Scottish Court of Session Decisions

LORD PRESIDENT (Cooper).—These are cross-appeals at the instance of both the company and the Inland Revenue relating to an item of £4363 expended by the company in the replacement of a chimney in its factory at Tillicoultry in Clackmannan. The Special Commissioners have held that so much of the £4363 as relates to the construction of the new chimney was capital expenditure and therefore not deductible from the company's Schedule D assessment in terms of Rule 3 (d) of the Rules applicable to Cases I and II, but they have held that the balance of £260 expended by the company on removing the old chimney which was replaced by the new chimney was admissible as a deduction.

The facts, so far as relevant to the matter in dispute, are that the business of processing paper carried on by the company is carried on in a large group of large buildings depicted in photographs attached to the case and described in the findings, the power being supplied by steam plant from two Lancashire boilers discharging into a chimney. The old chimney had been in existence for some eighty to ninety years and had been subjected to the usual overhaul, repointing and relining to which such appliances have to be periodically subjected; but, as a result of increasing age and subsidence of its foundations, it came to be in a dangerous state and on the advice of their experts the company had to replace it. With the object of keeping the factory in operation they did so by erecting a substitute chimney close by the existing chimney and then taking down the old chimney whenever the new chimney was in a position to take over the functions previously discharged by the old chimney. It is found as a fact that the new chimney is not an appreciable improvement over the old chimney. So far as function is concerned its suitability for boiler draught is exactly the same as that of the old chimney. No additional steamraising plant has been installed.

On these facts I take it from the way in which the case is stated that the decision by the Special Commissioners against the company is based, and solely based, upon the fact that they found themselves unable to distinguish the case before them from the case of O'Grady v. Bullcroft Main Collieries, Limited . "The Special Commissioners agreed (what is plain from the report) that there is a distinction between the case now before us and the case of O'Grady, in respect that in the O'Grady case the new chimney was in many respects an improvement upon the old chimney; but they found it impossible to discover in that distinction any ground for not following Rowlatt, J.'s, judgment. Looking at the O'Gradycase I find that it related to a chimney at the pithead of a colliery, and that in giving judgment Rowlatt, J., put the matter thus (at p. 101):

"The critical matter is what is the entirety? I think it is very largely a question of degree."

Then after describing the chimney with which he was concerned he says:

"I think the chimney is the entirety here, and they simply renewed it."

It is no part of our duty to review the decision of Rowlatt, J., as applied to the facts in the O'Grady case, but, so far as this case is concerned, the facts seem to me to demonstrate beyond a doubt that the chimney with which we are concerned is physically, commercially and functionally an inseparable part of an "entirety" which is the factory. It is quite impossible to describe this chimney as being in the words of Rowlatt, J., the "entirety" with which we are concerned. It is doubtless an indispensable part of the factory, doubtless an integral part, but none the less a subsidiary part, and one of many subsidiary parts, of a single industrial profit-earning undertaking.

So viewing the matter I am unable to see why the expense incurred in relation to this transaction should not be treated as an admissible revenue expenditure on repairs, and I am in part influenced in reaching that conclusion by the fact that the factory as a whole is insured for something in the region of £165,000 whereas the expense incurred in taking down the old chimney and building the substitute is only a matter of £4300 or about 2 per cent. The line of approach which in a case of this kind impresses me as preferable to that adopted by Rowlatt, J., is that which was taken by the Privy Council in Rhodesia Railways, Limited, which, although relating to quite a different type of subject, seems to me to afford a sounder basis in authority, in so far as authority is needed, for the contention which the company has brought before us.

If it be the case that the Commissioners were wrong in applying to the present case the test suggested by Rowlatt, J., in the O'Grady case, and if, accordingly, the expense incurred in building the new chimney is an admissible deduction, I think it was a matter of concession, and in any event I hold, that the small item of £260 expended in removing the old chimney after its purpose was served cannot be treated differently from the main sum.

I might add that reliance was also placed upon the case of Margrett v. Lowestoft Water and Gas Co., where Finlay, J., gave a decision in which he referred to the case of O'Grady; but in Margrett Finlay, J., had to deal with a case of a reservoir, with pumping and other ancillary plant, which he considered was a separate and distinct thing, "perfectly clearly divisible" from the rest of the whole undertaking of the respondents, and which had been discarded and replaced by a larger reservoir with twice the capacity of the old one and embodying a great many improvements. In that respect the case was clearly distinguishable both from the O'Grady case and from the present case, and it was with these specialties in his mind that Finlay, J., treated the reservoir as the "entirety" with which he was concerned. I see no cause in that respect to doubt the correctness of the decision in Margrett as applying to the facts then before the Court, but I do not think that that decision affords any support to the Crown in their present contentions.

In the result I would propose that we answer question 1 in the negative and question 2 in the affirmative.

LORD CARMONT .—I agree. It is plain from the statement of this case that the Commissioners regarded themselves as being bound by the reasoning of Rowlatt, J., in the case of O'Grady, but I think they are wrong in applying his reasoning to the facts of the present case. Rowlatt, J., it is true, found that he could regard the chimney in the O'Grady case as being the unit or, as he called it, the entirety. In the present case I am clearly of opinion that the unit to be considered is the factory, and the chimney cannot be taken in isolation. There was no improvement in the factory, on the findings of the case, by the erection, of the new chimney in place of the old. It is an entirely subsidiary matter in the factory. The money value of the renewal was relatively insignificant, and for these reasons I think the questions should be answered as your Lordship proposes.