Davis v "M"

• Jurisdiction: Ireland
• Judgment Date: 01 January 1947
• Date: 01 January 1947
• Court: Supreme Court

Supreme Court

Davis v. "M."

W. J. DAVIS, Inspector of Taxes

Appellant

and

"M," Respondents

Revenue - Income tax - Trade profits - Deductions - Company removing to new place of business - Factory in course of erection - Claims by adjoining tenants for alleged interference with rights to light and air - Company advised claims unsustainable - Claims compromised, for expediency, by payments of compensation and costs - Whether allowable deductions - Whether "wholly and exclusively laid out . . . for the purposes of the trade" - Whether revenue or capital expenditure - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. D., Rules applicable to Cases I and II, r. 3.

Case Stated under s. 149 of the Income Tax Act, 1918, and s. 10 of the Finance Act, 1924, by the Circuit Court Judge of the County of Dublin (Judge Davitt).

The Case Stated was as follows:—

"At the hearing of an appeal by way of re-hearing under s. 196 of the Income Tax Act, 1918, held by me at Dublin on the 15th December, 1943, "M." (hereinafter called "the Company") appealed against the determination of the Special Commissioner of Income Tax upon an assessment made under Schedule D of the Income Tax Act, 1918, upon the Company for the year 1942-3 in the sum of £7,350, less £1,368, wear and tear allowance.

The Company claims that from the amount of the said assessment there should be allowed as deductions a sum of £225, compensation paid to tenants of houses adjoining the Company's new factory at Lower . . . . Street, Dublin, and a sum of £75, legal expenses incurred by them. The only question in dispute is whether or not these two sums should be allowed as deductions from the assessment.

The following facts were proved or admitted:—

For some years prior to 1939, the Company carried on business at . . . Street. On the 25th January, 1939, it lodged with the Dublin Corporation, a site plan for a proposed new factory at Lower . . . Street. This site plan was rejected as there was no indication as to the extent of the factory and it was considered undesirable to allow any building which would restrict the passage of light and air to the adjoining dwelling houses at . . . Lane. Subsequently, a site plan was produced showing the space which would not be built on. This plan provided for a clear space of twenty feet between the existing boundary wall of the yards of the cottages and the proposed factory building. An approval in principle was then given by the Corporation. Detailed plans were afterwards lodged and approved by the Corporation and permission under the Town and Regional Planning Act, 1934, was issued on the 11th July, 1939. The factory was subsequently erected and the Acting Planning Officer has certified that it complies generally with the Corporation's requirement, the distance between the flank wall of the factory and the back walls of the dwelling houses in . . . . Lane being approximately thirty-six feet.

While the new factory was in the course of erection, some seven tenants in the houses adjoining had complained that their rights were interfered with, as regards light and air. These tenants began their claim on the 24th May, 1940, through their solicitors, and instituted proceedings in the High Court on the 17th July, 1940. The Company's legal advisers were of the opinion that the claim by the tenants was unsustainable, but advised that, if possible, a compromise with the tenants should be effected. Following this advice, a settlement of the action, which had been instituted in July, 1940, was effected by payment to the tenants of £225, compensation, and also the costs incurred by the said tenants amounting to £75. These are the two sums with which this case is concerned.

Prior to Christmas, 1940, the Company carried on its factory solely at . . . . Street. About Christmas, 1940, it began to transfer its factory to Lower . . . . Street, when plant and machinery, with materials in process of manufacture, began to be moved. The removal was completed on the 1st February, 1941. From Christmas, 1940, to the 1st February, 1941, the business was being carried on both at . . . . Street and Lower . . . . Street. From the latter date it was carried on solely at Lower . . . . Street.

Counsel for the Company contended that:—

(i) the £225, compensation and £75, costs were expended in defending an existing right;

(ii) these payments did not involve the acquisition of any new asset;

(iii) the action by the tenants against the Company was unsustainable as their ancient lights were not injured, but, as these tenants were men of straw, the Company considered it cheaper to settle the case out of Court;

(iv) the point in dispute is governed by the case ofSouthern v. Borax Consolidated, Limited(1) where legal expenses incurred by a Company in defending an action as regards its title to land (and buildings erected on it), were allowed as being in defence of existing rights.

The Inspector of Taxes, on behalf of the Revenue Commissioners, contended as follows:—

(i) that the merits of the ancient lights dispute with the adjoining tenants were irrelevant;

(ii) that the payments of £225, compensation, and £75, costs, were in the nature of initial expenditure and formed part of the capital cost of acquiring the premises at Lower . . . . Street, Dublin;

(iii) that the said payments constituted an expense which had to be incurred before trading could commence in the new factory and were, accordingly, capital expenditure, and cannot be regarded as expenses of the trade carried on previously in the Company's other premises;

(iv) that the case of Southern v. Borax Consolidated, Limited(1) has no bearing on the present case, as it merely decided that the expense of defending existing rights and of maintaining in the ordinary course the assets of the Company was admissible, whereas the Company in this case created a new asset when it built the new factory, and the payments now in dispute arose in connection with the acquisition of such new asset.

I allowed the payments, £225 and £75, as deductions, and the hearing was adjourned for agreement of figures on the basis of this decision. The figures were duly agreed in accordance with the above ruling and, at a subsequent hearing on the 24th March, 1944, I finally determined the assessment for 1942-3 at £7,145, less £1,368, wear and tear allowance. The Inspector of Taxes immediately after this decision declared his dissatisfaction therewith as being erroneous in point of law and, in due course, required me to state a case for the opinion of the High Court, pursuant to

the Income Tax Act, 1918, s. 149, as amended by s. 10 of the Finance Act, 1924, which case is now stated and signed accordingly.

The question for the decision of the High Court is:— Whether I was right in allowing the above-mentioned sums of £225 and £75 as deductions from the assessment to income tax under appeal."

The Case Stated was signed by the Circuit Court Judge (Judge Davitt) and was dated the 27th September, 1944.

A manufacturing company, its accommodation having become inadequate for the purposes of its trade, submitted to the local authority plans for the erection of a factory upon another site and, the said plans having been duly passed after certain amendments thereto, commenced to erect the factory. While the factory was in course of erection, the tenants of a number of dwellinghouses adjoining the site instituted proceedings against the company, claiming relief for alleged interference with their ancient lights. Though advised that the said claims were unsustainable, the company effected a compromise wits the said tenants, whereby the claims...