Corr v Larkin

• Jurisdiction: Ireland
• Judgment Date: 04 March 1949
• Date: 04 March 1949
• Court: High Court

Corr v. Larkin.

F. CORR, Inspector of Taxes

Appellant

and

FRANK E. LARKIN

Respondent.

Revenue - Income tax - Fire insurance - Indemnity against loss of profits occasioned by fire - Sum recovered from insurance company under policy of indemnity - Whether a profit or gain arising or accruing by virtue of insured's trade - Year for which assessment should be charged - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Schedule D, Cases I and II, rr. 1, 3.

By a contract of insurance the respondent, who carried on the business of grocer and baker, had obtained an indemnity against (a) loss of profits and (b) increase in cost of working sustained through interruption of or interference with his business by fire during the period covered by the policy. On the 5th May, 1942, the respondent's premises were destroyed by fire, and the respondent made temporary arrangements which enabled him to carry on business for the full period of indemnity, which ended on the 5th May, 1943. In November, 1944, he was paid by the insurance company a sum of £1,300 under the policy in respect of the period of indemnity. In computing the profits or gains of the respondent for the purposes of an assessment made, upon him for the year ended 5th April, 1946, the said sum of £1,300 was taken into account by the appellant as a trading receipt. The assessment was confirmed by the Special Commissioner, but on appeal it was reduced by the Circuit Court Judge who held that the year for assessment was correct, but the sum of £1,300 was not assessable to income tax. On appeal to the High Court by way of Case Stated it was

Held, that the sum of £1,300 received under the policy of indemity was a profit or gain arising from the respondent's trade and, as such, was assessable to tax, but that the year for which it was assessable was the year ending 5th April, 1945.

Case Stated under the Income Tax Act, 1918, s. 149, (as amended) by the Circuit Court Judge of the North-Western Circuit.

For the purposes of this report the relevant facts and the provisions and effect of the insurance policy are sufficiently stated in the Case Stated.

The Case Stated was as follows:—

"1. This matter came up for hearing before me on the 19th January, 1946, on an appeal by way of re-hearing by Frank E. Larkin, of Letterkenny, Co. Donegal (hereinafter called "the respondent"), under the provisions of s. 196 of the Income Tax Act, 1918, as amended by s. 10 of the Finance Act, 1924, s. 5 of the Finance Act, 1926, s. 5 of the Finance Act, 1929, and s. 9 of the Finance Act, 1932, against a decision of the Special Commissioner for the Special Purposes of the Income Tax Acts confirming an assessment upon the respondent under Case I, Schedule D of the Income Tax Act, 1918, for the year ended the 5th April, 1946, in the sum of £2,433.

2. The following facts were proved or admitted in the course of the hearing before me:—

(a) The respondent carries on business as grocer and baker at Letterkenny under the title of 'Larkin's Bakery.'

(b) He furnished audited accounts in respect of the business for the year ended the 31st December, 1944." [A copy of the accounts was annexed to and formed part of the Case Stated.]" The accounts were furnished with a view to arriving at the assessment to be made upon him under Case I, Schedule D, of the Income Tax Act, 1918, for the year ended the 5th April, 1946.

(c) There was a sum of £1,300 credited in the Profit and Loss Account of the accounts and described as 'loss of profits insurance.' This amount was included in the figure of £2,563 computed by the Inspector of Taxes as assessable profit for the year ended the 5th April, 1946.

(d) The said sum of £1,300 was a sum which the respondent received under a loss of profits insurance policy taken out with the Royal Insurance Company, Limited, indemnifying him against loss of profits sustained through interruption or interference caused by fire." [A copy of the insurance policy was annexed to and formed part of the Case Stated.]

(e) The amount of the indemnity paid by the insurance Company was paid under two heads of the policy, (a) and (b), as follows:—

(a) Indemnity in respect of loss of profits	£1,103
(b) Indemnity in respect of increase in costs of working	197
	_________
	£1,300
	__________

(f) A fire occurred on the respondent's business premises on the 5th May, 1942. The premises were destroyed, but the respondent was able to re-commence trading in groceries immediately after the fire in temporary premises. Temporary arrangements were made with the Milford (Donegal) Bakery and Flour Mills, Limited, and other bakers, to supply the respondent's agents and customers, other than the local customers hereinafter mentioned, until he should again be in a position to supply their wants. Flour quotas were transferred temporarily for this purpose. The Milford and other bakeries continued to supply the respondent's said agents and customers for the full period of indemnity under the policy, that is, the year to the 5th May, 1943. Baking facilities and accommodation in temporary premises, situated a short distance from the burnt premises, were also arranged, so as to enable the respondent to supply local contracts and customers.

(g) The sum of £1,103, paid by the insurance Company on foot of loss of profits, was paid in respect of loss of profits due to reduction of turnover caused by interruption of or interference with the respondent's business, consequent on the destruction of the respondent's premises by fire, and not by way of compensation for the destruction of stock or materials.

(h) The indemnity for loss of profits, that is, £1,103 recovered from the insurance Company, was attributable 1, to the loss of turnover resulting from the fire and the temporary arrangements hereinbefore set out at paragraph (f); 2, to the fact that potential turnover and the increased profits therefrom which would have arisen from increased flour quotas to which the respondent had become entitled by arrangement with the Department of Supplies on the 4th May, 1942, and from increases in the price of bread sanctioned by the said Department, were lost to the respondent by reason of the interruption caused by the fire.

(i) A claim for loss of profits under the terms of the insurance policy was lodged on the 12th October, 1943. The amount payable under the policy, viz., £1,300, was not agreed until the 28th November, 1944, and the £1,300 was paid shortly afterwards. The negotiations in the settlement of the claim were protracted because of the differences in opinion as to the interpretation of the policy and the necessity of obtaining information regarding flour quotas from the Department of Supplies.

(j) The Inspector of Taxes made an assessment under Case I, Schedule D, of the Income Tax Act, 1918, in the sum of £2,563. The respondent appealed against this assessment on the grounds that it was excessive and that it was not computed in accordance with law.

3. The Commissioner for the Special Purposes of the Income Tax Acts heard the appeal on the 26th October, 1945, and held that the £1,300 was a trading receipt of the year ended the 31st December, 1944, and was properly included in the assessment of £2,563. He, however, fixed the assessment at £2,433, as it was agreed by both parties to the appeal that the auditors' cost of £130, incurred in the preparation of the claim for loss of profits, was an allowable deduction if the £1,300 was properly assessable.

4. Mr. McGonigal Senior Counsel, appeared before me on behalf of the respondent and pleaded that

(a) the premiums for loss of profits were not allowable deductions under r. 3 (a) of Cases I and II, Schedule D, as not being money wholly and exclusively laid out or expended for the purposes of the trade. In such circumstances any sum recoverable as a result of the expenditure was not a profit or gain arising or accruing from the trade;

(b) the amount of £1,300 was not assessable as a profit or gain arising or accruing from the trade; it arose by virtue of the fact that the volume of trade was reduced or diminished through the interruption or interference caused by the fire;

(c) the said amount, if assessable, was a receipt of the year of indemnity (the year to the 5th May, 1943) and not of the year of payment (the year to the 31st December, 1944);

(d) a sum of £197, included in the said sum of £1,300 as indemnity for increased working costs incurred, being a payment made under the said insurance policy to meet the increased costs incurred in an endeavour to maintain turnover notwithstanding the fire, was not assessable as it was properly disallowable in the first instance under r. 3 (k) of Cases I and II of Schedule D of the Income Tax Act, 1918, in the years in which it was incurred.

5. The Inspector of Taxes contended:—

(a) that any sums recoverable under the policy were trading receipts and, as such, assessable to income tax, and the premiums paid in respect thereof were allowable deductions and were in fact allowed in each of the years ended the 31st December, 1938, the 31st December, 1939, and the 31st December, 1940;

(b) that the sum of £1,300 was a profit or gain arising or accruing by virtue of the respondent's trade and that, therefore, it was assessable; that trading had not ceased, and that the respondent had commenced trading a fortnight after the fire in a temporary premises;

(c) that the £1,300 was assessable in the year in which it became payable.

6. I was of the opinion (a) that the decision inGuinness & Co. v. Commissioners of Inland Revenue(1) was still law in Eire, as that decision had been upheld in the case of the Alliance Gas Co. v. M'Williams(2), despite the earlier decision in the Newcastle Breweries Case(3); and (b) that as the increased working costs, being a sum recoverable under a contract of indemnity, were proper to disallow under r. 3 of the Rules applicable,to Cases I and II of Schedule D...