Theobald v. Commissioner of Income Tax.
Present: Keuneman and Nihill JJ.
THEOBALD v. COMMISSIONER OF INCOME TAX.
157—D. C. (Inty.) Income Tax.
Income tax—Business of growing papaw trees to extract papain—Lease of landswithout rent—Agreement to reafforest or make permanent cultivation ontermination of lease—Buildings erected on the land—Claim for deduction—Capital expenditure—Income Tax Ordinance, s. 10 (c) (Cap. 188.) ■The appellant carried on the business of extracting papain from thepapaw fruit. For this purpose he took on lease from, the Crown andfrom private parties lands for which no rent is paid. In the case ofCrown lands he agrees to reafforest them and in the case of private landsto put on them a permanent plantation. During, the period of the leasethe appellant erects sheds on the land to house the drying ovens and linesto house the labourers. On the expiration of the' lease it is frequentlyfound not worth while dismantling these structures and re-erecting themelsewhere and they are left behind on the land when it is surrendered tothe lessor. It was stated that in the year of assessment in question asum of Rs. 6,512 was spent , on these "buildings. The appellant claimeda deduction of one-half of this sum as an outgoing or expense.
Held, that the expenditure incurred was of a capital nature withinthe meaning of section 10 (c) of the Income Tax Ordinance and was nota permissible deduction under section 9 of the Ordinance.
173 E. R. 1036» 176 E. R. 869.
176 E. R. 86S.A 174 E. R. 431.
Theobald v. Commissioner of Income Tax.
HIS was a case stated by the Board of Review under section 74 ofthe Income Tax Ordinance.
The facts are stated in the headnote.
The appellant claimed a deduction of Rs. 3,256 half the totalexpenditure. The appellant’s claim was disallowed by the Assessor andon appeal by the Commissioner of Income Tax, the matter was then arguedbefore the Board of Review. The Board held that the expenditure wasof the nature of capital expenditure under section 10(c), which
cannot be allowed as a deduction under section 9 of the Income TaxOrdinance.
H. V. Perera, K.C. (with him S. Aiyer and Renganathan), for assesseerappellant.—The question for consideration is whether the sum of Rs. 3,256represents capital expenditure or revenue expenditure. It is submittedthat it is revenue expenditure. According to the facts mentioned in the casestated, the structures regarding which the expenditure was incurred wereintended to be temporary and to serve only one set of operations and notthe whole of our business. The business itself is something more thanthe operations carried on on a particular land; it consists in a repetitionof these operations on different lands. The structures put up by theappellant on each land may be compared to those temporarily erected byan itinerating cinema or by a building contractor, and should be distin-guished from the sheds, cooly lines, &c., of a rubber plantation ; the latterare not only permanent but. are intended to serve the business indefinitely.
Section 9 (1) of Cap. 188 is applicable to the present case, and notsection 10 (c). The expression “ capital expenditure ” occurs also insection 30 (4). The benifit derived from the abondoned sheds by a thirdparty should not be taken into consideration—Usher’s Wiltshire Brewery,Ltd. v. Bruce For the tests to decide whether an item of expenditure iscapital expenditure or revenue expenditure, see The Vallambrosa RubberCo., Ltd. v. Farmer3; Atherton v. The British Insulated and Helsby Cables,Ltd.3; The Anglo-Persian Oil Co., Ltd. v. Dale '. The meaning of “ fixedcapital ” is dealt with in Ammonia Soda Co., Ltd. v. Chamberlain^
The Commissioner of Income Tax has purported to follow 'Addie’sCase ". The decision of the Board of Review cannot be justified. We areconcerned in this case with recurring, and therefore, revenue expenditure.
H. H. Basnayake, C.C., for Commissioner of Income Tax, respondent.—The question is whether the expenditure on the cooly lines, &c., falls undersection 9 or section 10 of Cap. 188. Section 10 (c) originally read thus :
“ Any capital withdrawn or any sum employed or intended to be employedas capital ” ; these words were deleted subsequently and in their placewere substituted “ any expenditure of a capital nature ”.
The fact that the sheds were for temporary use does not alter the natureof the expenditure as lone as something stood in place of the money spent—Eastmans, Ltd., v. Shaw ’ ; John Smith & Son v. Moore s. It is true thatthere is no exact definition of “ capital expenditure ” and of “ outgoingsand expenses”. Mallett v. The Staveley Coal & Iron Co., Ltd.° throws
■I. R. (1915) A. C. 433 at 469.’• L. B. (1918) 1 Ch. 266 <U 286.
» L. R. (1926) A. C. 205, 10 T. C. 155.7 14 T. C. 218.
* 16 T. C. 253.* 12 T. C. 266 at 282.
* 13 T. C. 772 at 780.
KEUNEMAN J.—Theobald v. Commissioner of Income Tax.
light on the meaning of those terms. Where the expenditure is incurred,for the purchase of a capital asset, it is of a capital nature—Eastmans,Ltd. v. Shaw (supra) Smith v. The Westing house Brake Co.1; The GraniteSupply Association, Ltd. v. Kitton ’; Hyam v. The Commissioners of InlandRevenue *; The Commissioners of Inland Revenue v. AdamThe questionof capital expenditure is not always confined to a trade or business; itmay arise even in the case of an individual—The Commissioners of InlandRevenue v. Fargus3, Green v. Favourite Cinemas, Ltd. *.
H. V. Perera, K.C., in reply.—The principle applicable is the one laiddown in Atherton’s case (supra). There is a difference between expendi-ture “ for the enduring benefit of the business and expenditure on aparticular set of operations; the former is capital expenditure, and the latteris revenue expenditure.
Cur. adv. vult.
June 6, 1940. Keuneman J.—
The appellant claimed to be entitled to deduct a sum of Rs. 3,256 fromhis assessable income for the year of assessment 1938-39 in the followingcircumstances which are set out in the case stated : —
“ The appellant has been carrying on for some years the business ofmaking papain from the papaw fruit, in partnership with another.The partnership take on lease from the Crown and from private partiesvarious blocks of jungle lands and grow papaw trees on them forobtaining the milk for the making of papain, from the fruits of thesetrees.
“ The leases were stated to be generally of a period from two to fouryears during which time the lessees clear the land and carry out eitherre-afforestation, in the case of Crown lands, or the planting of a perma-nent agricultural plantation, such as coconut, on private- lands, in lieuof rent as the lands are leased out'free of rent, because of thepermanent afforestation or plantation which the lessees have to effect,whilst they carry out the planting of papaw trees and extract thepapain therefrom in the course of their business. The papaw treesyield almost the whole milk that can be got from them in about twoyears, and on the expiration of the leases, the properties are handedback with the permanent plantation which has been established whilstthe papain was being tapped from the papaw trees which have beengrown.
“ For the purpose of converting the milk into papain for export, thefirm used a special kind of drying oven. The ovens and the sheds inwhich they are housed, covered with zinc sheets all round, are set upon each block of land on which the growing of papaw trees is done. Inaddition to that, temporary cooly lines to house the labourers employedin the business are also erected on these blocks of land. There areinvariably a number of different blocks of such lands, in various places,on which the firm is carrying on its business operations.
i 2 T. C. 357.• 4 14T.C. 34.
*5 T. C. 168.• 10 T. C. 665.
» 14 T. C. 479.■'* IS T. C. 390.
542 KEUNEMAN J.—Theobald v. Commissioner of Income Tax.
“ On the expiration of a lease, it is frequently found not worth whiledismantling these structures and re-erecting them elsewhere, so, theyare generally left on the land when it.is surrendered to the lessor, whosometimes pays compensation for them and sometimes does not. Sothat, on the opening of a new block for planting trees and tapping ofpapain, fresh drying sheds and lines have to be erected, more oftenthan not”.
The sum of Rs. 6,512 was claimed by the firm as having been incurredin the year in question, namely, Rs. 4,270 on the erection of papaindrying sheds, and Rs. 2,242 on cooly lines. The appellant claimed adeduction of Rs. 3,256, namely, half of the total expenditure. The amountof tax payable in respect of this sum is Rs. 586.08.
The appellant’s claim was disallowed by the assessor, and, on appeal,by the Commissioner of Income Tax. On July 26, 1939, the matter wasargued before the Board of Review. The Board held that the expenditurewas of nature of capital expenditure under section 10 (c), which cannot' be allowed as a deduction under section 9 of the Income Tax Ordinance(Chapter 188). The assessment was accordingly affirmed.
The matter now comes before this Court on a case stated by the Board•of Review, under section 74 of the Income Tax Ordinance.
Counsel for the appellant referred us in the first instance to the case ofThe Vallambrosa Rubber Co., Ltd. v. Farmer.1 In this case, a rubbercompany had an estate, of which, in the year under review, one-seventhonly produced rubber, the other six-sevenths being in process of culti-vation for the production of rubber. Expenditure for the superintendence,weeding, &c., was incurred by the company in respect of the whole estate.It was held that in arriving at the assessable profits, the company wasentitled to deduct the expenditure for superintendence, weeding, &c., onthe whole estate and not one-seventh of such expenditure only. Afterconsidering. and rejecting the proposition that nothing could ever bededucted as an expense unless the expense was purely and solely referableto a profit which was reaped within the year, the Lord President proceeded,to give a rough definition of ‘ capital expenditure ’—
“I think it is not a bad criterion of what is capital expenditure asagainst what .is income expenditure to say. that capital expenditure isa thing which is going to be spent once and for all, and income expendi-ture is a thing that is going to recur'every year.”
This definition of capital expenditure was carried a stage further in thecase of Atherton v. The British Insulated and Helsby Cables, Ltd.’ There,the respondent company claimed as a deduction in computing its profitsfor income tax purposes a lump sum of £31,784 which it had contributedirrevocably as a nucleus of a Pension Fund established by trust deed forthe benefit of its clerical and technical salaried staff, that being the sumactuarially ascertained to be necessary to enable past years of service ofthe then existing staff to rank for pension. It was held by a majority ofthe House of Lords that the sum in question was not in an admissible
3 5T.C. 52f.
(1926) U. L. A. G.205, 10 T. C. 155.
KEUNEMAN J.—Theobald v. CommissiorHer of Income Tax.
deduction. In the course of his judgment, Viscount Cave, Lord Chan-cellor, discusses the distinction between revenue expenditure and capitalexpenditure, and criticises the rough criterion set up in the Vallambrosacase (.supra). He says: —
“The criterion is not, and was obviously not intended by LordDunedin to be, a decisive one in every case; for it is easy to imaginemany cases in which a payment, though made ‘ once and for all ’, wouldbe properly chargeable against the receipts
His Lordship then goes on to give instances from decided cases, and.proceeds to lay down a general principle : —
"But when an expenditure is made, not only once and for all, butwith a view to bringing into existence an asset or advantage for theenduring benefit of a trade, I think that there is very good reason (inthe absence of special circumstances leading to an opposite conclusion),for treating such an expenditure as properly attributable, not to revenue,but to capital .
His Lordship was satisfied that the payment in that case was “ in thenature of capital expenditure
One other case cited by the appellant must be mentioned, namely,The Anglo-Persian Oil Co., Ltd. v. Dale There, by agreements made in1910 and 1914, the appellant company appointed another company as itsagents in Persia and the East for a period of years, upon the terms (inter-alia) that the agents should be remunerated by commission at specifiedrates. In course of time, the amounts payable to the agents increasedfar beyond the amounts originally contemplated by the company, and,after negotiation between the parties, the agreements were cancelled in1922, the agent company agreeing to go into voluntary liquidation, andthe company agreeing to pay to the agents £300,000 in cash. This sumwas in fact paid, and it was held that this payment was an allowablededuction fop.the purposes of Income Tax and Corporations Profits Tax.This case was ultimately decided in the Court of Appeal.
Counsel for the appellant laid great stress on the language of Romer L.J.where he deals with the passage from Viscount Cave’s judgment in theAtherton case (supra) : —
“ It should be remembered, in connection with this passage, that theexpenditure is to be attributed to capital if it be made ‘ with aview ’ to bringing an asset or advantage into existence. It is also tobe observed that the asset or advantage is to be for the ‘enduring;benefit of the trade. I agree with Mr. Justice Rowlatt that by‘ enduring ’ is meant ‘ enduring in the way that fixed capital endures ’.An expenditure on acquiring floating capital is not made with a viewto acquiring an asset that may be turned over in the course of trade, ata comparatively early date ”.
Counsel for the appellant argued that the proper test to apply in thiscase is that laid down by Viscount Cave and explained by Lord Justice
' 10 T. C. 253.
KEUNEMAN J.—Theobald v. Commissioner of Income Tax.
Homer. He argued further that, if that test was applied, the expenditurein the present case would be clearly not of a capital nature. I shall dealmore fully with this argument later.
Counsel for the respondent has also referred us to several cases, and Ishall refer to some of them. One of these cases is Eastmans, Ltd. v. Shawwhere the appellant company carried on business as butchers and meatretailers. It was the policy of the company to close or to open shops inaccordance with the needs of their business as a whole, and it was advan-tageous to dispose of fixtures and fittings in the shop given up ratherthan to transfer them to a newly acquired shop. It was held that thecompany could not deduct the difference between the cost of new fixturesand the price obtained for old fixtures in computing the company’sprofits for the purpose of Income Tax and Corporation Profits Tax.This was decided finally in the House of Lords on the ground that theexpenses were of a capital nature.
In this case, Rowlatt J. dealt with an interesting question which mayhave a bearing on the present case : —
“ Then Mr. Needham says, and this is the point:Their business
was really that of travelling butchers. He said, for instance, like acircus …. Let us take a travelling butcher who has his stallin one town to-day, and his stall in another town to-morrow, and whosebusiness it is to sell here to-day and there to-morrow. He may very well,
1 should think, charge his moving expenses …. as an expense’of his travelling business. But this is not a travelling business. It is,if I may borrow the expression from the Granite case (5 Tax Cases 168),a ‘ flitting ’ business …. They substitute one shop, which,for however short a time it lasts, is permanent in its nature, for anothershop, which for however short a time it has lasted, has also been in itsnature of a permanent character. They are substituting shops forshops, and are not, I think, in any reasonable sense of the word travel-ling their business from place to place”.
So also, in the case of The Granite Supply Association, Ltd. v. Kitton",'where a granite company moved their business to larger premises, the•expenses of carting the granite from the old to the new premises and of'baking down and re-erecting two cranes w.ere held not to be allowable•deductions. Vide also Smith v. The Westminghouse Brake Co.’ and Hyamv. The Commissioners of Inland Revenue *, in which an interesting comment•on Eastman’s case (supra) is to be found. The Lord President says : —
“ That was the case of a multiple-shop business, in which the policywas not to carry on business in a number of permanently establishedpremises, but to carry on …. a mobile trade here, there, and
everywhere, so long as there was a prospect in any particular locality,however temporary, of doing profitable business …. It mightbe argued that, having regard to the mobile character of the trade andthe constant change of premises which was necessarily incident to it,the cost of supplying these temporary premises with fittings was aproper revenue charge. But it was not so regarded either by the Judge•of first instance or by the Court of Appeal or by the House of Lords
14 T. C. 218.>2T.C. 357.
5 T. C. 168.* 14 T. C. 479.
KEUNEMAN J.—Theobald v. Commissioner of Income Tax. 545
Another case has also to be considered, namely Mallett v. The StaveleyCoal and Iron Co., Ltd.' Here, a colliery company held the right to workcertain beds of coal under mining leases for terms of sixty-three andtwenty-one years respectively. The company agreed in 1923 for thesurrender of a part of the seams demised. It was held that the paymentfor the surrender of the seams was an expenditure of capital, and not anadmissible deduction from profits for income tax purposes. In this case,Lord Hanworth, Master of the Rolls, accepted the test applied byRowlatt J. : —
“ The company do not make these payments to get rid of any annualcharge against revenue in the future. They make these pay-ments to get rid of the loss in the business of apprehended loss in thebusiness—an entirely different matter ….”
Another case of interest is John Smith & Son v. Moore", which, althoughrelating to Excess Profits Duty, has also an application to the presentquestion. The matter that concerns us is the payment of £30,000 forthe acquisition of certain unexpired contracts for the supply of coal atfixed prices. All these contracts expired at the end of the year in whichthey were purchased. The majority of their Lordships in the House ofLords held that this was a capital expenditure. Viscount Haldane saidin this connection: —
“ In the case before us, the appellant, of course, made profit withcirculating capital, by buying coal under the contracts ….
but he was able to do this simply because, he had acquired, amongother assets of his business, including the goodwill, the contracts inquestion. It was not by selling these contracts, of limited durationthough they were, it was not by parting with them to other masters,but by retaining them, that he was able to employ his circulatingcapital in buying under them. I am accordingly of opinion that;although they may have been of short duration, they were none theless part of his fixed capital”.
I have stated the law so far as it appears to be relevant to the presentcase. It remains now to apply the law to the facts.
The businesS bf the appellant is the making of papain from the papawfruit. For the purposes of this business, he takes leases for periods oftwo to four years generally, which is the period which is profitable forthe exploitation of the land for the appellant’s purposes. The leases arefree of money rent, but the appellant carries out an afforestation schemein the case of Crown lands, or carries out the planting of a permanentplantation in the case of private lands. To protect the drying ovens, theappellant puts up sheds, and, to house the labourers employed in thebusiness, he puts up temporary cooly lines. As the exploitation of eachland continues for a limited period, the appellant does not put up anystructure of a permanent character. At the end of each lease, thesestructures are generally left standing on the land when it is surrenderedto the lessor. Occasionally the lessor pays compensation to the appellantbut ordinarily no compensation is obtainable.- It is rarely worth thewhile of the appellant to dismantle the structures and to re-erect them on.1 14 T. C. 772.a 12 T.C. 266.
2»J . N .B 17627 (5/52)
546 KEUNEMAN J.—Theobald v. Commissioner of Income Tax.
fresh blocks of land taken on lease. So, for the most part, the appellanthas to utilize fresh malerial to erect his sheds and cooly lines on the landsto which he moves.
Does the expenditure in respect of these structures fall within thedefinition of Viscount Cave in Atherton’s case, as explained by Romer L.J.in the Anglo-Persian Oil Case?
To begin with, is it made “ once and for all ” ? There is no doubt thatthe expenditure is incurred “ once and for all ” in respect of each landleased, but Counsel for the appellant argues that, as far as the business isconcerned, it is a constantly recurring item. I think the matter will bestbe argued in connection with the third element in Viscount Cave’sdefinition.
Secondly, was the expenditure incurred “ with a view to bringing intoexistence an asset or advantage ” for the benefit of the business? Ithink this element is clearly satisfied in the present case.
Thirdly, is that asset or advantage “for the enduring benefit” of thebusiness ?
Now, I may point out, with all respect, that, although in other casesthe words “ permanent ” and “ relatively permanent ” have been used,Viscount Cave adopted the word “ enduring ”. How does fixed capitalendure ? Their Lordships of the House of Lords held in John Smith’scase (supra) that the fact that it is of short duration does not prevent anasset from being regarded as fixed capital. In the case in question, itwas a wasting asset. Fixed capital, I take it, may be wasting; it mayalso be subject to depreciation, and it may be that in the course of timeits value may be practically nil. Further, I think it may be fixed capital,although it is in the contemplation of the owners that it will have to besuperseded in the process of time. The asset must, however, be for theenduring benefit of the business to be regarded as fixed capital. RomerL.J. in the Anglo-Persian Oil case (supra) appears to have had in mindthis distinction between fixed capital and what has been referred to inother cases as circulating capital, and which he refers to as “ floatingcapital ”, namely, “ an asset which may be turned over at a comparativelyearly date ”.
It has not been argued by Counsel for the appellant, nor can I myselfsee, that the expenditure in question in this case can be regarded in anyway as circulating or floating capital. Counsel for the appellant in effectsought to compare his case to that of the travelling circus or travellingbutcher mentioned by Rowlatt J. in Eastman’s case (supra). He arguedthat this is in its nature a travelling business. He instanced the case of abuilding contractor who puts up his sheds for the purpose of his operations,and keeps moving from one site to another as his business requires, andon each site erects the necessary sheds. Eastman’s case, Counsel arguedis to be distinguished because it was the intention of the company in thatcase to maintain each shop it opened as a permanent shop, if the natureof the business in the locality was favourable.
In the present business, it must be admitted, there is a certain degreeof mobility, and there is no intention of remaining on any land leased fora longer period than the two to four years necessary for the exploitationof the land. But can this business really be regarded as a travelling
Vanderlan v. Vanderlan.
business ? I think the position is not in any reasonable sense comparablewith that contemplated by Rowlatt J., where the butcher has his stallin one place to-day and in another place to-morrow. In the present case,the appellant obtains the benefit of the structures for the full period forwhich the land can be regarded as economically exploitable for the makingof papain ; and that period of time, is, in my opinion, a substantial period,or,-to adopt the language of Romer L. J., the appellant has no intentionof removing or abandoning the structures “ at a comparatively earlydate For the purposes of his exploitation of the land, expenditure onsheds and cooly lines is necessary, and he takes care to adapt his expendi-ture to the economic conditions.'
No doubt the appellant realizes that, at the-end of his exploitation,there may be no value whatever attaching to the structures. But I thinkthe expenditure is incurred for the enduring benefit of the business, notonly in relation to the particular land, but also in relation to his businessgenerally, and is made once and for all.
It is not an easy matter to say whether a particular set of facts falls onone side of the line of division or of the other. But in this case, I am ofopinion that the expenditure in question is of “ a capital nature ” withinthe meaning of section 10 (c) of the Income Tax Ordinance, and that itsatisfies the condition laid down by Viscount Cave as set out earlier.
The assessment is confirmed and the appeal is dismissed with costs,but any deposit made by the appellant under section 74 (1) of the IncomeTax Ordinance will be reckoned as part of the costs.
Nthtt.t. J,—I agree.
THEOBALD v. COMMISSIONER OF INCOME TAX