Southern Railway of Peru Ltd v Owen (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Earl Jowitt,Lord Oaksey,Lord MacDermott,Lord Radcliffe,Lord Tucker |
| Judgment Date | 21 June 1956 |
| Judgment citation (vLex) | [1956] UKHL J0621-2 |
| Date | 21 June 1956 |
| Court | House of Lords |
[1956] UKHL J0621-2
Earl Jowitt
Lord Oaksey
Lord MacDermott
Lord Radcliffe
Lord Tucker
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause Southern Railway of Peru Limited against Owen (Inspector of Taxes), that the Committee had heard Counsel, as well on Monday the 23d, as on Tuesday the 24th, Wednesday the 25th and Thursday the 26th, days of April last, upon the Petition and Appeal of The Southern Railway of Peru Limited, of 144 Leadenhall Street in the City of London, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 17th of March 1955, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the printed Case of R. M. Owen (Her Majesty's Inspector of Taxes), lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 17th day of March 1955, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
I have had the advantage of reading the Opinion which is about to be delivered by my noble and learned friend Lord Radcliffe, with which I agree, and have nothing to add.
My Lords,
I agree that this appeal should be dismissed.
Mr. Pennycuick, in his able argument for the Appellants, contended that the social legislation of Peru conferred upon the Appellants' employees a right to the compensation therein referred to in the year of taxation, and that as an employee could at any time give the requisite period of notice and claim the compensation at the expiration of that period the amount of compensation which would then be due was a sum which the Appellants were entitled to charge against the profits of the year although, in fact, the employee had given no such notice during the year. In my opinion, the fallacy of this argument lies in the fact that the employees whose compensation the Appellants sought to charge against their profits had not, as a matter of fact, given their notices or terminated their contracts, and it is clear, and not disputed, that no compensation was payable to them until their service was duly terminated.
The Peruvian legislation contains certain provisions which entitle the Appellants to dismiss their employees for misconduct, and it is clear that until the contract of service is duly completed no liability to pay the compensation arises.
Reliance was placed, during the argument, upon the Sun Insurance Office v. Clark, 6 T.C. 59, in which this House held that a percentage of the premium income of an insurance company might be deferred as a receipt to a future year because it was paid as consideration for future liability, but the principle of that decision is not, in my opinion, applicable to the present case. The premium income was only deferred and would suffer tax in a future year, whereas in the present case if the Appellants are permitted to deduct compensation which they have not paid and which they may never have to pay that compensation will escape tax altogether. There is, in my opinion, a fundamental distinction between a contingent liability and a payment dependent upon a contingency. When a debt is not paid at the time it is incurred its payment is, of course, contingent upon the solvency of the debtor but the liability is not contingent. Similarly, the liability in the Sun Insurance case was not, in my opinion, contingent but remained in force throughout the period of the insurance, though payment in pursuance of that liability might or might not have to be made.
The circumstances in the present case may put an end to the liability altogether, but in the case of insurance for a period the circumstance of loss does not put an end to the liability but merely makes payment obligatory in pursuance of the liability.
After all, the only question in the present case is whether the compensation should be deducted when it is in fact paid or should be deducted before it is paid and in circumstances in which it may never be paid. In my opinion, the reasoning and the judgments in the Court of Appeal are correct and should be affirmed.
My Lords,
In this appeal the Appellant claims that, in the computation of its profits for each of the years of assessment under review, an allowance should be made in respect of its liability to pay to the employees then in its service in Peru certain lump sums which, under Peruvian legislation, those employees will be entitled to receive from the Appellant on the due completion of their service. The appeal is therefore concerned with payments to be made after—and it may be long after—each of the relevant accounting periods has ended. No question arises as to the deduction of wages and salaries currently paid for services rendered. What the Appellant contends is, in effect, that the total cost of those services each year included, in addition to current wages and salaries, a provision to meet the amount by which the services rendered that year have enhanced the lump sums that will eventually be payable under the Peruvian legislation. In short, the Appellant maintains that its employees earn each year a deferred as well as a present remuneration and that the former, no less than the latter, must be taken into account if the true yearly profits are to be ascertained for the purposes of taxation.
My Lords, as a general proposition it is, I think, right to say that in computing his taxable profits for a particular year a trader who is under a definite obligation to pay his employees for their services in that year an immediate payment and also a future payment in some subsequent year, may properly deduct not only the immediate payment but the present value of the future payment provided such present value can be satisfactorily determined or fairly estimated. Apart from special circumstances, such a procedure, if practicable, is justified because it brings the true costs of trading in the particular year into account for that year and thus promotes the ascertainment of the "annual profits or gains arising or accruing from" the trade. As I read the judgments, the substance of this proposition was accepted in the Court of Appeal; and before your Lordships the Crown, without making any formal concession, was not concerned to argue strenuously against it. The Crown's contention—and the view taken in the courts below—was rather to the effect that the proposition did not apply to the Appellant's case because (1) the Appellant was not under a definite obligation in any relevant year to pay its employees lump sums at the end of their engagements since, in each individual instance, the right to receive a lump sum depended upon the fulfilment of certain conditions that made the Appellant's prospective liability contingent until the service was duly terminated; and (2) it was impossible, in the circumstances, to regard any part of the lump sums as earned in or payable in respect of any particular year of service.
The first of these arguments necessitates a reference to the effect of the relevant Peruvian legislation. This was summarised in the Court of Appeal by Jenkins L.J. in two paragraphs which were accepted by both parties and which read as follows:—
"1. 'In the event of,' that is, 'upon' the determination of any service contract between the Company and any employee, whether from the employee's death, expiry of the term, or notice of determination given on either side, the Company is liable to pay compensation calculated as later appears to the employee or his representatives.
2. The above general proposition is subject to exceptions: (A) in the case of fixed term contracts where the contract has been determined by the employee before expiry of the term otherwise than on account of infringement by the Company; and (B) in the case (apparently) of all contracts of service where there has been wrongful conduct of certain kinds by the employee, e.g., dishonesty or insubordination."
The position, therefore, was that the Appellant's liability to pay a lump sum could only be avoided by some breach of contract or grave misconduct on the part of the employee concerned. It may be correct to call such a liability contingent, but I must say the contingency seems to me too remote to justify a prudent trader or, for that matter, a competent accountant, in ignoring the liability until the day for payment has arrived. Whether, if this appeal related to but one employee and one lump sum, the degree of the contingency would, nevertheless, be such as to preclude a present allowance in respect of the future liability is a question which, in my opinion, does not call for decision on the facts of this case. I do not forget that the Court of Appeal looked at this contingency argument from the point of view of the individual employee and may, therefore, be taken as of a different opinion. With respect, however, I think that that was the wrong approach or, perhaps more accurately, that it should have been taken a stage further. The question, as I see it, on this branch...
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