England and Wales High Court (King's Bench Division) Decisions

BAILII Citation Number: [1949] EWHC KB 1
Case No. 1417

High Court of Justice
(King's Bench Division)


Date: 31st January, 1949

Before:

Croom-Johnson, J.

Between:
- - - - - - - - - - - - - - - - - - - - -
Cooke (H.M. Inspector of Taxes) v. Quick Shoe Repair Service
- - - - - - - - - - - - - - - - - - - - -
Mr. G. R. Mitchison, K.C., and Mr. Reginald P. Hills appeared as Counsel for the Crown, and Mr. R. E. Borneman for the Respondents.
[Solicitors: - Solicitor of Inland Revenue; Bell, Broderick & Gray, for Turner, Martin & Symes, Ipswich.] - - - - - - - - - - - - - - - - - - - - -


Income Tax, Schedule D - Profits of trade - Deduction - Vendor's debts paid by purchasers of business to maintain goodwill - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Cases I and II, Rule 3.

The agreement by which the Respondent firm purchased a shoe repair business provided that the vendor should discharge all liabilities of the business outstanding at the date of sale. The vendor failed to do so, and the Respondents, in order to preserve the goodwill and to ensure continuity of supplies of material, etc., paid certain sums in discharge of the vendor's liabilities.

On appeal against an assessment to Income Tax under Case I of Schedule D, the General Commissioners held that the sums so paid by the Respondent firm were wholly and exclusively laid out for the purposes of its business and were not capital expenditure and were, therefore, allowable deductions for Income Tax purposes.

Held, that the Commissioners' decision was correct.

Case

Stated under Section 149 of the Income Tax Act, 1918, by the Commissioners for the General Purposes of the Income Tax for the Division of Ipswich in the County of Suffolk for the opinion of the King's Bench Division of the High Court of Justice.

1. At meetings of the said Commissioners held at Tower Church Yard, Ipswich, on 17th April and 1st May, 1947, Grace Kathleen Sheldrake, William Charles Garner and Thomas William Garner (hereinafter referred to as " the Respondents ") carrying on business under the style or name of Quick Shoe Repair Service appealed against an estimated assessment to Income Tax under Schedule D of the Income Tax Act, 1918, in the sum of £1,000 for the year ended 5th April, 1947, on the profits of their trade as boot and shoe repairers. The assessment had been made in an estimated amount in the absence of returns.
2. It was agreed that the said assessment should in any event be reduced to £930, and the sole question in dispute was whether certain payments, amounting to a total of £613 18s. 7d., which had been made by the Respondents in the circumstances hereinafter set out, should be deducted in computing the amount of the profits or gains to be brought into charge.
3. The following facts were agreed or admitted: -

(a) By a memorandum of agreement dated 2nd October, 1945, and made between Mr. Dent and the Respondents, which agreement is annexed hereto, marked "A", and forms part of this Case^[1], the Respondents purchased for £1,500 from Arthur Edward Dent

Not included in the present print (hereinafter referred to as "Mr. Dent") the entire business (including goodwill, plant, machinery, stock-in-trade and all other assets) of boot and shoe repairers carried on by Mr. Dent in the firm name of Quick Shoe Repair Service at various addresses in Ipswich, and carried on the trade from that date.

(b) By clause 3 of the said memorandum of agreement, it was provided that the leases or tenancy agreements in respect of part of the premises at which the said business was carried on should be assigned by Mr. Dent to the Respondents, and that a sub-tenancy should be granted in respect of the other part thereof subject to the consents of the respective landlords being obtained, and that Mr. Dent would use his best endeavours to procure such consents.

(c) By clause 4 of the said memorandum of agreement, it was provided that Mr. Dent should pay and discharge all liabilities owing by him in connection with the said businesses as at 30th September, 1945.

(d) Owing to his financial circumstances, Mr. Dent was unable to discharge all the said liabilities in accordance with the obligation which he had entered into by the said clause 4 of the memorandum of agreement, and the Respondents paid the following sums in respect of liabilities which Mr. Dent had incurred prior to the sale of the business, notwithstanding that they were under no legal obligation to do so:

Nature of Liability		Amount
		£ s. d.
Leather supplies		..349 10 0
Rents of business premises		62 8 2
National Insurance stamps		18 1 0
Renewals of small plant		5 2 0
Printing and stationery		9 1 7
Advertising .......		28 19 6
Hospital contributions		9 11 10
Wages ..........		4 18 6
Rates ..........		118 19 6
Gas ..........		1 6 10
Electricity .......		5 19 8
Total .	.£613 18 7	.£613 18 7

It is these payments which the Respondents claimed to deduct from the profits of their trade to be brought into charge.

(e) The said liabilities of Mr. Dent were discharged by the Respondents because the Respondents found that the creditors of Mr. Dent (who had traded in the same firm name) expected to have their liabilities discharged in the normal course. The payments were made generally in order to preserve the goodwill of the business and to ensure continuity of supply of material and labour. In addition, the special reasons for making some particular payments were as follows: -

(i) Payments for leather supplies

The Respondents considered that in order to ensure continuity of supplies it was essential not to lose the firm's goodwill with the suppliers. Owing to the shortage of leather, they found that it was almost impossible to open a new account with wholesale suppliers. A letter to the Respondents dated 8th January, 1947, from one of the leather suppliers with whom the Respondents discharged Mr. Dent's liabilities, is annexed hereto, marked " B ", and forms part of this Case ^[2]. This letter states that the action of the Respondents in discharging Mr. Dent's debts inspired in them a confidence which overcame their reluctance to entertain further business.

(ii) Payments for rents of business premises

Under the tenancy agreements relating to the various premises where the Respondents' business was carried on, it was necessary to obtain the landlord's consent to any assignment or sub-letting. The Respondents believed that considerable difficulty might have been encountered in obtaining the consent if arrears of rent owing by Mr. Dent were not discharged by them.

(iii) Payment for National Insurance stamps

The Respondents were informed by the National Insurance officer that the employees would cease to be entitled to , National Insurance benefits if their cards were not stamped in respect of some of the period during which, they had been employed by Mr. Dent, and it was to avoid possible labour difficulties that this payment was made.

4. Copies of the Respondents' balance sheet as at 30th September, 1946, and trading and profit and loss accounts for the year ended 30th September, 1946, are annexed hereto, marked " C ", and form part of this Case (1). Of the said purchase price of £1,500 which the Respondents paid to Mr. Dent for the business, the sum of £225 was treated in the said accounts as the purchase price of the stock-in-trade. This stock consisted largely of a supply of leather. The said sum of £225' Was allowed as a trading expense of the Respondents for the purpose of computing the profits of the Respondents' trade for the year ended the 30th September, 1946.
5. It was contended on behalf of the Respondents: -

(a) that the payments in question were not payments of the vendor's liabilities as such, but were payments made as the occasion arose for the purpose of facilitating the carrying on of the business;

(b) that the payments in question materially contributed to the profitable character of the trade for the year in which the payments were made and that they should be allowed as a deduction the reform. Reference, was made to the case of Usher's Wiltshire Brewery, Ltd. v. Bruce, 6 TC 399;

(c) that whilst the payments were not made under any legal compulsion the decision in Smith v. Incorporated Council of Law Reporting for England and Wales, 6 T.C. 477, makes it clear that payments made on the grounds of commercial expediency are necessarily incurred for the purposes of the trade;

(d) that the payments have not added to the value of the assets and have provided nothing of a permanent value, the purchase price of £1,500 being the full value of the assets without any deduction; there was accordingly no element of capital expenditure; reference was made to the case of Atherton v. British Insulated and Helsby Cables, Ltd., 10 TC 155; and

(e) that the payments were not necessary to complete the Respondents' title to the business and did not arise under the vending agreement; they were not preliminary to the earning of profits but were made in the course of doing so.

6. It was contended by H.M. Inspector of Taxes: -

(a) that the payments were not wholly and exclusively incurred for the purpose of the Respondents' trade;

(b) that the payments were capital expenditure; and

(c) that the payments were not proper to be allowed as deductions in arriving at the amount of the profits or gains of the Respondents' trade.

7. We, the Commissioners who heard the appeal, held as follows: - Having fully considered the facts and on the advice of the Clerk with reference to the point of law raised at the former hearing, we have decided to allow the appeal by reducing the assessment to £316, allowing a deduction of £613 18s. 7d. being moneys wholly and exclusively laid out or expended for the purpose of the Appellants' business during the year of account, and having regard to the nature of such payments consider they do not come under the heading of capital expenditure but proper deductions from income.
8. Immediately upon the determination of the appeal, H.M. Inspector of Taxes expressed to us his dissatisfaction therewith as being erroneous in point of law, and in due course required us to state a Case for the Opinion of the High Court pursuant to the Income Tax Act, 1918, Section 149, which Case we have stated and do sign accordingly.
E. L. Hunt
G. T. Moss
J. Chalmers
S. Chas. Grimwade


The case came before Croom-Johnson, J., in the King's Bench Division on 31st January, 1949, when judgment was given against the Crown with costs.

Judgment

Croom-Johnson, J. - In this case the General Commissioners have found that certain payments made by the Respondents, three partners in the business of the Quick Shoe Repair Service, were made generally in order to preserve the goodwill of the business and to ensure continuity of supplies and labour, and that the moneys so expended were expended wholly and exclusively for the purpose of the Respondents' business during the year of account. They go on to say that, having regard to the nature of the payments, they do not consider that they come under the head of capital expenditure, but are properly deductions from income.

The question which 1 have to determine first of all is whether that is a question of law or a question of fact. If it is a question of law then the decision can be examined into. If it is a question of fact then only one question can be looked into, which is itself a question of law, that is, whether there is any evidence to support the finding; with this modification, of course, that if I come to the conclusion that the Commissioners have misdirected themselves in coming to their conclusion of fact, then that opens the door to an examination to see whether they were correct or whether they could have come to the conclusion of fact that they did come to had they properly directed themselves.

I have come to the conclusion that this is a question of fact. I need not state the facts all over again. The Respondents were entitled to have paid to them by the vendor of the business in question, the debts which were due and owing by the vendor in respect of that business at the particular day which is specified in the contract. The purchase having been completed, the vendor found himself unable to pay and did not pay the debts in question, and inasmuch as the purchasers had purchased the goodwill of the business as well as other assets, they found themselves in this position - that if they did not pay, to use a popular expression, their name would be mud (that really is to put this case in its simplest form) - and accordingly they paid voluntarily the debts which the vendor owed and which the vendor ought to have paid. What the Commissioners have found is that those payments were made in order to preserve the value of the capital assets, namely, the purchase of the goodwill, which they had bought. How can I say in those circumstances that there is no evidence to support such a finding?

The deduction, if it is to be made at all, must be made having regard to the prohibition which is contained in Rule 3 of Cases I and II of Schedule D, which says that: " In computing the amount of the " profits or gains to be charged, no sum shall be deducted in respect of '" - (a) any disbursements or expenses, not being money wholly and " exclusively laid out or expended for the purposes of the trade" - I leave out the rest of it.

In Odhams Press, Ltd. v. Cook, 23 TC 233, where a deduction was claimed and that Rule was invoked as against those who were making the deduction, the question was raised whether it was a question of fact for the Commissioners and whether there was evidence upon which they could arrive at their conclusion. A second point that was decided cannot rule the present case. The House of Lords came to the conclusion, on the first point, that it was one of fact, and that does govern me and does rule this case; and accordingly I approach the matter primarily at all events from the point of view that this is fact, to which it is added, on behalf of the Crown, that once the facts in this case are stated it becomes manifest that this is capital expenditure. As has been pointed out in a great number of cases, opinions may differ - even the opinions of accountants may differ as to whether a particular payment is capital or revenue - but I think that that is for the Commissioners to decide.

I thought at one time that it might make a difference that the payment was a voluntary payment, in this sense, that the Respondents had been under no legal liability to make it, but, as a result of an examination of the cases, I do not think that that is decisive. But it is a circumstance to be looked at, and it was looked at in some of these cases. It was looked at in Smith v. Incorporated Council of Law Reporting for England and Wales, 6 T.C. 477, at page 485; it was looked at in the leading case on this topic, Atherton v. British Insulated and Helsby Cables, Ltd., 10 TC 155, and in particular in the observations of Pollock, M.R., at page 181, and by Lord Cave, L.C., in the House of Lords, at page 191.

That is the general position about it, and the next question is: What is the general rule which ought to be applied? I am looking at this, as I have said, to see whether these Commissioners have misdirected themselves as to what they are to do. Atherton v. British Insulated was brought to their attention and I have no doubt that they were thinking of it in arriving at their conclusion. Perhaps it is worth reading a few lines from the speech of Lord Cave in the House of Lords, at page 191:

"I think it clear that the deduction from the profits of the above-mentioned sum of £31,784 is not prohibited by the First Rule applicable to Cases I and II, which prohibits the deduction of a disbursement not being money wholly and exclusively laid out or expended for the purposes of the trade. It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce ^[3] and Smith v. Incorporated Council of Law Reporting^[4] that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade ".

It appears to me that the findings of the Commissioners in the present case bring the payment in question within that direction. I need not cite passages from the speeches of the other noble and learned Lords who came to the conclusion that they did come to in that particular case, but, applying that test here, it seems to me that I cannot say that there has been any misdirection by these Commissioners in point of law.

The cases show that, if money is expended with a view to preserving an asset, the result of it is, once the Commissioners are satisfied of that circumstance, it may be a deductible expenditure. That seems to be established by, amongst other cases, the case of Southern v. Borax Consolidated, Ltd., 23 T.C. 597, at page 603, where Atherton^[5] and other cases are cited, and where a passage from Lord Cave's judgment in the Atherton case^[6] was also cited. In the course of his judgment, Lawrence, J., after citing B. W. Noble, Ltd. v. Mitchell, 11 TC 372, says this, on page 604:

"It was a case in which a very large payment was made to get rid of a director, and it was held to be an income payment; and what Counsel for the Respondent Company suggested was that it was looked upon by the Court as not being a payment which was made for the purpose of acquiring or realising an asset but simply for the purpose of preserving the asset of the Company's goodwill."

Then Lawrence, J., cited from Sargant, L.J.'s judgment in Noble v. Mitchell (11 T.C., at page 421):

"The object", he says, "as disclosed by paragraph 9 of the Case, was that of preserving the status and reputa- tion of the Company, which the directors felt would be imperilled either by the other director remaining in the business or by a dismissal of him against his will, involving proceedings by way of action in) which the good name of the Company might suffer. To avoid that and to preserve the status and dividend-earning power of the Company seems to me a purpose which is well within the ordinary purposes of the trade, profession or vocation of the Company."

It seems to me that that is the very test which the Commissioners have applied in the present case and that it is a right test. It may be that some minds may think that it could have been debited to capital as between partners. I say nothing at the moment of the distinction that there may be with regard to the capital of a limited liability company, which might in certain circumstances be regarded as a capital expenditure. If the partners, for example, in order to find the sum of money necessary to pay these expenses, had been called upon to provide fresh capital and had provided fresh capital, and had their capital accounts increased accordingly, so that they might pay these amounts, that might be a circumstance which might influence the Commissioners to come to a different conclusion as to what the nature of that particular payment, so founded, might be. But that does not arise in this case. Here I have no complication of that sort. Here is a payment made in the circumstances of this case in order to ensure a supply of leather for the business, a payment made in order to ensure a continuance of hour willing to be employed in this business, and payment for rent in order' to ensure that the landlord's consent to assignment of the premises, of the lease of the premises in which the business was carried on should not be refused. I find it quite impossible to say that there is no evidence to justify those findings. Whether I should have arrived at the same conclusion on the facts of this case is neither here nor there, and accordingly I propose to say nothing about it.

At one time I thought that the fact that there was a right over as against the vendor of the business might make a difference but. I do not, find that that is something which I can set against the general view of these payments in the circumstances as found by the Commissioners. Mr. Borneman, in the course of an argument for which I am obliged, which was concise and precise, has convinced me that if I were to examine those matters I might be treading over into territory which is outside my jurisdiction instead of keeping directly to the task to which I, am confined in trying cases based on Cases Stated.

The result of this is that, in my opinion, the appeal fails and must be dismissed with costs.

Note 1    Not included in the present print.    [Back]

Note 2    Not included in the present print.    [Back]

Note 3    6 TC 399.    [Back]

Note 4   6 T.C. 477    [Back]

Note 5   10 TC 155    [Back]

Note 6   Ibid., at p. 192    [Back]