THE LOTHIAN CHEMICAL Company, Ltd v ROGERS (HM INSPECTOR of TAXES)
| Jurisdiction | Scotland |
| Judgment Date | 09 December 1926 |
| Date | 09 December 1926 |
| Court | Sheriff Court |
No. 605.-COURT OF SESSION, SCOTLAND (FIRST DIVISION).-
Income Tax, Schedule D-Excess Profits Duty-Profits of trade-Deduction-Loss on conversion of plant and works.
During the War the Appellant Company was manufacturing explosives for the Minister of Munitions, but owing to the dangerous situation of the works this was discontinued, and in October, 1917, an arrangement was entered into with the Minister
of Munitions, ultimately embodied in a written agreement dated the 22nd April, 1918, under which the Company agreed to convert its plant and works forthwith into a plant suitable for the manufacture of calcium nitrate, to be sold to the Minister on stated terms. The Minister undertook to recoup to the Company the whole cost of conversion up to a maximum sum of £15,000 which was the Company's estimate of the cost in the conditions then prevailing. The agreement was to continue in force until determined by the Minister by one month's notice, which might be given immediately on the termination of hostilities, but the agreement was not otherwise to expire before the 31st December, 1918. The converted works (except any existing plant and buildings incorporated therein and the land) were to be the property of the Minister, with an option to the Company within three months of the determination of the agreement to purchase the works at a valuation, and if such option was not exercised, an option to the Minister within twelve months to remove the buildings, plant and machinery so far as his property, or to purchase the Company's interest in the land and in buildings, etc., not already his propertyThe work of conversion was commenced in November, 1917, and completed in the autumn of 1918. Following on the Armistice the contract was determined according to its terms after only one week's output had been manufactured. None of the options in the agreement was exercised at its termination, and eventually in 1922 the works and plant belonging to the Minister, which were of little value to the Company, were taken over by the Company for £400.
Owing to rises in wages and cost of materials during the progress of the work the cost of conversion exceeded the £15,000 paid by the Minister of Munitions by £4,044, of which a sum of £1,879 (after deducting costs) was recovered from the Minister in 1925 in settlement of an action which had been commenced against him, and the net deficiency of £2,165 was claimed by the Company as a deduction in arriving at its profits for the purposes of Income Tax and Excess Profits Duty.
Held, that the loss in question was a loss of capital, and that it was not admissible as a deduction from the Company's profits for Income Tax or Excess Profits Duty purposes.
(1) The Lothian Chemical Co., Ltd. v. Rogers (H.M. Inspector of Taxes).
At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts, held on 24th February, 1926, for the purpose of hearing appeals, the Lothian Chemical Company, Ltd., hereinafter called "the Company", appealed against an assessment to Income Tax on the sum of £1,940 (subject to a deduction of £237 for wear and tear of machinery or plant) made upon the Company for the year ending 5th April, 1923, under the provisions of the Income Tax Acts.
I. The following facts were admitted or proved:-
(2) The Company occupies works in Broughton Road, Edinburgh, which it was using up to June, 1917, for the manufacture of T.N.T. under contract with the Minister of Munitions. At that date it was decided that the situation of the works was too dangerous for such manufacture, and thereupon the production of T.N.T. was discontinued.
(3) Thereafter the Company carried out experiments in the manufacture of Calcium Nitrate, and these experiments proving satisfactory an arrangement was entered into with the Minister of Munitions in October, 1917, for the conversion of the Company's plant and the works with the object of rendering them suitable for the manufacture of Calcium Nitrate. This arrangement was ultimately embodied in an agreement dated 22nd April, 1918, a copy of which (marked "A") is attached hereto, and forms part of this Case.
(4) The said agreement provided that the Company should forthwith convert its plant and the works into a plant for the manufacture of Calcium Nitrate with a capacity of at least 80 tons of Calcium Nitrate per week. The Minister of Munitions undertook to recoup to the Company the whole cost of the conversion up to a maximum sum of £15,000, which was the Company's estimate, in the conditions then prevailing, of the probable cost of conversion. In consideration thereof the works when converted (excepting only land and any buildings and plant forming part of the Company's existing works incorporated in the works when converted) were to be and remain the property of the Minister, and at the expiration or sooner determination of the agreement the Company was to have the option within three months to purchase the works (so far as the same were the property of the Minister) at a valuation, or if such option were not exercised by the Company the Minister was to have the option within twelve months either to remove all or any of the buildings, plant and machinery which were his property, or to purchase from the Company its interest in the land and any part of the buildings, plant or machinery which were not already his property. The Calcium Nitrate manufactured at the works when converted was to be sold to the Minister of Munitions upon stated terms. The agreement was to continue in force until determined by the Minister by one calendar month's notice, to expire not before the 31st December, 1918, provided that such notice might be given forthwith if hostilities with Germany should previously cease.
(5) The work of conversion was commenced in November, 1917, and was carried out by the autumn of 1918. Following upon the Armistice, the contract was determined towards the end of the year 1918 in terms of the contract after only one week's output had been manufactured.
(6) During the progress of the work of conversion increases in wages were awarded to employees in the engineering and building trades, and various increases took place in the prices of materials required by the Company in the work of conversion. Largely, if not entirely, in consequence of these increases the actual cost to the Company of the work of conversion exceeded the sum of £15,000 payable and paid by the Minister of Munitions in terms of the contract by a sum originally calculated at £4,174, but agreed for the purposes of this Case to be taken at £4,044, which sum was written off by the Company as a bad debt in its accounts for the half-year to 31st March, 1921.
(7) The Company did not exercise its option to purchase the works and plant belonging to the Minister of Munitions within three months after the determination of the contract, nor did the Minister exercise his option to remove his property or purchase the Company's property within twelve months. The works did not consist of a factory or any similar building, but of brick retorts, furnaces, & c., scattered about the premises. The question of disposal of the Minister's works and plant remained in abeyance until January, 1922, when the Disposal and Liquidation Commission, which had then succeeded to some of the functions of the Minister of Munitions, suggested that the Company should take them over for some reasonable sum, or that failing such an arrangement the plant should be sold by auction and the buildings removed. In view of the inconvenience that would have been caused by the adoption of the latter course, the Company offered to pay the sum of £400 for the whole of the Government plant and to relieve the Commission of all responsibility with reference to the removal of valueless brickwork, & c., and the making good of the premises. This offer was accepted and implemented. A small part of the plant had been sold by the Company, and the proceeds of sale had been taken into account in calculating the amount of the cost of conversion referred to in the preceding paragraph. A few articles of plant may be of use to the Company for general chemical purposes, but as a whole the works and plant taken over are of little value.
(8) In October, 1924, the Company raised an action against the Lord Advocate for recovery of the sum of £4,174, being the excess of the cost of the conversion of the works and plant over the sum received from the Minister of Munitions. The action was settled in February, 1925, by payment to the Company of £2,087, of which £208 was absorbed by legal expenses, so that the net sum received by the Company was £1,879.
(9) The loss of £2,165, being the difference between the said sum of £1,879 and the sum of £4,044 agreed to be taken as the excess cost of the work of conversion, as stated in paragraph (5) hereof, was claimed by...
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