Scottish Court of Session Decisions

The Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89) enacts—Section 38—“(1) There shall be charged, levied, and paid on the amount by which the profits arising from any trade or business to which this part of this Act applies, in any accounting period which ended after the fourth day of August Nineteen hundred and fourteen, and before the first day of July Nineteen hundred and fifteen, exceeded by more than two hundred pounds the pre-war standard of profits as defined for the purposes of this part of this Act, a duty (in this Act referred to as ‘excess profits duty’) of an amount equal to 50 per cent. of that excess. (2) For the purposes of this part of this Act the accounting period shall be taken to be the period for which the accounts of the trade or business have been made up.…” Section 40—“(2) The pre-war standard of profits for the purposes of this part of this Act shall, subject to the provisions of this Act, be taken to be the amount of the profits arising from the trade or business on the average, of any two of the three last pre-war trade years, to be selected by the taxpayer (in this part of this Act referred to as the profits standard).… The provisions contained in the second part of the Fourth Schedule to this Act shall have effect with respect to the computation of the profits of a pre-war trade year, and the provisions contained in the third part of the Fourth Schedule shall have effect with respect to the ascertainment of capital for the purposes of this part of this Act. ‘The last pre-war trade year’ means the year ending at the end of the last accounting period before the fifth day of August Nineteen hundred and fourteen, and ‘the three last pre-war trade years’ means the three years ending at the three corresponding times.” Section 41—“(1) Where capital has been increased during the accounting period, a deduction shall be made from the profits of the accounting period at the statutory percentage per annum on the amount by which the capital has been increased, for the whole accounting period if the increased capital has been employed for the whole accounting period, and if the increased capital has been employed for part only of the accounting period, for that part of the accounting period. … (3) For the purposes of this section capital shall be taken to be increased or decreased, as the case may be, where the pre-war standard of profits is a profits standard, if the capital employed in the trade or business exceeds or is less than the average amount of capital employed during the pre-war trade years or year by reference to which the profits standard has been arrived at.…”

J. & P. Hutchison, shipowners, Glasgow, appellants, being dissatisfied with a determination of the Commissioners for the General Purposes of the Income Tax Acts at Glasgow, assessing the appellants to excess profits duty for the accounting period of six months ending 31st March 1915, appealed by way of Stated Case, in which S. W. Bensted, Surveyor of Taxes, Glasgow, was respondent.

The Case set forth—“The following facts were admitted or proved:—1. The appellants have been in use to balance their books upon the 31st day of March and the 30th day of September in each year. 2. The profits for the purposes of the excess profits, duty are determined on the profits standard, and parties are agreed as to these, the question at issue being whether in computing the deduction for increased capital to be made from the profits under section 41 (1) of the Finance (No. 2) Act 1915 the pre-war capital should be based, as the appellants contend, upon the average of capital at the beginning of each of the two pre-war years selected for the purpose of fixing the pre-war standard by the appellants, or as the Surveyor of Taxes contends, upon the average of the four half-years comprised in the two selected years. 3. If the appellants are right the deduction to be made will be struck upon the calculation following, numbered I, and if the Surveyor of Taxes is right it will be struck upon the calculation following, numbered II:—

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I

Appellants' Calculations.

Capital	31/3/12	31/3/13	31/3/14	30/9/14
Written down value of ships	138,521	114,271	115,996	110,925
Other assets	45,620	68,700	81,465	63,484
Depreciation plant	…	184	349	427
…	184,141	183,155	197,810	174.836
Less investments	4,081	3,203	1,206	1,206
Less goodwill	19,027	19,027	19,027	19,027
Less bank	43,011	21,921
Less creditors	24,091	18,258	13,403	13,291
Less deposit receipts		17,501	27,662	11,155
Less depreciation plant allowed		107	205	255
	90,210	80,017	61,503	44,934
Capital employed	93,931	103,138	136,307	129,902
Pre-war	93,931		98,534	98,534
	103,138	Increase 7% half-year			37,773	31,368
	2/197,069	1,322	1,098
Average	98,534

Surveyor of Taxes' Calculations.

Capital	31/3/12	30/9/12	31/3/13	30/9/13	31/3/14	30/9/14
Written down value of ships	141,913	129,967	116,930	107,122	116,085	110,404
Other assets	45,620	53,079	68,700	70,982	81,465	63,483
Depreciation plant	203	295	387	469	552	628
	187,736	183,341	186,017	178,573	198,102	174,515
Less investments	4,081	4,081	3,203	1,703	1,206	1,206
Less goodwill ….	19,027	19,027	19,027	19,027	19,027	19,027
Less bank	43,011	34,442	21,921	10,461	…	…
Less creditors ….	24,091	18,153	18,258	12,028	13,403	13,291
Less deposit receipts	…	…	17,501	17,501	27,662	11,155
Less depreciation plant allowed	109	162	216	265	314	364
…	90,319	75,865	80,162	60,985	61,612	45,043
Capital employed	97,417	107,476	105,891	117,588	136,490	129,472
Pre-war		4/428,372			107,093	107,093
Average	107,093	Increase 7% Half-year		29,397	22,379
					1,092	783

…. 4. The Commissioners were of opinion that the mode of computing the capital employed in the appellant's business adopted by the surveyor was correct and in accordance with the provisions of the Finance (No. 2) Act 1915, and they accordingly confirmed the assessment and dismissed the appeal.”

The following were referred to:—The Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), sec. 38 (1) and (2), sec. 40 (2), sec. 41 (1) and (3), the Fourth Schedule, Part II, pars. 1, 2, and 4, and Part III, par. 1; the Finance Act 1916 (6 and 7 Geo. V, cap. 24), sec. 52; and the Finance Act 1917 (7 and 8 Geo. V, cap. 31), sec. 26 (5) ( b).

At advising—