W.A. & F. RUTHERFORD v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 13 July 1939 |
| Date | 13 July 1939 |
| Court | Sheriff Court |
NO. 1123-COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Deduction from profits - Solicitors acting also as insurance agents, factors and stockbrokers - Loss of money lent to clients.
The Appellants carried on business as Writers to the Signet but also acted as factors, insurance agents and stockbrokers. They did not hold themselves out as financiers or money-lenders but they were in the habit of making advances to clients. Such loans had always arisen directly out of the Appellants' general legal or other business.
The Appellants claimed that, in computing their profits for Income Tax purposes, a deduction should be allowed in respect of losses sustained in connection with advances made to two clients who required assistance in the purchase of, in the one case, farm stock and, in the other, a farm.
The Appellants did not seek to prove a custom of solicitors generally to lend money to clients but contended that theirs was a composite business, including the lending of money, from the profits or gains of which the losses were proper deductions. The General Commissioners refused the deductions claimed, on the ground that the advances were not moneys wholly and exclusively laid out for the purpose of the Appellants' profession within the meaning of Rule 3 (a) of the Rules applicable to Cases I and II, Schedule D.
Held, that the losses were not legitimate deductions from the Appellants' profits or gains.
Commissioners of Inland Revenue v. Hagart & Burn-Murdoch,14 T.C. 433, followed.
At meetings of the Commissioners for the General Purposes of Income Tax for the County of Selkirk, held at Selkirk on 23rd February, 1938, and 15th June, 1938, Messrs. W.A. & F. Rutherford, Writers to the Signet, Galashiels, (hereinafter referred to as "the Appellants") appealed against an assessment of £5,500 made upon them under Cases I and II, Schedule D, of the Income Tax Act, 1918, for the year 1937-38 and claimed a deduction of a sum of £653 18s. 9d. in respect of losses sustained by them in connection with advances to two clients (hereinafter referred to as client "A" and client "B" respectively).
In view of extensive admissions as to facts made by H.M. Inspector of Taxes, the Commissioners did not consider it necessary to examine on oath either the senior partner of the Appellants' firm (Mr. William Rutherford) or the junior partner (Mr. Archibald Cochrane Rutherford) both of whom were present at the aforesaid meetings of Commissioners.
I. The following facts were admitted:-
(2) The Appellants are a firm of Writers to the Signet and carry on business as Solicitors, or Writers, in Galashiels. They are a long-established firm of Writers in Galashiels, and have for many years also acted as insurance agents, factors (including factories on agricultural estates and house properties and the buying and selling of such estates or properties) and registered stockbrokers, indicating their willingness so to act by means, inter alia, of window notices and a brass plate at their office in Galashiels. They describe themselves on their note-paper as Writers to the Signet. The partners hold company and public appointments the remuneration from which is included in the Appellants' profits. They do not hold themselves out as financiers or money-lenders, but they have for many years been in the habit of making advances to clients where they considered it reasonable and proper to do so. They charge interest on such loans on the daily balances at the overdraft rate from time to time of the Scottish banks. A Statement (marked "A") attached hereto and forming part of this Case(1), shows the interest received by the Appellants for the years 1915 to 1936 inclusive. For the year 1936 the net interest received was £655 8s. 8d. which came from 50 clients in sums ranging from 6s. 7d. to £142 7s.11d. The Appellants lend to clients who have had dealings with them either as solicitors or as factors, etc. They seldom take security for such loans but have incurred very few bad debts in connection therewith. The loans have always arisen directly out of the Appellants' general legal or other business. They were not usually for any fixed term and the advances may vary from day to day.
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(3) The number of clients receiving advances in recent years has been as follows:-1930, 66; 1931, 54; 1932, 56; 1933, 54; 1934, 57; 1935, 40; and 1936, 50. Many of these clients appear in several years in succession and during the years 1931 to 1936 there was only a small number of new cases in which advances were made for the first time. The Appellants on occasions advance money to trustees and executors in cases wheree.g., estate duty must be paid before any estate can be received, and funeral expenses and debts, legacies to servants and employees, and living and other current expenses of clients paid before and until an
estate has been ingathered. In 1935 eleven of the clients who obtained advances were trustees or executors and in 1936 there were sixteen such clients. (4) The Appellants also on occasions advance money to clients where they are acting as factors for landed estates, and also to clients whose ordinary personal accounts are overdrawn.
(5) The following examples are typical cases of the advances made by the Appellants:-
(6) A. Trust Accounts.
(7) Example 1.-In this case a testator was in business at the date of his death. All the investments outside the business were set aside for the widow's annuity. Some of the beneficiaries wished payment on account of their shares, but money could not at the time be withdrawn from the business. The Appellants made the trustees large advances as required for this purpose. The trust account was overdrawn for some years, the maximum overdraft amounting to about £8,000.
(8) Example 2.-The trust estate consisted almost entirely of landed estate. On re-letting one of the farms there had been large expenditure on the house and steading, etc., also on reconditioning eight farm cottages, and the Appellants had given the trustees large temporary accommodation during the course of the work which had been unexpectedly protracted but which was intended to be met by borrowing on Bond and Disposition in Security. The trust account was at the date of the appeal meetings overdrawn about £1,500.
(9) Example 3.-This was the case of a man who after making his Will lost heavily, and the income from the residue of his estate, which consisted of house property heavily bonded, and tied up under the Rent Restrictions Acts, was not sufficient to meet the widow's annuity. The trust account was overdrawn about £300.
(10) Example 4.-This man had been ill for about 18 months before his death, and his book-keeper, who had been with him many years, had died about the commencement of his illness. The books were not up to date, and the accounts due to him had not been got in, and the accounts due by him not paid. The Appellants advanced money to tide the trustees over the difficulty so that their account was and still is overdrawn between £2,000 and £3,000.
(11) B. Ordinary Factors' Accounts for landed estates, where there is no trust
(12) Example 5.-This man on succeeding to an estate spent considerable sums on the mansion house and on reconditioning all the cottages. The Appellants financed the work, and he repaid them from income £1,000 a year. His account was at its highest overdrawn between £2,000 and £3,000.
(13) Example 6.-This is a wealthy man who owns a large estate. During the recent slump he could not re-let one of his farms and had no alternative but to take it into his own hands till times were better. He did not wish to realise any of his investments, and the Appellants told him it was part of their business to accommodate their clients, and they were quite willing to finance the business for him. A separate account kept for that farm has been for some years continuously overdrawn from £3,000 to £4,000.
(14) Example 7.-This is the case of a man continually overspending his income. He periodically requires to put bonds on his property to meet his debts. Each time the money has been required in such a hurry there was no time to find a lender. The Appellants took the bonds in their own favour and transferred them to ordinary lenders as soon as such could be got. His account has been frequently overdrawn large sums.
(15) Example 8.-This man owns a small property ripe for feuing. The Appellants have allowed his account to be overdrawn for the purpose of opening up the estate by making roads, etc.
(16) C. Ordinary Personal Accounts.
(17) Example 9.-This lady had a sister who had given great trouble and had become almost destitute. She asked the Appellants to take full authority and give her sister what was required within reasonable limits as she did not wish to have the responsibility of deciding, and they have paid regular fortnightly allowances, and made a great many extra payments as reasonably required. The lady repays the Appellants out of capital, but the account is sometimes overdrawn over £1,000.
(18) Example 10.-These ladies have spent a considerable sum on their properties. By arrangement the Appellants made all payments during the course of the work about seven or eight months, and they repaid the Appellants at the end in one sum, £543.
(19) The Commissioners asked whether the Appellants desired further enquiry as to the custom of Solicitors other than their own firm in lending money to clients in circumstances such as are disclosed in the present case but the Appellants intimated that they did not desire such enquiry. The Commissioners had, accordingly, before them only admissions as to the practice of the Appellants. H.M. Inspector of Taxes did not ask for any further enquiry on the question of custom.
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(20) The losses of £653 18s. 9d. arose in connection with the following two advances:-
1. Client "A".-This man whom the Appellants had...
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