Supreme Court of Ireland Decisions

1. The appellant is an inspector of taxes, and he has brought an appeal to this court from a decision of the High Court (Budd J.) on a case stated from the Circuit Court (Judge Lynch) in which the learned Circuit Court judge sought the opinion of the High Court as to whether he was correct in holding that the respondent was entitled to a deduction of £435,764 in computing the amount of its profits under Case 1 of Schedule D. The High Court answered the question in the affirmative. The basic facts proved or admitted are well summarised in paragraph 4 of the case stated and they read as follows:-

2. Following on the loan from Allied Irish Banks being applied for the redemption of the preference shares, there was a continuing ongoing liability on the part of the respondent to the bank for interest on the loan. Normally, where a trading company has to pay interest to a bank, that interest is deductible for tax purposes because it will have been “ wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation” of the taxpayer. In the case of non-capital expenditure that is the statutory test of whether it is deductible for tax purposes or not and that form of wording has been repeated from its original enactment to subsequent re-enactments in various Acts culminating in the Taxes Consolidation Act, 1997. However, the relevant enactment in this case, which applied at the relevant time, was section 61 of the Income Tax Act, 1967. The part of that section relevant to this case reads as follows:-

3. The arguments of both sides can be summarised very shortly. The appellant argues that since the purpose of the loan was to redeem the preference shares and, therefore, was related to the capital structuring of the company and not the ordinary trading, ongoing interest liability in respect of that loan must be treated as stamped with the same character and, therefore, cannot be deducted against profits for tax purposes. The respondent, on the other hand, argues that although the loan was undoubtedly for the redemption of the shares and that there could be no question of the capital sum spent on the redemption being deductible, the ongoing annual interest is in quite a different position as it becomes merged in the ordinary ongoing liabilities of the company in its trading. Counsel for the respondent, at p. 3 of his written submissions, puts it this way:

4. Later on in the same written submission it is pointed out that

5. Without the assistance of any decided cases and simply upon the basis of interpreting the statutory provisions, I find the respondent’s argument much more convincing. Indeed, if the respondent is not correct, there would be somewhat of an anomaly in the tax regime because as counsel for the respondent, Mr. Thomas S. McCann, S.C. points out in the written submissions at p. 6 and as he further orally argued in court, if the respondent had, at all times, financed its business by bank borrowings the interest payable would clearly have been allowable as a trading expense and this could not have been disputed by the Revenue Commissioners. Yet if that is the case, it would seem strange if the position should be different, merely, because there were no borrowings prior to the 1991 accounting period, the company having financed its business by redeemable share capital. The respondent submits that there is no distinction in principle between interest payable on the bank borrowings for the purposes of the redemption of the share capital and interest payable upon bank borrowings incurred in substitution for earlier borrowings from another bank. But even if this is no better than a debating point, I think that the respondent successfully demonstrates that the interest on an ongoing basis must be regarded as being laid out wholly or exclusively in earning of the profits of the particular accounting year.

6. I have already indicated that I arrive at that view as a matter of principle on the arguments put before the court and without recourse to case law. A large number of cases have in fact been cited in this court and in the court below. These have been accurately and exhaustively reviewed in the written judgment of Budd J. The general principles applicable have been considered in Irish, English, Scottish and Canadian cases. While in a very broad way each of them may be helpful, nevertheless with one single exception, I do not find any of them directly in point in relation to the particular application of the principles to the facts of this case. That single exception is the Canadian case of Trans-Prairie Pipelines Limited v. Minister of National Revenue 70 DTC 6351. The facts of that case are extraordinarily similar to the facts of this case, and although the wording of the relevant statutory provision is different, I do not think that that difference is material to the points at issue in this case. I , therefore, find very considerable support for the view which I have taken in the Trans-Prairie case. I think it useful to treat of that case at some length.

7. The learned judge then went on to observe as follows on the third page of his judgment:

8. I cannot see any difference in principle between that case and this case, though of course, this court would be perfectly entitled to take a different view from the view taken by the Exchequer Court of Canada. But as is clear from the earlier part of this judgment, I am in complete agreement with the reasoning adopted in that case. Budd J., in the High Court, also found it persuasive. nt. The Canadian legislation, as cited above, contains the expression “ money used for the purpose of earning income from a business or property” , whereas the wording in s. 61 of the Irish Income Tax Act, 1967 is “wholly and exclusively laid out or expended for the purposes of the trade” . But although it may well be that there could be cases in which that distinction would be relevant, it would not appear to be at all relevant in this case. Jackett P., in his analysis of what happened to the borrowings, was clearly expressing the view that they were wholly and exclusively laid out or expended for the purposes of the business. In view of the understandably strong reliance being placed on this case by counsel for the respondent, it is interesting how little analysis there is of it in the written submissions of the appellant. Counsel for the appellant has effectively confined themselves to drawing attention to the acknowledgment by the learned trial judge that the wordings of the relevant legislation differed, and while admitting that the facts were similar they submitted “ that for those and other reasons it is of little assistance”. There is really no indication as to what those “ other reasons” were and nothing convincing emerged from the oral argument of the appeal. Furthermore, the reference to Budd J.’s acknowledgment of the differences in the legislative wording is somewhat misleading in that after a quite detailed résumé of the Canadian case the learned trial judge expressed the view that assistance can be gleaned from that case “ even though the Canadian section is narrower in scope” . Budd J. points out that under the Canadian statutory provision the loan could be drawn down and used for the purchase of a luxury yacht, a use of the money which would, obviously, not be for the purpose of earning income from the business, but if the yacht was then sold and the proceeds of the sale were used for the purposes of earning income from the business then the interest paid on the loan would become deductible. He then cites the argument of counsel for the respondent (I think with some implicit approval) that

9. Returning to the judgment of Jackett P., I think it useful to cite a further sentence towards the end of his judgment where he said:-

10. By the same token it makes no sense, in my view, to hold that on a true interpretation of the relevant Irish legislation that because the loan was originally raised for the purposes of paying off the preference shareholders, the interest thereon cannot ever thereafter be treated as “ wholly and exclusively laid out or expended for the purposes of a trade”. The final paragraph of the judgment of Jackett P. in the Trans-Prairie case neatly illustrates the weakness of any alternative interpretation, and for the reasons which I have indicated would appear to be equally applicable to this case. It reads as follows:

11. For the reasons given I would, therefore, dismiss the appeal. I have also explained why I am reluctant to delve into the many other authorities, which were cited because in the first place they are of little assistance in the application of the correct principles to this particular case, and secondly, they have been very fully reviewed by the learned trial judge in his judgment. I would, however, make clear in this connection that I have read and considered, in addition to the Trans-Prairie case, the cases listed in the appendix to this judgment. I will just briefly refer to a few of them. Archbold Thomson, Black and Company v. Batty 7 TC 158 was a Scottish case relied on by the appellant. But the facts were wholly different. £300 had been spent in reducing the capital of the company and it was then claimed as an allowable deduction from the profits for income tax purposes. But there had been a finding of fact that the reduction of the share capital and, therefore, the expenditure of the money was for the purpose of giving a better dividend to the remaining shareholders and not for any purposes of the trade. The Second Division of the Inner House of the Court of Session being bound by that finding of fact held that as a matter of law it was not deductible. Who could argue with that result? But it is of no avail to the appellant in this case. In Strong and Company of Romsey Limited v. Woodifield 5 TC 215, a brewing company which also owned licensed houses in which they carried on the business of innkeepers incurred damages and costs to the amount of £1,490 on account of injuries caused to a visitor staying at one of their houses by the falling in of a chimney. The House of Lords held that these once off payments were not deductible, that because although there may have been a connection with the trade they were not made for the purpose of enabling the carrying on and earning profits in the trade. That case is also clearly distinguishable. The remaining cases, in so far as they are really relevant at all, were decided on their own facts and by that I mean, there was a finding of fact as to the purpose of the payment and in the light of that finding of fact it was reasonably clear whether as a matter of law the payment was deductible or not. If, for instance, the purpose of the payment was the financing of the business rather than the earning of profits, the payment could not be deductible (see Montreal Coke and Manufacturing Co. v. Minister of National Revenue [1944] 1 All ER 743, a decision of the Privy Council. I have no doubt that, in this case, the learned Circuit Court judge took the view that the ongoing interest payments were necessarily part and parcel of the trading of the company and were clearly deductible. In my opinion the learned High Court judge was correct in upholding that view.