Scottish Court of Session Decisions

The Arizona Copper Company, Limited, was formed and registered on 11th August 1882, and was re-constructed in 1884. On 4th December 1883 a company called the Arizona Trust and Mortgage Company, Limited, was formed and registered, as the prospectus bore, “primarily for the purpose of acquiring and holding the obligations of the Arizona Copper Company, Limited, and to provide the funds necessary to complete its works.”

By agreement between the Copper Company and the Mortgage Company, dated 8th and 11th December 1883, it was provided, inter alia, (1) that the Mortgage Company should lend to the Copper Company the whole sums required for these purposes, not exceeding in all the sum of £360,000; (2) that the Copper Company should repay all such sums as were lent, on 15th May 1894, with an option to the Copper Company, upon giving six months' notice to the Mortgage Company, to pay a part or the whole of the advances made to them at 15th May 1889, and that on repayment of any capital sum the Copper Company should also pay to the Mortgage Company along therewith a bonus of 10 per cent. on the amount unpaid; and (3) that the Copper Company should pay interest at the rate of 10 per cent. on the amount of the advances due by them.

Following upon this agreement the Mortgage Company lent the Copper Company sums amounting to £337,414, and the Copper Company repaid these sums under an agreement dated 2nd and 4th June 1888, and along with repayment of the capital sum borrowed they paid the Mortgage Company the stipulated bonus of 10 per cent., which, less 7 per cent. discount, amounted to £31,379, 11s. 9d.

In making their return for assessment to income-tax for the year 1889–90, based on the profits of the three preceding years 1886–88, the Copper Company stated a sum of £27,462, 8s. 7d. as the amount of their profits for the purpose of assessment, and on that sum they were assessed and paid income-tax. In making that return the Copper Company had deducted from the profits of the year ending September 30th 1888, inter alia, the amount of the bonus of £31,379, 11s. 9d., but this and certain other deductions were disallowed by the Income-Tax Commissioners, and an additional assessment of £14,527, or one-third of the disallowed deductions, was subsequently intimated to the company.

The Copper Company then appealed to the General Commissioners of Income-Tax. In support of their appeal they stated—“The above sum of £31,379, 11s. 9d. was duly debited to profit and loss as a charge on the business of the company, and it remained at the debit of that account until, in order to identify the larger sums so dealt with, and if deemed expedient spread them over longer than one year, the said suspense capital account was opened. The amount debited to that account was in due course charged against and paid out of the profits of the company.” The Commissioners refused to allow the deduction claimed for the amount of the bonus. At the request of the agent for the Copper Company, a case, from which the above narrative has been taken, was stated for the opinion of the Court of Exchequer.

The First Case of Schedule D, sec. 100, of the Income-Tax Act 1842 deals with “duties to be charged in respect of any trade, manufacture, adventure, or concern in the nature of trade not contained in any other schedule of this Act.”

Rule 3rd of the First Case provides, interalia, that “in estimating the balance of profits and gains chargeable under Schedule D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, … for any sum employed or intended to be employed as capital in such manufacture, adventure, or concern.” …

Rule 4 provides—“In estimating the amount of the profits and gains arising as aforesaid no deduction shall be made on account of any annual interest or any annuity or other annual payment payable out of such profits or gains.”

Section 159 provides—“And be it enacted that in the computation of the duty to be made under this Act in any of the cases before mentioned, either by the party making or delivering any list or statement required as aforesaid, or by the respective assessors or commissioners, it shall not be lawful to make any other deductions therefrom than such as are expressly enumerated in this Act, nor to make any deduction on account of any annual interest, annuity, or other annual payment to be paid to any person out of any profits or gains chargeable by this Act, in regard that a proportionate part of the duty so to be charged is allowed to be deducted on making such payments.” …

Argued for the Arizona Copper Company—The deduction; of a bonus paid on borrowed money was not one of those specially allowed by the Income-Tax Acts, but the company's right to deduct was not rested upon that ground. The deductions allowed were payments “out of profits,” while the payment in question was not made in that sense “out of profits” at all. It was part of the expense of carrying on the business of the company, without which no profit could be earned, and was to be deducted before the profits could be ascertained. Rule 4 of the First Case of sec. 100 had therefore no application at all. Whether the bonus was to be looked on as additional interest payable in the year immediately preceding repayment of the loan, or as a commission to a financial agent for getting the loan, it was in either case a payment quite distinct in character from the interest paid to the debenture-holders of a company, which was the matter under consideration in the case of the Alexandria Water Company v. Musgrave, infra. The scheme of the statute was to set forth all the deductions which were to be allowed, and as this deduction was not one of those prohibited, the inference was that it was an allowable deduction. There were a number of cases, of which the following were instances, in

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which claims for deduction had been considered, but none of them bore directly on the present question— Addie v. Solicitor of Inland Revenue, February 16, 1875, 2 R. 431; The Coltness Iron Company v. Black, April 7, 1881, 8 R. (H. of L.) 67; Forder v. Handyside, 1876, L.R., 1 Exch. Div. 233; Watney & Company v. Musgrave, 1880, L.R., 5 Exch. Div. 241. In Addie v. The Coltness Iron Company it had been held that coalowners were not entitled to deduct the expense of sinking new pits, and in Forder that an ironfounder was not entitled to deduct a sum set aside for depreciation of plant. The ground of judgment in these cases was that the payments in question were really to account of capital, but that was not the nature of the payments in this case. In Watney & Company no deduction was allowed for premiums paid by a brewer on the purchase of the leases of public-houses in respect that these were payments made outside his business with a view to increase his custom. The payment here was made in order to carry on the business. There was one decision as to the quality of a bonus, but the nature of the bonus there was entirely different from the one in question in this case— Irving v. Houston, 1803, 4 Pat. App. 521.

Argued for the Surveyor of Taxes—The sections of the Income-Tax Act dealing with deductions made no reference to gross or nett profits, but required a trader to put on one side everything in the nature of profits, making only such deductions as the statute allowed—section 159. The only allowable deductions from a trader's receipts before assessment, other than those expressly authorised by the statute, were legitimate working expenses, which had to be deducted before profit could be ascertained. The sum for which deduction was claimed here fell under neither category. In any view that might be taken of it, it was a payment bearing express relation to capital made out of profits, and any deduction for such a payment was expressly disallowed by the Act—section 100, First Case, rule 3; Edinburgh Southern Cemetery Company v. Surveyor of Taxes, November 29, 1889, 17 R. 154; Mersey Docks and Harbour Board v. Lucas, 1883, L.R., 8 App. Cas. 891; Paddington Burial Board v. Commissioners of Inland Revenue, 1884, L.R., 13 Q.B.D. 9. It was not a commission, for a commission implies an intermediary, and here there was none. Even if looked upon as a commission, it would not be an allowable deduction— City of London Contract Corporation, Limited v. Styles, 1887, Tax Cases, ii. 239. The idea that the claim of the Crown could be resisted on the ground that this bonus was a payment of a debt was excluded by the decision in the Mersey Docks case. It was an “annual payment,” for which no deduction was to be allowed—Schedule D, First Case, rule 4, section 159; Last v. London Assurance Corporation, Limited, 1885, L.R., 10 App. Cas. 438; Gresham Life Assurance Society v. Styles, 1890, L.R., 24 QBD 500. In its nature it very much resembled the premiums, deduction of which was disallowed in Watney & Company's case. It was really a payment of additional interest on borrowed capital, but no deduction could be allowed on that ground—Schedule D, rule 4, section 159; Alexandria Water Company v. Musgrave, 1883, L.R., 11 QBD 174. So far as the Crown was concerned, it was a question, inter alios, whether the Crown had a right to deduct the tax before paying the borrower.

At advising—