The Gloucester Railway Carriage and Wagon Company, Ltd v The Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 19 February 1925 |
| Date | 19 February 1925 |
| Court | King's Bench Division |
NO. 47*.-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION).-
COURT OF APPEAL.-
HOUSE OF LORDS.-
Corporation Profits Tax - Company manufacturing wagons for sale or hire - Whole stock of wagons used for hire sold at a profit - Whether capital accretion or profits of trade - Finance Act, 1920 (10 & 11 Geo. V, c. 18), Sections 52 and 53.
The Appellant Company was formed to manufacture, buy, sell, hire and let on hire, wagons and other rolling stock, and for many years it manufactured railway wagons, either selling them outright or on the hire-purchase system or letting them on simple hire. In the books of the Company the wagons built to be let on hire were capitalized at a sum which included an amount added as profit on manufacture, and year by year an amount was written off the value of the wagons for depreciation. In 1920, following on a decision to cease letting wagons on hire, the Company sold off the entire stock of wagons used in that branch of its business for a sum in excess of the value of the wagons in the Company's books.
That surplus was included in an assessment to Corporation Profits Tax on the Company in respect of the profits of its business, and the Company appealed contending that the surplus arose from the realisation of capital assets used in its hiring business.
The Special Commissioners found that the object of the Company's trade was to make a profit out of wagons, that the transactions in question were not of a capital nature, and that the surplus was properly included in the assessment.
Held, that the surplus was not a capital increment, and was properly included in the assessment.
Stated by the Commissioners for the Special Purposes of the Income Tax Acts under the Finance Act, 1920, Section 56 (6), and the Income Tax Act, 1918, Section 149, for the opinion of the High Court of Justice.
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at Gloucester on 11th March, 1921, the Gloucester Railway Carriage & Wagon Company, Limited, whose registered office is situate at Bristol Road, Gloucester (hereinafter referred to as the Company), appealed against an assessment to Corporation Profits Tax made upon them in the sum of £4,321 15s. for the accounting period from 1st January, 1920, to 31st May, 1920, by the Commissioners of Inland Revenue under the Finance Act, 1920, Part V, in respect of the profits of its business. The sole question at issue is whether a sum of £148,651 10s. 9d. hereinafter mentioned should be included as a trade receipt of the Company for purposes of computing its liability to Corporation Profits Tax for the accounting period in question.
1. A Company (hereinafter referred to as the old Company) was incorporated on 4th February, 1860, under the name of the Gloucester Wagon Company Limited. The third paragraph of the Memorandum of Association of the old Company provided that the objects for which the Company was established were "The construction, repair, maintenance, sale, purchase, hiring "and letting of railway wagons and carriages and other rolling "stock and the doing all such other things as are incidental or "conducive to the attainment of the above objects." This business has since then been carried on upon a large scale at Gloucester.
2. The original prospectus of the old Company stated:-
The increasing traffic in English Railways and the "extension of railway enterprise at home and abroad have "entirely gone beyond the supply of railway trucks and "rolling stock, notwithstanding the formation of several "Wagon Companies. The railway Companies very often "cannot, and for some descriptions of merchandise will "not, supply trucks. It is, therefore, found that the most "advantageous course open to the freighter is to hire "trucks under a contract for keeping them in repair. It "is therefore proposed to form such a Company under the "provisions of the Joint Stock Company's Act for the "construction, export, maintenance, and hiring out of "railway trucks.
3. The first report of the Directors for the year to 31st December, 1860, shows that 217 wagons, of which 119 already had been constructed, had been let on simple hire, and it is stated therein that the Company's wagons had been constructed with the greatest care and attention, no necessary expense being spared to secure the best materials and workmanship, on the ground that the more substantially the wagons were built the less would be the cost of maintenance.
4. The second report refers to the "large sum which has "already been invested in wagons let on hire."
5. Reports of the Directors from time to time show that the numbers of wagons let on hire were:-
in 1862 |
701 |
wagons |
in 1863 |
738 |
|
in 1864 |
902 |
|
in 1865 |
1404 |
|
in 1866 |
1659 |
6. Besides constructing wagons to be let on hire, the old Company also constructed wagons and rolling stock for sale on the deferred purchase system.
The Directors' fifth report states that "the business of this "Company has been almost entirely confined to building and "selling wagons and carriages on deferred payment." Over the period covered by the Directors' reports from 1862 to 1866 inclusive the number of wagons shown on the Company's books as sold on deferred payment are:-
1862 |
2311 |
1863 |
3287 |
1864 |
3596 |
1865 |
5205 |
1866 |
5525. |
7. In the year ended 30th June, 1888, the number of wagons let on hire was 5436 and the number of wagons sold on deferred payments was 3232. For this year the Directors reported that the wagons let on hire and valued in the old Company's books at £217,189 3s. were according to a valuation made under their directions worth only £95,369, and that it was necessary to effect a reduction of the old Company's share capital.
It was accordingly decided to reconstruct the old Company and this was effected by a voluntary liquidation of the old Company, and the incorporation on the 14th September, 1888, of a new Company, which is the Appellant Company in this Case, under its present name but with a diminished share capital. The objects of the Company are defined, inter alia, in clause 3 (B) of the Memorandum of Association as "to manufacture, construct, "repair, maintain, buy, sell, hire and let on hire, "carriages, wagons, vehicles, engines and other rolling stock." The diminution of the share capital was carried out by reducing 29,851 fully paid shares of £10 each to shares of £7 each fully paid, and 16,250 shares of £10 each, on which £5 had been paid, to shares of £7 each with an unpaid liability of £3 10s.
The decline in the value of the wagons was due to a considerable decrease in the market value and the consequent impossibility of maintaining existing rentals as indicated by a speech made by the Chairman of the old Company at the extraordinary meeting of that Company held on 8th November, 1887.
8. The above-mentioned sum of £217,189 3s., representing the value of the wagons let on hire at 30th June, 1888, was included in the capital assets of the old Company in its Balance Sheet for the year ending 30th June, 1888, and had been built up as follows. Wagons built to be let on hire had been capitalised in a rough and ready manner at a price which would include a profit on the manufacture, and the capital value so arrived at had been included both in the yearly statement of the old Company's assets and as an item in the manufacturing account of the old Company, from which the profit shewn in the revenue account of the old Company was arrived at, and upon which it had paid Income Tax from year to year. Owing to the lapse of time and to the method of book-keeping adopted the amount of profit so included cannot now be ascertained. On the other hand the old Company wrote off year by year from the total sums so arrived at, representing the value of wagons let on hire, various amounts for depreciation, which amounts also were passed through the yearly revenue accounts of the old Company and so became a deduction in arriving at the profits of the year. We are unable to state the amounts so deducted.
9. The same system of book-keeping was continued after 1888 by the Company, and it was not till the year 1899 that the Company's accounts were kept in such a form that it was possible to ascertain exactly the cost of manufacturing wagons. Since that year wagons retained by the Company have been capitalised at a sum which includes what is termed a "manufacturing "profit" and depreciation has continued to be written off by the Company year by year from the total value of the wagons. Depreciation on the wagons has also been allowed as a deduction in computing the profits of the Company for Income Tax purposes in each year.
10. Wagons have occasionally been purchased by the Company for the purpose of letting out on hire, and these wagons have generally been entered in the capital account at the cost price, but in some cases, where they were purchased very cheaply, they have been entered at a sum, being greater than the cost price, corresponding to the price at which similar wagons already stood in the Company's capital account, the difference being credited to the Company's revenue account upon which Income Tax has been paid.
11. In the year 1909, the wagons owned by the Company were re-valued by the Company, and a sum of £2,131 9s. 8d. was written off as the result of such re-valuation.
12. For the year ended 5th April, 1911, the question of the rate of depreciation to be allowed to the Company on wagons was considered at an appeal meeting by the Commissioners and was fixed by them at 5 per cent. on the written down value. Depreciation has since then been allowed to the Company at this rate for Income Tax purposes.
13. No claim was made at any time for relief from Income Tax for the amounts written off the value of the wagons in 1888 or 1909, these amounts being regarded by the Company as losses of capital.
14. During the ten...
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