Dolan (Inspector of Taxes) v AB Co Ltd

• Judge: Teevan J.
• Judgment Date: 11 March 1966
• Court: High Court

Income Tax - Schedule D - petrol marketing company-whether expenditure incurred under exclusivity agreements with retailers deductible - ITA 1918 s 209 and Sch D Cases I and II rule 3 - FA 1929 s 9.

The respondent company, to maintain its share of the market vis-a-vis its two major competitors, had entered into exclusivity agreements with a number of retailers. Under the terms of such an agreement the retailer agreed to buy exclusively from the company his total requirements of petrol and petroleum products. In return, the company paid the retailer a lump sum prior to or on his entering into the arrangement and as further consideration the company undertook to reimburse him in respect of sums expended on the decoration of his premises, re-siting and maintenance of petrol pumps, and other works. Any lump sum offered or paid to the retailer was in part calculated by reference to estimated gallonage though this fact was not disclosed to the retailer.

Initially, the agreements were made for a term of 1 to 3 years, the majority being for 3 years but as time went on the agreements were made for various terms of up to 10 years and in some cases for longer periods.

On appeal to the Special Commissioners the company contended that payments under these agreements were made wholly and exclusively for the purposes of the company’s trade, that they were not capital expenditure and were deductible in computing profits for income tax purposes. The Special Commissioners determined the appeal in favour of the inspector of taxes. Upon rehearing the Circuit Court Judge allowed the appeal.

Held, by Teevan J, that the payments made by the taxpayer, being the nature of capital expenditure, were not deductible for the purposes of income tax.

On further appeal by the taxpayer it was held by O’Dalaigh CJ and Budd J (Haugh and Fitzgerald JJ concurring) Walsh J dissenting,

• 1. that the payments made by the taxpayer on foot of agreements which specified periods not exceeding ten years were Revenue payments and allowable as deductions from receipts,
• 2. (O’Dalaigh CJ and Walsh J dissenting) that there was no ground for placing the remaining payments in a different category and that, accordingly, these payments were also revenue payments which were allowable deductions.

Legislation

ITA 1918 s 209 and Sch D Cases I and II rule 3, FA 1929 s 9, ITA 1967 s 61.

Cases referred to in judgments

AG Moore and Co v Hare 6 TC 572, [1915] SC 91.

Anglo Persian Oil Co v Dale 16 TC 253, [1932] 1 KB 124.

Appenroot v Central Middlesex Assessment Committee [1937] 2 KB 48.

Associated Portland Cement Manufacturers Ltd v Kerr 27 TC 103, [1945] 2 AER 535, [1946] 1 AER 68.

Atherton v British Insulated and Helsby Cables 10 TC 155, [1926] AC 205.

Bean v Doncaster Amalgamated Collieries 27 TC 296, [1944] 2 AER.

Bolam v Regent Oil Co Ltd 37 TC 56.

BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224.

Commissioner of Taxes v Nchanga Consolidated Copper Mines [1964] 2 WLR 339.

Davis v M 2 ITC 320, [1947] IR 145.

Evans v Wheatley 38 TC 216.

General Reversionary Interest and Investment Co Ltd v Hancock 7 TC 358, [1939] 1 KB 25.

Granite Supply Association Ltd v Kitton 5 TC 168, [1905] 8 F 55.

Hallstrooms Pty. Ltd v Federal Commissioners of Taxation [1946] 72 CLR 634.

Henriksen v Grafton Hotels Ltd 24 TC 453, [1942] 1 KB 82, [1942] 2 KB 184.

John Smith and Son v Moore 12 TC 266, [1921] 2 AC 13.

Re Limerick Gas Committee 1 ITC 405, [1932] IR 125.

Mohanlal Hargovino of Jubbulpore v Commissioners of Income Tax [1949] AC 521, 28 ATC 287.

Noble v Mitchell 11 TC 372, [1927] 1 KB 719.

Ounsworth v Vickers Ltd 6 TC 671, [1915] 3 KB 267.

Russell v Aberdeen Town and County Bank 2 TC 321, 13 AC 418.

Smith v Incorporated Council of Law Reporting [1914], 3 KB 514, 674.

Smith v Lion Brewery Co Ltd 6 TC 399, [1911] AC 150.

Southern Railway of Peru v Owen 36 TC 602, [1957] AC 334.

Southwell v Savill Bros Ltd [1901] 2 KB 349, 4 TC 430.

Strick v Regent Oil Co 43 TC 1, [1964] AC 295, [1966] 1 AER 585.

Sun Insurance Officer v Clark 6 TC 59, [1912] AC 443.

Sun Newspapers v Federal Commissioner of Taxation [1938] 61 CLR 337.

The Glenboig Union Fireclay v CIR 12 TC 427, [1922] SC 112.

The Gresham Life Assurance Society v Styles 3 TC 185, [1892] AC 309.

Usher’s Wiltshire Brewerey Ltd v Bruce [1915] AC 433, 6 TC 399, [1919] 1 KB 25.

Vallambrosa Rubber Co v Farmer 5 TC 529, [1910] SC 519.

Van Den Berghs Ltd v Clark 19 TC 390, [1935] AC 431.

Cases also cited

Alianze Co Ltd v Bell 5 TC 60, 172 [1904] 2 KB 645, [1905] 1 KB 184, [1906] AC 18.

Ammonia Soda Co v Chamberlain [1918] 1 Ch 266.

Beak v Robson 25 TC 33, [1943] AC 352.

Bomford v Osborne [1942] AC 14.

Bradbury v United Glass Bottle Manufacturers Ltd 38 TC 369.

CIR v Alexander von Glehn & Co [1920] 2 KB 553.

CIR v Cola 38 TC 334, [1959] SLT 122.

CIR v Granite City Steamship Co 1927 Sess Cas 705, 13 TC 1.

CIR v Newcastle Breweries 12 TC 927, 95 LJ, KB 936, 97 LJ, KB 735.

City of London Contract Corporation v Styles [1887] 2 TC 239.

Collins v Adamson 21 TC 400, [1937] 4AE 236, [1938] 1 KB 477.

Duke of Westminster v CIR 19 TC 490, [1936] AC 1, 151 LT 489.

Eastmans v Shaw 14 TC 218.

Edwards v Bairstow [1955] 3 WLR 410, 36 TC 207, [1956] AC 14.

Flynn v Blackwood ITL 79, 31 TC 344.

Flynn v Noone ITL 79, 31 TC 344.

Golden Horse Shoe Ltd v Thurgood [1934] 1 KB 548.

Hodgins v Plunder & Pollak [1957] IR 58.

Kelsall, Parsons & Co, v CIR 21 TC 608, [1938] SC 238.

Mallet v Stavely Coal and Iron Co [1928] 2 KB 405, 13 TC 772.

Mann Crossman & Paulin Ltd v Compton [1947] 1 AER 742, 28 TC 410.

Margerison v Tyre Soles Ltd 25 TC 59 (not reported elsewhere)

McLaren v Needham 39 TC 37.

Minister of National Revenue v Anaconda American Brass Ltd [1956] 1 AER 20.

Morgan v Tate & Lyle 35 TC 367, [1953] Ch 601, [1955] AC 21.

Morse v Stedeford 18 TC 457.

Patrick v Broadstone Mills [1954] 1 AER 163, [1954] 1 WLR 158, 35 TC 44.

Peter Merchant Ltd v Stedeford 30 TC 496.

Pyrah v Annis 37 TC 163, [1956] 2 AE 858, [1957] 1 AER 186.

Rorke v CIR [1960] 1 WLR 1132, 39 TC 194.

Ryan v Asia Mill 32 TC 275.

Saunders v Dixon 40 TC 329.

Southern v Borax Consolidated [1941] 1 KB 111, 23 TC 597.

Thompson Magnesium Elektron Ltd [1944] 1 AER 126, 26 TC 1.

United Steel Companies Ltd v Cullington (No 1) 23 TC 71, 162 LT 23.

Vacuum Oil Co Proprietaries v Comrs. of Taxation (25 February 1964).

Vale & Mahony & Sons Ltd [1947] IR 30.

Case stated

1. This matter came before me on 15, 16, 17, 20, 21 and 24 June 1960 by way of rehearing, pursuant to ITA 1918 s 196 of appeals against the assessments to income tax made upon AB Co Ltd (hereinafter called AB Co) for the years ended 5 April 1953, 1954, 1955, 1956 and 1957 inclusive under ITA 1918 Sch D Case I in respect of the profits or gains arising or accruing to AB Co from the trade of petroleum dealers carried on by it in the following amounts:

£
1952/53	50,000
1953/54	97,791
Less wear and tear	29,693
1954/55	119,915
Less wear and tear	30,110
1955/56	195,140
1956/57	250,000
Less wear and tear	30,000

2. The question for my determination was whether certain moneys (more particularly referred to in para (4)(p) of this case) laid out by AB Co in each of the years respectively preceding the years of assessment mentioned in para (1) of this case were admissible deductions in computing its profits or gains for the said years of assessment respectively.

3. A: The following documents were admitted or proved at the hearing before me and copies thereof are annexed to and forms part of this case. [Not included in present print]

• (a) Copy memorandum and articles of association of AB Co.
• (b) File marked B(iii)(a) being a bundle tied together of copies of miscellaneous reports from divisional managers and representatives of AB Co and of correspondence in reference to solus trading extracted from the AB Co managerial general solus file and head office old customers’ files.
• (c) File marked B(iii)(c) containing copies of 26 letters from dealers severing connection with AB Co.
• (d) Folder marked “A” containing the following items, videlicet;
• (e) Particulars of exclusivity expenditure A(ix).
• (f) B(viii) details of terms of years covered by the company’s sales agreements.
• (g) B(v) list of dealers gained and lost 1/7/1950 to 31/12/1955.
• (h) B(xi) memo re the company’s percentage share to Motor Spirit Dealer Market.
• (i) B(xii) memor re the company’s percentage share of Total Market.
• (j) B(vii) details of broken agreements.
• (k) Letter dated 12 March 1957, AB Co - to inspector of taxes.
• (l) Letter dated 14 March 1957, AB Co - to inspector of taxes.
• (m) Schedule of examples of exclusivity prepayments (referred to in letter of 14 March 1957).
• (n) Regent Oil Co Ltd agreements incorporated in Bolam v Regent Oil Co Ltd 37 TC 56.

B: General evidence was given orally before me by:

• Mr H, managing director of AB Co, from November 1948 until January 1953:
• Mr L, an employee of AB Co since 1929 and managing director of the company since 1 February 1957,

and expert evidence on commercial accountancy principles and practice was given orally by:

• Mr S, FCA, a partner in a London firm of chartered accountants, and Mr B, FCA, a partner in a Dublin firm of chartered accountants.

No expert evidence on accountancy was offered on behalf of the Revenue.

A copy of the transcript of the shorthand note of the evidence given before me by the said Mr S and by the said Mr B is annexed and forms part of this case. [Not included in present print]

4. The following facts were proved or admitted before me:

• (a) AB Co was incorporated in the Republic of Ireland on 14 January 1924 and is a wholly owned subsidiary of the R Co which is a subsidiary of an American company. For many years AB Co has carried on the trade of wholesale distributors in the Republic of Ireland of petrol and oil produced by its parent companies.
• (b) In addition to AB Co there are two other large companies which carry on the business of distributing petrol and other petroleum products in...