United Steel Companies, Ltd v Cullington (HM Inspector of Taxes) (No. 1)
| Jurisdiction | England & Wales |
| Judgment Date | 01 November 1939 |
| Date | 01 November 1939 |
| Court | King's Bench Division |
No. 1129-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
Income Tax, Schedule D - Sum payable by instalments to secure a customer - Receipts from other manufacturers for right to supply this customer - Whether capital or income.
Two Steel Companies (the Appellant Company and another) entered into an agreement, dated 25th August, 1932, with a Railway Company under which the Railway Company, in consideration of the sum of £180,000 to be paid to it by the Steel Companies in equal monthly instalments over a period of 10 years, agreed for that period to close down its steel works and to purchase specified steel products from the Steel Companies.
As contemplated by the agreement of August, 1932, the Steel Companies arranged for a proportion of the Railway Company's requirements to be supplied by outside manufacturers, who undertook to pay to the Steel Companies certain sums per ton of steel supplied by them. The sums so received by the Steel Companies were divided between them in the proportion in which they were liable to pay the £180,000 to the Railway Company.
Held, (1) that the parts of the instalments of the sum of £180,000 apportioned to the Appellant Company were payments of capital and were not admissible deductions in computing the Company's profits for Income Tax purposes, and
(2) that the Appellant Company's receipts from the outside manufacturers were revenue receipts in respect of which the Company was assessable.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 23rd March, 1938, the United Steel Companies, Ltd., (hereinafter called "the Company") appealed against an assessment to Income Tax in the sum of £690,000 less £175,000 Wear and Tear for the year ending 5th April, 1937.
The said assessment is made under Case I of Schedule D of the Income Tax Act, 1918, and is in respect of the Company's profits as steel manufacturers.
2. Prior to the 25th August, 1932, the London, Midland and Scottish Railway Company (hereinafter called "the Railway "Company") was for the purposes of its undertaking carrying on steel works at Crewe and Horwich.
At this time the Railway Company was contemplating rebuilding and modernising their steel works with a view to increased output, but desired to consider alternative means of meeting its requirements, and had so informed the Company. The Company and the Barrow Haematite Steel Co., Ltd., with a view to rationalization of output, desired that the steel works at Crewe and Horwich should be closed down and that they should supply in future the steel which the Railway Company would have obtained from those works.
It was the declared intention of the Company and Barrow to offer to other steel makers for an appropriate consideration one third of the orders for certain materials.
3. By an Agreement, in which these objects are recited, dated 25th August, 1932, between the Railway Company of the one part and the Company and the Barrow Haematite Steel Co., Ltd. (thereinafter called "the Steel Companies") of the other part it was agreed as follows:-
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1. The Railway Company hereby agrees with the Steel "Companies that the Railway Company:-
(a) "will on or before the first day of October One thousand "nine hundred and thirty two close down its Steel "Works at Crewe and Horwich except the steel "foundries at Crewe and Horwich used for the production "of steel castings. The Railway Company "reserves the right to operate the steel foundries at "Crewe and Horwich for the production of steel "castings at its discretion or to remove the steel "foundry plants and operate the same at whatever "place it may determine for the production of steel "castings at its discretion
(b) "will not between the first day of October One thousand "nine hundred and thirty two and the thirtieth day "of September One thousand nine hundred and forty "two operate its said steel works (save as aforesaid) "or build or acquire or operate any similar works "(save as aforesaid)
(c) "will either dismantle or retain in their present state "and condition its steel works agreed to be closed "down and
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(d) "will not sell let or part with the possession of its said "steel works except upon terms which will secure "that the purchaser lessee or other occupier will not "between the same dates operate or use or permit "to be operated or used the said works in any way "contrary to the terms of this Agreement and will "at all times upon the request of the Steel "Companies enforce such terms.
(a) In consideration of the foregoing covenant by the "Railway Company the Steel Companies jointly and severally "covenant to pay the Railway Company the capital sum of "£180,000 (One hundred and eighty thousand pounds)
(b) "The said sum shall be payable by 120 (one hundred "and twenty) equal monthly instalments of £1,500 (One "thousand five hundred pounds) each to be paid on the last "day of each month the first payment to be made on the "thirty-first day of October One thousand nine hundred and "thirty two.
3. "The Steel Companies will endeavour to provide "employment for skilled workers displaced owing to the "closing down of the said works consistent with their duty to "their own employees".
Under Part II of the said Agreement the Railway Company agreed to purchase in each year from the Steel Companies and the Steel Companies agreed to supply to the Railway Company steel products of the several kinds specified in the First Schedule to the said Agreement in the quantities specified in such Schedule.
The Steel Companies were to be at liberty to sub-contract for the supply of any of the steel products to be supplied by the Steel Companies provided that the sub-contractor was a manufacturer upon the Railway Company's list of approved contractors.
A copy of the said Agreement of 25th August, 1932, is attached hereto, marked "A", and forms part of this Case(1).
4. By an Agreement dated 28th October, 1932, between the Company of the one part and the Barrow Haematite Steel Co., Ltd. (thereinafter called "Barrow") of the other part, after reciting that it was the intention of the Company and Barrow to offer one third of such further proportion as might from time to time be arranged of the orders placed by the Railway Company pursuant to the main Agreement of 25th August, 1932, for the supply of rails, tyres and axles to outside manufacturers, and after reciting that terms of the arrangement with the outside manufacturers had been agreed it was agreed by Clause 3 of the said Agreement that Barrow should be bound to pay £69,949 10s. 10d. and the Company £110,050 9s. 2d. of the said sum of £180,000 payable by the Steel Companies to the Railway Company under the said Agreement of 25th August, 1932, provided that these proportions should be varied if the proportions should be varied in which the orders were to be shared by the Steel Companies.
A copy of the Agreement of 28th October, 1932, is attached hereto, marked "B", and forms part of this Case(1).
5. The terms of the arrangement with the outside manufacturers are contained in a form of undertaking dated 23rd December, 1932, given by the members of the Railway Tyre and Axle Makers' Association jointly and in eight forms of undertaking of various dates between 26th November, 1932, and 16th March, 1933, given by the members of the Rail Makers' Association, all with effect from 1st October, 1932. A copy of the undertaking dated 23rd December, 1932, and a copy of one, dated 16th March, 1933, of the undertakings given by the Rail Makers are attached hereto, marked "C" and "D", respectively(1).
By the Agreement dated 23rd December, 1932, the outside manufacturers (being members of the Railway Tyre and Axle Makers' Association) undertook in consideration of the Steel Companies procuring that they should be given directly by the London, Midland and Scottish Railway Company orders for tyres and axles, to pay monthly to the Steel Companies a sum of 15s. 9d. in respect of every ton of tyres and/or axles delivered during the preceding month.
By the Agreement dated 16th March, 1933, an undertaking was given by the outside manufacturers (being members of the Rail Makers' Association) to pay to the Steel Companies a sum of 6s. 6d. in respect of every ton of rails ordered from them by the London, Midland and Scottish Railway Company.
6. Payments were made by the outside manufacturers in terms of their undertakings to the joint account of the Company and
Barrow, and were subsequently divided between the Company and Barrow, as follows:-7. Instalments of the said sum of £180,000 under the main Agreement of 25th August, 1932, were paid to the Railway Company by the Company and Barrow as follows:-
Three Months to |
||
31st December, 1932 |
… |
£4,500 |
1933 |
… |
£18,000 |
1934 |
… |
per |
1935 |
… |
annum. |
1936 |
… |
The Company and Barrow paid the said instalments in the proportions set out in Clause 3 of the said Agreement of 28th October, 1932, and the instalments were adjusted subsequently as between the Company and Barrow in terms of the proviso to the said Clause 3.
The adjusted amounts provided by the Company and by Barrow are as follows:-
These adjusted amounts paid by the Company less the amounts shown in paragraph 6 are claimed by the Company as deductions from profits for the purpose of Income Tax.
8. Upon the facts set out in paragraphs 2 to 7 hereof it was contended on behalf of the Company that:-
(a) the instalments of the sum of £180,000 paid by the Company to the Railway Company under the Agreement of 25th August, 1932, were sums wholly and exclusively laid out or expended for the purposes of the Company's trade;
(b) the sums shown in paragraph 7 less those...
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