Scottish Court of Session Decisions

Archibald Thomson, Black, & Company, Limited, wire rope manufacturers, Glasgow, appellants, being dissatisfied with an assessment made on them under Schedule D of the Income Tax Acts for the year ending 5th April 1917, amounting to £2089 less depreciation allowance £895, took a Case in which J. Batty, surveyor of taxes, was respondent. The appellants claimed £300, being the amount expended by them in the year to 31st December 1915 in reducing the capital of the company, as an allowable deduction from their profits for income tax purposes.

The Case stated—“The following facts were admitted or proved 1. The appellants in the year 1914 reduced their capital from £30,000, divided into 15,000 preference shares of £1 each and 15,000 ordinary shares of £1 each, to £18,829, 16s., divided into 15,000 preference shares of £1 each and 12,766 ordinary shares of 6s. each. 2. The circumstances under which the reduction was effected were that for several years between 1906 and 1912 the company had not been successful, with the result that a balance had accumulated at the debit of profit and loss account until at 31st December 1912 it reached £10,010, 7s. 11d., and at 31st December 1913 it stood at £8397, 11s. 4d. There were also certain assets which were unrepresented by value. 3. The object of the reduction was to enable the company to resume the payment of dividends out of the balance of each year's trading, which would otherwise have fallen to be applied in reducing the debit balance in the profit and loss account until it was extinguished. 4. In reducing their capital as aforesaid the appellants incurred legal expenses consisting of accounts due to solicitors in Glasgow and Edinburgh, counsels' fees, printing, Court dues, and other incidental expenses. No objection was taken to the amount of the said expenses, and it was admitted that they had been incurred.

“The Commissioners, after hearing parties, were of opinion that the legal expenses incurred in reducing the capital of the appellants were not admissible as deductions from profits assessed under Schedule D of the Income Tax Acts, and they dismissed the appeal accordingly.”

Argued for the appellants—The sum in question was a legitimate deduction from profits in respect that it had been incurred not only for the purpose of the trade but in order to earn profits. A company's commercial success was dependent on its reputation, and if it was so encumbered that it could not pay a dividend its reputation and therefore its profits suffered. There was nothing to prevent an item of revenue expenditure being incurred once for all. Profits meant the surplus of the assets at the end of one accounting period over the assets at the preceding, and according to this standard the expenditure in question was a legitimate deduction— Usher's Wiltshire Brewery, Limited v. Bruce, [1915] AC 433, per Lord Loreburn at p. 443, 52 S.L.R. 894; Smith v. Lion Brewery Company, Limited, [1911] AC 150, 48 S.L.R. 1083; in re Spanish Prospecting Company, Limited, [1911] 1 Ch 92. The deduction in question did not fall within the express prohibition of the Income Tax Acts—Income Tax Act 1842 (5 and 6 Vict. cap. 35), sections 1 and 159.

Argued for the respondent—The deductions claimed were not allowable under the Income Tax Acts. The profits were in no way

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affected by the reduction of capital, which only changed their destination— Strong & Company, Limited v. Woodifield, [1906] AC 448, 44 S.L.R. 624; Gresham Life Assurance Society v. Styles, [1892] AC 309; Granite Supply Association, Limited v. Inland Revenue, 1905, 8 F. 55, 43 S.L.R. 65; Anglo-Continental Guano Works v. Bell, 1894, 3 T.C. 239, 70 L.T. 670; Texas Land and Mortgage Company v. Holtham, 1894, 63 L.J., Q.B. 496; Vallambrosa Rubber Company, Limited v. Inland Revenue, 1910 S.C. 519, 47 S.L.R. 488; Coltness Iron Company v. Inland Revenue, 1881, 8 R. (H.L.) 67, 18 S.L.R. 466. The deduction claimed in the present case had nothing to do with the trade which the company was carrying on.