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In

account, or on account of any other person; and every person shall be chargeable in respect of the whole of such duties in one and the same division, and by the same commissioner, except in cases where the same person shall be engaged in separate partnerships, or shall be engaged in different concerns relating to trade or manufacture in divers places, in each of which cases a separate assesment shall be made in respect of each concern, at the place where such concern, if singly carried on, ought to be charged as herein directed." Where is the business place of these gasworks? England. If the concern was carried on in different places, it might be assessed in different places; but here, as pointed out by Mr. Dicey, according to the decision of the court, in The Calcutta Jute Mills case (ubi sup.), the business is carried on at the place whence the orders emanate. That is the central point where the business is carried on, where the directors meet and whence the orders are issued, and where the whole transactions occur, and, according to the fifth part of this clause, it would be assessed here. Our attention was then called to sect. 108 for the same purpose. If I am right in my view that these gasworks are not " foreign possessions," then sect. 108, is inapplicable here, because it applies only to "foreign possessions." On the whole I am clearly of opinion that these works are assessable in that sum of 48,0037., and that therefore our judgment should be for the Crown.

Judgment for the Crown with costs. Solicitor for the appellants, Maresco Pearce. Solicitor for the respondent, The Solicitor of Inland Revenue.

Wednesday, Dec. 5, 1877.

(Before KELLY, C.B., CLEASBY and POLLOCK, BB.) KNOWLES AND SONS (LIMITED) (apps.) v. M'ADAM (resp.) (a)

Revenue ·Income tax-Coal mines· Working of on lease for years-Balance of profits or gains-Exhausted capital at end of yearDeduction on account of-What allowable-5 & 6 Vict. c. 35, sect. 60, sched. A., No. 3; sect. 100, sched. D., third case- -Rules 1 and 3, sect. 159-16 & 17 Vict. c. 34, sect. 2, sched. D.-29 Vict. c. 36, sect. 8-Construction.

The plaintiffs, a colliery company, owned certain leasehold coal mines, the lease of which they had purchased for a term of years; and in carrying on their business during the first year of the term they raised and sold a quantity of coal, thereby reducing the value of the mines at the year's end to 10,4241. less than the sum which they had originally paid for them. Upon being assessed to the income tax upon their profits as a colliery company for the year, they claimed to deduct from their gross receipts the above-mentioned sum of 10,4241. as for exhausted capital; and on a case stated by the special commissioners for the opinion of the court, it was Held, by the Exchequer Division (Kelly, C.B. and Cleasby and Pollock, BB.), that coal mines were by sect. 8 of 29 Vict. c. 36, transferred from Schedule A., No. 3, sect. 60, and were assessable under Schedule D., sect. 100 of the 5 & 6 Vict. c. 35; and that, in estimating the balance of their (a) Reported by H. LEIGH, Esq., Barrister-at-Law.

[Ex. Div.

profits or gains under rule 1 of the latter schedule, the company were entitled to make the deduction claimed, which was not within any of the deductions forbidden either by rule 3 of that schedule or by sect. 159 of the Act.

Forder v. Handyside and Co. (ubi infra) not in point or applicable.

THIS was a case stated for the opinion of the court by the commissioners for the special purposes of the Income Tax Acts, under 37 & 38 Vict. c. 16, as to income tax assessed under Schedule D., on appeal for the year ending the 6th April 1875.

CASE.

Andrew Knowles and Sons (Limited), a company carrying on business as colliery proprietors at Pendlebury and elsewhere, appealed against an assessment on the sum of 226,8241. made on them under Schedule D. of the Act (16 & 17 Vict. c. 34) in respect of the profits of their business as colliery proprietors.

At the hearing of the appeal the commissioners were of opinion that the assessment should be reduced to the sum of 216,8271. 28. 10d.; but it was urged by Mr. Chadwick that a sum of 10,4247. 158. 3d. should be deducted on the ground that, in estimating the amount of assessable profits, the commissioners ought to allow as a deduction that sum, which was claimed by the company as "depreciation," and which, as stated in the annual report for the year ending 31st Dec. 1874, "is based on a calculation of the extent of coal available and the duration of existing leases, but it may be modified as future circumstances require;" and he further explained that the term "depreciation" in the balance-sheet was used to show to the shareholders the deterioration or difference in the value of their property at the end of the year and after the working out of a year's coal and the expiration of a year of their leases, as compared with the value of such property at the beginning of the year; or, in other words, that a re-valuation of the property showed that it was worth at the end of the first year 10,4241. 158. 3d. less than at the time of the purchase twelve months before.

The commissioners were of opinion that they were precluded, by the 3rd rule applicable to the first case of Schedule D. in sect. 100 of the Act (5 & 6 Vict. c. 35), and by sect. 159 of that Act, from allowing the deduction claimed, and determined to enforce the assessment in the said sum of 216,8271.

The company thereupon expressed their intention to appeal, and this case was accordingly stated and signed by the commissioners on the 22nd March 1876.

The case came on for hearing before the Court of Exchequer in the Hilary sittings on Jan. 24, 1877, before Cleasby and Pollock, BB., when it was partly argued, and by decision of the court was directed to stand over for an amended statement to be made, showing the circumstances under which the deduction of 10,4241. was claimed, the court being of opinion that the case, as stated, did not raise the point between the parties so distinctly as it was desirable that it should do. The following amendments by way of addenda to the case were accordingly made.

AMENDMENTS TO CASE.

The company's colliery property comprises both freehold and leasehold mines, which were pur chased by them; the price paid for the leasehold

Ex. Div.]

coal mines, subject to an average royalty rent of 7d. per ton, and having an average of thirty-two years to run, being 717,4217., the purchase-money for the freehold mines being 67,550l.

At the end of the first year's working, which is the year of the assessment in question, it was ascer tained that from the company's leasehold collieries 844,877 tons, and from their freehold pits 62,000 tons of coal had been wrought or gotten and sold in that year, the total quantity therefore being 906,877 tons.

The appellants allege that, in ascertaining by a correct and accurate balance-sheet the profits made in that year, the company valued their coal mines at 10,424l. 158. 3d. less than the sum for which they had purchased them at the commencement of the year, which sum (as the appellants alleged) fairly represented the diminu. tion in their value by reason of the coal gotten as above mentioned, and which sum for the purposes of such balance-sheet was technically, but perhaps incorrectly, referred to as depreciation." Of the said sum of 10,4241. 158. 3d. the sum of 7211. 178. 11d. represents the diminution in the value of the freehold mines, and the balance that of the leasehold.

The appellants further alleged that, in ascertaining the profits of the freehold mine, no sum is set against or deducted from the gross receipts on account of any rent assumed to be paid in respect thereof.

Points for argument on behalf of the appellants: -1. That the determination of the commissioners is erroneous. 2. That the assessment upon the appellants under the Income Tax Acts, in respect of their business as colliery proprietors for the year ending 6th April 1875, ought not to be in a sum including the sum claimed as a deduction by the appellants. 3. That the sum claimed by them as a deduction is no part of the profits upon which they are liable to be assessed under the Acts in respect of the profits of their said business for the said year, and ought not to be included therein. 4. That the assessment upon the appellants ought not to be in a greater sum then 206,4021. 78. 7d. Points for the Crown:-1. That the amount of duty chargeable upon the appellant's colliery is to be calculated upon the full annual value of the profits of such colliery on an average of the preceding three years, without making any deduction therefrom on the ground of its depreciation in value, either through the working out of the coal, or the expiration of any portion of the lease. 2. That the deduction claimed by the appellants in the present case from the amount of profits or gains arising from their said colliery is not such as the appellants are justified in claiming under the provisions of the third rule of the first case of Schedule D. of the Income Tax Act (5 & 6 Vict. c. 35), and is contrary to law. 3. That the case of the colliery in question does not differ in principle from the case of leasehold properties or annuities, in neither of which cases is any such deduction allowable as is now claimed by the appellants.

The following sections, schedules, and rules of the Income Acts Tax (5 & 6 Vict. c. 35, 16 & 17 Vict. c. 34, and 29 & 30 Vict. c. 36), are material to this report.

The 5 & 6 Vict. c. 35, enacts (inter alia) as follows:

MAG. CAS.-VOL. XI.

Sect 60:

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That the duties hereby granted and contained in the said Schedule A. shall be assessed and charged under the following rules, which rules shall be deemed and construed to be part of the Act, and to refer to the said duties as if the same had been inserted under a special enactment. SCHEDULE A.

No. 1. General rule for estimating lands, tenements, hereditaments, and heritages mentioned in Schedule A. The annual value of lands, &c., charged under Schedule A. shall be understood to be the rent by the year at which the same are let at rack rent, if the amount of such rent shall have been fixed by agreement com. mencing within seven years previous to the 5th April next before the making of the assessment; but if not so let at rack rent, then at the rack rent at which the same are worth to let by the year, and which rule shall be construed to extend to all lands, &c., except the properties mentioned in Nos. 2 and 3 of this schedule.

No. 3. Rules for estimating the lands, &c., hereinafter mentioned, which are not to be charged according to the preceding general rules. The annual value of all the properties hereinafter described shall be understood to be the full amount for the year, or the average amount for one year of the profits received therefrom within the respective times herein limited.

Secondly, of mines of coal... on an average of the five preceding years subject, to the provisions concerning mines contained in this Act.

Sect. 100:

SCHEDULE D.

First case. Duties to be charged in respect of any trade, manufacture, adventure, or concern in the nature of trade, not contained in any other schedule of this Act. RULES.

First. The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade, &c., upon a fair and just average of three years, &c.

Third.-In estimating the balance of the profits and gains chargeable under Schedule D., for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, or allowed to be set against or deducted from, such profits or gains, on account of any sum expended for repairs of premises occupied for the purposes of such trade, &c., nor for any sum expended for the supply or repairs or alterations of any implements, &c., employed for the purposes of such trade, &c., beyond the sum usually expended for such purposes, according to an average of three years, &c.; nor on account of loss not connected with or arising out of such trade, &c.; nor on account of any capital withdrawn therefrom; nor for any sum employed or intended to be employed as capital in such trade, &c.; nor for any capital employed in improvement of premises occupied for the purposes of such trade, &c.; nor on account or under pretence of any interest which might have been made on such sums if laid out at interest; nor for any debts, except bad debts, proved to be such to the satisfaction of the commissioners respectively; nor for any average loss beyond the actual amount of loss after adjustment; nor for any sum recoverable under an insurance or contract of indemnity.

Sect. 159:

That in the computation of duty to be made under this Act in any of the cases before mentioned it shall not be lawful to make any other deductions therefrom than such as are expressly enumerated in this Act; nor to make any deduction from the profits or gains arising from any property herein described, or from any office, &c., on account of diminution of capital or of loss sustained in any trade, &c., profession, employment, or vocation.

The 16 & 17 Vict. c. 34, enacts (inter alia) by sect. 2, Schedule D.:

That for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere, and for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any profession, trade, employment, or vocation, whether the same shall respectively be carried on in the

Ꮓ

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United Kingdom or elsewhere, and to be charged for every 20s. of the annual amount of such profits and gains.

And for and in respect of the annual profits or gains arising or accruing to any person whatever, whether a subject of Her Majesty or not, although not resident within the United Kingdom, from any property whatever in the United Kingdom, or any profession, trade, &c., exercised within the United Kingdom, and to be charged for every 20s. of the annual amount of such profits and gains.

The 29 & 30 Vict. c. 36 enacts (inter alia) by sect. 8:

That the several and respective concerns described in No. 3 of Schedule A. of the 5 & 6 Vict. c. 34 shall be charged and assessed to the duties hereby granted in the manner in the said No. 3 mentioned, according to the rules prescribed by Schedule D. of the said Act, so far as such rules are consistent with the said No. 3.

Herschell, Q.C. (with whom was T. J. Sanderson) for the appellants.-The question is, whether at the end of a year's working the appellants are or not entitled, in making up the balance of profit and loss, to take into account the exhaustion during the year of so much of what may be called their stock, and to make a deduction in respect of such exhausted stock for the purpose of arriving at the balance showing the profit made during the year. The Crown contends that the appellants are not entitled so to do. The case comes, and the tax is assessable, under Schedule D., sect. 100, of the 5 & 6 Vict. c. 35, to which coal mines have been transferred from No. 3 Schedule A. of the Act by sect. 8 of the 29 Vict. c. 36. In every trade or business, in order "to arrive at the value of the profits or gains" of a year's trading, it is necessary to take stock at the commencement and at the end of the year, and the exhausted stock must, so to speak, be replaced at the year's end before any profits can be said to have been made; that is to say, exhausted capital must be accounted for before profits can be reckoned. The definition of profits by political economists is in accord with that. M'Culloch in his "Principles of Political Economy," 4th edition, chap. 7, p. 530, says: "Profits really consist of the produce, or its value, remaining to those who employ capital in industrial undertakings after all their necessary payments have been deducted, and after the capital wasted or used in the undertakings has been replaced. If the produce derived from an undertaking, after defraying the necessary outlay, be insufficient to replace the capital expended, a loss will have been incurred; if the capital be merely replaced, and there is no surplus, there will then be no loss, but there will be no annual profit, and the greater the surplus is the greater the profit.' I would adopt that language here. Take the ordinary case of a coal merchant having at the beginning of the year 100,000 tons of coal in his coal yard, purchased by him at 1l. a ton. If during the year he sold 10.000 tons for 10,000l. he has made no profit; if he has sold it for 12,0007. his profit is not the whole 12,000l. but the 2000l. difference between it and the 10,000l. which the coal cost him. The Crown will not dispute these propositions. What difference, then, is there in principle between that case and one where the coal produced is underground, or in a mine, as in the present case? The appellants contend there is none. The merchant at the year's end has 90,000 tons only left, instead of 100,000, and this company bave, at the end of the year, not all the coal in the mine when first bought, but only that quantity (say 1,000,000 tons) less the quantity (say

[Ex. Div. 100,000 tons) got out and sold by them during the year. The price originally paid for the 100,000 tons must be deducted from the price the coal sold for, and the difference, after deducting expenses of working-which are not here disputed-is the balance of profit for the year. Had the 100,000 tons of coal been sold for less than the price they were bought at, the result, if the Crown's contention is right, would be that the appellants would have to pay income tax on the selling price notwithstanding that at the end of the year there were a balance of loss instead of profit on the year's trading; so also, if that contention is to prevail, a person purchasing or inheriting a stock of coal above ground or in a mine, and selling it all in the year, would have to pay tax upon the net proceeds, even though his whole capital were exhausted. The appellants, however, contend that he might deduct from the proceeds the selling or market value of the stock of coal at the time at which he acquired it. The principle and the way in which the balance of profits is arrived at are the same, whether it is a lease of a mine for one year or (as here) for thirty-two years, and there is no difference between them. In neither case does profit begin until the exhausted capital, which is gone and will never be seen again, is replaced. This is properly a sale of so much coal to the appellants, and not a lease at all: (Gowan v. Christie, L. Rep. 2 H. L. Sc. App. 273). In that case Lord Cairns, speaking of a lease of minerals, says, at p. 283: "Without pursuing the question with regard to agricultural leases further, I should doubt extremely whether dicta of this kind apply at all to leases of mineral subjects; for, although we speak of a mineral lease or a lease of mines, the contract is not in reality a lease at all in the sense in which we speak of an agricultural lease. There is no fruit; that is to say, there is no increase there is no sowing or reaping, in the ordinary sense of the term, and there are no periodical harvests. What we call a mineral lease is really, when properly considered, a sale out and out of a portion of land. It is liberty given to a particular individual, for a specific length of time, to go into and under the land and to get certain things there if he can find them, and to take them just as if he had bought so much soil." Now, if at the expiration of their term the appellants should have gotten out and sold all the coal for less or for the same sum as they paid for their lease, they will have made no profit, and yet the Crown will contend that they will have been liable to tax every year upon their net yearly receipts. That would be regarding as profits all that a man receives, even though less than his exhausted capital. If a trading company, with power to pay dividends only out of profits, had realised 10,000l. by the sale of coal, but in so doing had exhausted an amount of coal which more than represented that sum, and then proposed to pay a dividend, the Court of Chancery would stop the payment on the ground that the company had no profits. It would say, True, you have 10,000l. at your bank, but you have 15,000l. worth of coal less in your mine." There is nothing in rule 3 of the first case of Schedule D., on which the Crown will rely, that modifies or conflicts with the appellants' argument. That rule points out the matters in respect of which no deduction is to be

Ex. Div.]

made in estimating the balance of profits, &c., viz., on account of sums expended in repairs of trade premises, &c. ; for the supply, repair, or alteration of implements, &c., beyond the usual sum, on an average of three years, or on account of any loss arising out of the trade, or for any capital employed in the trade, or in the improvement of the trade premises, &c., none of which are applicable here, and all of which are beside the present question. Neither is sect. 159, nor the case of Forder v. Handyside and Co. (35 L. T. Rep. N. S. 63; L. Rep. 1 Ex Div. 233; 45 L. J. 89, Q. B., C. P., & Ex.), on both of which the Crown relied, in point or applicable to this question.

66

Dicey (with him were the Attorney-General, Sir J. Holker, Q.C., and the Solicitor-General, Sir H. Giffard, Q.C.), for the Crown (respondent) contra, contended, first, that the case came within sect. 60, Schedule A., and not under Schedule D., and the appellants therefore had no locus standi; but secondly, even if it were within Schedule D., they had still no locus standi. Originally mines were treated by Parliament, not as trades, but as belonging to or coming under the category of lands, tenements, and hereditaments (sect. 60, Schedule A., rule No. 3, second sub-section), and they were not, as the appellants have contended, transferred by sect. 8 of 29 Vict. c. 36, from that schedule to Schedule D. For some purposes it is true they were by that section brought under that schedule for convenience, that persons might go privately before the commissioners. Sect. 8 only directs that in some respects they shall be assessed under the rules in Schedule D. so far as is consistent with Schedule A., under which schedule they still are. Sect. 7 of the 23 & 24 Vict. c. 14, confirms this view. The question here is not about deductions from profits, but about the annual value." As a matter of political economy, the doctrine contended for by the appellants may be correct, but the Income Tax Acts ignore political economy altogether. The tax, though it has in fact continued for many years, yet in theory it is an annual Act, and the intention is that everyone should pay a proportion of his income for each and every year. Mines under Schedule A. are to be treated as lands, and to be taxed upon their annual value, and not upon a balance of profits like a trade. The value of a mine is what a man gets from it by the coal which he sells, the Act treating coal exactly as if it were the produce of the land. That is the legal, though not perhaps the economical way of treating it. But assuming the mines to be brought within Schedule D., the present deduction is forbidden by the express words of rule 3 of the first case in that schedule, which prohibits any deduction 66 on account of any capital withdrawn therefrom " (that is from the trade, manufacture, or concern"), nor for any sum employed or intended to be employed as capital in such trade, manufacture, adventure, or concern," and sect. 159 of the same statute (5 & 6 Vict. c. 35) is also against the appellants' claim. The Act makes no distinction between a purchaser and an inheritor of land. If a landowner discovers a mine under his land, and takes out the coal and sells it for 100,000l., even my friend, I think, would not contend that in calcu lating the gains the landowner may say, "I've got 100,000l., but I must deduct enough to enable me to replace my estate in the position it was in

[Ex. Div.

before I got the coal." So if a man buys land out and out, and then finds a mine, and takes the coal and sells it, could it be contended that he might deduct the purchase money of the land from the money he received from the sale of the coal? But if the purchaser of land out and out may not deduct his purchase money, why should a leaseholder for, say ninety-nine years, be allowed to deduct the money paid for his lease? The case, however, is virtually decided by the case of Forder v. Handyside (ubi sup.) As in that case, so here, I say the amount set aside is in effect an addition to capital. It is either capital withdrawn or a sum employed or intended to be employed in the trade, &c. It is an attempt to set aside money to compensate for coal sold.

Herschell, Q.C. was not called on to reply.

KELLY, C.B.-I had not the advantage which both my learned brothers enjoyed of hearing the argument on the former occasion in this case; but, looking at the nature of the Income Tax Acts, and the plain and simple, clear, and_undoubted meaning of the word "profits," I do not think that this case admits of any doubt. The reference which has been made to the case of Forder v. Handyside (ubi sup.), and to the statutes passed before the time when this question arose, may be disposed of almost in a word. Under the 29 & 30 Vict. c. 30, sect. 8, it appears to me to be clear that the question here is transferred from Schedule A. to Schedule D., and we have therefore only to consider the construction of Schedule D. and the different rules to which the learned counsel on both sides referred, and upon which the whole question turns. Now, the first rule of Schedule D. is as follows: "The duty to be charged in respect thereof;" that is, "in respect of any trade, manufacture, adventure, or concern,' which includes "mines" and the business of working them, shall be computed "on a sum not less than the full amount of the profits and gains of such trade, manufacture, &c., upon a fair and just average of three years," and so on. That is the substantial enactment, the construction of which must decide the present question, unless it is qualified by something which comes after. Now, what is "the balance of the profits or gains" of such trade, &c. Beginning at that point, let us take the simplest possible case, and imagine a man purchasing at a wholesale warehouse a bale of cotton or a chest of tea for 40l., and selling it by retail for 45l., incurring no expense in the transaction beyond his purchase money of 401. What is his profit? It is the sum of 5l., the balance or difference remaining to him after having repaid himself everything that he expended in order to obtain the bale or chest which he sold for 45l.; and, if it stood by itself simply, it would be his whole year's income; but if it be multiplied some hundred times by as many different transactions, his income would be 500l. a year, and in respect of the one or the other sum, if so small a sum as 51. were assessable at all, he would be assessable to the income tax. Now let me go a little further, and suppose that the man became the owner of a bale of cotton by purchase for 201., and of a chest of tea of that value, which had been left to him as a legacy. Starting in business with these two articles of the joint value of 401., he sells them in the course of the year for 451. What is his profit ? Is it not the difference between the value of the articles and that for whic he sold them, viz., 51,