MacAonghusa v Ringmahon Company

• Jurisdiction: Ireland
• Judge: Mr. Justice Geoghegan
• Judgment Date: 29 May 2001
• Neutral Citation: [2001] IESC 47
• Date: 29 May 2001
• Court: Supreme Court
• Docket Number: [S.C. No. 313

MacAONGHUSA (INSPECTOR OF TAXES) v. RINGMAHON COMPANY

REVENUE

BETWEEN/

SEÁN MacAONGHUSA

Appellant

and

RINGMAHON COMPANY

Respondent

[2001] IESC 47

denham j.

Murray J.

Geoghegan J.

313/99

THE SUPREME COURT

Synopsis

Taxation

Revenue; corporation tax; deductible expenses; Schedule D Case I; respondent redeemed £6 million of redeemable preference shares and borrowed £6 million from a bank; High Court held on case stated that Circuit Court correct to allow expenditure as deduction; whether interest on an ongoing basis must be regarded as being laid out wholly or exclusively in earning of the profits of the particular accounting year.

Held: Appeal dismissed

MacAonghusa v. Ringmahon Company - Supreme Court: Denham J., Murray J., Geoghegan J. - 29/05/2001 - [2001] 2 IR 507

The redemption of preference shares by the respondent had left a gap in its finances, and it had to borrow funds in order to continue trading, and the funds so borrowed were used for trading. In those circumstances it was reasonable for the Circuit Court Judge to hold that the respondent was entitled to a deduction in respect of the calculation of its profits under Schedule D Case 1 in the amount expended in its interest payments on the sum borrowed. So held by the High Court in upholding the findings of the Circuit Court. On appeal in the Supreme Court Mr. Justice Geoghegan held that the judgment of the High Court was correct and dismissed the appeal.

Citations:

INCOME TAX ACT 19671967 SCHED D CASE 1

TAXES CONSOLIDATED ACT 1997

INCOME TAX ACT 1967 S61

INCOME TAX ACT 1967 S61(a)

TRANS-PRAIRIE LTD V MIN OF NATIONAL REVENUE 70 DTC 6351

ARCHBOLD THOMSON BLACK & COMPANY V BATTY 7 TC 158

STRONG & COMPANY OF ROMSEY LIMITED V WOODFIELD 5 TC 215

MONTREAL COKE & MANAFACTURING CO V MIN OF NATIONAL REVENUE 1944 1 AER 743

COMMISSIONERS OF INLAND REVENUE V CARRON COMPANY 45 TC 18

CRADDOCK V ZEVO FINANCE COMPANY LIMITED 27 TC 267

MORGAN V TATE AND LYLE LIMITED 35 TC 367

ATHERTON V BRITISH INSULATED & HELSBY CABLES LIMITED 10 TC 155

MCGARRY V THE LIMERICK GAS COMMITTEE 1 ITR 375

MARA V HUMMINGBIRD 1982 ILRM 421

COMMISSIONERS OF INLAND REVENUE V COLEMAN CAR COMPANY LTD 35 TC 221

MCGRATH V MCDERMOTT 111 ITR 683

MACNIVEN V WESTMORELAND INVESTMENTS LIMITED 1998 STC 1131

BOYLE BROTHERS DRILLING COMPANY LIMITED V MINISTER OF NATIONAL REVENUE 51 DTC 70

1 Mr. Justice Geoghegan delivered the 29th day of May 2001

2 The appellant is an inspector of taxes, and he has brought an appeal to this court from a decision of the High Court (Budd J.) on a case stated from the Circuit Court (Judge Lynch) in which the learned Circuit Court judge sought the opinion of the High Court as to whether he was correct in holding that the respondent was entitled to a deduction of £435,764 in computing the amount of its profits under Case 1 of Schedule D. The High Court answered the question in the affirmative. The basic facts proved or admitted are well summarised in paragraph 4 of the case stated and they read as follows:-

3 a "(a) Ringmahon, an unlimited company, is a wholly owned subsidiary of Ringmahon Holdings Limited, the ordinary shares of which are held by members of the Dunne family.

4 (b) In 1987 Ringmahon acquired some of the former H. Williams supermarkets and began to trade from these stores under the Dunnes Stores brand name.

5 (c) Ringmahon is engaged in the trade of "Retailing of food, clothing and other Household Goods".

6 (d) The purchase of the H. Williams shops was initially financed by way of loan from Dunnes Stores Ireland Company (hereinafter called "DSIC"), but this finance was replaced by the issue by Ringmahon of 11,500,000 redeemable preference shares of 5p at a premium of 95p per share to DSIC on the 4/ 1/1988. (DSIC is ultimately controlled by the Dunne Family Trust, the beneficiaries of which are members of the Dunne family).

7 (e) In 1991 the Ringmahon Board decided to redeem 6 million of the redeemable preference shares held by DSIC. The company negotiated a loan of £6 m. with Allied Irish Banks for this stated purpose. The loan was drawn down by Ringmahon on the 30/ 4/1991, and on the 2/ 5/1991 Ringmahon issued a cheque for £6 m. to DSIC. The journal entries reflect a redemption of 6,000,000 redeemable preference shares in the accounts of Ringmahon for the period ended 28/12/1991.

8 (f) The proposal to redeem part of the preference share capital was in pursuance of the stated objective at the time that Ringmahon was set up that the company would be financed independently of the Dunne Family Trust (including the group companies owned by the Trust) and would stand alone as a separate operation.

9 (g) There was no obligation on Ringmahon to redeem the preference share capital. The Articles of Association provide that the company has sole discretion in the decision to redeem all or part of its redeemable preference shares.

10 (h) The issued ordinary share capital of Ringmahon at the date of the aforementioned redemption was two ordinary £1 shares fully paid up."

11 Following on the loan from Allied Irish Banks being applied for the redemption of the preference shares, there was a continuing ongoing liability on the part of the respondent to the bank for interest on the loan. Normally, where a trading company has to pay interest to a bank, that interest is deductible for tax purposes because it will have been "wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation" of the taxpayer. In the case of non-capital expenditure that is the statutory test of whether it is deductible for tax purposes or not and that form of wording has been repeated from its original enactment to subsequent re-enactments in various Acts culminating in the Taxes Consolidation Act, 1997. However, the relevant enactment in this case, which applied at the relevant time, was section 61 of the Income Tax Act, 1967. The part of that section relevant to this case reads as follows:-

"Subject to the provisions of this Act, in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -"

(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession;

12 ..."

13 The arguments of both sides can be summarised very shortly. The appellant argues that since the purpose of the loan was to redeem the preference shares and, therefore, was related to the capital structuring of the company and not the ordinary trading, ongoing interest liability in respect of that loan must be treated as stamped with the same character and, therefore, cannot be deducted against profits for tax purposes. The respondent, on the other hand, argues that although the loan was undoubtedly for the redemption of the shares and that there could be no question of the capital sum spent on the redemption being deductible, the ongoing annual interest is in quite a different position as it becomes merged in the ordinary ongoing liabilities of the company in its trading. Counsel for the respondent, at p. 3 of his written submissions, puts it this way:

"From the point of view of the respondents this in effect means that the interest must have been "wholly and exclusively" laid out for the purposes of the trade carried on by them. In the submission of the respondents it was so laid out - the basis of this submission is that the only way in which the trade could be carried on after the redeemable preference shares had been redeemed was by new share capital or by borrowings and the interest on those borrowings is then wholly and exclusively laid out for the purposes of the trade. If the interest was not laid out for the purposes of the trade the question arises as to what it was laid out for? - nothing in the case stated suggests that it was laid out for anything other than to enable the company to carry on the trade and while the principal was laid out to redeem the preference shares the interest in each year was laid out to retain the benefits of the borrowing so as to enable the company to carry on its trade."

14 Later on in the same written submission it is pointed out that

"the essence of interest is that it must be looked at in each year and is not, it is submitted, necessarily coloured by the fact that the principal was used for a capital purpose - indeed it is not so coloured at all because if one builds a factory on borrowings, which is clearly a capital expenditure and the borrowings would not be an allowable deduction, nonetheless the interest is an allowable deduction as has been agreed with the Revenue. In the present case no new asset was acquired by the respondent - it extinguished share capital and continued its business by substituting bank borrowings on which it pays interest."

15 Without the assistance of any decided cases and simply upon the basis of interpreting the statutory provisions, I find the respondent's argument much more convincing. Indeed, if the respondent is not correct, there would be somewhat of an anomaly in the tax regime because as counsel for the respondent, Mr. Thomas S. McCann, S.C. points out in the written submissions at p. 6 and as he further orally argued in court, if the respondent had, at all times, financed its business by bank borrowings the interest payable would clearly have been allowable as a trading expense and this could not have been disputed by the Revenue Commissioners. Yet if that is the case, it would seem strange if the position should be different, merely, because there were no borrowings prior to the 1991 accounting period, the company having financed its business by redeemable share capital. The respondent submits that there is no distinction in principle between interest payable on the bank borrowings for the purposes of the redemption of the share capital and interest...