United Kingdom House of Lords Decisions

Lord Chancellor ( Loreburn)—In this case the appellants are a brewery company who owned an inn and conducted it through a manager. A customer sleeping in the inn was injured by the falling of a chimney upon him, and the appellants had to pay 1490 in costs and damages, because the fall of the chimney was due to the negligence of the appellants' servants, whose duty it was to see that the buildings were in proper condition. The appellants claim a right to deduct this sum of £1490 from the amount of their profits and gains assessable to income-tax, and the question is whether the Commissioners were right in disallowing the deduction. The Court of Appeal held that the Commissioners were right, and I am of the same opinion. It is unnecessary to recite the different sections of the Income Tax Act 1842, which govern the present appeal. They are section 100, Schedule D, case 1, rules 1 and 3, and rule 1 of the rules applying to both the cases 1 and 2. That which has to be assessed is the balance of the profits or gains of a trade—that is to say, the sum left after subtracting the proper deductions from the profits and gains. A deduction may be allowed on account of loss, and this is a loss. The Act does not affirmatively state what losses may be deducted. It furnishes merely negative information. A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication. Beyond that the Act is silent. In my opinion, however, it does not follow that if a loss is in any sense connected with the trade it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I think that only such losses can be de ducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accident in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case I think that the loss sustained by the appellants was not really incidental to their trade as innkeepers, and fell upon them in their character not of traders but of householders. Accordingly I think that this appeal must be dismissed.

Lord Macnaghten—I am of the same opinion.

Lord Davey—The question in this appeal is whether a sum of £1490 which the appellants have had to pay for costs and damages occasioned to a person staying in their inn by the fall of a chimney is a proper deduction in arriving at the profits of the appellants' trade for the purpose of the income-tax. The answer to that question, in my opinion, depends on the answer to be given to another question, whether the deduction claimed was a disbursement or expense wholly and exclusively laid out or expended for the purpose of the appellants' trade within the meaning of rule 1 applying to both cases 1 and 2 of Sched. D in sec. 100 of the Income Tax Act 1842. It has been argued that the deduction claimed was a loss connected with or arising out of the appellants' trade within rule 3 applying to case 1 only. Case 1 relates to trades, manufactures, adventures, or concerns in the nature of trade, and I think that the word “loss” in rule 3 means what is usually known as a loss in trading or in speculation. It contemplates a case in which the result of the trading or adventure is a loss, wholly or partially, of the capital employed in it. I doubt whether the damages in the present case can properly be called a trading loss. I prefer to decide the case upon rule 1, which applies to profits of trades and also to professions, employments, or vocations. I think that the payment of these damages was not money expended “for the purpose of the trade.” These words are used in other rules, and appear to me to mean “for the purpose of enabling a person to carry on and earn profits in the trade,” &c. I think that the

Page: 626↓