Scottish Court of Session Decisions

The Income Tax Act 1842 (5 and 6 Vict. cap. 35) enacts—Section 100, Schedule D, Rules applying to First and Second Cases—“ First.

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In estimating the balance of the profits or gains to be charged … no sum shall be set against or deducted from such profits or gains for any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purposes of such trade, manufacture, adventure, or concern.…” Section 120—“Upon receiving notice of appeal … the said Commissioners shall direct their precept to the person appealing to return to them within the time limited therein a schedule containing such particulars as the said Commissioners shall demand … for their information respecting the property of such person, or the trade, manufacture, adventure, or concern in the nature of trade …, and the amount of the balance of his profits and gains, distinguishing the particular amounts derived from each separate source before mentioned, or respecting the particulars of the deductions from any of such profits or gains made in such statements or schedules.…” Section 123—“Whenever the Commissioners for General Purposes shall be dissatisfied … with any schedule delivered to them, or shall require further information respecting the same, it shall be lawful for the said Commissioners for General Purposes to put any question in writing touching … the contents of such schedule, or touching any of the matters which ought to have been contained therein, or any sums which shall have been set against or deducted from the profits or gains to be estimated in such … schedule and the particulars thereof, and to demand an answer in writing accordingly from and signed by the person to be charged …, and the said Commissioners for General Purposes shall from time to time issue their precept requiring true and particular answers to be given to such questions within seven days after the service of such precept; and every such person shall make true and particular answers in writing …, or shall within the like period tender himself before the said Commissioners for General Purposes to be examined by them viva voce to such matters.…”

At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held at the Inland Revenue Office, Edinburgh on 7th July 1914, and at an adjourned meeting of the said Commissioners held at York House, Kingsway, London, on 31st August, 1914, for the purpose of hearing appeals under Schedule D of the Income Tax Acts, the Grahamston Iron Company of Falkirk, appellants, appealed against an assessment of £3141 for the year ended 5th April 1914, made upon them under section 100, Schedule D, of the Income Tax Act 1842 (5 and 6 Vict. cap. 35) as amended by the Income Tax Act 1853 (16 and 17 Vict. cap. 34) in respect of the profits of the concern, viz., that of iron founders, carried on by them. The assessment appealed against was based on the average profits of the three years ended 31st December 1912, and in arriving at such assessment the additional Commissioners for the Division of Falkirk had disallowed a claim on the part of the appellants to deduct the sum of £923, being one-third part of the sum of £2770 debited in the profit and loss account of the appellants for the year ended 31st December 1912—the last of the three years entering into the average on which the assessment was based—in respect of payments consisting of contributions and levies (hereinafter referred to as “payments”) to the National Light Castings Association, of which they were members. The disallowance by the additional Commissioners of the said sum of £923 as a deduction from the income of the appellants for the purposes of the income tax was the only point on which the opinion of the Court of Session was sought. In the event of the decision of the Special Commissioners with respect to such deduction being held to be erroneous in point of law, it was agreed that the case be referred back to them for such adjustment of the appellants' liability as might be necessary.

The Special Commissioners, on consideration of the facts and arguments submitted to them, were of opinion that in default of full and explicit information, and especially in the absence of the accounts of the association showing precisely the manner in which the sums received were expended or the extent to which such sums had been expended by the association, they were not in a position to determine whether the whole or any portion of the payments in question was an admissible deduction under the Income Tax Acts in arriving at the appellants' liability. They accordingly confirmed the assessment appealed against as made on the sum of £3141, and at the request of the appellants stated a Case for appeal.

The Case stated—“1. The following facts were admitted or proved—(1) The National Light Castings Association (N.L.C. A.) (hereinafter called the association) was formed for the purpose of raising and keeping up the price to the buyer of goods and articles made and/or supplied by its members. During the year 1912 payments amounting to £2770 were made by the appellants to the association under the rules and regulations after mentioned. (2) On 26th June 1914 the Special Commissioners addressed to the appellants a precept in the following terms:—‘The Commissioners for the Special Purposes of the Income Tax Acts having received notice of appeal against the above assessment do hereby require you to forward to them at their office, 49 Wellington Street, Strand, London, W.C., on or before the 3rd day of July 1914, a schedule containing the following particulars, namely—1. A copy of the rules and regulations of the National Light Castings Association. 2. A copy of the accounts of the said association for each of the three years 1910, 1911, and 1912. If the association was set up and commenced within the three years accounts should be furnished for the period from the date of first setting up the same. Given under our hands this 26th day of June 1914.’ (3) In response to the said precept the appellants produced a copy of the rules and regulations of the association. The appellants did not produce the accounts of the association called for in the said precept on the ground that the said accounts were not in the

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possession or under the control of the appellants. The appellants, however, tendered the evidence of Mr A. E. Wenham, the secretary of the association, who was prepared to give viva voce evidence as to the objects and methods of the working of the association. The Special Commissioners considered that the objects and methods of working of the association were fully set forth in its printed ‘rules and regulations’ (which form part of this case), and that any further evidence in relation thereto which did not include the precise manner in which the payments made to the association were expended by the association was unnecessary and not pertinent to the point at issue.

2. Mr Douglas Wenham, on behalf of the appellants, contended that their payments to the association were sums laid out exclusively for the purposes of their trade, and hence that such payments were properly allowable as an admissible deduction in arriving at their profits assessable to income tax, Schedule D; that he had only to show for what purpose the money was expended by the appellants, and that the manner in which the sum so expended by them might be subsequently applied is immaterial. He further contended—(1) That the rules and regulations of the association produced showed conclusively that the payments made to the association by the appellants were for the sole purpose of maintaining prices, and thereby enabling the appellants to earn profits, and that therefore the deduction in question was justified. (2) That as it was not within the power of the appellants to produce the accounts of the association the Special Commissioners were not entitled on that ground alone to refuse the appeal. (3) That in any event the Special Commissioners were bound, before finally adjudicating upon the appeal, to receive and consider, quantum valeat, the evidence tendered.

3. Mr E. S. London, Deputy Chief Inspector of Taxes (with him Mr W. Crawford, Surveyor of Taxes) contended for the Crown—(1) That the expenditure of a mutual association, such as the one in question, is admissible—for the purposes of the Income Tax Acts—only to the extent that it would be a permissible deduction if incurred by the appellants themselves. (2) That the association receives sums from members which are not de facto expended. (3) That the rules (No. 28) provide for the division of any surplus assets amongst the members in the event of the association being wound up. (4) That the association accounts can alone prove to what extent expenditure of an admissible nature for income tax purposes has been incurred.”

Argued for the appellants—The deduction claimed was expended exclusively for the purposes of the appellants' trade, and was therefore a good deduction— Moore v. Stewarts & Lloyds, Limited, July 20, 1906, 8 F. 1129, 43 S.L.R. 811. It was sufficient to show that the appellants had so expended the sums in question, and unnecessary to inquire as to how the association had dealt with them— Guest, Keen, & Nettlefolds, Limited v. Fowler, [1910] 1 KB 713; Usher's Wiltshire Brewery Company, Limited v. Bruce, 1914, 31 T.L.R. 104; Lochgelly Iron and Coal Company, Limited v. Crawford, 1913 S.C. 810, 58 S.L.R. 597. If the Surveyor of Taxes considered the money was being misappplied by the association the onus of proof was on him. The accounts called for were not the appellants' accounts nor under their control, and by the rules of the association the appellants were not entitled to see them. The oral evidence tendered was accordingly the only evidence the appellants had and was sufficient. The Commissioners were not entitled to refuse the appeal merely because the accounts were not produced— Reg. v. Chew, 1894, 71 L.T.R. 541.

Counsel for the respondent were not called on.