Southern (HM Inspector of Taxes) v Borax Consolidated, Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 16 October 1940 |
| Date | 16 October 1940 |
| Court | King's Bench Division |
NO. 1167-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
Income Tax, Schedule D - Profits of trade - Deduction - Expenses of litigation in defending title to property - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Cases I and II, Rule 3.
The Respondent Company held all the shares in an American company whose business fell to be treated, for Income Tax purposes, as a branch of the Company's business. For the purposes of its business the Company acquired land in America and put its subsidiary company into possession. Later an action in the American Courts was commenced against the Company and its subsidiary company claiming that the Company's title to the land and buildings erected thereon was invalid; and the American company incurred substantial legal expenses over a period of years in defending the action.
On an appeal by the Company against an assessment to Income Tax under Case I of Schedule D the General Commissioners found that the legal expenses in question were wholly and exclusively laid out by the American company for the purposes of its trade and were an allowable deduction in computing the profits of the Respondent Company for Income Tax purposes.
Held, that the decision of the Commissioners was correct.
Commissioners of Inland Revenue v. Scottish Central Electric Power Company, 15 T.C. 761, distinguished.
Stated by the Commissioners for the General Purposes of the Income Tax Acts for the City of London pursuant to the provisions of Section 149 of the Income Tax Act, 1918, for the opinion of the High Court of Justice.
1. At meetings of the said Commissioners held on 20th June, 1938, and 20th February, 1939, at Gresham College, Basinghall Street, in the said City, Borax Consolidated, Ltd., an incorporated company having its registered office at Regis House, King William Street, in the said City (hereinafter called "the Company"), appealed against an assessment to Income Tax made upon it under
Case I of Schedule D of the Income Tax Acts for the year ended the 5th day of April, 1938, in the sum of £422,976, less wear and tear £51,689.2. The question for the determination of the Commissioners was whether a sum of £6,249 representing legal expenses incurred in the circumstances hereinafter set forth was deductible in computing the profits of the Company for the purposes of the said assessment.
3. The Company, whose business consists in the mining, manufacture and sale of borax and other mineral products, is the holder of the whole of the capital of a Nevada corporation called the Pacific Coast Borax Company (hereinafter called "the Pacific "Company").
4. On the facts of the relevant years it has been agreed between the Inland Revenue and the Company that the business of the Pacific Company should be treated as a branch of the Company's business and accordingly for the purpose of assessment to Income Tax the profits of the Pacific Company fall to be included in computing the profits of the Company.
5. In 1923 the Company, for the purposes of its business, acquired land in Mormon Island in California, near Los Angeles, of which the Pacific Company was put into possession and upon which the Pacific Company erected wharves and buildings. The Pacific Company does not pay any rent or other consideration for the use of these premises, its business being considered to be a branch of the business carried on by the Company.
6. The Pacific Company's business consists in the mining, preparation and shipment of borax.
7. In 1929 the City of Los Angeles, in order to put itself in a position to obtain wharfage dues and rents from the Company or from the Pacific Company, commenced an action in the Federal District Court of Los Angeles against the Company and the Pacific Company claiming that the Company's title to the land and buildings occupied was invalid, and that such land and buildings were in fact the property of the City. This action was defended by the Company and by the Pacific Company.
8. After six years of litigation a new trial was ordered, and the costs incurred by the Pacific Company up to that time amounted to £6,249, which sum the Company claimed to be entitled to deduct as a business expense in computing its profits for the purposes of assessment under the arrangement referred to in paragraph 4 hereof.
9. Mr. Frank M. Jennifer, the President of the Pacific Company (whose evidence we accepted), stated that the object of the City of Los Angeles in bringing the action was admittedly to require the Pacific Company to pay tolls for the use of the wharves. Part of the property consisted of foreshore and the City contended that a grant of foreshore was invalid. If the action was lost the Pacific Company would have to pay tolls for the use of the wharves- probably retrospectively-and it estimated the cost of such tolls at about 40,000 dollars per annum.
10. It was contended for the Company that the said expenditure was incurred by the Pacific Company wholly and exclusively for the purpose of its trade and that in computing the profits of the Company on the basis that the trade of the Pacific Company was a branch of the trade of the Company such expenditure was deductible.
11. It was contended by the Inland Revenue that the action concerned the capital assets of the Company and was contested to preserve the existence of those assets, and was capital expenditure.
12. The following cases were referred to:-
Strong & Co. of Romsey, Ltd. v. Woodifield, TAX5 T.C. 215
Van den Berghs, Ltd. v. Clark, TAX19 T.C. 390
Commissioners of Inland Revenue v. Scottish Central Electric Power Co., TAX15 T.C. 761
MacTaggart v. Strump,...
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