Scottish Court of Session Decisions

The Highland Railway Company in making their return to the Income-Tax Act of 1888–89, based on the profits of the preceding year, as shown by their printed accounts for the two half-years ended 31st August 1887 and 29th February 1888, claimed to deduct in addition to the several items charged as the expenditure of the year in working the railway, four sums of £9119, £755, £1555, and £878. These amounts were entered under the following heads in the said accounts of the company for the half-years ended 31st August 1887 and 29th February 1888—

£9119, August 1887 £1555, February 1888	{	Improvement of Sutherland Caithness section, to bring it up to the standard of the rest of the main line.
£755, August 1887 £878, February 1888	{	Cost of extra weight. Relaying with steel rails and heavier chairs, &c.

The Special Commissioners, in assessing the profits of the Highland Railway liable under the Income-Tax Act of 1888–89, disallowed these four sums, on the ground that they were properly charged to capital, as shown in their own printed accounts, duly certified to by their auditors, and they added the amounts to the sum returned by the company's secretary, against which notice of objection was given on the 5th November 1888.

The company appealed, and the appeal was heard by the Special Commissioners at Edinburgh on 6th March 1889.

The company contended that the sums of £755 and £878, £9119 and £1555, before mentioned, expended for extra weight, &c., in relaying the railways, and improvement of the Caithness section, represented the extra cost necessitated by the inferior condition of the permanent way of the original line, and also that of Caithness line when amalgamated with the Highland Railway in 1884. The expenditure on

Page: 658↓

the Caithness line was stated to represent the extra cost of relaying the lines, over and above what would have been necessary to renew and relay the section as it was previous to the amalgamation in 1884.

The company failed to satisfy the Commissioners that the deductions were admissible, and the charge was confirmed to the extent of the addition of the four sums above described.

The ground of the Special Commissioners' decision was that the expenditure was an improvement of the property, and chargeable to capital; and as regarded the Sutherland and Caithness section, that the purchase of that railway in an inferior condition would obviously affect the cost at which it was obtained.

The company expressed dissatisfaction with this decision of the Special Commissioners as being erroneous in point of law, and they demanded a case for the opinion of the Court of Exchequer.

The present case (from which the preceding narrative has been taken) was accordingly stated by the Special Commissioners in terms of the Taxes Management Act 1880 (43 and 44 Vict. cap. 19), sec. 59.

In an appendix annexed to the case the details of the expenditure of the foresaid sums were set out as follows:—

Main Line.

Amount expended during the year ending 29th February 1888—

					£755	3	8
					878	2	10
	Ton.	Cwt.	Qr.	Price.	£	s.	d.
The additional weightof the steel rails over the iron ones, was, average,£4, 17s. 2 1 4 per ton,	105	15	2	95s. to 100s.	514	0	3
The additional weightof chairs over the old ones was average price, 65s.¿3, 6s. 4 1 3. per ton,	337	6	3	65s. and 67s. 6d.	1119	6	3
					£1633	6	6

SUTHERLAND SECTION.

Amount expended during the year ending 29th February 1888—

£9119 4 9

1555 15 4

	Ton. Cwt. Qr Price.	Price	£ s. d.
Steel Rails,	833 8 2	110s	4594 9 9
Chairs,	327 10 0	65s	1064 13 11
Fish-plates and other accessories,	.. ..	..	648 15 1
Sleepers, .	No. 26,235	3s. 4d.	4372 11 4
Engine power,	.. ..	..	135 0 0
Timber beams for girder bridges,	.. ..	..	260 2 3
Carriage of materials,	.. ..	..	7 16 8
Wages of platelayers and labourers,	.. ..	..	857 16 3
			11,941 5 3
Cr. Old iron flange rails and fish-plates taken up	.. ..	..	1266 5 2
				£10,675 0

Argued for the company—The case as stated by the Commissioners did not fairly represent the company's contentions, and there ought therefore to be a remit for a fuller statement. While for the purposes of the company, and as between the company and the shareholders, those outlays were charged against capital, yet they ought properly to be charged against revenue. They really were sums expended on the maintenance of the line. The mere circumstance that steel rails and not iron ones were used in connection with these repairs did not alter the character of the repairs. There was no such permanent improvement of the property as to make these Outlays a proper charge against capital— Caledonian Railway Company v. Special Commissioners of Income-Tax, November 18, 1880, 8 R. 89. The company had never been allowed anything for depreciation under the Customs and Inland Revenue Act 1878 (41 Vict. cap. 15), sec. 12. If the deductions claimed were not allowed the company would not have enjoyed the profits upon which they had been charged. The company derived no additional revenue from these outlays, and so they were a proper deduction from the revenue of the year. The rules under Schedule D of the Income-Tax Act 1842 (5 and 6 Vict cap. 35), sec. 100, had no application to the present case— Coltness Iron Company v. Black, April 7, 1881, 8 R. (H. of L.) 67.

Argued for the Commissioners—There was sufficient stated to enable the Court to deal with the question between the parties. The company were condemned by their own actings in entering this expenditure against capital, and in so doing they acted properly, as the money laid out had materially improved the permanent way, and had made the company's property more valuable. The repairs on the Sutherland section were really a portion of the cost of the undertaking, as owing to its inferior condition it had been purchased so much the cheaper. The repairs on the main line had been actual renewal, not maintenance, and they had been properly charged against capital both by the company and the Commissioners.

At advising—