Whimster & Company v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 28 October 1925 |
| Date | 28 October 1925 |
| Docket Number | No. 5. |
| Court | Court of Session |
Lord President (Clyde), Lord Skerrington, Lord Cullen, Lord Sands.
Revenue—Excess profits duty—Computation of profits—Deductions—Losses—Fall in freights on time-charters—Estimated future loss—Stock in trade—Finance (No. 2) Act, 1915 (5 and 6 Geo. V. cap. 89), sec. 40 (1), Fourth Sched. Part I., par. 1.
In estimating their profits and losses for the purpose of excess profits duty a firm of shipping agents, who chartered ships on time-charters and either subchartered them or carried goods in them at current freights, claimed to be entitled, as regarded the unexpired periods of the time-charters, to deduct as a loss the difference between the rates for chartering and the freights current when the ships were chartered on the one hand, and the lower rates and freights current at the close of the accounting period on the other. They contended that the time-charters were their stock in trade, and that, in so valuing them and deducting the loss, they were following ordinary commercial practice.
Held that the deduction was inadmissible, in respect that it was an attempt to include among the ascertained losses for the accounting period a loss which, even if inevitable and such as a prudent man of business would provide against by an appropriation to reserve, had not been actually incurred during the accounting period.
Collins & Sons v. Inland Revenue, 1925 S. C. 151, followed.
At meetings of the General Commissioners of Income Tax for the Lower Ward of Lanarkshire held at Glasgow on 30th October 1923 and 30th January 1925, Whimster & Company (hereinafter called the appellants), shipping agents, Glasgow, appealed under section 35 of the Finance Act, 1922, against the determination of the Commissioners of Inland Revenue that the amount of the deficiency or loss that arose in their business in the accounting period to 31st December 1920 was £11,087. The appellants claimed that this deficiency should be increased by the sum of £6063, and should be found to be £17,150.*
The Commissioners dismissed the appeal, and, at the request of the appellants, stated a case for appeal.
The case set forth:—
‘1. The following facts were admitted:—(1) The appellants have for a number of years carried on business in Glasgow as shipowners and ship managers. Part of their business consists of hiring ships on time-charter, and carrying goods and merchandise as offered to them on regular routes, for the carriage of which goods and merchandise they receive such freights as are current and procurable from time to time. In such a business, profits are made if the freights received exceed in amount the hire of the vessel chartered and the other expenses of running her, and losses if the reverse is the case. (2) The appellants were in use to make up and balance their books as at 31st December in each year. … (3) At 31st December 1920 the appellants had a number of vessels on time-charter under charter-parties, the currency of which did not expire till various later dates, and while they knew the charter rates which they were liable to pay for vessels during the unexpired periods of their respective charters, they could not, with certainty,
foresee the rates that would rule on time-charters, nor the rates or amount of freight or the quantity of goods that would be procurable and earned by the chartered vessels, during the said unexpired periods. (4) During the earlier part of 1920 shipping business was good, but, in the latter part of the year, it experienced a severe depression which extended over 1921. The appellants were thus at 31st December 1920 faced with the extreme probability, amounting to a practical certainty, that in 1921 rates of hire paid for vessels on time-charter, the quantity of cargo that would be tendered to them, and the freights for the carriage of goods by sea would fall very seriously. They thus foresaw that not only would they be paying for their chartered vessels substantially more than they would have had to pay on similar time-charters if made at the date of balance, but that they might also find it impossible to earn freights with these vessels at sufficiently high rates to enable them to avoid severe losses on the running of the vessels whose charters were then current. (5) The appellants in framing their balance at 31st December 1920 estimated the loss they had to face in the circumstances above stated by debiting the whole of the hire of the vessels chartered by them to become payable by them after 31st December 1920, and per contra arrived at the amount of freights they would receive by taking the hires current for vessels on time-charter at 31st December 1920. The way in which they carried this out was by making up voyage accounts for the year 1920 of the vessels chartered by them, debiting the whole of the hire of these vessels paid and to become payable, over the whole periods of the various charters (including amounts which had not actually become due at 31st December 1920), and per contra they credited—not the amounts to become due under the charters for the periods subsequent to that date—but freights earned to 31st December 1920 and the current hires they would have had to pay for these periods, if they had entered into similar charters as at the date of balance. (6) They thus on the credit side of the voyage accounts substituted for the actual hires falling due on the current charters for periods subsequent to 31st December 1920 reduced rates of hire, which [were] calculated at the market rate they would only have had to pay for these periods on charters if entered into on 31st December 1920. By so stating the accounts they arrived at a loss greater by £6063 than the amount allowed by the Inland Revenue Commissioners as the deficiency to be taken into account for 1920 in fixing the appellants' liability for excess profits duty. In the actual event, it turned out that the loss made by the appellants on their charters was greater than the amount at which they had estimated it by adopting the method before stated and the amount taken into their balance-sheet of 31st December 1920. (7) Mr Whimster, the senior partner of the appellants' firm, retired from it at the said 31st December 1920, and was settled with by his partners and paid out his interest in the firm on the said balance-sheet. He thus bore his proportionate share of the said sum of £6063, which was treated so far as he was concerned as an ascertained and definite loss. The agreement, which is dated 31st December 1920, provided for the firm of Whimster & Company, of which Mr Whimster was the senior partner, being dissolved, for his partners taking over the business on the terms of the balance-sheet, including taking over the charters in question and getting the benefit of the £6063, but running the risk of further loss...
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