Haughton Tea Co., Ltd. v. Commissioner of Income Tax.
Present: Hearne and Wijeyewardene JJ.
HAUGHTON TEA COMPANY, LIMITED v. COMMISSIONER
Income Tax—Planting of estate with budded rubber—Ordinary precautionarymeasure—Expenditure not of capital nature—Permissible deduction—Income Tax Ordinance, ss. 9 (1) (c) and 10 (c) (Cap 188).
Where a rubber estate was replanted with budded rubber by the owneras an ordinary precautionary measure inseparable from the running ofthe estate on business lines,—
Held, that the expenditure was a permissible deduction under section9 (1) (c) of the Income Tax Ordinance.
HIS was a case stated by the Board of Review under section 74 of
JL the Income Tax Ordinance.
The appellant Company, which owns Haughton estate, purchasedSiriniwasa estate at an execution sale under a mortgage decree onFebruary 29, 1936. Soon after the acquisition of the estate, the appellantCompany decided upon a replanting programme with budded rubber.
The Income Tax Assessor was of the view that the sums expended bythe Company on replanting could not be wholly allowed as deductions incomputing profits of the Company and made additional assessmentsunder section 65 of the Income Tax Ordinance disallowing the expenditureof replanting in 1936, 1937 and 1938 although in the earlier assessmentsthe entire expenses of each of those three years had been allowed asdeductions. Additional assessments were accordingly made on theappellant Company for the years 1937-38, 1938-39 and 1939-40.
Both the Commissioner and the Board of Review subsequently upheldthe contention of the assessor.
H. V. Perera, K.C. (with him E. F. N. Gratiaen), for the appellant.—The reassessment is based on a misapplication of certain English cases.
Section 6 (1) (a) of the Income Tax Ordinance refers to profits from,inter alia, any business, and “business” would, under section 2, includeany agricultural undertaking. It is submitted that deductions shouldbe allowed in this case either under the general provisions of section 9(1)or under section 9 (1) (c).
The periodical replacement of trees is done in the ordinary course of thebusiness and is an expenditure normally incurred in keeping alive thesource of income. The source of income in the present case is the businessand not the tree ; the rubber tree is only an item in the business. Thechange of ownership of Siriniwasa estate would not make any difference.The Commissioner has misapplied The Law Shipping Co., Ltd., v. TheCommissioners of Inland Revenue1; and The Commissioners of InlandRevenue v. The Granite City Steamship Co., Ltd.1 By replanting treeswe were only doing something which the previous owner would have done.The replanting did not amount to the addition or improvement of aphysical asset. Where there is a continuity in the business the twoEnglish cases are inapplicable. Change of ownership is immaterialunless it corresponds to a discontinuance of the old business.
' 12 T. O. 6212 13 T. C. 1.
OF INCOME TAX.
Income Tax Appeal No. 113—5.
HE ARNE J.—Houghton Tea Co., Ltd. v. Commissioner of Income Tax. 323
On the basis of the previous assessments replanting was encouraged.The reassessment, therefore, would cause much hardship.
H. H. Basnayake, C.C., for the respondent.—The question is whetherthe expenditure incurred in replanting can be regarded as capitalexpenditure. If it is capital expenditure, the applicability of section 9need not be considered at all.
The Shipping Company case (supra) is not applicable to the facts of thiscase. Nor can the usual practice of the Commissioner of allowing deduc-tions for replanting be justified. The additional assessments can, however,be supported on the ground that the expenditure incurred in replanting isexpenditure of a capital nature falling under section 10 (c) of the IncomeTax Ordinance. Each tree is, in theory, an asset in the production ofthe income. There is no difference between a new plantation and areplantation. Any expenditure “ for the enduring benefit of thebusiness” is capital expenditure. See The Vallambrosa Rubber Co., Ltd.,v. Farmer1; Theobald v. Commissioner of Income Tax5; Hyam v. Com-missioners of Inland Revenue ”; Atherton v. The British Insulated andHelsby Cables'; Commissioner for Inland Revenue v. George Forest TimberCo., Ltd.0 No part of section 9 would be applicable in a case like this—The Rhodesia Railways, Ltd., et al. v. Commissioner of Taxes (SouthernRhodesia)0; Income Tax Case No. 1805; Margrett v. Lowestoff Water &Gas Co.8; Ainley v. Edens0; Income Tax Case No. 18410; Hyam’sCase (supra) ; Thornhill v. Commissioner of Income Tax11.
The provisions of the Income Tax Ordinance are to be strictly construedhowever great the hardship it may cause see (Income Tax CaseNo. 146™) ; Income Tax Case No. 184™.
E. F. N. Gratiaen, in reply.—The only question before the Commissionerwas the applicability of the Shipping Company case (supra). It is not,therefore, necessary to consider section 10 (c) of the Income Tax Ordi-nance. The Commissioner himself has followed the practice of treatingreplanting ordinarily as revenue expenditure, apparently on the authorityof Rhodesia Railways, Ltd. v. Collector of Income Tax', BechuanalandProtectorate". No Rubber tree which is planted in place of another canpossibly be regarded as a permanent improvement. By the replantingprogramme we were only substituting one wasting asset, for anotherwasting asset. Consumable assets should be distinguished from perma-nent assets—see judgment of Scrutton L.J. in Atherton’s case (supra).
Cur. adv. vult.
February 28, 1941. Hearne J.—
This is an appeal by the Haughton Tea Company, Ltd., on a casestated by the Board of Review under section 74 of the Income TaxOrdinance. Arguments by Counsel for the Company and the Assessorwho appeared before the Board have been summarized in the reference to
1 5 T. C. 529.919 T. C. 481.
9 41 N. L. R. 539.919 T. C. 303.
9 14 T. C. 486.'°5 S. A. T. C. 270.
3 10 T. C. 155, al p. 192." 40 N. L. R. 313.
9 11914) A.D. (S. Africa) 516, 524 et seq.19 4 S.A.T.C. 280.
* 1 S.A.T.C. 133.195 S.A.T.J. 268, 272.
7 5 S.A.T.C. 256.i*(1933) A.C. 368.
324 HEARNE J.—Haughton Tea Co., Ltd. v. Commissioner of Income Tax.
us, but the particular point of law requiring decision by this Court wasnot stated. It has, however, been possible to gather it from a minute inwhich the Commissioner of Income Tax set out the reasons for his decisionfrom which the Company appealed to the Board.
The assessee Company purchased Siriniwasa estate on February 29,1936, and in that year replanted five acres with “ budded rubber ”, In1937', 139 acres were replanted and in 1938, 100 acres. The expenditureincurred in these years was Rs. 6,391, Rs. 31,111 and Rs. 36,723 respect-ively. The Commissioner allowed the above-mentioned sums to bededucted in computing the profits of the Company during the years inquestion. It is clear from a perusal of his minute, to which I havereferred, that his original ruling had been that the deduction wasadmissible under section 9 (1) (c) of the Ordinance. Further, the impli-cation flowed from that ruling that the deduction was not expresslyprohibited by section 10 (c), as being in respect of an expenditure of acapital nature.
At a later stage, however, he made additional assessments afterdeducting the whole of the expenditure of replanting in 1936, Rs. 25,000of the sum expended in 1937 and a further Rs. 25,000 of the sum expendedin 1938. He indicated unambiguously why he had revised his firstview.
It was not because “budded” and not ordinary rubber had beenplanted ; it was not because he had overlooked section 10 (c) ; it was notbecause he thought the interpretation that had hitherto been placed onsection 9 (1) (c) was wrong; it was, in his opinion, because while theallowance is admissible to make up to the owner of a wasting asset thedeterioration caused by its use by him, such allowance is not admissibleto make up to the owner the deterioration caused by its use by a previousowner. In the former case, as he had hitherto held, the cost of re-planting would be a proper charge against receipts ; in the latter case, hethought, the expenditure would be of a capital nature.
Against this view Counsel for the Company contended ~ before theCommissioner and the Board. He submitted that the object of theoutlay was not to bring the estate into a better condition, i.e., to effectany improvement in it, but that “ the programme of replanting was thenormal programme of a certain percentage (of trees) being planted eachyear ”.
The Board supported the Commissioner and, in doing so, was in my'opinion wrong. Its decision was based on a misapprehension of theprinciple to be derived from the Law Shipping case
In that case, as the head-note reads, the appellant Company purchaseda second hand ship at a date when her periodical Lloyd’s survey wasoverdue, but had been deferred pending the completion of a voyage. Onher return, six months later, the survey was made and the Company wasobliged to spend a large sum in repairs. It was held that except for suchpart of the cost of repairs as was attributable to the period during whichthe ship was employed in the appellant Company’s trade, the expenditurein question was in the nature of capital expenditure, and was not anadmissible deduction in computing the Company’s profits.
112 T. C. 621.
HEARNE J.—Haughton Tea Co., Ltd. v. Commissioner of Income Tax. 325
The grounds for the view that was taken are clearly set out in thejudgment of the Lord President. “The purchasers started their tradewith a ship already in need of extensive repairs …. When theystarted to trade with the ship, the capital they required was not limitedto the price paid to acquire her, but included the cost of the arrears ofrepairs which their predecessors had allowed to accumulate ”.
That was not the position in this case. Siriniwasa estate was not in apoor condition at the time of its acquisition. The Commissioner accepteda statement to this effect from a representative of the Company. Re-planting took place, not to repair the neglect of years so as to enable theestate to yield a return, as the ship in the Law Shipping case (supra) hadto be made serviceable before any trade with her was at all possible, butas an ordinary, precautionary measure inseparable from the running of arubber estate on business lines.
Counsel who appeared for the Commissioner found himself unable—and in my opinion quite rightly—to support the additional assessmentson the ground that his client was right in his view of the law based on12 Tax Cases 621 and affirmed by the Board.
This, properly, is the end of the matter before us—the determination ofthe issue between the Commissioner and the Company which the latterunsuccessfully carried to the Board and thence to this Court.
The Board, however, expressed its views on section 10 (c) and section9 (1). In its opinion no deduction should be allowed, in any circum-stances, in respect of expenditure involved in replanting, as suchexpenditure is capital expenditure under section 10 (c) and, in particularthat it does not fall within the “ general words of section 9 (1) andCounsel for the Commissioner who,, at this stage, really constitutedhimself Counsel for the Board (I say this without in any way meaning togive offence), associated himself with the opinions expressed and invitedthis Court to endorse them. But he went further and argued that thepractice of the Income Tax Department based upon the applicability ofsection 9 (1) (c) was wrong.
I am of opinion that (this is neither the time nor the occasion tochallenge the practice of the Department in regard to section 9 (1) (c).It was not canvassed before the Board. The sub-section, the Commis-sioner says, has been generously interpreted and his reasons for giving ita generous interpretation are not known to us. It would, I think, bemost inappropriate to express any opinion on a matter which affects awide public and which is not involved in the reference, without theadvantage of hearing the Commissioner and merely on the submissionsof Counsel who, while formally appearing for him, does not representhis views. The interpretation of section 9 (1) (c) might, and probablywill, involve a consideration of questions of fact as well as of law. It isnot to be assumed that the commissioner, even if he has acted, in the past,as he felt generously, did so arbitrarily.
I am also of the opinion that the obiter dicta of the Board in regard to“ the general words of section 9 (1) ” do not call for comment. TheCommissioner’s view was based on section 9 (1) (c); while, in regard tosection 10 (c), I do not think the Board had before it the material to
Marimuttupillai v. Suppiah.pu.lle.
express an opinion on the thorny question of whether the expenditurewas of a capital nature. Certainly no reasons were given by the Boardfor its opinion.
The question of what is capital expenditure is one of fact which mustbe decided on available data and in accordance with principles that havebeen laid down. In Atherton v. British Insulated and Nelsby Cables, Ltd',Viscount Cave said that “ when an expenditure is made not only onceand for all but also with a view to bringing into existence an asset or anadvantage for the enduring benefit of a trade, there is very good reasonfor treating such an expenditure as properly attributable, not to revenuebut to capital ”, but he qualified this by saying that “ there may be specialcircumstances leading to an opposite conclusion ”.
There may be special circumstances obtaining in the rubber industryknown to the Commissioner but of which the Board and we are unaware.It does not appear to me that the expenditure involved in replanting, inthe substitution of an asset subject to waste for another wasting asset,effects any “ permanent improvement ”—to use the phrase of LordMacmillan in Rhodesia Railways, Ltd. v. Collecter of Income Tax2—in anestate, and it may be that it is generally regarded as an essential revenueexpenditure for the purpose of maintaining a certain requisite level ofproductive efficiency. At any rate, without fuff knowledge of the facts,the question is incapable of decision.
For the purpose of this appeal I assume but, in all the circumstances,do not decide that the past practice of the Income Tax Department is inaccordance with the law. The ground, however, on which the Commis-sioner made his additional assessments and departed from the establishedpractice of the Department under his control is not, for reasons which Ihave given, sustainable and the Board was, in my opinion, wrong inupholding him.-*
The appeal must, therefore, be allowed with costs and the additionalassessments annulled.
Wijeyewardene J.—I agree.
HAUGHTON TEA COMPANY, LIMITED v. COMMISSIONER OF INCOME TAX