Southern Railway of Peru v Owen
| Jurisdiction | England & Wales |
| Date | 1953 |
| Court | House of Lords |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Leaving payments under foreign law - Basis on which payments deductible.
Under Peruvian law the Respondent Company was bound to pay its employees in Peru prescribed compensation payments upon the termination of their services with the Company, subject to the fulfilment by the employee of certain conditions. The amount to be paid depended on (a) length of service and (b) rate of pay at the end of the period of service, except that a reduction in pay would not affect the amount to which an employee was entitled by reference to the period of service already performed.
On appeal against assessments to Income Tax on the Company made under Case I of Schedule D for the years 1947-48 to 1951-52 inclusive, it was contended on behalf of the Company that upon proper principles of commercial accountancy amounts of compensation calculated to have accrued due to each employee from year to year as deferred remuneration should be allowed as a deduction. The Special Commissioners held that it was a matter of correct accountancy practice to make provision in the accounts for the sums in question, and allowed the appeal.
The Chancery Division held that the deferred payments must be brought into account for Income Tax purposes at the time when they became payable, and not before. The Court of Appeal affirmed this decision.
In the House of Lords (Earl Jowitt and Lords Oaksey, Radcliffe, Tucker and MacDermott) judgment was given in favour of the Crown. Earl Jowitt and Lords Radcliffe and Tucker were of opinion that, where a number of similar contingent obligations arise from trading, there is no rule of law which prevents the deduction of a provision for them in ascertaining annual profits if a sufficiently accurate estimate can be made; but that the provision claimed by the Company throughout the proceedings was not permissible by reason of the absence of discount and other factors. Lord Oaksey agreed with the judgments in the Court of Appeal.
Lord MacDermott, dissenting, favoured a remit to the Special Commissioners to ascertain whether it would be practicable to arrive at satisfactory deductions.
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the Chancery Division of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 21st July, 1952, the Southern Railway of Peru, Ltd., hereinafter called "the Respondent", appealed against the following assessments
to Income Tax made upon it under Case I of Schedule D of the Income Tax Act, 1918:1947-48 |
… |
… |
£174,017 less £26,544 capital allowances |
1949-50 |
… |
… |
£232,879 less £27,709 capital allowances |
1950-51 |
… |
… |
£240,228 less £62,116 capital allowances |
1951-52 |
… |
… |
£185,930 less £90,757 capital allowances. |
The grounds of the appeal were that in computing the amounts of the said assessments no allowance had been made in respect of certain accrued liabilities which arose under Peruvian law hereinafter referred to and were properly deductible therefrom.
2. Evidence was given at the hearing of the appeal by Dr. Hernando De Lavalle, a qualified abogado of the Republic of Peru, sometime Dean of the Law Association of Peru and President of the Inter-American Bar Association and Vice-President of the International Lawyers Association, Honorary President of the Inter-American Bar Association and a director of a number of companies in Peru; Charles Maitland Duncan, a fellow of the Institute of Chartered Accountants in England and Wales and a partner in the firm of J. Dix Lewis, Caesar, Duncan & Co., chartered accountants, of Cannon Street, London, E.C.4, auditors to the Respondent (hereinafter referred to as "the auditors"); Reginald Longford Latimer, a fellow of the Institute of Chartered Accountants in England and Wales and a partner in the firm of Whinney, Smith & Whinney, chartered accountants, of London; William Henry Hall, an accountant employed by the Respondent; Rafael Francisco Jose Valls, a barrister-at-law and a member of the Spanish Bar, legal adviser to the Spanish Embassy, the Spanish Consulate General and the Spanish Chamber of Commerce; and the following documents were produced and admitted or proved:
(2) A translation of Law No. 4916 of the Republic of Peru.
(3) A translation by Dr. De Lavalle of Articles 294 and 296 of the Peruvian Commercial Code.
(4) A translation of Law No. 5119 of the Republic of Peru.
(5) A translation of Law No. 6871 of the Republic of Peru.
(6) A translation of Law No. 8439 of the Republic of Peru.
(7) A translation by Dr. De Lavalle of Law No. 9463 of the Republic of Peru.
(8) A translation of Law No. 10211 of the Republic of Peru.
(9) A translation of Law No. 10239 of the Republic of Peru.
(10) A translation by Dr. De Lavalle of Article 2 of Law No. 7607 of the Republic of Peru.
(11) A document showing the calculation of the compensation due in respect of two employees of the Respondent.
(12) A copy of the memorandum and articles of association of the Respondent.
(13) A bundle containing copies of the Respondent's accounts for the year to and balance sheet at 30th June, 1946, 1947, 1948, 1949, 1950, and 1951.
(14) A translation by Dr. Valls of Articles 1107 and 1108 of the Civil Code of the Republic of Peru.
(15) A translation by Dr. Valls of Articles 293, 294, 295 and 296 of the Commercial Code of the Republic of Peru.
The above documents are not attached to and do not form part of this Case but are available for the use of the High Court if required.
3. On the evidence adduced at the hearing of the appeal, we found the following facts admitted or proved:
(2) At all material times, the Respondent, a company registered on 30th December, 1890, under the Companies Acts, 1862 to 1886, and having its registered office situate in England, operated a railway in the Republic of Peru which it controlled from the United Kingdom.
(3) The law of the Republic of Peru includes the undermentioned provisions (hereinafter referred to collectively as "the social legislation"), of which only Article 3 of Law 8439, Article 1 of Law 10211, and the Supreme Decree dated 14th April, 1944, apply toobreros or manual workers, and the remainder apply toempleados or clerical workers and administrative staff. All contracts of service must be deemed to import the social legislation in its entirety.
(4) Peruvian Commercial Code
(5) Article 293. If the contracts between the merchants and their clerks and salesmen are for a specified period, neither of the parties may withdraw without the consent of the other from the fulfilment thereof, until the completion of the agreed period. Those who contravene this enactment shall be liable in damages, save as is provided in the following Articles.
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(6) Article 294. The following are special causes enabling merchants to discharge their employees, even though the agreed period may not have expired:
1. Fraud or breach of trust in the matters confided to them.
2. The carrying out of commercial transactions for their own account, without the express consent or licence of the principal.
3. Serious lack of respect and consideration in regard to the principal or members of his family or dependants.
(7) Article 295. The following grounds shall enable employees to take leave of their principals, even though the period of the contract has not been fulfilled:
1. Non-payment of salary or stipend at the agreed periods.
2. Non-fulfilment of any other condition agreed upon for the benefit of the employee.
3. Bad treatment or serious insult by the principal.
(8) Article 296. In those cases where the engagement is not for a fixed period either of the parties may treat it as at an end by giving the other party one month's notice. In that event the clerk or salesman shall be entitled to the salary due for that month.
(9) Law No. 4916 (modifying Article 296 of the Commercial Code).
(10) The Congress of the Peruvian Republic has enacted the following law:
(11) Article 1. Article 296 of the Code of Commerce is hereby modified as follows:
(a) If and when the engagement or lease of services is not subject to a fixed term of duration, evidenced by public deed, either party may terminate it provided that the employer gives ninety days prior notice to the employee or the employee notice of forty days to the employer.
(b) If and when termination of the engagement or lease of services should arise from a decision to such effect on the part of the employer, thereby giving notice of dismissal to his subordinate individual or employee, abiding by the procedure outlined in the foregoing subparagraph, the latter shall be entitled to receive salary compensation following the scale set down below:
Up to 2 years service time = One month's salary.
From 2 to 5 years service time = Two months' salary.
From 5 to 10 years service time = Four months' salary.
From 10 to 20 years service time = Eight months' salary.
From 20 to 25 years service time = Ten months' salary.
From 25 to 30 years service time = Twelve months' salary.
(c) Such claims as may arise thereto will be resolved by arbitration tribunal whose members will be an arbitrator appointed by the employer, another appointed by the employee or employees involved in the claim, and the third member appointed by the Ministry of Fomento as a delegate of the Government, when in Lima, and outside Lima by the regional political authority; the award, which will be final, is to be issued within a maximum period of thirty days.
(d) In the event of controversy arising out of payment of the compensation referred to in subparagraph (b), the authority concerned may be able to assign provisionally, in accordance with the foregoing subparagraph, to the claiming employee an amount...
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