Brosnan v Mutual Enterprises Ltd

• Jurisdiction: Ireland
• Court: Supreme Court
• Judgment Date: 01 January 1998
• Docket Number: [1994 No. 80R; S.C. No. 169 of 1995]
• Date: 01 January 1998

High Court

Supreme Court

[1994 No. 80R; S.C. No. 169 of 1995]

Brosnan v. Mutual Enterprises Ltd.

T.G. Brosnan (Inspector of Taxes)

Applicant

and

Mutual Enterprises Ltd.

Respondent

Cases mentioned in this report:—

Beauchamp v. Woolworth plc. [1990] 1 A.C. 478; [1989] 3 W.L.R. 1; [1988] S.T.C. 718.

Browne v. Bank of Ireland Finance Ltd. [1991] 1 I.R. 431; [1991] I.L.R.M. 421.

C.I.R. v. Land Securities Investment Trust Ltd. 45 T.C. 495.

Edwards (Inspector of Taxes) v. Bairstow [1956] A.C. 14; [1955] 3 W.L.R. 410; [1955] 3 All E.R. 48.

Farmer v. Scottish North American Trust Ltd. [1912] A.C. 118; 5 T.C. 693.

Inspector of Taxes (Mara) v. Hummingbird Ltd. [1982] I.L.R.M. 421.

Pattison v. Marine Midland [1982] Ch. 145; [1981] S.T.C. 540.

Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] A.C. 295; [1965] 3 All E.R. 174.

Case stated - Company's liability to pay Corporation Tax, question of law - Trade - Profits.

Revenue - Corporation Tax - Whether losses of a revenue or capital nature - Monies borrowed for purchase of capital assets - Income Tax Act, 1967 (No. 6), s. 61 (e) and (f).

Case stated.

The facts have been summarised in the headnote and are fully set out in the judgment of Murphy J., infra.

The applicant appealed a decision of the appeal commissioner made on the 28th April, 1988, to the Circuit Court. The case was heard in the Circuit Court on the 15th May, 1989. His Honour Judge Murphy sought the opinion of the High Court by way of a case stated dated the 28th June, 1994, pursuant to s. 430 of the Income Tax Act, 1967, as applied to corporation tax by s. 146 of the Corporation Tax Act, 1976. The learned Circuit Court Judge stated the case for the opinion of the High Court in the following terms:—

"The question of law for the opinion of the High Court is whether upon the facts proved or admitted . . . I was correct in law in holding that the respondent was entitled to bring into account in computing his trading profits and allowable losses for the purpose of corporation tax, the amount of the said losses incurred on foreign currency exchange rates applicable to its aid borrowings notwithstanding the provision of s. 61 (e) and (f) of the Income Tax Act, 1967."

The case stated was heard by the High Court (Murphy J.) on the 10th February, 1995.

Notice of appeal was filed on the 17th May, 1995. The appeal was heard by the Supreme Court (Hamilton C.J., Barrington and Lynch JJ.) on the 3rd July, 1997.

Section 61 of the Income Tax Act, 1967, provides, inter alia, that:—

"Subject to the provisions of this Act, in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of . . .

• (e) any loss not connected with or arising out of the trade or profession;

• (f) any capital withdrawn from, or any sum employed or intended to be employed as capital in such trade or profession."

Section 492 of the Act of 1967 provides that any person aggrieved by the determination of the Special Commissioners may within ten days after such determination require that his appeal shall be reheard by a Circuit Court Judge.

In 1979, the respondent obtained a loan of monies in sterling, payable "on demand"from a bank to facilitate the purchase of a business premises from which it was intended to carry on its trade. The monies were used for the purchase of a premises but the sterling debt was converted from time to time into various European currencies to achieve the best possible rate of interest payable. As a result of these currency dealings, the company incurred substantial losses. The respondent sought to include the losses incurred on the foreign currency transactions in computing the trading profits and allowable losses for corporation tax purposes. The appellant argued that as the monies were borrowed for the purpose of acquiring a capital asset, any losses incurred on foreign currency dealings with the monies were capital losses and were not allowable trading losses. That issue was determined in favour of the respondent by the appeal commissioner. On appeal to the Circuit Court, the Circuit Judge formed the opinion that the losses were not of a capital nature or intended to be employed as capital in the company's trade and that they were connected with the trade and allowable under s. 61 (e) of the Income Tax Act, 1967. The applicant was dissatisfied with the determination and the Circuit Court Judge stated a case for the opinion of the High Court as to whether his decision was correct in law.

Held by Murphy J., in answering the case stated in the affirmative, 1, that in deciding whether losses were of a revenue or capital nature, all relevant facts must be taken into account.

2. That an important factor to be considered in determining whether a bank loan was of a revenue nature, rather than of a capital nature was whether it was a fluctuating and temporary accommodation, the weight to be attached to these factors was a question of fact to be determined by the appeal commissioners as they thought fit. It could not be said that no reasonable judge of first instance could have concluded on the facts as a whole that the loans were a means of fluctuating and temporary accommodation.

Held by the Supreme Court (Hamilton C.J., Barrington and Lynch JJ.), in dismissing the applicant's appeal, 1, that where a loan was a capital transaction, then any accompanying currency exchange loss was a capital loss and was not deductible from profits; but where the loan was in the nature of a revenue transaction, then the currency exchange loss was deductible in computing the respondent's profits. In determining whether a loan was a revenue transaction the test was whether it constituted a temporary and fluctuating borrowing.

Farmer v. Scottish North American Trust Ltd. [1912] A.C. 118 approved.

2. That the question whether borrowings were of a temporary or fluctuating nature was one of fact, and not of law.

Beauchamp v. Woolworth plc. [1990] 1 A.C. 478 considered.

3. That a finding by a Circuit Court Judge in determining whether a loan was temporary or fluctuating may only be disturbed where there was no evidence to support it, or one which no judge could reasonably have made on the basis of the facts proved or admitted.

Inspector of Taxes (Mara) v. Hummingbird Ltd. [1982] I.L.R.M. 421 followed.

4. That, as it was open to the Circuit Court Judge in this case to find on the facts proved or admitted, that the loan constituted a temporary or fluctuating accommodation, and it was not a finding that no reasonable judge could have made in the circumstances of the case, it was not open to the High Court or Supreme Court to interfere with such a finding.

Cur. adv. vult.

Murphy J.

The issue which arises on the revenue case stated herein may be summarised by the contention of counsel on behalf of the respondent to the effect that I should prefer and apply the principles of law enunciated by Nourse L.J. in delivering the unanimous decision of the Court of Appeal in England in Beauchamp v. Woolworth plc. [1990] 1 A.C. 478, to the opinion of Templeman L.J. expressing the unanimous view of the House of Lords in the same case. That daunting proposition arises in this way.

The respondent, Mutual Enterprises Ltd., is a company which was incorporated on the 25th June, 1979 and carries on as its only business the trade of licensed vintner and restaurateur at 74 Oliver Plunkett Street, Cork. On the 3rd September, 1979, the company purchased the leasehold interest in the premises at Oliver Plunkett Street at a cost of £300,000. The company obtained a loan of £280,000 sterling from Allied Irish Investment Bank Ltd. in January, 1980, for the purpose of acquiring the said premises and obtained a further loan of £25,000, again in sterling, from Ulster Bank Ltd. in the accounting period ended the 6th January, 1981. The loan of £280,000 was expressly made for the purpose of purchasing the Oliver Plunkett Street premises and was duly applied for that purpose. The business of the company is and has been carried on from those premises.

The terms of the loan by Allied Irish Investment Bank Ltd. provided that the same was to be by way of "loan repayable on demand" and then went on to provide for repayment in the following terms:—

"While the loan is repayable on demand it is A.I.I.B's present intention that the facility will be repaid as follows:—

• 31st January, 1981: 10%

• 31st January, 1982: 15%

• 31st January, 1983: 20%

• 31st January, 1984: 25%

• 31st January, 1985: 30%

(The percentage will relate to the original amount of the facility)."

The facility letter expressly provided that the Bank should have the benefit of various charges both on the Oliver Plunkett Street premises and certain other properties together with guarantees from the directors of the company and other corporate bodies. In fact, the sterling indebtedness was converted from time to time into various European currencies. Dutch guilders in 1980, Swiss francs in 1983, Irish punts in November, 1983 and Deutschmarks in 1986. The purpose of these various conversions was to achieve the best possible rate of interest payable from time to time. As a result of these currency dealings the company incurred losses during the period of the loan as follows:—

Accounting period ended 31st December, 1981- £ 8,454.00

Accounting period ended 31st December, 1982 - £26,496.00

Accounting period ended 31st December, 1983 - £35,000.05

Accounting period ended 31st December, 1984 - NIL

In those circumstances a dispute arose between the applicant, the Inspector of Taxes, and Mutual Enterprises Ltd. as to whether the company was entitled to include the losses on foreign currency transactions in computing the trading profits/allowable losses for corporation tax purposes. That issue was determined in the first instance by the appeal commissioner and on appeal by Circuit Court Judge Anthony Murphy who, having...