The Glenboig Union Fireclay Company, Ltd v The Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 23 February 1922 |
| Date | 23 February 1922 |
| Court | Court of Session |
NO. 32*.-COURT OF SESSION, SCOTLAND.-
HOUSE OF LORDS.-
Excess Profits Duty - Pre-war standard - Computation of profits - Compensation for sterilisation of capital asset - Damages for wrongous interdict - Finance (No. 2) Act, 1915 (5 & 6 Geo. V, c. 89), Section 40 (1) and (2), and Fourth Schedule, Part I, Rule 1, and Part II, Rule 1.
The Appellant Company carried on business as manufacturers of fireclay goods and as merchants of raw fireclay, and was lessee of certain fireclay fields over part of which ran the lines of the Caledonian Railway.
In 1908 the Railway Company, to whom the lands belonged, though not the minerals beneath, instituted an action to restrain the Appellant Company from working the fireclay under the railway, contending that the fireclay was not a mineral and consequently formed part of the Railway Company's property. Pending the settlement of the action the Appellant Company was interdicted from working under the railway. In 1911 the House of Lords decided against the Railway Company, which thereupon exercised its statutory powers to require part of the fireclay to be left unworked on payment of compensation. The amount of compensation was settled by arbitration and duly paid to the Appellant Company in 1913.
For the years 1908 to 1911, during which the action was proceeding, the Appellant Company charged in its trading accounts the expenditure incurred in keeping open the fireclay field which formed the subject of the proceedings, and in the year 1913 it received a sum from the Railway Company as damages in respect of such expenditure.
The sums received by the Appellant Company in respect of compensation and damages were included in their trading accounts for the year 1913, and in their profits for that year as computed for Income Tax purposes. In computing the pre-war standard of profits of the Appellant Company for Excess Profits Duty purposes, however, the Commissioners of Inland Revenue eliminated the said payments, contending that they did not constitute profits arising to the Company from the produce of the fireclay fields.
Held, (1) in the House of Lords, that the amount received for compensation in respect of the fireclay left unworked was not a profit earned in the course of the Company's trade, but was a capital receipt, being a payment made for the sterilisation of a capital asset;
and
(2) by a majority in a Court of seven Judges of the Court of Session (Lords Salvesen and Ormidale dissenting), that the amount received as damages for the wrongous interdict was not a trading profit of the Company, but was merely the equivalent of expenditure incurred in protecting a capital asset which subsequently turned out to be unproductive owing to the exercise by the Railway Company of its statutory powers.
No decision was given by the House of Lords on the damages point, an agreement being reached between the parties by which a portion of the sum paid for damages was treated as a trading receipt of the Appellant Company.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts, held on 28th June, 1919, for the purpose of hearing appeals, The Glenboig Union Fireclay Company Limited (hereinafter called "the Company") appealed against an assessment to Excess Profits Duty in the sum of £32,157, less earlier (net) deficiencies, viz. £5,837, or £26,320 net duty, for the accounting period commencing on 1st September, 1916, and ending on 31st August, 1917, made upon the Company by the Commissioners of Inland Revenue under the provisions of Part III of the Finance (No. 2) Act, 1915, and subsequent enactments.
I. The following facts were admitted or proved:-
(2) The Company was incorporated on 26th August, 1882, under the Companies Acts, 1862 to 1880.
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(3) The objects for which the Company was established include:-
(a) Carrying on the trades or businesses of manufacturing and trading in fireclay and other kinds of clay goods.
(b) The quarrying of rocks, stones, and sand, and vending the same.
(c) The purchasing or leasing of any lands, clay, &c., for the purpose of the Company's businesses or trades.
(d) The realising of all or any part of the lands held by the Company.
(e) Selling and otherwise dealing with and disposing of all or any parts of the Company's businesses, effects, and estates.
(4) A copy of the Memorandum of Association, so far as relating to the objects for which the company was established, is annexed hereto and forms part of this Case.
(5) Since 1882 the Company has carried on business as manufacturers of fireclay goods and as merchants of raw fireclay.
(6) The Company is lessee of numerous fireclay fields in or near Glenboig, the total extent of which is about 1835 acres.
(7) The Company was lessee of the fireclay at Gartverrie, Glenboig, and in 1908 its workings had approached the Caledonian Railway line running over that field, and notice, dated 25th January, 1908, of intention to work that fireclay was given by the Company to the Caledonian Railway Company (hereinafter referred to as "the Caledonian") in terms of the Railways Clauses Consolidation (Scotland) Act, 1845.
(8) The Caledonian in reply to that notice took up the position that the fireclay was not a mineral and therefore was not excluded from the conveyance of the ground which it held and was the property of the Caledonian.
(9) The Company repudiated that claim, and on its proceeding to work the fireclay underneath the railway at that point, the Caledonian raised an action of interdict against it to prevent it from working the fireclay underneath any part of the railway at Gartverrie.
(10) On 29th February, 1908, interim interdict was granted in the Court of Session against the Company working the fireclay at the place in question, and that interdict remained operative until 15th April, 1910, when after various proceedings it was recalled by the Inner House of the Court of Session.
(11) The Caledonian appealed the case to the House of Lords, and on 12th November, 1910, interim interdict was again granted in the Court of Session against the Company pending the decision in the House of Lords appeal. This interdict remained operative until 28th April, 1911, when the interdict was recalled by the House of Lords.
(12) During the two periods of interdict, viz. from 29th February, 1908, till 15th April, 1910, and from 12th November, 1910, till 28th April, 1911, the Company had to bear the expense of keeping open and in a workable state the portion of the fireclay field which it had been interdicted from working-in particular it had to bear the expense of pumping operations and of keeping the roadways, airways, and haulage ways in this area in a proper state of repair-although the Company was not during these periods getting any return from this expenditure. The expenses so incurred were included in the ordinary general mining expenses of the Company and debited in a "charges account," which in turn was at the end of each year debited to the revenue account of the Company.
(13) These expenses were debited to the revenue accounts for the years ended 31st August, 1908, 31st August, 1909, 31st August, 1910, and 31st August, 1911, in the proportions in which they had been incurred during these years.
(14) Following on the decision by the House of Lords, which was to effect that fireclay was a mineral, and so was excluded from the Caledonian's conveyance, the Caledonian, by notice, dated 29th June, 1911, intimated in terms of its powers under the Railways Clauses Consolidation (Scotland) Act, 1845, its desire that a certain portion of red fireclay at the place in question, extending to 1.306 acres, should be left unworked, and offered compensation therefor.
(15) By similar notice, dated 3rd October, 1911, the Caledonian reserved a further small portion of red fireclay, extending to .109 acres, and offered compensation therefor.
(16) By a similar notice, dated 3rd October, 1911, the Caledonian reserved an area of white fireclay, overlying the red fireclay and extending to 1.222 acres, and offered compensation therefor. The area of fireclay reserved by the Caledonian therefore extended at its greatest part to 1.415 acres, made up of the areas of 1.306 acres and .109 acres of red fireclay before referred to.
(17) The interdict proceedings related to the whole of the Gartverrie field underlying the railway, but the portions of fireclay reserved by the Caledonian under the above notices only form a small portion of the interdicted area.
(18) The parties could not agree as to the amount of compensation payable by the Caledonian for the fireclay so reserved by the latter, and the question went to arbitration.
(19) After a proof and various other proceedings, the oversman in the arbitration issued proposed findings, thereafter final findings, and finally a decree arbitral awarding £15,316, 11s. 4d. as the amount of compensation due. Copies of the proposed findings, final findings, and decree arbitral are annexed hereto, and form part of this Case.(1)
(20) On 9th April, 1913, the Caledonian paid to the Company the above sum of £15,316 11s. 4d., together with interest thereon at five per cent. from 6th March, 1913 (being the date of the final findings by the oversman), amounting to £67 3s. 6d., after deduction of Income Tax.
(21) The following receipt endorsed on the decree arbitral, was given to the Caledonian by the Company:-
Glasgow, 9th April, 1913. Received from the Caledonian "Railway Company the several sums mentioned in "the foregoing decree arbitral, amounting to Fifteen "thousand three hundred and sixteen pounds, eleven "shillings and fourpence sterling, together with the sum "of Sixty-seven pounds, three shillings and sixpence, being "the nett interest thereon at five per cent. from 6th March, "1913, to date, after deducting Four pounds, three shillings "and twopence of Income Tax.
(22)
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