Vale v Mahony and Brothers Ltd

• Jurisdiction: Ireland
• Judgment Date: 13 December 1947
• Date: 13 December 1947
• Court: Supreme Court

Supreme Court

Vale v. Mahony and Brothers, Ltd.

J. B. VALE, Inspector of Taxes

Appellant

and

MARTIN MAHONY AND BROTHERS, LIMITED

Respondents.

Revenue - Income tax - Trade profits - Deduction - Cost of installation of new buildings and fittings to provide improved sanitary accommodation for company's employees - Former sanitary system primitive in design, but in satisfactory working order - Company served with notice by local authority requiring sanitary accommodation to be improved, but not compellable to comply therewith - Whether disbursement an allowable deduction from profits - Whether sum expended "wholly and exclusively laid out or expended for the purposes of the trade" - Whether installation of new buildings constituted "repairs of premises occupied" - Whether water closets constituted"implements, utensils, or articles employed for the purposes of the trade" - Whether expenditure properly attributable to revenue or to capital - Nature of test to be applied - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40).Sch. D., Rules applicable to Cases I and II, r. 3 (a), (d), and (g).

Case Stated by the Circuit Court Judge of Cork (Judge O'Connor) under s. 149 of the Income Tax Act, 1918, as amended by s. 10 of the Finance Act, 1924.

The facts were set out in the Case Stated which was as follows:—

"(1) The appeal of Martin Mahony and Brothers, Ltd. (hereinafter called the Company), against an assessment under Schedule D for the year ending 5th April, 1944, was re-heard under s. 196, Income Tax Act, 1918, by me as Circuit Court Judge, at the Court House, Cork, on the 5th May, 1944.

(2) The following facts were held proved or admitted:—

(a) The Company carries on business as woollen goods manufacturers at Blarney where the Company's Mills are situate and where they employ between 600 and 700 employees in the said Mills.

(b) About 1940 and 1941 the South Cork Board of Public Health carried out a water and sewerage scheme at Blarney where there had previously been no public water supply or sewerage system.

(c) Subsequently to the completion of the said water and sewerage scheme, the South Cork Board of Public Health, acting as the Sanitary Authority under the provisions of the Public Health (Ireland) Act, 1878, served on the Company notices dated respectively 7th February, 1940, and 13th August, 1941. [The notices were annexed to and formed part of the Case.]

(d) The Company duly complied with the requirements of the said notices. The necessary work was carried out in accordance with the specifications and drawings of James F. McMullen, B.E., A.M.I.C.E.I., 30 South Mall, Cork. [The architect's drawings and specifications were annexed to and formed part of the Case.]

(e) The sanitary facilities formerly provided for the Company's employees at the Company's Mill were of the type known as earthen privies. The earthen privies were housed in a number of sheds within the Mill curtilage, some of which were independent structures and others of the lean-to type erected against the walls of the existing Mill structure. In no case was there internal communication as between these structures and the Mill premises proper. The sheds in question had wooden walls and corrugated iron roofs. The structures and the earthen privies housed in them were at all times kept in good order and repair and were suitable, satisfactory and sufficient for the requirements of the Mill staff and employees.

(f) Compliance with the Board's notices entailed bringing water from the Sanitary Authorities' mains into the mill premises and the construction of the necessary drains and sewers and the erection of new buildings on the mill premises to house the W.C.s. These new buildings are constructed of reinforced concrete, with slate roofs. They are attached to the mill premises and have internal communication therewith. At the same time, the Company availed of the opportunity to install wash-up facilities or lavatories which were an improvement and addition to the similar conveniences previously provided. The installation of the lavatories did not entail any additional outlay on the structures. The cost of the lavatories and their installation was £232.

(g) The outlay incurred by the Company in connection with the new installations has been charged in the Company's accounts for the year to 31st March, 1943, as follows:—

Charges in main P. & L. Account under the head Mill Sanitation . . £4,174.

The said sum of £4,174 includes the cost of the lavatories £232.

• (3) On behalf of the Company it was contended:—

(a) that the outlay charged in the Company's accounts under the heading Mill Sanitation was a disbursement of money wholly and exclusively laid out or expended for the purposes of the Company's trade and was not, therefore, debarred by Rule 3 (a) of the Rules applicable to Cases I and II, Schedule D;

(b) that the outlay was not of a capital nature as it had added nothing to the Company's earning capacity and for that reason did not bring into existence an asset or an advantage for the enduring benefit of the trade. The judgments in Atherton v. British Insulated and Helsby Cables, Ltd.(1) were quoted in support of this contention;

(c) that the expenditure came within the scope of Rule 3 (d) of the Rules applicable to Cases I and II, Schedule D, on the ground that the W.C.s. were utensils employed for the purposes of the trade;

(d) that the replacement of the earthen privies by water closets is a repair. The case of Rabbitt v. Grant and Murphy(2)was quoted in support.

• (4) The Inspector of Taxes contended:—

(a) that deduction of the expenditure was prohibited by Rule 3 (a) of the Rules applicable to Cases I and II, Schedule D, on the ground that the expenditure had not been incurred wholly and exclusively for the purposes of the trade. He

relied on the decisions in Martin Fitzgerald v. Commissioners of Inland Revenue(1); Robert Addie and Sons' Collieries Ltd.v. Commissioners of Inland Revenue(2), Lord President's judgment on page 676; Hyam v. Commissioners of Inland Revenue(3), judgment of Lord Sands at pp. 487-8;

(b) that the expenditure had in fact been incurred by the Company as property owners, and referred to Commissioners of Inland, Revenue v. Scottish Central Electric Power Company(4);

(c) that the deduction did not come within the scope of Rule 3 (d) of the Rules applicable to Cases I and II, Schedule D, as it was neither outlay on repairs nor for the supply of utensils;

(d) that the outlay was prohibited by Rule 3 (f) of the Rules applicable to Cases I and II, Schedule D, on the ground that it was capital expenditure. It had brought into existence an asset or an advantage for the enduring benefit of the trade, and furthermore had been incurred in connection with the Company's fixed capital. He quoted in supportAtherton v. British Insulated & Helsby Cables, Ltd.(5) andVan den Berghs Ltd. v. Clark(6);

(e) that the deduction was prohibited by Rule 3 (g) of the Rules applicable to Cases I and II, Schedule D, as being capital expended on improvements of the premises occupied.

(5) I found the following facts:—

i. That the sanitary accommodation previously existing at the Mills was suitable, satisfactory and sufficient for the requirements of the Mill staff and employees.

ii. That the sanitary accommodation provided to comply with the Public Health Authority's notices is not more than is sufficient for the said requirements and added nothing to the Company's earning capacity, but was necessary in view of the notices to maintain that earning capacity.

iii. That the installation of a water supply from the public supply was necessary for the service of the said sanitary accommodation and to comply with the said notices.

iv. That the water supply from the public supply is not required or used for the purposes of the Mills otherwise than for the service of the said sanitary accommodation and lavatories, the Mills being supplied from a separate and private source.

v. That the said outlay incurred by the Company in connection with the new installations was wholly and

exclusively laid out and expended for the purpose of the Company's trade.

vi. That the said outlay, excluding the said sum of £232, was expended for repairs of premises occupied, and for the supply, repair, and alteration of utensils and articles employed for the purposes of the Company's trade.

And I held that the said outlay, exclusive of the said sum of £232, is an admissible deduction and revenue charge in computing the Company's profits for assessment under Schedule D for the year of assessment ending on the 5th April, 1944.

(6) The questions for the decision of the Court are:—

(i) Whether there was any evidence to support my findings of fact as hereinbefore set forth;

(ii) Whether I was right in holding that the said outlay was an admissible deduction in computing the Company's profits for assessment to Income Tax.

^Dated the 27th day of July, 1945.

^Joseph K. O'Connor, Circuit Court Judge."

From this decision the Inspector of Taxes appealed to the Supreme Court (1).

The respondent company, which owned and operated a largo woollen mill employing between 600 and 700 employees, was served by the local sanitary authority with a statutory notice alleging that the sanitary accommodation provided for the employees constituted a nuisance, and requiring that it be abated. It was conceded, for the purpose of the case, that the company could not have been compelled to comply with the notice for the reason that the system of sanitation in question, though old, was satisfactory from the point of view of public health, but the company did, in fact, seek to comply with the notice, and erected five new concrete buildings with modern water closets and up-to-date fittings at a cost of nearly £4,000. The company claimed that this expenditure constituted an allowable deduction from profits for the purpose of assessment to income tax under Schedule D of the...