Thornhill v. Commissioner of Income Tax.
1939Present: Moseley A.C.J. and Soertsz J.
THORNHILL v. COMMISSIONER OF INCOME TAXS. C. 137 (Inty.).
Income tax—Tea factory—Depreciation by wear and tear—Outgoings andexpenses—No deduction as such—Allowance in respect of repair andrenewal—Ordinance No. 2 of 1932, ss. 9 (1) (a) & (c) and 10 (c).
In ascertaining the income of a person from a tea estate, no allowancecan be made for depreciation by wear and tear in respect of a tea factorybuilding.
An allowance is expressly made for such premises by section 9 (1) (c)on account of repair and renewal.
HIS was a case stated for the opinion of the Supreme Court by theBoard of Review constituted under the Income Tax Ordinance:
The facts, as stated, are as follows :—
The appellant was assessed under the Income Tax Ordinance forthe year of assessment 1937-38 as being liable to pay a tax of Rs. 5,258.16on a taxable income assessed at Rs. 19,159. The appellant claimedan allowanc of Rs. 8,893 being the amount of the depreciation in thevalue of the buildings on his tea estates as being deductible in computinghis income which is liable to taxation. The Assessor refused to allowthe deduction which was claimed.
The appellant appealed to the Commissioner of Income Taxwho upheld the assessment of the Assessor and refused the deductionfor the'reasons given.in his decision.
Thereupon the appellant appealed to the Board of Review,constituted under the Income Tax Ordinance, upon the grounds ofappeal appearing in his petition of appeal dated June 8, 1938.
At the hearing it was urged that as the appellant was a tea planterwho converted his own green-leaf into tea upon his own estate, hewas carrying on a “ business ”, inasmuch as “ business ” includes an“ agricultural undertaking ”, under the Ordinance, and that he requiredcertain buildings to carry on that business. The buildings themselves,in respect of which he had claimed the depreciation were of the value ofRs. 177,869.75, but upon the appeal, he restricted the claim only tothe depreciation in respect of the tea factory which it was contended,was essentially used for the purposes of his “ business as it was therethat the various processes of converting green-leaf into tea were carriedon. It was contended that as “ profits ” were only restricted to “ netprofits ”, for the purposes of arriving at the taxable income, there musttherefore be deducted all necessary expenses of business losses from thegross income before arriving at the “net profits”. Authorities werecited as deciding that “ profits ” means surplus after deducting expensesand replacing capital which is lost. It was argued that the authoritieslaid down the proposition that any expense legitimately and properlydeductable to ascertain the net profits should be allowed to be deductedunless any such deduction was disallowed by any express provisions of
Thornhill v. Commissioner of Income Tax.
the Ordinance. The absence in any provision in our Ordinance likesection 209 (1) (a) of the English Income Taxt Act of 1918 was stressed.It was urged, that if ho deduction for depreciation was allowed, then itwould amount to a taxation of capital and not of income. The deductionwas claimed either under the words “ plant, machinery and fixtures ” orunder the words “ outgoings and expenses ” in section 9 (1) of theOrdinance; or else it must be allowed to be deducted as a “ businessloss ” before arriving at the appellant’s profits or income from his estates.
The Assessor contended that depreciation is a capital loss whichcannot be deducted in view of the provisions of section 10 (c) ; that thedepreciation of buildings was not an “ outgoing ” or an “ expense ”under section 9 (1), and could not be claimed under section 9 (1) (a) asthere was no depreciation by way of wear and tear arising out of its usein a trade.or business ; that the appellant was not carrying on a business ;that all expenses of a capital nature and all capital lost sunk or exhaustedshould be ignored in computing income for income tax; and thatdepreciation is not a loss of income.
The Board dismissed the appeal.
The appellant being dissatisfied with the decision of the 'Board,asked a case to be stated on a question of law. The question is whetherthe appellant is entitled to any deduction for the amount of the deprecia-tion of the value of his tea factory in respect of the year of assessmentin ascertaining his profits or income from his tea estates for income taxpurposes.
H. V. Perera, K.C. (with him Iyer, Renganathan and Rasaratnam), forappellant.—The appellant is entitled to a deduction on account of thedepreciation, by wear and tear, of his factory. Section 6 (1) of OrdinanceNo. 2 of 1932 read with section 2 as amended in 1937 speaks of nett profitsonly as chargeable with tax. Depreciation must be regarded as expendi-ture, according to ordinary commercial practice—In re The SpanishProspecting Company, Limited1; Ammonia Soda Co. v. Chamberlain;.Commercial pratice is taken into account even for purposes of incometax—Usher’s Wiltshire Brewery, Limited v. Bruce ’. It is in the light ofthese decisions that the provisions of section 9 of our Ordinance should beexamined.
Depreciation of a factory is caught up by the provisions of section9 (1) (a). The word “ plant ” includes a factory ; vide meaning of “ plant ”in Webster’s International Dictionary. If the word “ including ” insection 9 (1) is to be given effect to, outgoings and expenses should not beconfined to monies actually spent and liabilities actually incurred.Section 9 should be read with section 10. According to the spirit as wellas the letter of the law, we are entitled to a deduction for depreciation ofthe factory.
S. J. C. Schokman,. C.C., for Commissioner of Income Tax.—The case hasto be decided according to our own Ordinance. Depreciation of a buildingis not an “ outgoing ” under section 9. Depreciation of a factory wouldcome under loss of capital mentioned in section 10 (c) and no deductiontherefore can be allowed for it. Depreciation in plant and -machinery
(1911) 1 Ch. 92.- (IMS) 1 Cli. 26G at 291.3 (1916) A. C. 433 at 167.
SOERTSZ J.—Thornhill v. Commissioner of Income Tax.
.has been expressly provided for by section 9 (1) (o). So far as buildingsare concerned, there is provision for a deduction for renewal or repairbut not for depreciation—section 9 (1) (c).
Our law is similar to the English law before 1918. The relevantEnglish law before 1918 can be obtained from Snelling’s Dictionary ofIncome Tax Practice, p. 358; Henry Forder v. Andrew Handyside & Co.,Ltd. V Earl of Derby v. Aylmer Kauri Timber Co., Ltd. v. Commissionerof Taxes”; Alianza Company, Ltd., v. Bell'.
The word plant cannot be construed to include the factory itself—seeDaphne v. Shaw Margrett v. Lowestoft Water & Gas Co.In re Nutley& Finn
In England, by the Finance Act of 1918, a further allowance was madefor depreciation of mills and factories. We have no such enactmentin Ceylon.
H. V. Perera, K.C., in reply.—Full effect should be given to the words“ outgoings and expenses incurred in the production thereof “ appearingin section 9. There were no such words in the English law before 1918.
In regard to section 10 (c), loss of capital should not be confused withcapital loss ; the former occurs only where capital ceases to be.
It has been held that a warehouse is a plant and entitled to an allowancefor depreciation—John Hall, Junior & Co. v. Rickman *.
Cur. adv. vult.
March 23, 1939. Soebtsz J.—
The question that arises on this appeal is whether the assessee, a tea-planter, is entitled to deduct a sum of Rs. 8,893 on account of “ thedepreciation by wear and tear ” of his tea-factory, that is to say, of thebuilding itself, as distinguished from its contents.
The Commissioner of Income Tax and the Board of Review held againsthim on this point.
Mr. H. V. Perera who appeared in support of this appeal contended,that this allowance was claimed as an “ outgoing ” or expense “ incurredby the assessee ” in the production of his “ profits ” or “ income ”, andfalling within the specially enumerated instance in section 9 (1) (a),which provides for such a deduction as the Commissioner considersreasonable for “ the depreciation by wear and tear of plant, or machineryand fixtures, arising out of their use by the owner thereof in a trade,business, profession, vocation, or employment carried on or exercisedby him Alternatively, he argued that if the assessee’s claim did notfall within that particular provision, it was none the less good, inasmuchas it still was an “ outgoing ” or “ expense ” and was not taken out of thegeneral operation of section 9 (1), by section 10 or any other section ofthe Income Tax Ordinance.
The case put forward for the Commissioner of Income Tax was thatthis claim was not an allowable deduction under section 9 (1) (a) becauseit could not be described as a claim made on account of wear and tear of“ plant, machinery and fixtures ”, and that section 10 (c) took it out of the
1 Tar 'Coses 65.511 Tax Cases266.
6 Tax Cases 665.819 Tax Cases.481.
(1918) A. C. 771.r(isi)4) WeeklyNotes 64.
(1906) -A. C. 18.*(1906) 1 K. B. 311.
316SOERTSZ J.—Thornhill i>. Commissioner of Income Tax.
general scope of “ outgoings ” and “ expenses ” provided for by sction 9 (1),and that claims in respect of the maintenance and upkeep of buildingshad not been ignored by the Ordinance, but that there is provisionmade, for instance, by section 9 (c), for deductions on account of their repairand renewal.
Mr. Perera submitted that words and phrases occuring in thisOrdinance should be construed liberally in favour of the taxpayer, andthat the meaning that they ordinarily bear should be extended, withinreasonable limits, because the same words and phrases have been usedin respect of a variety of activities—professions, trades, vocations, andemployments, in some of which they are very much at home, while inothers they appear somewhat exotic. While agreeing with that submis-sion, I am unable to say that a reasonable extension of the meaning of theword “ plant ” can be made to include the building or shell which holds it.This view is in accord with that taken by Finlay J. in Margrett v. The Lowes-toft Water and Gas Company *. In that case, the taxpayer contended that awater tower which replaced an engine and pumps for the purpose of increas-ing the pressure of the supply of water through the pipes, was “ plant ”for which he could claim on account of depreciation by wear and tear.Finlay J. said “ you have to examine what the thing is. It is not enoughto say it was used in a particular way. Clearly if one takes the case of afactory with machinery in it, the bricks and motar would not be plant.One would anticipate, I think, that the same principle would apply here,that the pipes and so forth would be plant, but the actual structurewould not be “ plant ”.
In the present case one cannot, I think, say as much as could have been,and was said in support of the claim in that case, for there was the factthat the water tower replaced an engine and pumps, and performed theirfunctions. Again, in Daphne v. Shaw *, Rowlatt J. commenting on a con-tention addressed to him that the books of a‘lawyer are “ pant ”, observedas follows : “ I cannot bring myself to say that such books … '. are
plant. It is impossible to define what is meant by plant and machinery.It conjures up before the mind something clear in the outline, at any rate; itmeans apparatus, alive or dead, stationary or immovable to achieve theoperation which a person wants to achieve in his vocation ”. In In. reNutley and Finn3 it was sought to include within the expression “ wholeof the fixed plant and machinery at the brewery ”, (a) a chimney shaftwhich was built just outside the boiler house, but formed no part of it ;(b) a double boarded partition forming a malt and grain store. This hadbeen erected solely for the purpose of the business ; (c) staging erectedby placing joints on the stout bearers built into the walls of the brewerypremises. In an affidavit made by an experienced valuer it was statedthat the articles enumerated were invariably included under the head offixed plant on sales of freehold breweries. But, Kekewich J. disallowedthe claim. He said that he “ thought that as, speaking generally,‘ machinery ’ included everything which by its action produces or assistsin production, so ‘ plant ’ might be regarded as that without whichproduction could not go on. It was, so to speak, dead stock, it did notitself act, but was that through and by means of, and in which, actiontook place, and included such things as brewers’ pipes, vats and the like ”.
1 19 Tax Cases 481.3 11 Tax 256.3 (1894) Weekly Notes 64.
ABRAHAMS C.J.—Debate v. Wijesooriya.
If it had been intended to allow for depreciation of the structure itselfin which plant, machinery and fixtures are placed' it would have beenquite simple for the Legislature to do so by the addition of a word or two.It seems to me that the scheme of the Legislature was to allow deductionsonly for depreciation of such things as physically deteriorate by wear andtear in the course of constant use, and to make provision for premisesemployed in producing income such as : such buildings as tea-factorieswhich apart from natural decay, may, in a sense, be said to depreciateby wear and tear, for instance, by being subjected to constant vibration,by allowing for sums expended in their repair or renewal. It isinstructive that in 1878 the English Act made allowance for depreciationby wear and tear of plant and machinery. It was only in 1918 that,by another act, an allowance was made to cover depreciation of mills,factories and similar premises.
For these reasons, I am of opinion that when ascertaining the profitsor income of any person from any source by deducting all outgoings andexpenses incurred in the production thereof, no allowance can be madein respect of premises such as a tea-factory building employed inproducing income, for depreciation by wear and tear. Such an allowanceis impliedly disallowed by section 9 (1) (a). An allowance is, however,expressly made for such premises so employed by section 9 (1) (c) onaccount of repair and renewal.
The appeal, therefore, fails and must be dismissed with costs.
Moseley A.C.J.—I agree.
THORNHILL v. COMMISSIONER OF INCOME TAX