Scottish Court of Session Decisions

The Burnley Steamship Company, Limited, the owners of the steamship “Burnley,” which was employed for carrying cargo for hire, were assessed, under Schedule D of the Income-Tax Acts for the year ending 5th April 1894, on the sum of £327. They appealed against the assessment to the Commissioners for General Purposes, objecting that a sufficient sum had not been allowed in respect of diminished value under the provisions of the Customs and Inland Revenue Act 1878. The depreciation allowed to the company under the assessment had been fixed on the basis of deducting 5 per cent. from the cost of the ship for the first year of the existence, and of deducting 5 per cent. from the written down value from each subsequent year.

After hearing evidence the Commissioners found the deduction at the rate of 5 per cent. upon the written-down value from year to year reasonable in the case of a vessel such as the “Burnley,” if applied as an average rate over a series of years, and accordingly confirmed the assessment.

The company being dissatisfied with this decision, the present case was stated for the opinion of the Court of Exchequer.

The following note was appended to the case—“The Commissioners in this case were asked by the appellants to take into consideration, in deciding what rate was just and reasonable, the facts (1) that ships frequently become obsolete and of less earning power before they were physically worn out; and (2) that their market or sale value might and frequently did fall below their value as fixed by the depreciation rate allowed in making the assessment or even that proposed by the appellants. Evidence was led on both these points. The Commissioners are of opinion that the words ‘diminished value by reason of wear and tear,’ used in section 12 of the Customs and Inland Revenue Act 1878, do not cover ( a) loss of earning power owing to plant being rendered more or less obsolete through the introduction of improved or other plant, or ( b) diminution in market value apart from its having been caused by wear and tear.”

Section 12 of the Customs and Inland Revenue Act of 1878, provides—“Notwithstanding any provision to the contrary contained in any Act relating to incometax, the Commissioners for General or Special Purposes shall, in assessing the profits or gains of any trade, manufacture, adventure, or concern in the nature of trade, chargeable under Schedule D, or the profits of any concern chargeable by reference to the rules of that schedule, allow such deduction as they may think just and reasonable as representing the diminished value by reason of wear and tear during the year of any machinery or plant used for the purposes of the concern, and belonging to the person or company by whom the concern is carried on.” …

Argued for the Burnley Steamship Company—The Act of 1842 only provided that allowance should be made for the actual cost of repairs, but under the Act of 1878 it was provided that allowance should be made for diminished value by reason of “tear and wear.” These words were susceptible of construction, and should be construed liberally, for the object of the clause was to remove an injustice, and the same considerations which justified an allowance for tear and wear would justify the allowance for which the company contended. Liberally construed, the words “tear and wear” would cover depreciation caused by newer and better vessels being built. This contention derived support

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from the views expressed in The Caledonian Railway Company v. Special Commissioners of Income-Tax, November 18, 1880, 8 R. 89.

Argued for the Surveyor of Taxes—The words “wear and tear” could not be contended to include depreciation caused by plant becoming obsolete and out of date.

At advising—