Hodgins v Plunder & Pollak (Ir.) Ltd

• Jurisdiction: Ireland
• Judgment Date: 01 January 1958
• Date: 01 January 1958
• Court: Supreme Court

Supreme Court.

Hodgins v. Plunder & Pollak (Ir.) Ltd.

J. T. HODGINS (Inspector of Taxes)

and

PLUNDER & POLLAK (Ireland) Ltd. THE REVENUE COMMISSIONERS v. PLUNDER & POLLAK (Ireland) Ltd

Revenue - Income tax - Corporation profits tax - Deduction - Replacement of weigh-house - New weigh-house smaller than old - Whether replacement of weigh-house a repair - Whether expenditure on weigh-house a capital expenditure or a revenue expenditure - Whether a new asset was brought into existence - Income Tax Act, 1918 (8 and 9 Geo. 5, c. 40), Schedule D, Rules applicable to Cases I and II, Rule 3, paras. (a), (b), (d) and (g).

Case Stated under the Income Tax Act, 1918, s. 149, by Timothy Donovan, a Commissioner for the Special Purposes of the Income Tax Acts for the opinion of the High Court upon a question of law.

The Case Stated was as follows:—

"1. At a sitting by a Commissioner for the Special Purposes of the Income Tax Acts, held on the 8th May, 1952, at Cork, for the purpose of hearing appeals, Plunder & Pollak (Ireland) Limited (hereinafter called 'the Company') appealed against an additional assessment to income tax of £701 made upon the Company under Schedule D of the Income Tax Act, 1918, for the year ended 5th April, 1951, in respect of the profits of its business.

2. The sole question which was before me on the appeal and on which the opinion of the Court is sought is whether an expenditure of £446 on buildings which is charged against revenue in the manufacturing account of the Company is to be regarded as properly chargeable to income or capital.

3. The following facts were admitted or proved:—

(a) The Company was incorporated on the 14th April, 1938, for the purpose (amongst other things) of carrying on the business of leather manufacturers, tanners, etc.

(b) The Company acquired and took over as a going concern in 1938 the business of the Carrick-on-Suir Tannery Company Limited and in connection therewith adopted an agreement dated the 8th November, 1937, for the acquisition of the said business.

(c) The profits of the company for the year ended 31st December, 1949, were £44,259 which includes a payment of £446 disallowed as a revenue payment by the Inspector of Taxes. This disallowance is the sole matter in dispute.

The Inspector of Taxes assessed £43,558 in the first assessment and this was not appealed. Subsequently an additional assessment of £701 was made which includes the disputed amount of £446.

(d) In the year ended 31st December, 1949, the Company incurred an expense of £446 in the following circumstances:—

For the purpose of its business the Company had on its premises a weigh-bridge and ramp leading up to it on which vehicles were driven for the purpose of recording the weight of materials used in the course of the Company's business. The platform of the weigh-bridge was out in the open, but it was operated by an employee from within a small building immediately adjoining the weigh-bridge in which building the weight of the said materials was mechanically recorded by portion of the weigh-bridge machinery. This building was a separate unit from the rest of the factory and portion of it was used as a workshop and storeroom. The building was physically separated from the main factory buildings but formed part of the 'premises,' the whole of such premises being the factory premises or the 'entirety.' The building had suffered general damage in a storm two or three years before and cracks developed in the walls and because of its dangerous condition substantial repairs were necessary. The Company decided that the most effective way of dealing with the problem was to raze the building to the ground leaving the weigh-bridge and ramp untouched. When this was done a new weigh-bridge house was erected on approximately one third of the site of the old building on part of the same foundations and some of the old materials were used in the reconstruction. The new building is lower in height than the old building. The cost of demolition and rebuilding of the weigh-bridge house was £446 and this sum was charged to revenue in the Company's accounts for the year in question.

It was admitted that the new building was not an improvement on and is much smaller than the old building. The unused part of the site of the old building is now part of the factory grounds and the workshop and storeroom are now located in a different part of the grounds where a new structure was erected at a cost of £497 which was fully charged to capital account.

4. On behalf of the Company it was contended:—

(a) that the said outlay of £446 was an admissible deduction in computing the Company's profits for assessment to income tax as it was expended wholly and exclusively for the purposes of their trade on repairs to premises and was not prohibited by the Rules applicable to Case I and Rules 1 (1) and 3 (a) and 3 (d) applicable to Cases I and II, Schedule D, and s. 209 of the Income Tax Act, 1918;

(b) that the judicial pronouncement on the subject of repairs by Buckley L.J. in Lurcott v. Wakely and, Wheeler(1),quoted by Finlay J. in Margrett v. The Lowestoft Water and Gas Co. (2), is in the Company's favour, thus '"repair" and"renew" are not words expressive of a clear contrast. Repair always involves renewal; renewal of a part; of a subordinate part.' In this case the weigh-bridge house was only part of a structure which included the weigh-bridge and ramp and in turn was only a small part of the factory— a small part of a single profit-earning unit and although physically separated from the main factory buildings was nevertheless part of an 'entirety' which is the factory and that the recent case in the Court of Session in 1951 of Samuel Jones & Co. (Devonvale), Ltd. v. Commissioners of Inland Revenue(3) supported this view that the whole factory should be regarded as the 'premises' referred to in Rule 3 (d);

(c) that the payment was primarily and in substance a matter of maintenance of the existing capital structure or assets of the Company. The manner in which it was done was governed by sound principles of building construction;

(d) that in the case of FitzGerald v. Commissioners of Inland Revenue(4) the impelling motive was other than a trade interest, i.e., a legal compulsion under the covenant. In this case the motive was a trade interest;

(e) that in the case of Margrett v. The Lowestoft Water and Gas Co. (5) the new reservoir was double the capacity of the old, was in several respects an improvement and was on a diffierent site.

5. It was contended by the Inspector of Taxes:—

(a) that the payment of £446 was a payment of a capital nature and inadmissible as a deduction for revenue purposes and was prohibited by Rules 3 (a) and 3 (d) of the Rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918.

The Inspector referred to Rule 3 (d) and stated that the rule refers to repairs and not renewal of premises. The weigh-bridge house was distinct from the weigh-bridge and the two were not structurally connected; they adjoined but except for any mechanical connection underground or at ground level they were separate structures. The Company's outlay was not for the repairs of the old building which was completely demolished but for the erection of a new building. He stated that in this case the weigh-bridge house was set apart from the main buildings and was separate and divisible from the factory, that the 'entirety' was the weigh-bridge house itself and that that 'entirety' was replaced and that therefore the payment was not of a revenue character.

(b) The weigh-bridge house had no part in the actual work of production and without it the Company could finish and turn out its products. In the Jones' Case(1) mentioned in para. 4 (b) of this Case, the chimney, the subject of the allowance, was an integral part of the power unit (receiving the discharge from the boilers) and was actually connected with and formed part of the factory. Without the chimney, processing was not possible.

(c) The Inspector referred to the cases of O'Grady v.Bullcroft Main Collieries, Ltd. (2); Margrett v. The Lowestoft Water and Gas Co.(3) and FitzGerald v. Commissioners of Inland Revenue(4). He quoted from the judgment of Murnaghan J. in the latter case, at page 197:—"The expenditure incurred in restoring the premises cannot be said to be in the nature of recurrent annual expenditure necessary for the making of annual profits." He also referred toAtherton v. British Insulated and Helsby Cables, Ltd. (5)wherein Viscount Cave said:—"But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The Inspector stated that a new asset was brought into existence by the expenditure of £446.

He also contended that even assuming the £446 to represent the cost of a repair, which he did not admit, the principle laid down in the case of The Law Shipping Co., Ltd. v. The Commissioners of Inland Revenue(6) should be

applied to restrict the deduction claimed to the proportion of the expenditure referable to the user by the Company of the old weigh-house building.

6. I, the Commissioner who heard the appeal, have carefully considered the evidence and arguments adduced before me and the decisions in Vale v. Mahony and Brothers, Ltd.(1) and Southern v. Borax Consolidated Ltd.(2) in which Lawrence J., at p. 116 of the report said":—"On the other question whether this is a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the cases is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to...