LAW JOURNAL REPORTS

FOR

THE YEAR 1897

IN THE

Queen's Bench Division

OF THE

HIGH COURT OF JUSTICE,

INCLUDING

The Court for Crown Cases Reserved,

REPORTED BY

GILBERT METCALFE, FRANCIS BOOKER FITZROY COWPER,
SPENCER LANGTON HOLLAND, JAMES EDWARD ALDOUS, AND
(Bankruptcy Cases) W. IVIMEY COOK,
BARRISTERS-AT-LAW,

IN

The House of Lords,

REPORTED BY

JAMES EYRE THOMPSON, BARRISTER-at-Law,

AND IN

The Court of Appeal,

REPORTED BY

W. E. GORDON, G. HUMPHREYS, AND JOSEPH SMITH'; · AND
A. J. SPENCER, A. J. HALL, AND H. C. ROPER,
BARRISTERS-AT-LAW.

EDITOR:

JOHN MEWS.

SUB-EDITORS:

W. E. GORDON AND A. J. SPENCER.

VOLUME LXVI.

CONTEMPORARY WITH LAW REP. [1897] 1 & 2 Q.B.; AND LAW REP. [1897] A. C.

B

LELANŲ STANFORD,
LIBRARY

UNIVERSITY

PUBLISHED FOR THE PROPRIETORS AT THE OFFICE OF

THE LAW JOURNAL REPORTS, 119 CHANCERY LANE, LONDON.

1897

DECISIONS

OF THE

QUEEN'S BENCH DIVISION

AND ON APPEAL THEREFROM

TO THE

COURT OF APPEAL AND HOUSE OF LORDS,

INCLUDING THOSE ON

CROWN CASES RESERVED

AND OF THE

RAILWAY AND CANAL COMMISSION.

purchase-money of the business acquired, Company) "until the transfer of the

ROYAL INSURANCE Co. v. WATSON, H.L. with any other fire or life insurance company. The remainder of the staff of the Queen Insurance Company shall also be taken over by the Royal Insurance Company."

On the transfer of the business the manager of the Queen Insurance Company was taken into the service of the Royal Insurance Company at the salary of 4,0007. per annum, and shortly afterwards, in pursuance of the powers conferred on them by article 6 of the agreement, and in accordance with its terms, the Royal Insurance Company paid him the sum of 55,8467. in commutation of his annual salary.

The Commissioners for the Division of Liverpool were of opinion that the sum so paid was a proper deduction from the profits chargeable to income tax, but at the request of the Surveyor of Taxes stated a Case.

In the Queen's Bench Division Vaughan Williams, J., thought that the case ought to be sent back to ascertain the circumstances in which the agreement to pay this sum was made. Wright, J., held that the amount ought not to be deducted, but withdrew his judgment. On the appeal of the Surveyor of Taxes the Court of Appeal (Lord Esher, M.R., Lopes, L.J., and Kay, L.J) held that this was not a payment made for the purposes of trade within the meaning of Schedule D, rule 1 of the Income Tax Act, 1842 (5 & 6 Vict. c. 35), s. 100, and could not therefore be deducted from the year's gross in

come.

The company appealed to this House.

Joseph Walton, Q.C., and W. H. Horsfall (A. Hyslop Maxwell with them), for the appellants.-The appellants are entitled to deduct from their profits this sum of 55,8467. as it was a disbursement or expense wholly and exclusively laid out for the purposes of their business within the meaning of the rules in the Income Tax Act, 1842, s. 100, Schedule D. There is no doubt that if the manager had been retained and had received 4,000l. a year the deduction would have been allowed. This payment, being in substitution for the 4,000l. a year, ought on the same principle to be allowed in diminution of income.

If damages were obtained for the wrongful dismissal of a servant, there can be no doubt that such damages would be lawfully deducted from the year's profits. The Court of Appeal did not take the view that this was a payment on capital account, or part of the purchase-money of the Queen Company's business. It would have been capital if the manager's services had been immediately dispensed with; but he continued for some time to serve

the appellant company. The payment was really for his services, and as much part of the working expenses of the concern as the salaries of clerks and other persons employed. It was in no sense a purchase of goodwill. The deductions allowed are not confined to those which aid in the profits of the particular year in which they are made. Advertisements, for example, are intended to bear fruit in future years; and yet they and this payment also are a means to enable the company to earn its profits and proper allowances under rule 1 of cases 1 and 2. The "balance of the profits and gains" within the meaning of the Act of 1842, s. 100, Schedule D, 1st case, rule 1, could not have been ascertained until this sum was deducted. The Commissioners were right in finding that this was not capital expenditure; the Court of Appeal have not said it was, and there is no other possible position than that it is a legitimate deduction from assessable income or profits.

The Solicitor-General (Sir R. B. Finlay, Q.C.), and Danckwerts, for the respondent, were not heard.

THE LORD CHANCELLOR (LORD HALSBURY).--I have had some difficulty in dealing with the various grounds on which this case has been debated both in the Court below and in the Court of Appeal, but there is one ground which practically is, to my mind, only a question of fact, and which, I think, is decisive of the issue in this appeal. I desire to make that statement, because with reference to some other questions which I think will not be governed by this decision, this case will turn on more or less a question of fact, and if it had been necessary to enter into those other questions, I think we should have heard the Solicitor-General

ROYAL INSURANCE Co. v. WATSON, H.L. and applied our minds to the solution of some of the very difficult and intricate problems which are raised by the language of the Income Tax Acts. Confining myself to the one ground upon which this case, I think, must depend, I entertain no doubt whatever that the judgment of your Lordships ought to be in affirmation of the judgment of the Court of Appeal.

Whatever else is clear or obscure in the Income Tax Acts, there is no doubt about one particular head of enquiry, which is to my mind decisive of this case. It is often a very difficult question to ascertain, in dealing with a commercial account, what is capital and what is income; but if it is established as a fact that the expenditure is capital, the language of the statute itself determines that that expenditure cannot be deducted from the profits, and that the profits are to be ascertained without reference to the capital expenditure. That appears to me to be decisive of this case, because, looking at the whole circumstances of this transaction, I observe that the transfer from the one company to the other is to be upon certain terms contained in the agreement sanctioned by the statute. I can entertain no doubt whatever that the money which was to be paid by the one company, and which was the consideration for the transfer of the business from the one company to the other, was capital expenditure in the hands of the new company who had taken over the business, the goodwill, and the staff and all other accessories which made it possible to continue the business; and one of the items there is the particular matter which arises here. There was a manager, and the object was to have that manager brought within the new company. been argued on behalf of the appellants that it was important that the manager should be in communication with the agencies that it was important for the company that that man should still continue in connection with the company. Then an agreement is made, not between

the

It has

manager and the company-there may have been another agreement, and, of course, there must have been-but the agreement before us is one made between the vendor company and the vendee company, and it places upon the vendee com

pany the obligation of taking this manager upon certain terms.

It is not necessary to go into any other part of the question than this. Other questions undoubtedly would arise: the question of commutation and other matters which I decline to refer to, but this is perfectly clear. It may be said that the bargain between the two companies involved a liability which was discharged by the payment of this sum, and therefore I, as a matter of fact, come to the conclusion that this was a part of the purchasemoney; and when I use the compendious phrase phrase "purchase-money," of course I include the arrangement made in respect of shares, because it matters not whether it was paid in money or was paid in money's worth-but the result is that one of the companies sells to the other, and part of the consideration which was contemplated by both parties, and in respect of which the bargain was made and without which the bargain could not have been made, was the manager, and all that was incident to the manager, in respect of the payments to be made to him, whether made at once or made in this form of commutation.

Under these circumstances it appears to me that this comes within the express language of the statute; it is capital expenditure; it is the purchase-money for the concern that is to say, it is partly so. It is perfectly immaterial whether it was entirely so or partly so, because, if it was partly so, it is enough to establish the proposition which I am maintaining.

Under these circumstances it appears to me to be unnecessary and undesirable to consider the other questions raised in this case; that one proposition satisfies me, and I hope will satisfy your Lordships, that this appeal cannot be maintained, and therefore I move your Lordships that the appeal be dismissed with costs.

LORD HERSCHELL.-I am of the same opinion. The question is whether this sum of between 50,000l. and 60,000. paid to the former manager of the Queen Insurance Company, who afterwards became the manager of the appellant company, can be set against the receipts of the year in which the payment was made