Irish Agricultural Machinery Ltd v S. Ó Culacháin (Inspector of Taxes)

• Jurisdiction: Ireland
• Court: High Court
• Judge: Mr. Justice murphy
• Judgment Date: 06 February 1987
• Neutral Citation: 1987 WJSC-HC 808
• Docket Number: [1986 No. 198R],No. 198 R/1986
• Date: 06 February 1987

1987 WJSC-HC 808

THE HIGH COURT

No. 198 R/1986

IRISH AGRICULTURAL MACHINERY LTD v. O CULACHAIN

BETWEEN

IRISH AGRICULTURAL MACHINERY LIMITED

APPELLANT

AND

S. Ó CULACHAIN INSPECTOR OF TAXES

RESPONDENT

Citations:

INCOME TAX ACT 1967 S428

INCOME TAX ACT 1967 S430

CORPORATION TAX ACT 1976 S146

FINANCE ACT 1975 S31

FINANCE ACT 1975 S31(a)

FINANCE ACT 1976 S26

FINANCE ACT 1975 S31(2)

FINANCE ACT 1977 PART V

CHARLES MCCANN LTD V O CULACHAIN 1986 IR 196

CRONIN (INSPECTOR OF TAXES) V STRAND DAIRIES LTD UNREP MURPHY 18.12.85 1986/1/358

FRASER V LONDON SPORTS CARS CENTRE LTD 1985 STC 688, 1989 59 TC 63

FINANCE ACT 1975 S31(1)(d)

FINANCE ACT 1975 S31(9)

Synopsis:

REVENUE

Income tax

Corporation tax - Relief - Stock relief - Deduction from profits - Deduction allowed by s.31, sub-s. 2, of Act of 1975 - Case 1 of Schedule D - Deduction of amount by which value of company's trading stock at end of accounting period exceeded the value of that stock at the beginning of that period - Appellant company was entitled to such relief if it had carried on a trade, as defined in sub-s. 1, consisting "wholly or mainly" of (a) the "manufacture of goods" or (b) the "sale" of machinery or plant to certain persons - Sub-section 9 of s.31 provides that where a company carries on a trade consisting partly of trading operations mentioned in sub-s. 1 and partly of other trading operations, the company shall be regarded as carrying on a trade consisting wholly or mainly of qualifying trading operations if the total amount receivable by the company from sales made in the course of the qualifying trading operations is not less than 75% of the total amount receivable by the company from all sales made in the course of its trade - The business of the appellant company consisted of the importation of the components of agricultural machinery, the purchase of additional material locally, the assembly of the acquired components to make complete machines, and the sale of the completed machines - The appellant contended that the assembly of the various components involved considerable work and skill in adapting and altering the components so as to construct the complete machines - The Circuit Court judge determined that the appellant was not engaged in the "manufacture of goods" but, at the request of the appellant, the judge stated a Case pursuant to s.430 of the Act of 1967 in which he sought the opinion of the High Court upon the correctness of his determination - Held that the Circuit Court judge was entitled, in the light of the evidence adduced, to hold that the appellant was not so engaged - Held that the "sales made in the course of the qualifying trading operations", as mentioned in sub-s. 9 of s.31, did not include sales initiated by the appellant and effected by means of an intermediate disposition to a person other than the buyer - Income Tax Act, 1967, s.430 - Finance Act, 1975, ss.31, 31A - (1986/198 R - Murphy J. - 6/2/87) [1987] IR 458

|Irish Agricultural Machinery v. O Culachain|

WORDS AND PHRASES

"Manufacture"

Company - Income tax - Stock relief - Assembly of agricultural machinery from components - Machinery not manufactured - ~See~ Revenue, income tax - (1986/198 R - Murphy J. - 6/2/87) [1987] IR 458

|Irish Agricultural Machinery v. O Culachain|

WORDS AND PHRASES

"Sales"

Company - Income tax - Stock relief - ~See~ Revenue, income tax - (1986/198 R - Murphy J. - 6/2/87) - [1987] IR 458

|Irish Agricultural Machinery v. O Culachain|

1 Judgment of Mr. Justice murphy delivered the 6th day of February, 1987.

2 This matter comes before the Court by way of Case Stated under Sections 428 and 430 of the Income Tax Act 1967and Section 146 of the Corporation Tax Act 1986.

3 The case concerns the refusal by the Inspector of Taxes to allow stock relief in ascertaining liability to Income Tax, Corporation Profits Tax and Corporation Tax for different periods between October 1972 and the 31st of October 1977. The relief against Income Tax was claimed pursuant to Section 31 of the Finance Act 1975(as amended) and the relief against Corporation Tax pursuant to Section 31 A of the same Act as inserted by Section 26 of the Finance Act 1976. As the provisions of Sections 31 and 31 A aforesaid as amended are identical the arguments on behalf of each party were addressed to the provision of Section 31 (as amended). The quantum of the relief was not in dispute. The issue related to the Company's entitlement to any such relief.

4 To qualify for relief in respect of increase in stock values (stock relief) in the computation for the purposes of Income Tax of its trading profits it was necessary for a company to comply with the provisions of Section 31 of the Finance Act 1975. Subsection (2) of that section provided as follows:-

" (2) Subject to the following provisions of this section if -"

(a) a company carries on in an accounting period a trade in respect of which it is within the charge to income tax under Case I of Schedule D, and

(b) the value of the company's trading stock at the end of the accounting period (in this section referred to as its "closing stock value") exceeds the value of its trading stock at the beginning of the accounting period (in this section referred to as its "opening stock value"),

5 the company shall, in the computation for the purposes of income tax of its trading profits, be entitled to a deduction under this section by reference to the amount of that excess as if the deduction were a trading expense incurred in the accounting period; and in the following provisions of this section the amount of that excess is referred to as the company's increase in stock value."

6 The word "trade" as used in subsection (2) (a) aforesaid is given a special and restricted statutory definition by preceding subparagraph of Section 31. That definition, which gives rise to the issue between the parties is expressed in the following terms:-

7 "trade" means a trade which is carried on in the State and which during an accounting period consists wholly or mainly of any of the following classes of trading operations:-

8 (a) the manufacture of goods,

9 (b) the carrying out of construction operations within the meaning of section 17 of the Finance Act, 1970.

10 (c) farming, or

11 (d) the sale of machinery of plant (excluding vehicles suitable for the conveyance by road of persons) or goods to a person engaged in a trade consisting wholly or mainly of trading operations of a class specified in paragraph (a), (b) or (c) for use for the purposes of that trade."

12 Section 31 as enacted may be open to criticism. It is difficult to see how any trade could consist wholly of the sale of any goods or articles. To endure the trade would have to extend to some means of acquisition, production or generation of the goods to be sold. Similarly, the manufacture of goods or indeed farming are not activities which of themselves and taken in exclusion from other activities could be seen as constituting a trade. Certainly they would not generate "trading profits" without the trader engaging in some activity designed to dispose of or realise the goods manufactured or the products cultivated, by him. These considerations may be material in considering whether and to what extent it is necessary to infer a more general) intent then that apparent from the words actually used in the subsection.

13 If there is some ambiguity within the section as to what trading operations fall within it clearly even greater difficulties could arise in seeking to determine whether one of a number of trading operations carried on by a particular trader constituted the main part of the trade carried on by him. Should such questions of degree be determined by the number of employees engaged in a particular operation? or perhaps the relative importance of the operation should be determined by reference to the gross receipts or net profits which it generates.

14 In fact this problem was resolved by the insertion of an additional subparagraph in Section 31 aforesaid by Part V of the Finance Act 1977. The additional subparagraph is in the following terms:-

"(9) Where in any accounting period which ends on or after the 6th day April, 1973, a company carries on a trade which consists partly of trading operations of any of the classes mentioned in the definition of "trade" in subsection (1) (hereinafter referred to as "qualifying trading operations") and partly of other trading operations, the company shall be regarded as carrying on a trade which consists wholly or mainly of qualifying trading operations if, but only if, the total amount receivable by the company from sales made in the course of the qualifying trading operations in the accounting period is not loss than 75% of the total amount receivable by the company from all sales made in the course of its trade in the accounting period."

15 The Appellants sought to bring themselves within Section 31 of the Finance Act 1975amended as aforesaid by adducing evidence in support of the contention that the trade carried on by them consisted mainly of the manufacture of goods or alternatively consisted mainly of the sale of machinery or plant (excluding vehicles suitable for the conveyance by road of persons) or goods to a persons engaged in a trade consisting wholly or mainly of farming.

16 The findings or admissions in relation to the nature of the Appellants activities are summarised in the Case Stated in the following terms:-

"The company imports components for agricultural machinery, purchases as necessary additional material locally, assembles those components into finished machines, as...