High Court of Ireland Decisions

MacAonghusa, Inspector Of Taxes v. Ringmahon Company Ltd. [1999] IEHC 48 (26th November, 1999)

JUDGMENT of Mr. Justice Declan Budd delivered on the 26th day of November 1999

This is a case stated for the opinion of the High Court pursuant to the Taxes Consolidation Act 1997 Section 943 from a decision of His Honour, Judge Dominic Lynch given in his judgment delivered on 11th November, 1997 with which the Inspector immediately expressed dissatisfaction and required a case to be stated. The Inspector had initially raised an assessment for corporation tax on the Respondent, Ringmahon Company ("the Company"). On appeal by the Company the matter went before the Appeal Commissioners. There was then an appeal to the Circuit Court which heard the matter as a full appeal on the facts and heard the evidence of Frank Bowen, Chartered Accountant, who had acted as advisor to the Company. The learned Circuit Court Judge held that the Company was entitled to a deduction of [sterling]435,764.00 in computing the amount of its profits under Case I of Schedule D. The relevant part of Section 81 of the Taxes Consolidation Act 1997 reads as follows:-

S.81 (1) The tax under Cases I and II of Schedule D shall be charged without any deduction other than is allowed by the Tax Acts.

(2) Subject to the Tax Acts, in computing the amount of the profits or gains to be charged to tax under Case I or II of Schedule D, no sum shall be deducted in respect of -

a) "any disbursement or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession;...".

1. The provisions of Section 61 of the Income Tax Act 1967 dealing with the general rule as to deductions is in similar terms:-

61. Subject to the provisions of this Act, 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 or profession;..."

2. Since reference will be made to the similar provision in the UK Tax Codes it is helpful to note that the Income and Corporation Taxes Act 1988 Section 74 deals with general rules as to deductions not allowable:-.

(As inserted by virtue of Finance Act 1994 S144[2] this provision now reads)

74(1)"Subject to the provisions of the Tax Acts, in computing the amount of the (profits) to be charged under Case I or Case II of Schedule D, 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, profession or vocation;".

3. The facts of the matter as found by the learned Circuit Court Judge are vital. The essence of the matter is the purpose for which the Company took out a loan. If the cost of that loan, the interest paid thereon from year to year, is held to be money wholly and exclusively laid out or expended for the purpose of the Company's trade, then this interest is a deductible expense for the purposes of Corporation Tax and the Company would effect a tax saving at about 40%.

4. The Inspector's case is that the Company raised a loan from Allied Irish Banks for the purpose of redeeming six million redeemable preference shares held by Dunnes Stores Ireland Company (called "DSIC"). He argues that the loan was raised for the purpose of a share restructuring of the Company rather than for the trade of the Company, which is engaged in the trade of "Retailing of Food, Clothing and other Household Goods". He stresses the "wholly and exclusively" test in the Irish and UK legislation.

5. The actual findings of the learned Circuit Court Judge are important and accordingly I append the wording of the entire case stated. This gives the history of the transactions and also the findings made by the Circuit Court. These are significant because the case made on behalf of the Inspector is that the findings of the learned Circuit Court Judge and his conclusions based on primary facts were significantly influenced by a wrong view of the law. No criticism is made of the statements in the Case Stated up to paragraph 8 but the contention made on behalf of the Inspector is that the learned Circuit Court Judge fell into error in saying that he would have to add words to the phraseology in Section 81 2(a) in order to be able to find for the Inspector.

THE JURISDICTION OF THE HIGH COURT IN A CASE STATED UNDER THE TAX CONSOLIDATION ACT, 1997 SECTION S941, 942 AND 943

6. First, while the proceedings in this tax matter before the Appeal Commissioners and the Circuit Court were in private, this Case Stated is dealt with in open court. Secondly, charging sections are in general construed against the Revenue while relief sections are construed against the tax payer. Thirdly, a citizen is entitled to look at the wording of the tax statutes and to arrange his affairs so as to minimise the incidence of tax.

In T.G. Brosnan (Inspector of Taxes) -v- Mutual Enterprises Limited [1997] 3 IR 257, in 1979 the Respondent had obtained a loan of monies in sterling payable "on demand" from a bank to facilitate the purchase of a business premises from which it was intended to carry on its trade. The monies were used for the purchase of a premises but the sterling debt was converted from time to time in various European currencies to achieve the best possible rate of interest payable. As a result of these currency dealings the Company incurred substantial losses. The Respondent sought to include the losses incurred on the foreign currency transactions in computing the trading profits and allowable losses for Corporation Tax purposes. The Appellant argued that, as themonies were borrowed for the purpose of acquiring a capital asset, any losses incurred on foreign currency dealings with the monies were capital losses and were not allowable as trading losses. That issue was determined in favour of the Revenue by the Appeal Commissioner. On appeal to the Circuit Court, the Circuit Judge formed the opinion that the losses were not of a capital nature or intended to be employed as capital in the Company's trade and that they were connected with the trade and allowable under S 61(e) of the Income Tax Act 1967. The Applicant was dissatisfied with the determination and the Circuit Court Judge stated a case for the opinion of the High Court as to whether his decision was correct in law. Murphy J. in the High Court answered the Case Stated in the affirmative stating that, in deciding whether losses were of a revenue or capital nature, all relevant facts must be taken into account and that an important factor to be considered in determining whether a bank loan was of a revenue nature, rather than of a capital nature, was whether it was a fluctuating and temporary accommodation; the weight to be attached to these factors was a question of factto be determined by the Appeal Commissioners as they thought fit. It could not be said that no reasonable judge of first instance could have concluded on the facts as a whole that the loans were a means of fluctuating and temporary accommodation. On appeal to the Supreme Court it was held that where a loan was a capital transaction, then any accompanying currency exchange loss was a capital loss and was not deductible from profits; but where the loan was in the nature of a revenue transaction, then the currency exchange loss was deductible in computing the Respondent's profits. In determining whether a loan was a revenue transaction the test was whether it constituted a temporary and fluctuating borrowing and that this was a question of fact and not of law. The Supreme Court went on to say that a finding by a Circuit Court Judge in determining whether a loan was temporary or fluctuating may only be disturbed where there was no evidence to support it, or it was a finding which no judge could reasonably have made on the basis of the facts proved or admitted; and, as it was open to the Circuit Court Judge to find on the facts proved or admitted, that the loan constituted a temporary or fluctuating accommodation. And as and it was not a finding that no reasonable Judge could have made in the circumstances of the case, it was not open to the High Court or Supreme Court to interfere with such a finding. In the High Court, at page 266, Murphy J. said:-

" To my mind the fact that the purpose of the borrowing was clearly identified and that that purpose was the acquisition of a capital asset and that it was implemented was a factor of very considerable importance. These relevant facts were obvious to the learned trial judge. It may be that he attached less weight to them than I would have done or that he attached greater significance to other factors, such as, the fact that the borrowing was repayable "on demand". All one can say is that there were a number of factors to be taken into account and I cannot say that no reasonable judge of first instance could have concluded on the facts as a whole that the loans were a means of fluctuating and temporary accommodation. In the circumstances there are no grounds on which I would be justified in interfering with the decision which he reached".

7. In the Supreme Court Hamilton C.J. at page 283 helpfully sets out a synopsis of the case law and encapsulates the rule as to the approach to be taken. The Circuit Court Judge had been dealing with an appeal under the provisions of the Income Tax Act, 1967. Under Section 429 of that Act there is provision for an appeal by way of a rehearing before the Circuit Court Judge and the fundamental issue for decision in all the circumstances of the case was whether theAIB loan, made to the Respondent, was "fluctuating and temporary accommodation" or an accretion to the capital of the Company. At page 283 the Chief Justice said:-

"The Circuit Court Judge had held that the loan was temporary and fluctuating.

Such finding by the Circuit Court Judge can only be disturbed if it was a finding in respect of which there was no evidence to support or which no judge could reasonably have made on the basis of the facts proved or

admitted before him".

8. He then set out with approval the views expressed by Murphy J. in the passage quoted above and continued:-

"In adopting this approach, which was the correct approach, the learned trial judge was applying the principle enunciated in many cases that findings on primary facts should not be set aside by the courts unless there was no evidence whatever to support them.

In the course of his judgment in Inspector of Taxes (Mara) -v- Hummingbird [1982] ILRM 421, Kenny J. stated at p.426 of the report that:-

"A case stated consists in part of findings on questions of primary fact, e.g. with what intention did the taxpayers purchase the Baggot Street premises. These findings on primary facts should not be set aside by the courts unless there was no evidence whatever to support them. The commissioner then goes on in the case stated to give his conclusions or inferences from these primary facts. These are mixed questions of fact and law and the court should approach these in a different way. If they are based on the interpretation of documents, the court should reverse them if they are incorrect for it is in as good a position to determine the meaning of documents as is the commissioner. If the conclusions from the primary facts are ones which no reasonable commissioner could draw, the court should set aside his findings on the ground that he must be assumed to have misdirected himself as to the law or made a mistake in reasoning. Finally, if his conclusions show that he has adopted a wrong view of the law, they should be set aside. If however they are not based on a mistaken view of the law or a wrong interpretation of documents, they should not be set aside unless the inferences which he made from the primary facts were ones that no reasonable commissioner could draw. The ways of conducting business have become very complex and the answer to the question whether a transaction was an adventure in the nature of trade nearly always depends on the importance which the judge or commissioner attaches to some facts. He will have evidence some of which supports the conclusion that the transaction under investigation was an adventure in the nature of trade and he will have some which points to the opposite conclusion. These are essentially matters of degree and his conclusions should not be disturbed (even if the court does not agree with them, for we are not retrying the case) unless they are such that a reasonable commissioner could not draw them or they are based on a mistaken view of the law.

The way in which a court should approach the conclusions of the Commissioner was discussed in the House of Lords in Edwards (Inspector of Taxes) -v- Bairstow [1956] AC 14, in which the House reversed the finding of the commissioner that a purchase of plant was not an adventure in the nature of trade. In the course of his speech Viscount Simonds said:-

'For it is universally conceded that though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think fairly summarised by saying that the court should take that course if it appears that the commissioners have acted without any evidence, or on a view of the facts which could not reasonably be entertained and Lord Radcliffe in the course of his speech said:-

'I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court, it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears on the determination, it is, obviously erroneous in point of law. But without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law, and that this has been responsible for the determination. So too there has been error in point of law. I do not think that it matters much whether this state of affairs is described as one in which there is no evidence to support the determination, or as one in which the evidence is inconsistent with, and contradictory of, the determination or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three since I think it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these, many of the facts are likely to be neutral in themselves and only to take their colour from the combination of circumstances in which they are found to occur".

As it was open to the learned Circuit Court Judge to find, on the facts proved or admitted, that the AIB loan constituted 'temporary and fluctuating' accommodation, it was not open to the High Court or this Court to interfere with such finding unless it was a finding that no reasonable judge could have made in the circumstances of this case"

9. Both parties accepted the principles as explained by the Supreme Court in the Brosnan Case. Counsel for the Inspector on the one hand contended that the findings of the Circuit Court Judge and his conclusions, while based on primary facts, were significantly influenced by his erroneous view of the law and that he was in error in saying that he would have to add words such as"vital to survive" or "only possible option" before he would be able to find for the Inspector. Counsel for the Company, on the other hand, stressed that the learned Circuit Court Judge had set out the facts from which he drew reasonable inferences in paragraph 8 and had then come to the conclusion that the interest incurred on the loan was wholly and exclusively laid out for the purposes of the Company's trade. I agree that the findings of fact in the case stated were clearly and sufficiently set out and that there was no need for any further findings of fact.

10. In an earlier case stated WS McGarry, (Inspector of Taxes) -v- Limerick Gas Committee [1932] IR125 Limerick Corporation, having installed modern plant and machinery in their gas works, dismissed a number of their workmen in consequence of the modernisation. The Corporation had no power to pay any compensation by way of pensions or otherwise to these men and so they promoted a Private Bill in Parliament to authorise them to do this. In computing the liability of the Corporation to income tax for the year in which the Bill was promoted, the Commissioners for the special purposes of the Income Tax Acts were of opinion that the cost of promoting the Bill was not in the nature of capital expenditure, but was a proper debit item to be set against the income of the undertaking and that it was a necessary trading expense incurred in the course of carrying on the undertaking. The Inspector required the Special Commissioners to state a case for the opinion of the High Court which held that the Commissioners were right in holding that the cost of promoting the Bill was an admissible deduction in the revenue account of the Corporation for the purpose of computing the liability of the Corporation to income tax for the year. The cost of promoting the Bill had been[sterling]200 which was allowed by the Special Commissioners. They decided that this item was an admissible deduction because it was a necessary trading expense incurred in the course of carrying on the business. At page 133 Hannah J. said:-

"Construing paragraph 13, in substance the Special Commissioners found that it was a necessary trading expense incurred in the course of carrying on the undertaking. It was open to them upon the evidence to come to that conclusion, or, on the contrary, to come to the conclusion that the item was not a necessary trading expense. There was evidence of the purpose for which the Bill was promoted and of the circumstances from which there was a moral obligation to be discharged by the Gas Committee in regard to the men who had been previously employed by them. There was evidence upon which the Special Commissioners could have come to a different conclusion, but they have come to this conclusion. The evidence was that in consequence of the changes made in their undertaking and the installation of newer forms of machinery, it was necessary for the Gas Committee to get rid of some of their employees and to make provision for pensions. They had to get legal sanction for certain financial arrangements, which were necessary in order to enable them to discharge this moral obligation. That being so, it was open to the Special Commissioners to come to one or other of two conclusions and they came to the conclusion now in question.

English cases do not assist us much in this matter because our Supreme Court in the case of Lord Iveagh -v- Revenue Commissioners [1930] IR 386 has explained the law which this court should apply in dealing with appeals from the Special Commissioners. In the first place, we are not bound by the form in which the question to be determined is submitted; the mere words, 'question of law' do not bind the Court to answer the question as such; the Court must look at the case stated to see whether or not, and how far, the question is one of fact, and, if it is a question of fact, the Court can set aside the finding of the Special Commissioners that it is a question of law. In Lord Iveagh's Case - to which I referred at a very early stage in the argument - the Chief Justice said at page 437: ' Now, by the code of income tax law derived from the British Legislature, and continued in operation with some adaptations and amendments in the Saorstát, the determination of questions of fact for income tax purposes has been consigned to a jury of two official persons, who are final on fact and subject to instruction and correction on questions of law by the High Court on case stated.' The rest of the paragraph is immaterial. He continued at page 438:- ' In my opinion, therefore, the question propounded at foot of the case - "Whether the appellant was domiciled in Saorstat Eireann in the years of assessment?" - being, as so stated, a question of fact, was not such a question as the statute authorised to be submitted to the High Court. Moreover, the High Court, misled by the question, was not, in my opinion, authorised by the statute in examining the evidence and dealing with the appeal generally as if it were an appellate tribunal hearing an appeal from a judgment on a trial by a Judge without a jury, with full jurisdiction to review determinations of law and fact.' Fitzgibbon J. in a more detailed judgment, agreed with this view, and cited passages from the authorities to the same effect. At p.441 he cited Lord Sumner in Levene -v- Inland Revenue Commissioners [1928] AC 217 at p.228 as saying: 'The tribunal thus provided is neither bound by the findings of other similar tribunals in other cases nor is it open to review, so long as it commits no palpable error of law, and the Legislature practically transfers to it the function of imposing taxes on individuals, since it empowers them in terms so general, that no one can be certainly advised in advance, whether he must pay or can escape payment. The way of taxpayers is hard, and the Legislature does not go out of its way to make it any easier'. Mr. Justice Fitzgibbon continued, in reference to the same case: 'Lord Cave says:

"Under the well established rule these findings cannot be disturbed by the Courts unless there was no evidence to support them'"..

Therefore, having come to the conclusion that the Special Commissioners have found as a fact that this was a necessary trading expense, I have to deal with two points: first, whether there was evidence to support that finding, and, second, whether there was any palpable error of law. I have already indicated the view I have formed as to the finding of fact based on the evidence. In dealing with the other point I am aided by the fact that there was no express prohibition in Rule 3 of the Rules applicable to Cases I and II, Schedule D, of the Income Tax Act, 1918, against the Commissioners finding as they have done; they are, therefore, left more at large as to their determination (that this was a proper debit item) than if there had been a definite rule covering this under which they had to act. There is also the further fact that, under this private Act (The Limerick Corporation Gas Undertaking (Pensions) Act, 1929), the Corporation were given power to pay all the costs, charges and expenses incurred by them in obtaining the Act out of their revenue and assets. But the right so given by sect. 12 of the Act to pay the costs out of the revenue and assets does not necessarily bind the Court in its determination, though it is a fact in the case.

Now it has been argued that the Commissioners have made a palpable error of law. We have only one clue to the reasoning of the Commissioners; they say that there is a close analogy between this case and the case of Mitchell -v- BW Noble, Ltd [1927] 1KB 719. Is this so? In Mitchell's Case a very large sum of money - more than [sterling]19,000 - was paid by a Company to a director of the Company in order to get rid of him, and to make financial arrangements, so that the Company might have the benefit of carrying on its business and trade more satisfactorily, and it was held that that money, having been paid for the purpose of discharging an agreed obligation to a director who was leaving for the benefit of the Company, was an admissible deduction in the revenue account. The Commissioners might have held the other way, but having so found, they were held by the Court of Appeal to be right.

Now, in the present case the outlay was necessary in order to obtain power to make legal certain financial arrangements to discharge the obligation which the Committee were under in regard to persons leaving their employment by reason of the changes in their business. I think this shows that there is an analogy in principle between Mitchell's Case and the present case. I therefore think that the Commissioners have not made any error of law, and accordingly

I answer the question submitted in the affirmative."

11. My understanding from these cases is that there is an onus on Counsel for the Inspector to show that there is palpable or obvious and certain error in the inferences and deductions made by the learned Circuit Court Judge from the facts as found. Much of these are in reality common case up to paragraph 8 of the case stated.

12. Counsel for the Company also relies on Patrick McGrath and Ors -v- JE McDermott (Inspector of Taxes) 3ITR 683 which involved a tax avoidance scheme which brought about allowable losses for capital gains tax purposes which losses were utilised to offset taxable gains incurred by the Appellant's on previous disposals of assets by the Appellants. The Inspector of Taxes had refused to allow the Appellants loss claim on the grounds that no real loss was incurred and that the series of transactions had no purpose other than the avoidance of tax and that the doctrine of fiscal nullity as applied by the UK Courts should be followed in this country. It was held byCarroll J. in the High Court in allowing the taxpayer's appeal that in determining whether a liability to tax arose from transactions it was necessary to look, not at the substance of the transactions or financial results but at the actual legal effect of each transaction and the rights of the parties thereunder. An exemption from tax is governed by the same principles as a liability to tax. The doctrine of fiscal nullity as developed by the courts in the United Kingdom has not been accepted by the Irish courts. The imposition of tax and the granting of relief is solely a matter for the legislature and if the legislature had failed to legislate against a tax avoidance scheme it was not the function of the courts to intervene. Her decision was upheld by the Supreme Court in dismissing the appeal by the Respondent on the grounds that the doctrine of fiscal nullity did not form part of Irish law and that the function of the courts in interpreting a statute is limited to ascertaining the true meaning of each statutory provision. To add to or delete from express statutory provisions so as to condemn tax avoidance schemes would constitute an invasion of the legislative powers of the Oireachtas. At page 703 Finlay C.J. said:-

"It is clear that successful tax avoidance schemes can result in unfair burdens on other tax payers and that unfairness is something against which the courts naturally lean.

The function of the courts in interpreting a statute of the Oireachtas is, however, strictly confined to ascertaining the true meaning of each statutory provision, resorting in cases of doubt or ambiguity to consideration of the purpose and intention of the legislature to be inferred from other provisions of the statute involved, or even of other statutes expressed to be construed with it. The courts have not got a function to add to or delete from express statutory provisions so as to achieve objectives which to the courts appear desirable. In rare and limited circumstances words or phrases may be implied into statutory provisions solely for the purpose of making them effective to achieve their expressly avowed objective. What is urged upon the court by the Appellants in this case is no more and no less than the implication into the provisions of either s.12 or s.33 of the Act of 1975 of a new subclause or subsection providing that a condition precedent to the computing of an allowable loss pursuant to the provisions of s.35(5) is the proof by the taxpayer of an actual loss, presumably at least coextensive with the artificial loss to be computed in accordance with the subsection.

In the course of the submissions such a necessity was denied but instead it was contended that the real as distinct from what is described as the artificial nature of the transactions should be looked at by the court, and that if they were, the section could not apply to them."

I must reject this contention. Having regard to the finding in the case stated that these transactions were not a sham, the real nature, on the facts by which I am bound, of the scheme was that the shares were purchased and the purchaser became the real owner thereof, that shares were sold and that the vendor genuinely disposed thereof and that an option to purchase shares really existed in a legal person legally determined to be connected to the person disposing of them.

In those circumstances, for this court to avoid the application of the provisions of the Act of 1975 to these transactions could only constitute the invasion by the Judiciary of the powers and functions of the legislature, in plain breach of the constitutional separation of powers."

13. As to whether the Court should adopt a realistic new approach to the construction of a taxing statute, the Supreme Court declined the invitation of Counsel to depart from Irish precedent. McCarthy J. At p. 704 reaffirmed the position in Ireland:-

"In his argument in reply on behalf of the Revenue, Mr. Kelly S.C., expressly invited this court to adopt a 'new approach' to the construction of a taxing statute and, for that purpose, where what is admittedly a real transaction in the purchase and sale of shares in a company, but which has resulted in what is termed a 'fiscal nullity', to look to reality and not to allow an unreal result. To do this would be, it is said, to look through realistic spectacles as did the House of Lords in England in Ramsay Ltd -v- IRC and Furniss -v- Dawson [1984] AC 474. The argument is attractive in equity but it is wrong in law.

Until the decision of the appeal commissioners in the instant case, it appears to have been accepted that where a taxpayer brought himself within the actual wording of a taxing statute providing for some taxation relief, that was an end to the matter. The court did not look beyond to see what the end result was. This has been identified as the principle in the case of the IRC -v- Duke of Westminster [1936] AC 1 which was expressly accepted in the High Court by Kenny J., in O'Sullivan -v- P Ltd 3 ITC 255. In their closely reasoned decision, the appeal commissioners recount part of Mr McCann's argument 'that Ramsay et seq have, effectively, overruled the Duke of Westminster principle, that this principle is part of Irish law, as a result of the Judge Kenny decision in O'Sullivan -v- P Ltd and that the Irish Courts up to the High Court level, and specifically this tribunal, are precluded from following this new' The appeal commissioners found the argument unacceptable on the basis that, since various opinions expressed in the House of Lords had stated words to the effect;

the difference is in approach. It does not necessitate the overruling of any earlier decision of this House.

This meant that such a view point must be accepted within this jurisdiction. For myself I am unable to perform the mental gymnastics that I think necessary to conclude that Ramsay did not reverse Westminster. But that is not for me, the practice direction of the House of Lords in [1966] 3 AER 77 expressly qualifies in cases involving fiscal arrangements the stated right of the House to depart from its previous decisions. No tribunal other than the High Court or the Supreme Court may properly review a statement of principle culled from a judgment of the High Court."

14. In the course of his judgment at page 705 McCarthy J. referred to Revenue Commissioners -v- Doorley, Bishop of Elphin [1933] IR 750 in which Kennedy C.J. cited with approval the speech of Lord Cairns in Partington -v- Attorney General LR 4 HL 100:

"I am not at all sure that, in a case of this kind, a fiscal case, form is not amply sufficient, because, as I understand the principle of all fiscal legislation, it is this, if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in the taxing statute, where you can simply adhere to the words of the statute."

15. Accordingly Counsel for the Company submits that in a tax case the court should confine its gaze to the actual wording of the statute and should not be looking under stones or speculating at the underlying economic reality of the transactions.

SUBMISSIONS MADE ON BEHALF OF THE INSPECTOR

16. Counsel on behalf of the Appellant Inspector urged that the court should scrutinise the real and significant purpose of the transaction. He suggested that the object of taking out the loan was in reality to give benefit to the shareholders and was not only for the purpose of the Company's trade. In this instance the loan obtained at the cost of the interest paid to the bank, was not spent on the Company's trade but instead was to put cash into the pockets of the shareholders. By way of contrast, he suggested that if the Company had lost a major case and was forced to borrow a sum from the bank in order to pay the damages and to keep the business afloat, then the costs of this loan could be"wholly and exclusively for the purposes of such trade". Likewise if a medical consultant were to visit a patient at his villa in the South of France and to stay there for a fortnight in order to minister to his sick patient, then, provided there was a genuine medical reason for the entire of the stay, the pleasant sojourn could be regarded as merely incidental even though the doctor had dined in a number of excellent restaurants during his stay in Provence. He submitted that a number of principles could be derived from the cases which he proposed to cite:-

1. The words "for the purposes of the trade" mean "to serve the purposes of the trade". They do not mean for the purposes of the tax payer.

2. To ascertain whether a payment was made for the purposes of a tax payer's trade, it is necessary to discover his object in making the payment. The test is therefore, an objective one.

3. The object of the taxpayer in making the payment must be distinguished from the effect of the payment.

4. Although the taxpayer's subjective intentions are determinative, they are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inextricably involved in the payment that, unless merely incidental, they must be taken to be a purpose for which the payment was made. However, consequential and incidental effects can be

ignored;

5. The primary enquiry is to establish what was the particular object of the

taxpayer in making the payment.

17. He argued that since the loan was taken out to pay off the preference shareholders and was paid to achieve this within a couple of days then the objective of the transaction can be identified as the payment for the shares. In effect the AIB loan went to buy out the preference shares and put cash in the hands of the preference shareholders and this did not affect the trading carried on by the Company. The short response of counsel for the Company's short response to this is that the Company was entitled to redeem the preference shares in the event of the shareholders requiring capital. Once the Company had paid over [sterling]6,000,000 to redeem the preference shares, then the Company needed [sterling]6,000,000 in order to carry on its trading business. Since the cost of the loan of [sterling]6,000,000 from Allied Irish Banks is the cost of the interest then this recurrent annual cost is a necessary expenditure in order to allow the Company to continue its trade. He argues that the loan was necessary and accordingly the cost of interest was wholly and exclusively an expenditure which allowed the trade of the Company to continue.

18. I have had the benefit of both Counsels' comments in respect of a number of cases. The first case referred to was Mallalieu -v- Drummond (Inspector of Taxes)[1983] STC 665. The tax payer, a practising lady barrister, complying with the Bar Council's notes for guidance on dress in court, wore, in court and in chambers and on her way there, black dresses, suits and shoes and white blouses. The clothing although subdued consisted of perfectly ordinary articles of apparel suitable for everyday wear. But for the requirements of her profession that she should be so clothed for her court appearances and for the fact that she would have been barred from pleading in court if she had not been so clothed, the tax payer would have not purchased those clothes. The tax payer had an ample supply of other clothes to keep her in comfort and decency. The preservation of warmth and decency was not a consideration which crossed her mind when she bought the clothes. In computing the profits of her profession in the year of assessment 1977-78, the taxpayer claimed that the sum she had spent on the replacement, laundering and cleaning of the clothes she wore in court was expenditure incurred"wholly and exclusively...for the purpose of her profession" within S.130(a) of the Income and Corporation Taxes Act, 1970. The Inspector of Taxes disallowed the deduction and the General Commissioners dismissed her appeal on the ground that although the taxpayer's sole motive in choosing the particular clothes was to satisfy the requirements of her profession and that if she had been free to do so she would have worn different clothes, the expenditure had a dual purpose, the professional purpose of enabling her to earn profits in her profession and the non-professional purpose of enabling her to be warmly and properly clad while on her way to chambers or court and thereafter while she was engaged in her professional activities. The Judge allowed her appeal holding that when the taxpayer spent money on the upkeep of her working clothes, she had nothing in her mind except the requirements of her profession and accordingly the expenditure was incurred exclusively to serve the purposes of her profession. The Court of Appeal affirmed the decision and the Crown appealed to the House of Lords which held (with LordElwyn-Jones dissenting:-) the words 'expended for the purposes of the ... profession' in S.130(a) meant 'expended to serve the purposes of the ... profession' and 'purposes' in this context referred to the purposes of the business. To ascertain whether money was expended to serve the purposes of the tax payer's business it is necessary to discover the tax payer's object in making the expenditure. Although the tax payer's conscious motive was of vital significance in ascertaining her object, it was not decisive and the Commissioners were entitled to find on the facts that as the taxpayer had to wear something, one object was the provision of the clothing that she needed as a human being. It followed that the expenditure was not incurred wholly and exclusively for the purposes of her profession and the appeal would therefore be allowed. At page 668 Lord Brightman said:-

"The effect of para (a) is to exclude, as a deduction, the money spent by the taxpayer unless she can establish that such money was spent exclusively for the purposes of her profession. The words in the paragraph 'expended for the purposes of the trade, profession or vocation' mean in my opinion 'expended to serve the purposes of the trade, profession or vocation'; or as elaborated by Lord Davey in Strong & Co of Romsey Ltd -v- Woodifield (Surveyor of Taxes) [1906] AC 448 at 453, 5 TC 215 at 220 'for the purpose of enabling a person to carry on and earn profits in the trade etc.' The particular words emphasised do not refer to 'the purposes' of the taxpayer as some of the cases appear to suggest; (as an example see the report of this case in [1983] STC 24 at 127/28, [1983] 1WLR 252 at 256). They refer to 'the purposes' of the business which is a different concept although the 'purposes' (i.e. the intentions or objects) of the tax payer are fundamental to the application of the paragraph.

The effect of the word 'exclusively' is to preclude a deduction if it appears

that the expenditure was not only to serve the purposes of the trade, profession or vocation of the tax payer but also to serve some other purposes. Such other purposes, if found to exist, will usually be the private purposes of the taxpayer: see for example Prince -v- Mapp (Inspector of Taxes) [1970] 1WLR 260, 46 TC 169.

To ascertain whether the money was expended to serve the purpose of the

taxpayer's business it is necessary to discover the taxpayer's 'object' in making the expenditure: see Morgan -v- Tate and Lyle Ltd [1955] AC 21 at 37 and 47. As the taxpayer's 'object' in making the expenditure has to be found, it inevitably follows that (save in obvious cases which speak for themselves) the commissioners need to look into the taxpayer's mind at the moment when the expenditure is made. After events are irrelevant to the application of s.130 except as a reflection of the taxpayer's state of mind at the time of the

expenditure.

If it appears that the object of the taxpayer at the time of the expenditure was

to serve two purposes, the purposes of his business and other purposes, it is immaterial to the application of s.130 (a) that the business purposes are the predominant purposes intended to be served.

The object of the taxpayer in making the expenditure must be distinguished

from the effect of the expenditure. An expenditure may be made exclusively to serve the purposes of the business, but it may have a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity of the business purposes. For example, a medical consultant has a friend in the South of France who is also his patient. He flies to the South of France for a week, staying in the home of his friend and attending professionally on him. He seeks to recover the costs of his air fare. The question of fact will be whether the journey was undertaken solely to serve the purposes of the medical practice. This will be judged in the light of the taxpayer's object in making the journey. The question will be answered by considering whether the stay in the South of France was a reason, however subordinate, for undertaking the journey, or was not a reason but only the effect. If a week's stay on the Riviera was not an object of the consultant, if the consultant's only object was to attend on his patient, his stay on the Riviera was an unavoidable effect of the expenditure on the journey and the expenditure lies outside the prohibition in s.130.

At page 671 he continued by describing the approach taken in the High Court and the Court of Appeal:-

"As the taxpayer according to the undisputed evidence had nothing in her mind except the etiquette of her profession on the several occasions when she spent money on the upkeep of her wardrobe of working clothes, and 'had no thought of warmth and decency', it inevitably followed that the money was spent exclusively to serve the purposes of her business.

The provision of clothing as such, it was held, was nothing more than an incidental, although no doubt welcome, effect of her one and only object. The approach of the Court of Appeal was similar. After summarising the General Commissioner's findings of fact, the learned Master of the Rolls continued [1983] STC 124 at 129 [1983] 1 WLR 252 at 258

'From those findings of fact there is in my judgment only one reasonable conclusion to be drawn, namely, that the taxpayer's sole purpose in incurring the expenditure was a professional purpose, any other benefit being purely incidental"

Unfortunately for Ann Mallalieu, Lord Diplock, Lord Keith and Lord Roskill all agreed with Lord Brightman in his conclusion at page 673:-

"My Lords, I find myself totally unable to accept this narrow approach. Of course the taxpayer thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I reject the notion that the object of a taxpayer is inevitably limited to the particular conscious motive in mind at the moment of expenditure. Of course the motive of which the taxpayer is conscious is of vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist. In my opinion the commissioners were not only entitled to reach the conclusion that the taxpayer's object was both to serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion.

It was inevitable in this sort of case that analogies would be canvassed; for example, the self employed nurse who equips herself with what is conveniently called a nurse's uniform. Such cases are matters of fact and degree. In the case of the nurse, I am disposed to think, without inviting your Lordships to decide, that the material and design of the uniform may be dictated by the practical requirements of the art of nursing and the maintenance of hygiene. There may be other cases where it is essential that the self employed person should provide himself with and maintain a particular design of clothing in order to obtain any engagements at all in the business that he conducts. An example is the self -employed waiter, mentioned by Kerr LJ, who needs to wear 'tails'. In his case the 'tails' are an essential part of the equipment of his trade, and it clearly would be open to the commissioners to allow the expense of their upkeep on the basis that the money was spent exclusively to serve the purposes of the business. I do not think that the decision which I urge on your Lordships should raise any problems in the 'uniform' type of case that was so much discussed in argument. As I have said, it is a matter of degree."

19. Since the expense of the clothing was not wholly and exclusively laid out for the purposes of the trade, profession or vocation but was laid out in part for the advantage and benefit of the taxpayer as a living human being, in contrast to Ann Mallalieu, barrister-at-law, the cost was not a deductible allowance. In the course of argument before me, it was suggested that the Mallalieu case concerned a once off expenditure on purchase of a barrister's clothing. However Lord Brightman at p.668 makes clear that the initial cost of purchase being a capital expense was not material for present purposes whereas the cost of cleaning and renewing the clothes was the sum claimed as a deduction in computing the profits of her practice chargeable underSch D. Incidentally it was common ground that the relevant time for determining what were the taxpayer's purposes and what was in her mind when the expenditure was incurred was at the moment the expenditure was made. This has a bearing on Ringmahon and puts significance on the time when the recurrent interest was paid

20. Counsel for the Respondent argues that the Company cannot claim the [sterling]6,000,000 as deductible but can claim the cost thereof being the interest paid as a recurrent cost in order to obtain the funds which enabled the company to keep going. The [sterling]6,000,000 loan would have been used in the Company's trading to buy premises, plant stock or services and thus was used for the purpose of the trade and was not retained as an actual cash sum simply for investment.

21. Counsel for the Inspector referred me to several cases as illustrating the practical working of the principles involved. In MacKinlay (Inspector of Taxes -v- Arthur Young McClelland Moores and Co [1989] STC 898 the taxpayers were the partners in a large firm of Chartered Accountants (the firm). The firm's policy, agreed to by all the partners was to pay certain specified removal expenses of employees and partners who moved to offices in different parts of the United Kingdom at the firms request. In the year of assessment 1981-82 two partners moved to offices in different parts of the United Kingdom from those where they had hitherto practised and their removal expenses were met by the firm. A claim that the removal expenses of the two partners were deductible in ascertaining the profits of the firm as money wholly and exclusively paid out for the purpose of the firm's business was disallowed. The Crown contended that expenses incurred by a sole practitioner in moving his home for the purposes of his business would not be deductible since, as he had to live somewhere, the expenditure would be regarded as serving the dual purpose of his business and his personal interests and that there was no difference in principle between a sole practitioner and the members of a partnership. The taxpayers accepted that the removal expenses of a sole practitioner would not be deductible, but contended that, in the case of a large partnership implementing a policy adopted by all the partners for the purpose of advancing the interests of the firm, the interests of the partners as partners could be severed from their private interests which could be regarded as incidental to that purpose. The Special Commissioners upheld the taxpayer's contentions and determined the appeal in favour of the taxpayers. An appeal by the Crown was allowed by Vinelott J. who upheld its contentions that expenditure which would be treated as having a dual purpose when incurred by a sole trader was likewise to be regarded as having a dual purpose when incurred by a partnership regardless of its size and was therefore precluded from deduction by the provisions of S.130(a) of the Income and Corporation Taxes Act, 1970. An appeal by the taxpayers was allowed by the Court of Appeal on the ground that, in paying the removal expenses of two of its partners, the collective purpose of the partnership - which for this purpose was an entity separate its individual partners - was, on the facts,"wholly and exclusively" to promote its professional business: so that the deduction of those expenses was not precluded by S.130(a). On appeal by the Crown to the House of Lords it was held that the payment, or reimbursement, by a partnership of the removal expenses of a partner, although made with the motive of persuading him to move so as to further the business interests of the partnership, must inevitably have the immediate and essentially private purpose of assisting him to establish a new home; so it could not qualify as 'money wholly and exclusively laid out and expended for the purposes of the trade (or) profession' within the meaning of S.130(a), so as to be deductible in computing the profits of the partnership for income tax purposes. Some of Lord Oliver of Aylmerton's observations are instructive. At page 900 he said:-

"There is a wealth of authority regarding the application of this formula to individual items of expenditure of various kinds, but whilst the cases may be helpful as illustrations or analogues, the question in each case is the simple question whether the facts are capable of fitting and do fit the formula. There is no very difficult issue of construction involved, for it is not in doubt that the word 'exclusively' is used in its ordinary and natural sense. The difficulties, such as they are, lie not in the words 'wholly and exclusively' but in ascertaining whether a particular expenditure is, as a matter of fact, laid out 'for' and only for the purposes of the trade or profession".

22. At page 905 he continued:-

"One is, accordingly brought back, first, last and all the time to the question whether an expenditure on a partner's removing expenses can be said to be laid out not just partly but exclusively for the purposes of the partnership business. That cannot, in my judgment, be answered simply by ascertaining what was the motive with which the move was undertaken. It is inescapable as it seems to me, that the expenditure, motivated no doubt by the fact of moving house, which in turn was motivated by the desire to put the partner concerned in a better position to further the interests of the firm, was an expenditure serving and necessarily and inherently intended to serve the personal interests of the partner in establishing his private residence for himself and his family and it cannot be said to be exclusively for the purposes of the partnership practice.

Your Lordships have been referred to what may be regarded as a seminal decision of this house in Mallalieu -v- Drummond (Inspector of Taxes) [1983] STC 665, [1983] 2 AC 861 and much argument has been addressed to the question whether the purpose of the particular payment falls to be ascertained objectively or by reference only to the subjective intention of the payer. For my part, I think that the difficulties suggested here are more illusory than real. The question in each case is what was the object to be served by the disbursement or expense? As was pointed out by Lord Brightman in Mallalieu's case, this cannot be answered simply by evidence of what the payer says that he intended to achieve. Some results are so inevitably and inextricably involved in particular activities they cannot but be said to be a purpose of the activity. Miss Mallalieu's restrained and sober garb inevitably served and cannot but have been intended to serve the purpose of preserving warmth and decency and her purpose in buying cannot but have been, in part at least, to serve that purpose whether she consciously thought about it or not. So here the payment of estate agents' fees, conveyancing costs and so on, and the provision of carpets and curtains cannot but have been intended to serve the purpose of establishing a comfortable private home for the partner concerned even though his motive in establishing a home in that particular place was to assist him in furthering the partnership interests. Nobody could say with any colour of conviction that in purchasing new curtains he or his wife was acting on partnership business. In my judgment once one escapes from what I regard as the fallacy of confusing the purpose of the expenditure with the motives of the members of the executive committee (and, inferentially, of the other partners) in resolving to reimburse the expenditure, the case presents very little difficulty and is, indeed, a much clearer and easier case than Mallalieu."

23. Counsel also referred me to Vodafone Cellular Limited and Ors -v- Shaw (Inspector of Taxes) [1997] STC 734 which contains a useful summary of the principles involved by Millett L.J. At page 742, under the heading "Was the payment made wholly and exclusively for the purposes of the taxpayer company's trade?", he said:-

"Whether a payment is made exclusively for the purpose of the taxpayer company's trade or partly for that purpose and partly for another is a question of fact for the commissioners. The court can interfere only if the commissioners have made an error of law in reaching their conclusion. The principles on which the court acts are to be found in the speech of Lord Radcliffe in Edwards (Inspector of Taxes ) -v- Bairstow [1956] AC 14 36 TC 207, and are too well known to repeat. It is sufficient to say that the court will interfere where the true and only reasonable conclusion from the facts found by the commissioners contradicts the determination.

In the case of an individual taxpayer, the other purpose is usually a private purpose of his own. In a case like the present, where the taxpayer company is a company forming part of a group, the other purpose is likely to be the purpose of the trade of one or more of the other companies in the group. But the same principles apply. The trade of a parent company is for tax purposes distinct from the trade of its subsidiary. The two companies are separate taxable persons, and the trade or business of one is not the same as the trade or business of the other, however closely it may affect it (see Odhams Press Limited -v- Cook (Inspector of Taxes) (1938) 23 TC 233 at 254, 257).

The leading modern cases on the application of the exclusively test are Mallalieu -v- Drummond (Inspector of Taxes)... and MacKinlay(Inspector of Taxes) -v- Arthur Young McClelland Moores & Co ... From these cases the following propositions may be derived.

1. The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer.

2. To ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer's subjective intentions at the time of the payment.

3. The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

4. Although the taxpayer's subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.

To these propositions I would add one more. The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is in my opinion a matter for the commissioners, not for the taxpayer. Thus in Mallalieu -v- Drummond (Inspector of Taxes) the primary question was not whether Miss Mallalieu intended her expenditure on clothes to serve exclusively a professional purpose or partly a professional and partly a private purpose, but whether it was intended not only to enable her to comply with the requirements of the Bar Council when appearing as a barrister in court but also to preserve warmth and decency.

Similarly, in my opinion, the present case does not involve an inquiry whether the directors who resolve to enter into the fee cancellation agreement consciously intended to obtain a benefit thereby for one company rather than another. The primary inquiry is to ascertain the particular object which the directors sought to achieve by it. Once that is ascertained the characterisation of that object as serving the purposes of the trade of one particular company or another is not a finding of primary fact but a conclusion based upon the primary facts."

24. He explained how the special Commissioners and the Judge had fallen into error and concluded:-

"In my judgment the case is a simple one. The directors' purpose is self evident: it was to rid the group of a trading liability owed to a third party. The liability in question was a liability of the taxpayer company alone: ergo the directors' intention, whether articulated or not, was exclusively to serve the purposes of the taxpayer company's trade. The elimination of the liability to Millicom would make it unnecessary to put in hand whatever arrangements there might be within the group to enable the taxpayer company to finance the liability. But this was merely a consequential and incidental effect of the elimination of the liability; it cannot possibly have been its purpose. It was, after all, not even necessary to cancel the fee agreement in order to release the subsidiaries from the obligation to reimburse the taxpayer company. That was within the power of the taxpayer company at any time, and did not require Millicoms consent or the expenditure of $30m.

In my judgment the true and only reasonable conclusions from the facts found by the Special Commissioners contradicts their determination."

25. I derive assistance from this decision. First, it reinforces the proposition that the court will interfere with the finding of the Commissioners, or in this case the findings of fact by the learned Circuit Court Judge, where the true and only reasonable conclusion from the facts found by the learned Circuit Court Judge contradicts the determination. Secondly, the case emphasises that the object of the taxpayer in making the payment must be distinguished from the effect of the payment and a payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. I remind myself that in the present case the payment involved is that of the recurring interest on the loan secured from the bank which has been used for the financing of the trade ofRingmahon. One must go on then to examine whether the securing of the private benefits in that the owners of the redeemable preference shares were paid off, was merely a consequential and incidental effect of the securing of the loan by the payment of the recurring interest.

Trans-Prairie Pipelines Ltd -v- Minister of National Revenue,70 DTC 6351 a decision of the Exchequer Court of Canada delivered on 3rd of November, 1970 was analysed by both Counsel. The similarity of the facts to those in Ringmahon is striking but Counsel for the Inspector cautions that the significance of the comparison is diluted by the difference in the wording of the Canadian statute as the phrase "wholly and exclusively expended for the purposes of the trade" is not used. I set out the facts of this case and the wording of the Canadian Income Tax Act, 1952. Section 11(1)(c) for the purposes of analysis as to whether the principles derived are in point or whether, although the facts are similar, the difference in the wording of the statutes are such that the Canadian comparative is worded so as to be of wider application than the Irish phrases and so unhelpful and perhaps misleading. The appellant company was incorporated in 1954 to construct and operate a pipeline, its original issued capital being a number of common shares and 140,000 redeemable preferred shares, the latter having a total par value of $700,000. In 1956 the Company issued $700,000 first mortgage bonds and used $400,000 of the amount so borrowed (with $300,000 obtained by issuing additional common shares) to redeem the preferred shares. In 1956 (and subsequent years) the Company deducted the interest paid on its bonds; in 1956 it also deducted (under Section 11.(1)(cb)) legal expenses incurred in connection with the bond issue and the preferred share redemption. The Minister allowed the company to deduct only three-sevenths of the claimed expenses. The Minister took the position that four-sevenths, or $400,000, of the money borrowed through the issue of bonds was used by the company to redeem its preferred shares and not used for the purpose of earning income from its business; that interest on the $400,000 was therefore not deductible under Section 11.(1)(c); and that legal expenses incurred in the course of borrowing only $300,000 of the $700,000 could be deducted under Section11.1(cb). The Appeal Board had agreed with the Minister's interpretation and the Company had appealed to the Exchequer Court which allowed the appeal holding that the Company was entitled to deduct all of the interest paid on its bonds during the years in question and all of the legal expenses claimed under Section11(1)(cb). The whole of the $700,000 borrowed on the bonds was, during those years, borrowed money used for the purpose of earning income from the Companies business within the meaning of Section 11(1) (c). Prior to the transactions in question, the capital being used for the purpose of earning income from the Company's business was the $700,000 subscribed by the preferred shareholders and the amount subscribed by the original common shareholders. After those transactions, the money subscribed by the preferred shareholders had been withdrawn and what the Company was using in its business to earn income was the amount subscribed by common shareholders (original and additional) and the $700,000 of borrowed money. As a practical matter of business common sense, the $700,000 of borrowed money went to fill the hole left by the redemption of the $700,000 preferred shares. Surely, what must have been intended by Section 11.(1).(c) was that the interest should be deductible for the years in which the borrowed money was employed in the business rather than that it should be deductible for the life of the loan as long as its first use was for the purpose of earning income from the business. At p.6352Jackett P. Said:-

"Accordingly, in 1956, the appellant redeemed its preferred shares and, to do so, paid $700,000 to the holders of those shares. At the same time, it borrowed $700,000 from the Great West Life Assurance Company by way of

a bond issue and raised a further $300,000 by issuing additional common shares.

In the course of carrying out these transactions, the preferred shares were redeemed by using the $300,000 obtained by the new issue of common shares and $400,000 out of the $700,000 received on the floating of the bond issue.

(Question of deductibility of interest)

In these circumstances, the question arises as to whether the appellant is entitled to a deduction, in computing its income for 1956 and subsequent years, of the whole or only part of the interest payable on such bonds by virtue of Section 11.(1).(c) of the Income Tax Act, which reads as follows:-

11.(1) notwithstanding paragraphs (a),( b) and (h) of subsection 1 of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:...

(c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt), or...

or a reasonable amount in respect thereof, whichever is the lesser.

The respondent has disallowed the deduction of four-sevenths of the amount of such interest for each of the years in question on the ground that $400,000 out of the $700,000 borrowed by the bond issue was used to redeem preferred shares and was not, therefore, used "for the purpose of earning income" from the business. In this conclusion, the respondent has been upheld by the Tax Appeal Board.

[All of interest deductible.]

The alternative view is that, prior to the transactions in question, the capital being used for the purpose of earning income from the appellant's business was the $700,000 subscribed by the preferred shareholders and the $140,006 subscribed by the common shareholders, and that, after those transactions, the money subscribed by the preferred shareholders had been withdrawn and what the appellant was using in its business to earn income was the $440,006 subscribed by common shareholders and the $700,000 of borrowed money. This in my view is a correct appreciation of the matter.

It follows that in my view the whole of the $700,000 of borrowed money was being used by the appellant in its business for the purpose of earning income from the business; and that is my view even though, from another point of view, and in a different sense, some $400,000 of the $700,000 was in fact paid on the redemption of the preferred shares.

(Interpretation of Section)

The difficulty arises from the fact that, in ordinary parlance when one talks of the use of money in a business to earn income, one is referring to the mass of capital dedicated to that business, through all the different forms through which it passes while it remains in the business, and, when one talks of using money to acquire property or to pay a debt, one is referring to using money to make a particular payment as a result of which the payer no longer has that money.

When a business person has borrowed money to use in a business, he is, according to the ordinary use of language, using that borrowed money in his business to earn income therefrom even though part of it has been converted into "bricks and mortar" and part of it was paid out during the first year for inventory and by way of salaries. Indeed, except in very unusual circumstances, he is using that borrowed money in his business to earn income until the loan matures and is paid off. By contrast, the actual money borrowed will, according to the ordinary use of language, have been "used" to acquire plant and machinery and to pay running expenses and will, in fact, have completely ceased to belong to the business man once it has been so used.

It would not, of course, be completely absurd to attribute the latter sense to the words 'money used' where they first appear in Section 11 (1) c(i) Whether or not interest is deductible on borrowed money during each year of the life of a loan would then depend upon whether the first expenditure of the money after being borrowed was an expenditure for the purpose of the business. That test would, in most cases produce the right result. However, in my view, such an interpretation is not only not in accordance with the ordinary sense of the words as used in the context but it results in a rule that is not sound in principle. For example, a parent company such as the appellant Company in DWS Corporation -v- Minister of National Revenue (1968) 2 Ex C.R. 44 [68 DTC 5045], and 69 DTC 5203 (SC of C) having raised some borrowed capital, could use it on one occasion to acquire inventory for its business and could then, when it comes back in the ordinary course of trade, put it at the disposal of a subsidiary for the balance of the term of the loan and charge the interest as an expense of the parent's business. If, on the other hand, the words "money used for the purpose of earning income in a business" are given their ordinary sense in this context of interest on borrowed capital, the obviously sensible result achieved in the D.W.S case would flow whether borrowed capital was turned over to a related company without ever being used in the borrower's business or was turned over to a related company after being so used for a limited time. Surely, what must have been intended by Section 11 (1) (c) was that the interest should be deductible for the years in which the borrowed capital was employed in the business rather than that it should be deductible for the life of the loan as long as its first use was in the business.

The facts of the present appeal provide an even more striking illustration of the inappropriateness of the meaning of the words 'money used for the purpose of earning income from a business' that is relied on by the respondent. Prior to the 1956 transactions, the appellant's capital used in its business consisted in part of $700,000 subscribed by preferred shareholders. As a result of those transactions, the $700,000 had been repaid to the shareholders and the appellant had borrowed $700,000 which, as a practical matter of business common sense, went to fill the hole left by redemption of the $700,000 preferred. Yet, according to the view relied on by the respondent, for the purpose of this provision concerning interest on borrowed capital, $400,000 of the borrowed money cannot be regarded even though being used to earn income from the business.

It seems to me that assistance can be gleaned from this case even though the Canadian Section is narrower in scope. Under the Canadian Section the loan could be borrowed and used for the purchase of a luxury yacht, a use of the money which is obviously not for the purpose of earning income from the business. However, if the yacht is then sold and the money gained from this sale is used for the purpose of earning income from the business then the interest paid for such a loan would become deductible. Counsel for the Company stresses that in the Canadian case the Appellant had borrowed $700,000 and this as a matter of business common sense went to fill the hole left by the redemption of the $700,000 preferred shares. Under the Canadian Section the interest on the loan should be deductible for the years in which the borrowed capital was employed in the business and he says that the same principle applies in the very similar situation inRingmahon.

Both Counsel have referred to Morgan (H M Inspector of Taxes) -v- Tate & Lyle Limited 35 TC 367 which concerned the deductibility for income tax purposes of the expenses of an anti-nationalisation campaign. The Respondent Company, which carried on the business of sugar refiners, claimed to deduct in the computation of its trading profits for Income Tax purposes expenses incurred on a propaganda campaign designed to show that nationalisation of the sugar refining industry would be harmful to"workers, consumers and stock holders alike". On appeal, the General Commissioners accepted evidence that the primary object of the campaign was to prevent the Company from losing its business and to preserve its assets intact. The Crown contended, inter alia, that so far as this was the object of the campaign the expenditure was incurred not directly for the earning of profits but was the cost of a campaign to decide who should earn the profits, viz the Company or the State, and that another purpose was to prevent the acquisition of the Company's capital stock by a national body. The Commissioners found that the sum in question was money wholly and exclusively laid out for the purposes of the Company's trade and was an admissible deduction. On an appeal by way of Case Stated to the Chancery division Harman J. on 18th December, 1952 concluded that the City of London Commissioners of Taxes had come to a right conclusion and dismissed the appeal and this was upheld by a majority of the Court of Appeal. The Crown appealed and on 1st June, 1954 judgment was given against the Crown in the House of Lords. Counsel for the Inspector sought to derive comfort from a passage near the conclusion of the judgment of Jenkins L.J. at page 403 where he said:-

"I have only to add, with respect to the Privy Council case of Ward & Co Ltd -v- Commissioner of Taxes [1923] AC 145, that while the expenditure in question affords a closer parallel to the disputed expenditure in the present case than is to be found in any of the other cases of which I am aware, the language of the material New Zealand enactment which prohibited the deduction of expenditure "not exclusively incurred in the production of the assessable income" was so markedly different from, and so much narrower then, the language of the enactment governing the present case that I cannot read it as providing any authority against the conclusion to which I have come.

As Lord Cave said at the end of his judgment:"It is only necessary to add that the decisions on the English Income Tax Acts, the language of which is different from that of the New Zealand Act, have no real bearing upon the question now under decision"

26. The New Zealand wording may be markedly different but Counsel for the Company argues cogently that our provision with regard to deductibility stems from the same source as the provision in the United Kingdom and I note that the W.S. MacGarry -v- Limerick Gas Committee [1932] IR 125 was cited. At page 408 Lord Morton of Henryton said:-

"My Lords, the purpose for which a company expends money can only be either the purpose of the directors, if they expend it under the powers conferred upon them by the memorandum and articles without the express sanction of a general meeting, or the purposes of the shareholders if these purposes are expressed at a general meeting. Here there is no conflict between the purpose of the directors and the purpose of the shareholders in general meeting. The passages which I have quoted from the Case Stated show that these bodies had one purpose only, namely, to prevent the seizure of the business and assets of the Company. The sum in question was spent for that purpose. It would appear likely, from the documents exhibited to the Case Stated, that part of the sum was spent by the Directors before the 15th September, 1949 but to my mind this fact is immaterial, as the purpose for which it was spent was the same throughout.

At page 417 Lord Reed said:- The proposal which the directors were opposing was the transfer to public ownership of their sugar refining concern. If that proposal became law the Company would lose its business and assets. I think that its is reasonably clear that the dominant purpose of the directors was to prevent the Company from losing its business and to preserve its assets intact. People often have more than one reason for forming a purpose, and I think that the facts found in the case indicate that the directors had two main reasons. They believe that nationalisation would be disastrous to the industry and that it would cause loss to the shareholders. Whether their beliefs were right or wrong is quite

immaterial. The question whether their purpose can be held to come within the terms of Rule 3(a) does not depend on whether or not their purpose was misconceived.

The shareholders purpose and reasons are set out in the resolution of 15th of September, and there is nothing in the Case to indicate that its terms do not reflect their real purpose and reasons. Their purpose was to prevent the assets of the Company being seized and their reasons were that such seizure would harm workers, consumers and themselves alike. Again it does not matter whether does reasons were good or bad.

It was maintained by the Appellant at one stage that this expenditure was not wholly and exclusively laid out for the purposes of the Respondents' trade because their propaganda was directed against nationalisation of the industry of sugar refining as a whole and was not confined to opposition to compulsory acquisition of their own concern. But this argument has now been given up. If the propaganda was to be effective it had to be on broad lines, and the fact that it would also benefit other concerns does not matter if the purpose was to preserve the Respondents own concern."

27. At page 425 Lord Reid continued:-

"A general test is whether the money was spent by the person assessed in his capacity of trader or in some other capacity, whether on the one hand the expenditure was really incidental to the trade itself or on the other hand it was mainly incidental to some other vocation or was made by the trader in some other capacity than that of trader. It is said that the Appellant can succeed in this case on an application of that test because a distinction must be recognised between a person as trader and the same person as owner of his trade. I find that distinction difficult to understand. Whatever may be meant by referring to the trade as an entity, until there is a change of ownership of the trade the trade only exists because it is being carried on by the trader and the trader is the only owner of the trade because he is carrying it on. I do not see how a person can be owner of the trade unless he is also the trader or how he can be the trader unless he is also the owner of the trade. It therefore appears to me that there is no real distinction between a person in his capacity of trader and that person in his capacity of owner of the trade and that if the Appellant is to succeed it must be that the terms of the Rule require, in the special circumstances of this case, some modification of the test generally applicable. I see no sufficient reason for so holding".

28. Counsel for the Company argues that this passage nullifies the distinction between money paid out for the purposes of the trade and money paid for the purposes of the Company. However, I read this in the context that Lord Reid was finding that the Respondents' expenditure was wholly and exclusively laid out to prevent their business and assets being taken from them. My understanding of the reasoning and outcome in this case is that money expended on such a propaganda campaign can be within the category of money"wholly and exclusively expended for the purposes of the trade" and as such is deductible for income tax purposes. This would seem to be of rather wider ambit than the situation where, on the findings of the learned Circuit Court Judge, the Company found itself in need of funds and so the Company then borrowed money to carry on its trade and had to pay interest as the cost of obtaining the loan.

29. Counsel for the Inspector referred me to Archibald Thomson Black and Co.,

Limited -v- Batty 7 TC 158 in which a Company which had made losses in trading carried forward a debit balance from year to year in its balance sheet. The existence of this debit balance stood in the way of the payment of dividends when the Company entered on a period of profit earning. To enable dividends to be paid the Company applied to the Court to have its capital reduced, and in so doing incurred legal and other expenses. The Appellant

30. Company claimed to deduct these expenses in computing the balance of profits and gains for the purposes of assessments to Income Tax, Schedule D, but it was held that the expenditure in question was not expenditure for the purposes of the trade of the Company, but was rather for the purpose of distributing the profits of its trade, and was not a proper deduction in computing theprofits for the purposes of assessment to income tax. The Court of Session (Scotland) Second Division on 7th of January, 1919 concluded that the expenditure, while being quite a proper expenditure and quite properly made in the interests of the Company, was not, for the purposes of the trade but was made for the purposes of distributing more advantageously, as it was thought, the results of that trade, namely, the profit, which, on a trading account balance, would have been available for distribution among the shareholders, had it not been for the debit balance. They held that it was not, in a proper sense of the term, adisbursement made for the purposes of the trade. It was made for the purpose of dealing with the results of that trade, after these results had been realised; that is to say, it was made for the purpose of distributing the balance of profit and loss among the shareholders instead of, as had previously been the case, by placing it to the credit of the debit balance. They concluded that it was not a deduction made for the purposes of the trade of the Company, but for the purposes of distributing the profits of its trade after these profits have been earned.

31. I think that there is a clear distinction between these legal and other expenses incurred in an application to court to have a Company's capital reduced so that it might be able to pay dividends and it is readily understandable why these costs were not deductible as they were not incurred for the purposes of its trade.

Montreal Coke and Manufacturing Company -v- Minister of National Revenue [1944] 1 REO 743 is relied on by both parties. This case came before the Privy Council in 1944. The Appellant Company carried on undertakings in Canada which were financed by money borrowed from the public on interest-bearing bonds which were redeemable prior to maturity at a premium. The principal and interest were payable at thebond-holders option in currency other than Canadian dollars. Owing to the state of the exchange the options as to the mode of payment occasioned considerable expense to

both companies. Market conditions being favourable, both companies decided in 1935, with a view to reducing their interest charges, to redeem their existing bonds before maturity and to reborrow at lower rates on less onerous conditions as to payment. The carrying through of these financial operations necessarily involved substantial outlays on the part of both companies. The question is whether or not under the Income War Tax Act, 1927 S.6(a) the appellants were entitled in computing their respective incomes for the purposes of assessment to income tax for the year 1935-1936 to deduct certain expenses incurred by them respectively in effecting changes in their bonded indebtedness for the purpose of reducing their annual interest payments. It was decided that the expenditure in question incurred by the appellants was in relation to the financing of their businesses and was not incurred in the

"earning of the income" within the meaning of S.6(a) of the Act; and, therefore, was not deductible in computing their taxable income. An editorial note helpfully explains that this was a conversion loan which consisted of paying off high interest securities and replacing them by borrowing on more favourable terms. This process necessarily involved considerable incidental expense. It was not however a part of the ordinary trading of the Company, but an isolated episode and the expense was chargeable to capital account and was not deductible as money spent to earn income.

32. Counsel for the Inspector contends that this is a closely analagous case and so it requires further scrutiny. At page 746 Lord MacMillan said:-

"The question at issue turns entirely upon the terms of the Income War Tax Act, 1927. Part II of the Act, which is headed "Exemptions and Deductions", contains sect. 6 which has a subheading "Deductions from income not allowed." So far as relevant to the present purpose sect. 6 reads as follows:

6. In computing the amount of the profits or gains to be assessed, a deduction shall not be allowed in respect of (a) disbursements or expenses not wholly, exclusively and necessarily laid out or expended for the purpose of earning the income; (b) any outlay, loss or replacement of capital or any payment on account of capital or any depreciation, depletion or obsolescence, except as otherwise provided in this Act.

By sect. 9 of the Act the tax is charged upon income and by sect. 3 income is defined to mean annual net profit or gain.

It is important to attend precisely to the language of sect.6. If the expenditure sought to be deducted is not for the purpose of earning the income, and wholly, exclusively and necessarily for that purpose, then it is disallowed as a deduction. If the expenditure is a payment on account of capital it is also disallowed. The appellants say that the outlays in question were made wholly, exclusively and necessarily for the purpose of earning income and were not payments on account of capital. The respondent maintains the contrary.

The justification for upholding the deductions claimed could not be more attractively presented than it is in the judgement of Rinfret J. (now Chief Justice of Canada), with which Taschereau J. concurred. The judge says:

There are two ways of increasing the profits from a trade or commercial or other calling; either by increasing the earnings while the expenses remain the same or by decreasing the expenses while the earnings remain the same. Of course, if the expenses diminish at the same time as the gross earnings are increased the profits will be correspondingly larger and the proposition just mentioned is only made more evident... In order to pay a lower interest and to get rid of the exchange rates it was necessary to redeem the original bonds; and therefore the expenses required to achieve that result were wholly, exclusively and necessarily laid out or expended for the purpose of decreasing the fixed interest and exchange charges and accordingly "for the purpose of earning the income".

Down to the last nine words quoted the statement of Rinfret J. is unexceptionable but their Lordships are unable to accompany him in leaping the last fence. If the statute permitted the deduction of expenditure incurred for the purpose of increasing income the appellants might well have prevailed. But such a criterion would have opened a very wide door. It is obvious that there can be many forms of expenditure designed to increase income which would not be appropriate deductions in ascertaining annual net profit or gain. The statutory criterion is a much narrower one. Expenditure to be deductible must be directly related to the earning of income. The earnings of a trader are the product of the trading operations which he conducts. These operations involve out-goings as well as receipts and the net profit or gain which the trader earns is the balance of his trade receipts over his trade out-goings. It is not the business of the appellant to engage in financial operations. The nature of their business is sufficiently indicated by their titles. It is to these businesses that they look for their earnings. Of course, like other business people, they must have capital to enable them to conduct their enterprises, but their financial arrangements are quite distinct from the activities by which they earn their income. No doubt the way in which they finance their businesses will or may reflect itself favourably or unfavourably in their annual accounts but expenditure incurred in relation to the financing of their businesses is not in their Lordship's opinion expenditure incurred in the earning of their income within the statutory meaning. The statute in sect. 5(b) above quoted significantly employs the expression "capital used in the business to earn the income", differentiating between the provision of capital and the process of earning profits.

A faint suggestion was made that the item for overlapping interest might be differentiated from the other items of expenditure in view of the fact that interest on borrowed money is a permissible deduction at such rate as the Minister may allow. But the overlapping interest was paid as part of the cost of the refunding operations and on money borrowed temporarily in excess of what was required for the purpose of the businesses during the overlapping period and was thus properly disallowed by the Minister".

33. They concluded that the particular expenditure in the case fell clearly within the statutory prohibition against deduction.

34. This is an important case illustrating the distinctions involved. While the Privy Council did not stress the words "and necessarily", these are an additional reason why there is a very real difference between the Montreal Coke transaction and Ringmahon's situation. At issue in Montreal Coke was simply the expense of financing being the costs of replacing one loan with another and it was not concerned with interest on a loan to maintain trading finance except peripherally where overlapping interest was mentioned. It was not a decision in which the Privy Council disallowed interest on a new loan in the future incurred for trading purposes. The nub of the distinction is that if a company simply refinances its trading operations then it has not acquired any new asset. If, for example,Ringmahon were to buy a luxurious yacht and refinances this expenditure by way of a loan from a bank then Ringmahon has acquired an asset and this floating gin palace could hardly be described as being for the purpose of its trade in household goods and so the interest on the loan would not be deductible. On the other hand if the cost of the raising of the loan to keep the Company trading is the interest on the loan then it isthis cost of interest which permits the Company's trade to continue. The costs of such interest is a recurrent item each year.

35. At page 747 there is a further passage in the judgment of Lord MacMillan which clarifies the distinction between refinancing involving the costs of replacing one loan with another on the one hand, and on the other hand taking out a loan for the sole and exclusive purpose of using the funds therefrom in order to continue in trade and to earn profits:-

"It was conceded in the courts in Canada, and in any event it is clear, that the expenses incurred by the appellants in originally borrowing the money represented by the bonds subsequently redeemed were properly chargeable to capital and so were not incurred in earning income. If the bonds had subsisted to maturity the premiums and expenses then payable on redemption would plainly also have been on capital account. Why then should the outlays in connection with the present transactions, described as "refunding operations", not also fall within the same category? The Lordships are unable to discern any tenable distinction. In the history of both companies the financial readjustment of their borrowed capital was an isolated episode, unconnected with the day to day conduct of their businesses, and the benefit which they derived was not "earned" by them in their businesses."

36. This may be contrasted with the finding at para 8 of the Case Stated that the deduction claimed by Ringhmahon was in respect of money which was wholly and exclusively laid out for the purposes of the trade of Ringmahon.

37. I was referred to Strong and Company of Romsey Limited -v- Woodifield (Surveyor of Taxes) 5 TC 215 as illustrating where the line should be drawn. The Appellants were a brewery company who owned an inn in Poole called the Lion and Lamb Inn. On 2nd March, 1901 a guest at the inn was injured by the falling of a chimney during a gale. On behalf of the Appellants it was contended that as in the course of their business as brewers it became necessary at times to carry on business as innkeepers and that the profits of such business as innkeepers were included in the accounts of the Company that as the expenditure was incurred by the Appellants in the course of and incidental to the conduct of the concern the profits of which were assessed, allowance must be made on account of such expenditure of[sterling]1,490, being damages and costs incurred by them in defending the action brought by the injured guest. In agreeing with his colleagues that this sum was not allowable as a deduction at page 215 Lord Davey said:-

"My Lords the question in this Appeal is whether a sum of [sterling]1,490 which the Appellants have had to pay for costs and damages occasioned to a person staying in their inn by the fall of a chimney is a proper deduction in arriving at the profits of the Appellant's trade for the purpose of the Income

Tax. The answer to that question, in my opinion, depends on the answer to be given to another question, whether the deduction claimed was a disbursement or expense wholly and exclusively laid out or expended for the purpose of the Appellants' trade, within the meaning of Rule 1 applying to both cases 1 and 2 of Schedule D in Section 100 of the Income Tax Act, 1842.

It has been argued that the deduction claimed was a loss connected with or arising out of the Appellants' trade within Rule III, applying to Case 1 only. Case 1 relates to trades, manufactures, adventures or concerns in the nature of trade, and I think that the word "loss" in Rule III means what is usually known as a loss in trading or in speculation. It contemplates a case in which the result of the trading or adventure is a loss, wholly or partially of the capital employed in it. I doubt whether the damages in the present case can properly be called a trading loss. I prefer to decide the case upon Rule 1, which applies to profits of trades and also to professions, employments or vocations. I think that the payment of these damages was not money expended "for the purpose of the trade". These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, & C. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of , or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits."

38. The logic of the judgment is that the loss sustained by the Appellants was not really incidental to their trade as innkeepers but fell upon them in their character not of traders but of householders. Since the Appellant was carrying on the business of an innkeeper one might have thought that the court might have been sympathetic to the suggestion that, as it was a customer of the inn who was injured while in premises where the Appellant was carrying on the business of an innkeeper there might have been a tenable argument that this was an expense incurred in the course of trade. However, the costs and damages incurred in dealing with the claim by the customer fell on the wrong side of the line. Counsel for the Respondent contrasts the use made of the sum of[sterling]1,490 expended in this case with the cost of financing a loan which was used to maintain Ringmahon's trading operations.

39. In a Scottish case Commissioners of Inland Revenue -v- Carron Company 45 TC 18 the Respondent Company, which carried on the business of iron founders, was incorporated by charter in 1773. The Company's constitution remained virtually unaltered until revised in 1963. By the late 1950s many of its features had become archaic and unsuited to modern conditions, and the Company's commercial performance was suffering a progressive decline. The most significant disadvantages were the restriction of the Company's borrowing powers to [sterling]25,000, restrictions on the issue and transfer of shares and the restriction of voting rights to certain members holding at least ten [sterling]250 shares. The restrictions relating to shares and voting rights prevented the manager of the Company's day- to day commercial business from being given the status of a managing director and so made it difficult to obtain a suitable person for the post. It was accordingly decided to petition for a supplementary charter under which, inter alia, (a) responsibility for management could be vested in a board of directors, so that management could proceed on lines similar to that of a company incorporated under the Companies Act, (b) the limitation of the Company's borrowing powers to[sterling]25,000, the restrictions on the issue and transfer of shares and the restriction of voting rights would all be removed, and (c) the members' liability would be limited. A number of the points covered by the proposed charter had little to do with the Company's trade.

40. The Company petitioned for the supplementary charter in December 1959, but proceedings were suspended pending the outcome of an action by a shareholder claiming that the procedure adopted in deciding to petition was invalid. After winning the action before the Lord Ordinary and in the First Division of the Court of Session, the Company was advised that its prospects of success in the House of Lords were dubious, and the shareholder threatened to raise a further action on new grounds which would once more indefinitely postpone consideration of the petition. Consequently the Company settled the action on the terms that it should pay the pursuer's costs in the action and buy out part of her holding and the whole holding of another shareholder, her nephew, who had for many years been at variance with the Company, and, on the other hand, that she and her nephew should desist from future obstruction and he should never again acquire shares in the Company. A supplementary charter was granted in January 1963 substantially in the form proposed; the Company's affairs were then reorganised and its commercial performance improved. On appeal against an assessment to income tax under Case 1 of Schedule D for the year 1964-65 the Company claimed to deduct the costs of obtaining the charter ([sterling]3,107) and defending the action ([sterling]2,641) and the amounts paid to the two dissenting shareholders in respect of their shares([sterling]83,800) and expenses in the actions ([sterling]1,666). For the Crown it was contended that the sums in question were not incurred wholly and exclusively for the purposes of the trade; alternatively, that they were incurred on capital account. The Special Commissioners found that the significant objects of the new charter were the removal of the restrictions on borrowing and the issue and transfer of shares and qualification for voting, which were obstacles to the proper management and conduct of the business, and that the object of the other expenses was the removal of the obstruction to the charter; they held that the Company was entitled to the deductions claimed.

41. In the Courts it was conceded by the Crown that if the cost of obtaining in the charter was deductible, so were the other sums in question. It was held by the House of Lords that the objects of the new charter (a) being to remove obstacles to profitable trading, anything in it beyond that could be disregarded; and (b) that, since the engagement of a competent manager and the removal of restrictions on borrowing facilitated the day to day trading operations of the Company, the expenditure was on income account.

42. At page 48 Lord President Clyde in the Court of Session had said:-

"In the present case the Special Commissioner have held that the expenditure in question was all incurred by the Company to modernise its structure by securing additional borrowing powers and as a means of engaging managerial staff of the required calibre. These purposes are obviously purposes which are in their nature capable of being for the purposes of the trade, and as these are the purposes which the Commissioners held were in fact the Company's purposes their conclusion is one of fact for them....

The Crown's contention was that the purpose of the Company in occurring this expenditure was in order to obtain a supplementary charter. But the findings of the Commissioners are against this view, and a commercial company would not spend money on a mere piece of paper as an end in itself. The supplementary charter was a mere stepping stone to the real practical purpose of improving their trading potential. The Crown also argued that, even although the Special Commissioners were entitled to find, as they did, what were the Company's purposes in obtaining the supplementary charter, yet this conclusion was vitiated because that charter also contains incidental provisions not directly concerned with trading. But there is no finding in the Case that such incidental provisions were attributable to any other purpose than a trading purpose, and in any event such merely incidental benefits will not prevent the whole and exclusive purpose of the expenditure in question being for the purpose of the expender's trade.... "

43. At page 62 Lord Cameron said:-

" The business of the Company was not to obtain or trade in charters; to obtain a supplementary charter was not an end in itself. I think the Crown's contention confuses purpose, objects and means of achieving the objects. As I read the facts, the purpose of the Company was to improve its capacity to trade profitably under modern conditions. The Company's object was to modernise its machinery, to give it adequate power to finance its day-to-day trading transactions and to obtain the requisite managerial skill. The method of execution was by way of obtaining a supplementary charter, with the necessarily corollary of getting rid of obstruction in the way of doing so presented by the activities of Mr. Stevenson and Mrs Brown. The findings of the Commissioners as to the objects of the Respondents, which are set out in their decision as findings on the evidence, are in my opinion critical. The object of the operation was found to be: (1) to remove the limitation on the Company's borrowing power and (2) to deal with the restriction on the shares and the qualification for voting which were obstacles to the proper management and conduct of the business. These are unchallenged facts. The plain purpose in pursuing these objects was to enable the Company to finance its trade and to obtain a management fit and qualified for its trade. It is found as a fact in paragraph VI (5) of the Case that the "only remedy which would remove the obstacles... was the grant of a supplementary royal charter" . In my opinion, upon these facts the Commissioners were well entitled to find that the sums expended were expended wholly and exclusively for the purposes of the trade. The expenses of the petition would plainly come within such a purpose, because it was only by means of such a charter that the operative machinery of the Company could be repaired and modernised, and in my opinion the other sums fall within it"

44. The Crown appealed to the House of Lords from this decision of the first Division of the Court of Session and lost again. Lord Wiberforce relied on the findings of the Special Commissioners that the objects of Carron were to remove obstacles to profitable trading. If such was their object, the expenditure was brought within S. 137(a), and it is immaterial that other advantages came in its train. He said that it would in fact be in accordance with normal practice and legal prudence to use the opportunity of obtaining new powers for essential trading purposes to introduce other convenient constitutional amendments, and he agreed with the Commissioners that this action could not disqualify the expenditure.

45. Counsel for Ringmahon relies on the principles involved in this case which concerned the costs incurred by a Company which needed to change the terms of its charter in order to obtain modern efficiency. It had discretion to remain as it was but opted for improved commercial efficiency and was allowed to deduct the costs of obtaining the alteration of the charter and the cost of buying out the dissident shareholders. Counsel points out that the allowance of these once off payments as a deduction is a weaker case in principle than Ringmahon's recurrent payment of interest as the cost of obtaining finance which has been used for trading purposes.

46. Counsel for the Respondent admitted that if the loan was taken out for the purpose of purchasing a luxury yacht or a race horse irrelevant to the trade of the Company, then the cost of this loan would not be deductible. However, if the yacht or the racehorse were then sold the money gained from such a sale could be brought in and used for the purpose of the Company's trade and then the interest payable on this sum would be deductible since this would be the cost of money being used to fund the trading business.

47. Finally Counsel referred me to Commissioners of Inland Revenue -v- Pullman Car Company Ltd 35 TC 221 in which in 1938 the Respondent Company, as part of a scheme of reduction and reorganisation of its share capital, substituted cumulative income stock for part of its cumulative preference shares. The income stock was redeemable under certain conditions and carried cumulative interest at 5% perannum, subject to the adequancy of the cumulative net profits of the Company. In assessments to profits tax on the Company for the chargeable accounting period ending 30th September, 1949, interest paid on the income stock was not deducted in computing the profits and was treated as part of the gross relevant distributions to proprietors. On appeal to the Special Commissioners the Company contended that the interest was a proper deduction in computing profits by virtue of paragraph 4, Fourth schedule, Finance Act, 1937 and that, in any event, it was not a distribution. The Special Commissioners accepted the Company's first contention, expressed no opinion on the second and allowed the appeal. Harman J. sitting in the Chancery division of the High Court on 26th May, 1954 held that the interest was not a distribution of profits and was allowable as a deduction in computing profits for profit tax purposes. He decided that the payments were interest on money and not distribution of profits and dismissed the appeal brought by the Crown. In effect the Company had reducedthe share capital and these funds were replaced by borrowings from the shareholders. Thus the interest payable was a charge which fell to be made against the profits of the Company. Harman J. at page 227 said:-

"It seems to me that holders of income stock are in the position of people who have lent money to the Company, and they are not proprietors nor sharers in the profits as such".

48. It would seem that there is no real distinction whether the loan is from an individual, a shareholder or from the bank. The crucial question is was the money lent used to support and maintain the trade of the Company.

CONCLUSION

49. It was accepted by the learned Circuit Court Judge that the Revenue Commissioners cannot direct a taxpaying Company as to how it should finance its business. Up to 1991 Ringmahon had financed its business by redeemable share capital. It was quite reasonable for the learned Circuit Court Judge, who had heard the evidence, to conclude that Ringmahon, having redeemed the 6,000,000 redeemable preference shares then found itself in need of funds and so had to arrange to borrow funds for the purpose of keeping its trade going. The recurrent interest paid was the cost of obtaining this finance. It seems to me thatRingmahon was entitled to redeem the preference shares. It was then faced with the need to plug the gap in its finances by acquiring trading funds which it did by acquiring a loan from the bank at the recurrent cost of interest. Since these funds were used for trading, and no new asset was acquired from these funds other than trading assets, applying the principles deduced from the cases cited, it seems to me that the learned Circuit Court Judge was quite correct in holding thatRingmahon was entitled to a deduction of [sterling]435,764 in computing the amount of its profits under Case I, Schedule D. I should add that it seems to me that the hypothetical added further words were only postulated by the learned Circuit Court Judge in order to illustrate his point that "wholly and exclusively expended for the purposes of the trade" embraced the cost of the loan of the funds which gave Ringmahon working finance to maintain its trade. When he mentioned the phrases "vital to survive" and "only possible option", this phraseology was merely illustrative that an added proviso to the effect that the taking out of the loan was vital to the survival of Ringmahon and the only possible option for the Company would have been a necessary further hurdle for the taxpayer achieving deductibility and since Ringmahon need not have redeemed the preference shares, it would not have satisfied this further criterion. The decision of the learned Circuit Court Judge was perfectly within the evidence adduced before him and he was entitled to make the findings he made and to come his rational conclusion that the recurrent cost of the loan was wholly and exclusively laid out for the purposes of the trade ofRingmahon.

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