of the said appeal are set forth in the following paragraphs.
3. The Estates Company is a wholly owned subsidiary of the Parent Company, a large public company whose main business is the manufacture and sale of Smith's potato crisps. The Parent Company has for many years been the largest single consumer of potatoes in the country, and its requirements of potatoes of a particular kind and quality have been about 40,000 tons a year.
In 1936 the directors of the Parent Company were becoming increasingly concerned to ensure their supplies of potatoes, and they had the opportunity of acquiring the Nocton estate in Lincolnshire which for many years previously had produced, in addition to other general farm products, a large quantity of potatoes suitable for the Parent Company's business, and had been developed under the direction of the previous owner (one of the best known farmers and potato growers in the country) on highly organised and industrialised lines. It had about 27 miles of light railway connecting the fields and a large and fully equipped grading mill and other appurtenances.
4. The Estates Company was formed as a subsidiary of the Parent Company in order to acquire the Nocton estate. It purchased the estate in April, 1936, at a price of £250,500 payable in cash, and the stock, machinery, tenant rights, etc., at a price determined by valuation. The purchase was financed by the Parent Company subscribing for 200,000 shares of 5s. each (the entire issued capital of the Estates Company), and by an issue by the Estates Company to the public of £350,000 4 per cent. first mortgage debenture stock, which was guaranteed by the Parent Company. The total area of the property purchased was 6944 acres.
5. Mr. Young had been the manager of the estate for the vendor for many years, and as the vendor's reason for desiring to sell the estate was that his health was failing, Mr. Young was largely concerned in conducting the negotiations for sale.
None of the directors of the Parent Company or the Estates Company had any knowledge of farming, and they were naturally anxious that the Estates Company should secure Mr. Young's services as general manager, because he had not only a great knowledge and experience of farming but also a special knowledge of this particular estate. Indeed they would not have committed themselves to the purchase of the Nocton estate if they had not been sure of obtaining his services. At the same time they were uncertain as to what profits the estate would earn, and they desired to have the amount of Mr. Young's remuneration based mainly on results. Mr. Young was confident that large profits would be made, especially by reason of the fact that the Estates Company could have an assured outlet for its potatoes, and was willing to take remuneration in the form of a salary of £1,500 per annum plus a commission at the rate of ten per cent. on any amount by which the Estates Company's net profit for each year exceeded a sum equal to 5 per cent. on the sum of £400,000 (the initial share and loan capital of the Estates Company) and on any additional share or loan capital which might be subsequently introduced. These terms were embodied in an agreement in writing dated 3rd April, 1936, for a period of 5 years, and thereafter until determined by either party giving six months' notice. The agreement also provided, that in arriving at the net profits of the Estates Company for the purposes of the agreement, any potatoes sold by the Estates Company to the Parent Company should be deemed to have been sold at the price of £3 10s. 0d. per ton, irrespective of the prices at which they were actually sold. A copy of the agreement is included in the printed statement of facts and grounds prepared for the purpose of the said appeal to the Board of Referees, which is annexed hereto, marked "A" and forms part of this Case(1).
6. Up to and including the year 1939 the anticipated large profits were not realised, and indeed the farming profits made were barely sufficient to pay the debenture interest and overhead charges. During those years Mr. Young earned no commission under the agreement. These results were due to causes outside Mr. Young's control and were...
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