Smith & Son v Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 20 December 1919 |
| Date | 20 December 1919 |
| Docket Number | No. 26. |
| Court | Court of Session |
Lord Justice-Clerk, Lord Dundas, Lord Salvesen, Lord Guthrie.
RevenueExcess Profits DutyComputation of profitsDeductionsCapital expenditurePrice of unexpired coal contractsPrice paid out of profitsFinance (No. 2) Act, 1915 (5 and 6 Geo. V. cap. 89), sec. 40 (1), and Fourth Schedule, Part I., paragraphs 1 and 3, Part III., paragraph 1 (a).
The testamentary trustees of a coal merchant, who died on 7th March 1915, conveyed the business to his son, who took over the whole assets at a valuation made as at the testator's death. Part of the assets consisted of unexpired contracts with colliery owners, under which the colliery owners undertook to deliver from time to time fixed quantities of coal at definite prices. The rights under these contracts, all of which expired at or before 31st December 1915, were valued at 30,000. This sum was paid by the son to the trustees out of his profits from the business during 1915.
Held (diss. Lord Salvesen) that the 30,000 was part of the purchase price of the capital of the business, and that, in ascertaining the profits of the business for the purposes of excess profits duty for the accounting period from 7th March to 31st December 1915, it was not an admissible deduction.
City of London Contract Corporation v. StylesTAX, (1887) 2 Tax Cases, 239, approved and applied.
RevenueExcess profits dutyComputation of profitsDeductionsRemuneration of manager of businessDiscretion of Inland Revenue CommissionersFinality of decisionFinance (No. 2) Act, 1915 (5 and 6 Geo. V. cap. 89), Fourth Schedule, Part I., paragraph 5.
For the computation of the profits of a trade or business for the purposes of excess profits duty the Finance (No. 2) Act, 1915, by paragraph 5 of Part I. of the Fourth Schedule, enacts that any deduction allowed for the remuneration of managers shall not, unless the Commissioners of Inland Revenue, owing to any special circumstances or to the fact that the remuneration of any managers depends on the profits of the trade or business, otherwise direct, exceed the sums allowed for this purpose in the last pre-war trade year.
In the computation of the profits of a business for the purpose of excess profits duty the Commissioners of Inland Revenue allowed a deduction for the remuneration of the manager, who was paid by a share in the profits. The manager was not an employee of the firm before the war, and in the last pre-war trade year no sums were allowed for the remuneration of a manager.
An appeal having been taken against this deduction to the Commissioners for the General Purposes of the Income-Tax Acts, heldthat the decision of the Commissioners of Inland Revenue was final and could not be disturbed.
Rex v. Inland Revenue CommissionersELR, [1918] 1 K. B. 143; Williamson Film Printing Co. v. Inland Revenue CommissionersELR, [1918] 2 K. B. 720; and Inland Revenue Commissioners v. AuldIR, [1919] 2 I. R. 66, followed.
John Smith & Son, shipping and coal agents, Glasgow, appealed to the Commissioners for the General Purposes of the Income-Tax Acts for the Division of the City of Glasgow against an assessment to excess profits duty, made under section 38 of the Finance (No. 2) Act, 1915,* in the sum of 52,081 for the accounting period from 7th March 1915 to 31st December 1915. The appellants objected to the assessment on the ground that, in calculating their excess profits for the period in question, the following deductions should have been made:(1) 30,000 paid to the trustees of the late John Smith junior for unexpired coal contracts; and (2) 20,615, 17s. 9d. described in the profit and loss account as management
salary to Thomas Keith Fair, instead of 1644 authorised by the Commissioners of Inland Revenue to be allowed.*
The Commissioners refused the appeal, and at the request of the appellants stated a case for appeal to the Court of Session.
The case set forth:
I. The following facts were proved or admitted, viz.:
(1) The business of John Smith & Son has been carried on for many years, and John Smith junior was sole partner up to 7th March 1915, the date of his death. (2) By trust-disposition and settlement, dated 17th October 1908, and codicil, dated 7th January 1909, the said John Smith junior left the business after his death to his son, John Ross Smith, declaring that the whole assets of the said business shall be taken over at the value which may be ascertained from a balance-sheet made up, as at the date of my death, by a chartered accountant, but nothing shall be charged for goodwill. (4) John Ross Smith became sole partner of the business from 7th March 1915, and has since carried it on as a continuing business under the name of John Smith & Son. (5) A balance-sheet was prepared by Aikman & Glen, C.A., dated 27th October 1915, giving the assets and liabilities of the business as at 6th March 1915. In this a sum of 30,000 is entered for coal contractsamount to be paid as value of same. On this entry the accountants report as follows:With reference to the value placed upon the coal contracts current at the date of the truster's death, we have to report that in view of the many contingencies as at that date, viz., 6th March 1915, inter alia, the duration of the war, Government export restrictions, freight difficulties, the terms of the contracts as to deliveries, &c., and in view, further, that any Sale of the contracts to outsiders might not have been recognised by the colliery owners, we consider that the value (30,000) placed on same, which we understand has been agreed to by Mr John R. Smith and the trustees, is in all the circumstances a fair and equitable one. It appears to us very doubtful if, in view of all the above contingencies, such a large sum would have been given at the date of the truster's death by any outside party taking over the business, and all the risks and responsibilities under the contracts. (6) The said coal contracts were entered into by the late John Smith junior and several colliery owners, and by the contracts the latter agreed to deliver to the former certain quantities of coal at fixed prices. The said contracts had various terms of duration, but none extended beyond 31st December 1915. (7) A profit and loss account for the period from 7th March 1915 to 31st December 1915, prepared by Thomas Kelly, C.A., and dated 23rd August 1916, shows a profit of 71,231, 15s. 7d., from which is deducted 30,000 as sum paid to the trustees of the late John Smith, being agreed-on value of current contracts taken over by the new firm. (8) The appellants admitted that the said Thomas
Keith Fair was son-in-law of the late John Smith junior and brother-in-law of John Ross Smith; that he signed cheques on behalf of the appellants; that, together with John Roas Smith, he managed the business of the appellants, and was a manager or a person concerned in the management of the business; that the said sum of 20,615, 17s. 9d. paid to him was not calculated by reference to the profits of any section of the business, but consisted of one-third of the profits of the firm; that he was not an employee of the business before the outbreak of the present war; and that in the last pre-war trade year no sums were allowed or paid for remuneration of managers.
IV. After considering the whole of the facts and arguments, the Commissioners held, for the purposes of the excess profits duty:(1) That the sum of 30,000 paid to the trustees of the late John Smith junior for unexpired coal contracts was not an admissible deduction from the profits of John Smith & Son during the accounting period from 7th March 1915 to 31st December 1915; and (2) that, as it had been admitted in evidence that Mr Thomas Keith Fair is a manager or person concerned in the management of the business, the question of the amount to be deducted in...
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