Smith v Lion Brewery Company
| Jurisdiction | UK Non-devolved |
| Date | 1911 |
| Year | 1911 |
| Court | House of Lords |
Revenue - Income Tax - Deductions - Profits of Brewery - Tied Licensed Houses - Compensation Levy -
A brewery company as an essential part of their business acquired and held licensed houses which they let to tenants who covenanted to buy all their beer from the company. The sole purpose of the company in thus acting was to increase the profits of their trade in manufacturing and selling beer wholesale. If any house lost its licence the company got rid of that house as soon as possible. The annual compensation levy imposed by the Licensing Act, 1904, s. 3, was paid as to the company's share of the levy by the tenant paying that share and deducting it from his rent as provided by the Act.
In estimating for income tax purposes the yearly profits of their trade — which were increased by their ownership of the houses — the company claimed to make a deduction in respect of the sum which they were compelled to pay for the levy, and contended that the sum was “wholly and exclusively laid out or expended for the purposes of their trade” within the moaning of the Income Tax Act, 1842, s. 100, cases 1 and 2, r. 1; Sched. D:—
Held by the Earl of Halsbury and Lord Atkinson (Lord Loreburn L.C. and Lord Shaw of Dunfermline dissenting), that upon the facts as stated by the Income Tax Commissioners a deduction was allowed by the Income Tax Act, 1842.
THE facts relative to this appeal are set forth in the judgments in this House. The compensation charges which were deducted from the rents of the tied houses owned by the brewery company amounted in the year 1905 to 3600l. Of this sum the Income Tax Commissioners held that the brewery company in estimating their profits for assessment to the income tax were entitled to deduct one third (1200l.). Channell J. heldF1 that the brewery company were not so entitled, as the money was not “wholly and exclusively laid out or expended for the purposes of” the brewery company's “trade.” This decision was reversed by the Court of Appeal (Cozens-Hardy M.R. and Farwell L.J., Kennedy L.J dissenting). Hence this appeal.
1910. Nov. 7, 8. Sir Rufus Isaacs, A.-G., and Rowlatt (W. Finlay with them), for the appellant. By the Income Tax Act, 1842, s. 100, cases 1 and 2, r. 1; Sched. D, in estimating the balance of profits or gains of a trade no sum can be deducted “for any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purposes of such trade.” The question here is whether the contribution by the brewery company to the compensation levy under the Licensing Act, 1904, s. 3, was wholly and exclusively laid out or expended for the purposes of the respondents' brewery trade. The contribution to the compensation levy is imposed upon the owner of a licensed house in respect of that house, and not upon him as a brewer in respect of his brewery or any other trade. The object of the levy is to provide an insurance fund for compensating the tenant and the owner of a licensed house where for no fault of theirs the licence is not renewed. The owner contributes to the fund and shares in the compensation. The amount of the owner's contribution depends upon the value of the house, and not upon the profits of the brewery or any other trade the owner carries on. The ownership of licensed houses is not a part of the respondents' brewery trade and is not in itself a trade. The retail trade carried on by the tenant of a licensed house is not confined to beer; it may include wine and spirits with which the brewery trade is not concerned. The amount of the respondents' contribution was therefore not wholly and exclusively laid out for the purposes of the brewery. The owner of a licensed house pays income tax for it under Sched. A, not under Sched. D, and cannot claim a deduction under Sched. D in respect of that house.
None of the decided cases are direct authorities in respect of the question raised here, but the reasoning of Watney & Co. v. MusgraveF2, Brickwood & Co. v. ReynoldsF3, and Strong & Co. v. WoodifieldF4 is in favour of the appellant.
Sir Robert Finlay, K.C., and Bodkin, for the respondents. It is found as a fact in the case stated by the Commissioners of Income Tax that the respondents are, as part of their business as brewers and as a necessary incident of the profitable exploitation thereof, owners and landlords of licensed houses acquired and held by them in the course of and solely for the purposes of their business whereby they earn profits which they could not earn without the houses. This finding brings the case within the deductions allowed by the Income Tax Act, 1842. The ownership having been acquired and held wholly and exclusively for the purposes of the trade, it follows that the contribution to the compensation levy was money wholly and exclusively laid out or expended for the purposes of the trade, namely, the earning of profits. It was not an optional expense such as an insurance: it was a statutory and compulsory requisition. What becomes of the contribution after it is paid has no bearing on the question. It matters nothing to the brewery to what purposes the contribution is applied, whether for a retail business of wine, spirits, or beer. The retail trader can deduct a necessary expense in estimating his profits: why cannot a wholesale trader make a similar deduction? The principle of deduction is clearly explained in Gresham Life Assurance Society v. StylesF5 by Lord Herschell.
Sir Rufus Isaacs, A.-G., in reply.
The House took time for consideration.
1911. Feb. 14. LORD LOREBURN L.C. My Lords, I consider that this order ought to be reversed. The point arising for decision is short. The Lion Brewery Company have for income tax purposes to ascertain the balance of the gains and profits of their trade. In so doing they claim to deduct the amount which they are obliged to pay as owners of tied houses in respect of the compensation levy authorized by the
Now the Income Tax Act, 1842, s. 100, tells us under what circumstances a deduction of this kind can be made. It can be made if the money was “wholly and exclusively laid out or expended for the purposes of such” (that is the brewery company's) “trade, manufacture, adventure or concern.”
The Lion Brewery Company's trade is that of manufacturing and selling beer wholesale. The brewery company owned a number of tied houses, and owning such houses is found to be a necessary incident of their trade and increases their profits, and this was the only reason for which they acquired or retained these tied houses. It must be taken that the motive of the brewery company in owning tied houses was simply and solely to obtain a reliable market for their beer, and this is the utmost which can be conveyed in the somewhat redundant findings of the special case. The company owned the tied houses for that reason and it was essential to their trade to own them.
The Act of 1904 compels a licence holder to pay a levy. That levy is to form a fund, out of which compensation is to be made to those whose licences are discontinued by no fault of their own but in order to carry out the statutory policy of reducing the number of licensed houses, and also to those who own the houses themselves. They are entitled to share in the compensation and are also bound to contribute to the fund. The licence holder can deduct a part of it from the rent he pays, and his landlord may in turn deduct from the rent he has to pay, and so on, in order that each person interested in the house may contribute to the fund in proportion to the extent of his interest, in accordance with the tables set forth in Scheds. I. and II.
When a public-house is deprived of its licence under the Act of 1904 a trade is destroyed. It is the retail trade which is destroyed, comprising the sale of wines and spirits as well as the sale of beer. That is the loss which is to be compensated, and the owner of the house shares in the compensation, because a house with a licence is more valuable than a house without a licence. He is compensated simply for the diminution in the value of the house itself by reason of the discontinuance of the licence to sell beer, spirits, and wine therein.
Suppose that the owner of the house is not a brewer, but a man who has no trade at all. He will have to bear his share of the levy, as he would receive his share of the compensation. It was not argued that he can make a deduction from income tax under Sched. A, and as to Sched. D he can make no deduction because he carries on no trade, and he is not, therefore, accountable at all under that schedule.
But it is said that the owner of the house, if he is also a brewer, is accountable under Sched. D in respect of his trade and can therefore make the deduction from the profits of his brewery trade under that schedule. In my opinion he cannot, and for two reasons.
In the first place the trade from the profits of which he seeks to make the deduction is the wholesale trade of manufacturing and selling beer alone. The levy, so far as it is laid out or expended for the purpose of any trade, is laid out or expended for the purpose of insuring against loss by destruction of the retail trade authorized by the licence, which is that of selling wine and spirits and not beer alone. I confess that I cannot see how the levy can be said to be “wholly and exclusively laid out or expended for the purposes of the trade” of the Lion Brewery Company, which...
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