Scottish Court of Session Decisions

The Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), Fourth Schedule (sec. 40), Part II, rule 6, enacts—“It is hereby declared that where any business or trade is confined to the management of any particular assets, but power exists to substitute other assets for these particular assets or any of them, such a substitution shall not be deemed, for the purposes of Part III of this Act, to constitute a change of ownership of the business, but where any such substitution has been carried out by the sale of assets and the purchase of other assets the capital of the trade or business shall be taken to be increased or decreased, as the case may be, only by the amount of the difference between the price of the assets purchased and the price obtained for the assets sold, and the capital representing the assets purchased shall be estimated on the same basis for all purposes of Part III of this Act.”

The Finance Act 1916, sec. 47, enacts—“Where any ship has been sold since the 4th day of August 1914 in such circumstances that the profits of the sale are not the profits of a trade or business, the following special provisions shall, if the Commissioners of Inland Revenue so require, be applied in the computation of the liability to excess profits duty in respect of the profits arising from the use of the ship. ( a) The pre-war standard of profits of the purchaser as respects the ship shall where the standard of the trade or business of the vendor is a profits standard be calculated by reference to the profits arising from the use of the ship during the pre-war trade years, and shall be ascertained in accordance with the provisions of the principal Act, but calculated, where necessary, as if the use of the ship were a separate business; and where that standard is a percentage standard the pre-war standard of profits as respects the ship shall be the same as if the ship had not been sold, or in the case of a ship which was used for the first time after the 4th day of August 1914 shall be calculated by reference to the capital represented by the ship at the date when it was first used; and the pre-war standard of profits of the trade or business of the vendor and of the purchaser shall respectively be reduced and increased as the case may require, with any adjustments which may be necessary to meet the case of borrowed money or unpaid purchase money or other similar matters.…”

The Northern Navigation Company, Limited, appellants, being dissatisfied with an assessment to excess profits duty for the accounting period from 1st September 1914 to 31st August 1915 in the sum of £3557, 10s. made under section 38 of the Finance (No. 2) Act 1915, appealed by Stated Case in which S. James Hender, surveyor of taxes, was respondent. They claimed that under section 47 of the Finance Act 1916 the pre-war standard of the s.s. “Mountfields” (renamed s.s. “Blairmore”), purchased on 27th October 1914, should be substituted for that of the s.s. “Benedick,” which was sold on 27th September 1912.

The Case stated—“1. The following facts were proved or admitted, viz.—(1) The appellants (whose company was formed in 1909) were the owners of a single ship—the s.s. “Benedick”—which was acquired on 1st September 1909 and sold on 27th September 1912. (2) The appellants owned no ship from 27th September 1912 until 27th October 1914, when they purchased the s.s. “Mountfields” (renamed s.s. “Blairmore”) from the Doughty Shipping Company, Limited, which is not a single ship company. (3) In accordance with the manager's statement that the company was carrying on a continuing business, the income-tax assessments under Schedule D for the period when the company had no steamer were made on the average profits of the three preceding years. (4) The excess profits duty assessment was made in accordance with Rule 6 of Part II of the Fourth Schedule of the Finance (No. 2) Act 1915. (5) The pre-war standard was based on the average profit of the two years to 31st August 1913, and the duty on the deficiency of the first accounting period to 31st August 1914 was set off against the duty on the excess of the second accounting period to 31st August 1915. (6) The appellants made application to the Commissioners of Inland Revenue to have the pre-war standard of their present steamer (the s.s. “Blairmore”) transferred to the new owners under section 47 of the Finance Act 1916 but the Commissioners of Inland Revenue declined to make the transfer.…

4. After considering the whole of the facts and arguments the Commissioners were unanimously of opinion that the question raised was not one within their jurisdiction as the application of section 47 of the Finance Act 1916 was entirely within the discretion of the Commissioners of Inland Revenue, who had declined to apply it, and accordingly the General Commissioners refused the appeal.”

Argued for the appellants—The purpose of the excess profits duty was to treat a business as a continuing one, and therefore a fair comparison could only be made by taking the pre-war standard of the same ship as earned the profits brought into assessment. There was no instance where it had been put in the absolute power of the Commissioners of Inland Revenue to select the standard that suited them best. Reference was made to the Finance (No. 2)

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Act 1915 (5 and 6 Geo. V, cap. 89), sections 35, 40, 45 (5), Fourth Schedule, Part II, rules 5 and 6.

Argued for the respondents—Unless the Commissioners of Inland Revenue had the discretion claimed the words of the section (Finance Act 1916 (6 and 7 Geo. V, cap. 24), section 47) would be rendered nugatory. The intention of the Legislature was that the section should be applied against the taxpayer and not when it was in his favour, and its whole object was to catch the enormous profits made on the sale of ships. It implied an absolute discretion in the Commissioners of Inland Revenue, and from their decision there was no appeal. A similar discretion was given in the Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), Fourth Schedule (section 40), Part I, rule 5. A similar discretion had also received judicial interpretation in Macfarlane v. Commissioners of Inland Revenue, 1859, 22 D. 266, and in relation to the present Act in Williamson Film Printing Company, Limited v. Commissioners of Inland Revenue, 1918, 34 T.L.R. 545, per Sankey, J. In England no mandamus would be competent against the Commissioners of Inland Revenue for refusal to apply the section.