Supreme Court of Canada
Minister of National Revenue v. Dominion Natural Gas
Co. Ltd., [1941] S.C.R. 19
Date: 1940-11-18
The Minister of National
Revenue Appellant:
and
The Dominion
Natural Gas Company Limited Respondent.
1940: May 27, 28; 1940: November 18.
Present: Duff C.J. and Crocket, Davis,
Kerwin and Hudson JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Income tax—Computation of taxable income—Claim
for deduction for legal expenses incurred in defending franchise to supply
natural gas—Income War Tax Act, R.S.C. 1927, c. 97, s. 6 (a) (b)—"Expenses
not wholly, exclusively and necessarily laid out or expended for the purpose of
earning the income"—"Payment on account of capital."
Respondent company supplied natural gas to
inhabitants in parts of the city of Hamilton. Its right to do so was attacked in an action in which there were
claimed against it a declaration that it was wrongfully maintaining its mains
in the streets, etc., in said city and wrongfully supplying gas to the
inhabitants, an injunction against its continuing to do so, a mandatory order
for removal of its mains, and damages. Respondent defended the action and was
successful, at trial and on appeals. Its legal expenses of the litigation were
$48,560.94 (after crediting all sums recovered against the other party as taxed
costs). The question now in dispute was whether that sum, which respondent paid
in 1934, should be allowed as a deduction in computing respondent's taxable
income for that year under the Income War Tax Act, R.S.C., 1927, c. 97.
Held: The sum
was not deductible in computing respondent's taxable income. (Judgment of
Maclean J., [1940] Ex. C.R. 9, reversed).
Per the Chief
Justice and Davis J.: In order to fall within the category "disbursements
or expenses wholly, exclusively and necessarily laid out or expended for the
purpose of earning the income" (s. 6 (a) of said Act), expenses
must be working expenses; that is to say, expenses incurred in the process of
earning "the income"; and the expenditure in question did not meet
that requirement. Lothian Chemical Co. Ltd. v. Rogers, 11 Tax
Cases 508, at 521; Robert Addie & Sons' Collieries Ltd. v. Inland
Revenue Commissioners, 1924 S.C. 231, at 235; Tata Hydro-Electric
Agencies v. Income Tax Commissioner, [1937] A.C. 685, at 695-6; Ward
& Co. Ltd. v. Commissioner of Taxes, [1923] A.C. 145, at 149).
Further, the expenditure in question was a capital expenditure. It was incurred
"once and for all" and was incurred for the purpose and with the
effect of procuring for respondent "the advantage of an enduring
benefit" within the sense of Lord Cave's language in the criterion laid
down in British Insulated v. Atherton, [1926] A.C. 205, at 213. (Van
den Berghs Ld. v. Clark, [1935] A.C. 431, at 440; Moore v. Hare,
1914-1915 S.C. 91, also cited). Though in the ordinary course legal
expenses are simply current expenditure and deductible as such, yet that is not
necessarily so (as example, reference to Thomson v. Batty, 1919, S.C.
289).
Per Crocket
J.: The expenditure in question cannot be said to have been wholly and
exclusively made by respondent "as part of the process
[Page 20]
of profit earning" according to the test
formulated (on statutory provisions not distinguishable in effect, as regards
the present case, from those now in question) in the Addie case (supra),
1924 S.C. 231, at 235, which test was expressly adopted and applied by the
Judicial Committee of the Privy Council in the Tata case (supra),
[1937] A.C. 685, at 696, and therefore is binding on this Court.
Per Kerwin and
Hudson JJ.: The test stated in the Addie case (supra), 1924
S.C. 231, at 235, and approved in the Tata case (supra), is
applicable to the case at bar, and the expenditure in question was not one
"laid out as part of the process of profit earning" within the
requirement of that test. It was a "payment on account of capital,"
as it was made "with a view of preserving an asset or advantage for the
enduring benefit of a trade" (British Insulated v Atherton, [1926]
A.C. 205, at 213).
APPEAL by the Minister of National Revenue
from the judgment of Maclean J. President of the Exchequer Court of Canada, allowing the present respondent's appeal
from the decision of the Minister of National Revenue affirming the
disallowance of the sum of $48,560.94, paid by the respondent in the year 1934
for certain legal expenses, as a deduction in computing the respondent's
taxable income for that year under the Income War Tax Act, R.S.C., 1927,
c. 97. The material facts of the case are sufficiently stated in the reasons
for judgment in this Court now reported. The appeal to this Court was allowed,
and the assessment of respondent (with said deduction disallowed) restored,
with costs throughout.
F. P. Varcoe K.C. and A. A. McGrory for
the appellant.
R. C. H. Cassels K.C. for the respondent.
The judgment of the Chief Justice and Davis J.
was delivered by
The Chief
Justice—The point in issue in this appeal is whether
certain legal costs incurred in the litigation about to be mentioned and paid
in the year 1934 are deductible from the profits, or gains, of the respondent
company for the purpose of assessing such profits, or gains, as income under
the Income War Tax Act for that year.
The respondent company since 1904 had
continuously supplied the Township of Barton and its inhabitants with natural gas
under a by-law of that township granting perpetual rights for that purpose, and
before and after that
[Page 21]
date has been developing gas fields and
supplying gas to the inhabitants of other municipalities. Since 1904 parts of
the township have been at different times annexed to the City of Hamilton. The respondent company has
continued to supply the annexed territory with natural gas as before
annexation. The United Company had since the year 1904 been supplying the City
of Hamilton, as it was before the annexations and its inhabitants with
manufactured gas under authority granted to it by by-laws of the City. About
the year 1930 the United Company advanced a claim under these by-laws that it
had the exclusive right to sell gas in the City of Hamilton including the annexed districts, and that the respondent company
had no competing rights.
Pursuant to authority conferred by an agreement
made between the City of Hamilton and the United Company dated March 24th,
1931, which agreement was confirmed by Statute of the Province of Ontario (21
Geo. V, Chap. 100), the United Company in the year 1931 took action in its own
name as well as in the name of the City of Hamilton, in the Supreme Court of
Ontario, against the respondent claiming:—
(a) a declaration that the respondent was
wrongfully maintaining its mains in the streets, public squares, lanes and
public places in the City of Hamilton, and wrongfully supplying gas to the
inhabitants of the said City;
(b) an injunction restraining the
respondent from continuing to so use the said streets, public squares, lanes
and public places, and from continuing to supply gas to the inhabitants of the
City of Hamton;
(c) a mandatory order requiring the
respondent to remove its mains and other property from the streets, public
squares, lanes and other places of the City of Hamilton;
(d) damages;
(e) further and other relief.
The respondent company defended this action and
in due course it came on for trial and was dismissed. An appeal was then taken by the United
Company from the
[Page 22]
judgment of the trial Judge to the Court of
Appeal for Ontario, which
appeal was dismissed. The
United Company then appealed to His Majesty in Council, which appeal was also
dismissed. The
costs of this litigation paid by the respondent company in the year 1934
amounted to $48,560.94 after crediting all sums recovered against the United
Company as taxed costs.
In its Income Tax return for 1934 the respondent
company deducted from its taxable income this sum of $48,560.94, returning a taxable
income of $202,326.86. This deduction was disallowed and the respondent
company's assessment was increased accordingly. The respondent appealed to the
Minister of National Revenue who dismissed the appeal, and thereupon appealed
to the Exchequer Court of Canada and this appeal was allowed. The Minister now appeals from that
judgment.
The relevant statutory provisions are:—
Deductions not
allowed.
|
6. In computing the amount of the profits or gains to be assessed,
a deduction shall not be allowed in respect of:—
|
Expenses not laid
out to earn income.
|
(a) disbursements or expenses not wholly, exclusively and
necessarily laid out or expended for the purpose of earning the income;
|
Capital outlays
or losses, etc.
|
(b) any outlay, loss or replacement of capital or any
payment on account of capital or any depreciation, depletion or obsolescence,
except as otherwise provided in this Act.
|
[There are two broad
grounds upon which I think the Minister is entitled to succeed. First, in order
to fall within the category "disbursements or expenses wholly, exclusively
and necessarily laid out or expended for the purpose of earning the
income," expenses must, I think, be working expenses; that is to say,
expenses incurred in the process of earning "the income.''] The judgment
of Lord Clyde in Lothian Chemical Co. Ltd. v. Rogers seems to point to the material distinction. The passage is
pertinent, because the words Lord Clyde is applying are more comprehensive than
those of sec. 6 (a). He says:
The question, and the only question it
seems to me that arises in the present case, is this. Was the expenditure of
the original £4,000 an expenditure which was part of the working expenses of
the business carried on by this Company, that is to say, expenditure laid out
in the
[Page 23]
process of manufacture and of sale by which
the Company expected to make profit from year to year? Or, on the other hand,
was this expenditure which was necessary to acquire the disposal of property,
buildings or plant, the use of which was necessary for conducting the processes
of the manufacture and sale of the Company, so long as those processes were
carried on? My Lords, if those two alternative questions fairly state the
question here, there can be no doubt whatever upon which side the expenditure
in question falls. It was not part of the working expenses of the Company, and
it cannot be so represented. It was expenditure which was made for the purpose
of acquiring the disposal of property or plant which was to be used in the
business of the Company, namely, the manufacture of some chemical products and,
in this case, of one chemical product in particular, and which was to be so
used, not for the purpose of making profit in any particular year, but for the
purpose of such manufacture so long as that manufacture might be carried on.
Similar language is used by Lord Clyde in Addie's
case and was
approved and applied by Lord Macmillan in delivering the judgment of the
Judicial Committee in Tata v. Income Tax Commissioner. Under s. 10, sub-s. 2, of the Indian
Income-tax Act the profits or gains of any business carried on by the assessee
are to be computed after making allowance for "(ix) any expenditure (not
being in the nature of capital expenditure) incurred solely for the purpose of
earning such profits or gains." Lord Macmillan said at pp. 695-696:—
Their Lordships recognize, and the decided
cases show, how difficult it is to discriminate between expenditure which is,
and expenditure which is not, incurred solely for the purpose of earning
profits or gains. * * * In short, the obligation to make these payments was
undertaken by the appellants in consideration of their acquisition of the right
and opportunity to earn profits, that is, of the right to conduct the business,
and not for the purpose of producing profits in the conduct of the business. *
* * * * In the case of Robert Addie & Sons' Collieries, Ld. v. Commissioners
of Inland Revenue (1), the Lord President (Clyde), dealing with
corresponding words in the British Income-tax Act, says: "What is 'money
wholly and exclusively laid out for the purposes of the trade' is a question
which must be determined upon the principles of ordinary commercial trading. It
is necessary, accordingly, to attend to the true nature of the expenditure, and
to ask oneself the question, Is it a part of the Company's working expenses; is
it expenditure laid out as part of the process of profit earning?"
Adopting this test, their Lordships are of opinion that the deduction claimed
by the appellants is inadmissible as not being expenditure incurred solely for
the purpose of earning the profits or gains of the business carried on by the
appellants.
The distinction is also explained in the
judgment of the Court of Appeal for New Zealand in a passage approved by the Judicial Committee in Ward &
Co. Ltd. v. Commissioner of Taxes.
[Page 24]
"We find it quite impossible to hold
that the expenditure was incurred exclusively, or at all, in the production of
the assessable income. It was incurred not for the production of income, but
for the purpose of preventing the extinction of the business from which the
income was derived, which is quite a different thing. It was contended by the
Company that it was illogical that while legitimate expenses incurred in the
production of the income are deductible, similar expenses incurred for the much
more important purpose of keeping the profit-making business alive are not
deductible, and, further, that it was inequitable that the Legislature should,
on the one hand, force a certain class of traders into a struggle for their
very existence, and, on the other hand, treat the reasonable expenses incurred
in connection with such struggle as part of the profits assessable to income
tax. These aspects of the matter are clearly and forcibly set out in the
contentions of the Company as embodied in the correspondence with the
Commissioner contained in the case, but they raise questions which can only be
dealt with appropriately by the Legislature. This Court, however, cannot be
influenced by such considerations, being concerned only with the interpretation
and application of the law as it stands."
Their Lordships agree with this reasoning.
* * * The expense may have been wisely undertaken, and may properly find a
place, either in the balance sheet or in the profit-and-loss account of the
appellants; but this is not enough to take it out of the prohibition in s. 86,
subs. 1 (a), of the Act.
Again, in my view, the expenditure is a capital
expenditure. It satisfies, I think, the criterion laid down by Lord Cave in British Insulated v. Atherton. The expenditure was incurred "once
and for all" and it was incurred for the purpose and with the effect of
procuring for the company "the advantage of an enduring benefit." The
settlement of the issue raised by the proceedings attacking the rights of the
respondents with the object of excluding them from carrying on their
undertaking within the limits of the City of Hamilton was, I think, an enduring benefit within the sense of Lord Cave's language. As Lord Macmillan points
out in Van den Berghs Ld. v. Clark:
Lord Atkinson indicated that the word
"asset" ought not to be confined to "something material"
and, in further elucidation of the principle, Romer L.J. has added that the
advantage paid for need not be "of a positive character" and may
consist in the getting rid of an item of fixed capital that is of an onerous
character: Anglo-Persian Oil Co. v. Dale.
The character of the expenditure is for our
present purposes, I think, analogous to that of the expenditure in question in Moore v.
Hare, where
promotion expenses incurred by coalmasters in connection with two parliamentary
[Page 25]
bills giving authority to construct a line to
serve the coalfield were held to be capital expenditures. Lord Skerrington at
p. 99 says:—
One can figure a case where a firm of
coalmasters in the position of the appellants might incur Parliamentary or
other preliminary expenses with a view to constructing a railway which was to
be the private property of the firm, and which when constructed would be useful
and would in fact be used wholly and exclusively for the purposes of their
trade as coalmasters. Such expenditure would be of the same legal character as
the actual cost of building the railway. It would be capital employed in the
firm's trade as coalmasters, and therefore would not be a legitimate deduction
from profits.
I do not perceive any distinction between
expenditures incurred in procuring the company's by-laws authorizing the
undertaking and the expenses incurred in their litigation with the City of Hamilton.
In the ordinary course, it is true, legal
expenses are simply current expenditure and deductible as such; but that is not
necessarily so. The legal expenses incurred, for example, in procuring
authority for reduction of capital were held by the Court of Sessions not to be
deductible in Thomson v. Batty.
The appeal should be allowed and the assessment
restored with costs throughout.
Crocket J.—In 1931 the United Gas and Fuel Company of Hamilton, Limited, and
the City of Hamilton brought an action in the Supreme Court of Ontario to
restrain the respondent from continuing to supply natural gas to the
inhabitants of those portions of the City of Hamilton, which prior to the year
1904 formed part of the Township of Barton and subsequently became part of that
city. The United Company claimed that by its franchise it had the exclusive
right to supply gas in the City of Hamilton, including the annexed districts,
and that the by-law of Barton Township granting the respondent a perpetual franchise
to supply its inhabitants with natural gas, as it had been doing since 1904,
gave it no right to supply gas to the annexed districts or their inhabitants
subsequent to their incorporation in the city. The respondent defended the
action, which was dismissed by the trial judge. The United Company appealed to
the Court of Appeal for Ontario,
which confirmed the trial judgment. A further
[Page 26]
appeal to the Judicial Committee of the Privy
Council was dismissed in 1934, and in that year the respondent expended the sum
of $48,560.94 as costs and expenses in connection with this litigation.
In its income tax return for 1934 the respondent
computed its taxable income at $202,326.80 after deducting the said legal
expenses. The taxing authorities disallowed this deduction. The respondent
appealed to the Minister of National Revenue, who affirmed the disallowance,
and then to the Exchequer Court
from the Minister's decision, with the result that the appeal was allowed.
The respondent contended before the learned
President, who heard the appeal in the Exchequer Court, that the amount in
question was wholly, exclusively and necessarily expended for the purpose of
earning its income, and was not an outlay, loss or replacement of capital or
any payment on account of capital, and therefore did not fall within either the
prohibition (a) or (b) of s. 6. The learned President sustained
this contention, and the Minister now appeals from that decision.
If we were free to decide this appeal on
considerations of practical business sense and equity, or to deduce from
decided cases the governing rule, which should be applied in determining
whether the respondent was or was not entitled, under the formula prescribed by
s. 6 of the Canadian Income War Tax Act, to the deduction claimed in
computing its assessable profits or gains for the year 1934, I should have no
hesitation in adopting the conclusion at which the learned President of the
Exchequer Court arrived and the reasons he has given therefor. We are
confronted, however, with a recent judgment of the Judicial Committee of the
Privy Council in the case of the appeal of Tata Hydro-Electric Agencies,
Ltd., Bombay, v. Commissioner of Income Tax, Bombay Presidency and Aden, in which a test, formulated in 1924 by
Lord President Clyde of the Scottish Court of Session in the case of Robert
Addie & Sons' Collieries, Ltd. v. Commissioners of Inland Revenue, for determining whether a deduction is
allowable under practically identical provisions of the English Income Tax
Act, 1918, is expressly adopted and applied. The English Act of 1918, ch.
40, 8 & 9 Geo. V,
[Page 27]
by rule 3 of Schedule "D," prohibits
deductions in respect of "any disbursements or expenses, not being money
wholly and exclusively laid out or expended for the purposes of the trade,
profession, employment or vocation," or in respect of "any capital
withdrawn from, or any sum employed or intended to be employed as capital in
such trade," etc., as well as other specified capital expenditures for improvements
and the like, the effect of which, as regards this case, it seems to be
impossible to distinguish from the prohibitions (a) and (b) of s.
6 of the Canadian Act. I apprehend, therefore, that the test so distinctly
adopted by the Judicial Committee in the Tata case is binding upon us. In delivering judgment
in the Addie case, the
Lord President of the Court of Sessions said:—
What is "money wholly and exclusively
laid out for the purposes of the trade" is a question which must be
determined upon the principles of ordinary commercial trading. It is necessary,
accordingly, to attend to the true nature of the expenditure, and to ask
oneself the question, Is it a part of the Company's working expenses; is it
expenditure laid out as part of the process of profit earning?
Lord Macmillan in delivering the judgment of the
Judicial Committee in the Tata case
quoted this passage and immediately added:
Adopting this test, their Lordships are of
opinion that the deduction claimed by the appellants is inadmissible as not
being expenditure incurred solely for the purpose of earning the profits or
gains of the business carried on by the appellants.
It should perhaps here be pointed out that in
the Tata case the
deduction claimed was for an amount equal to 25% of the commission earned and
received by the appellants as managing agents of the Tata Power Co. Ltd. and of
three other electric power companies in India, which proportion of the
commission they were required to pay to certain parties under the terms of the
agreement by which they had acquired the agency from their predecessors.
The attention of the learned President of the Exchequer Court does not seem to have been
called to this case. He did not refer to it in his printed reasons. No mention
of it is made either in the appellant's nor in the respondent's factum, though
Mr. Varcoe cited it in his argument before us. The learned President discussed
the New Zealand case
[Page 28]
of Ward v. Commissioner of Taxes, and other cases, on which the appellant
had relied in the hearing before him. He quoted extensively from the judgment
of Romer, L.J., in Anglo-Persian Oil Co. v. Dale, and seems to have based his judgment that
the expenditure in question was deductible under s. 6 of the Canadian Act as a
proper charge against revenue rather than against capital upon the law as laid
down by Romer, L.J., in the Appeal Court in that case and by Lord Loreburn,
L.C., and Lords Macnaghten and Atkinson in Strong & Co. Ltd. v. Woodifield
in the House of Lords. In
the last named case the House of Lords held that a payment by a brewery company
to satisfy a judgment recovered against it for damages and costs for personal
injury sustained by a customer sleeping in an inn, owned by the brewery
company, owing to the negligence of the company's servants, could not be
deducted in computing the company's profits for the purpose of income tax, the
loss not being connected with or arising out of the trade and the moneys not
having been wholly and exclusively laid out and expended for the purposes of
the trade. Lord Loreburn in his speech in support of this judgment used the
following language at p. 452 of the report:—
In my opinion, however, it does not follow
that if a loss is in any sense connected with the trade, it must always be
allowed as a deduction; for it may be only remotely connected with the trade,
or it may be connected with something else quite as much as or even more than
with the (trade. I think only such losses can be deducted as are connected with
in the sense that they are really incidental to the trade itself. They cannot
be deducted if they are mainly incidental to some other vocation or fall on the
trader in some character other than that of trader. The nature of the trade is
to be considered. * * * In the present case I think that the loss sustained by
the appellants was not really incidental to their trade as inn-keepers, and
fell upon them in their character, not of traders, but of householders.
Lord Macnaghten and Lord Atkinson concurred in
the Lord Chancellor's opinion as thus expressed, which, as I read it, lays down
the rule that the test as to whether an expenditure is allowable under the
English Income Tax Act (which was then of the same import as now) is,
not whether it was made "as part of the process of profit earning,"
but whether it was "really incidental to the
[Page 29]
trade." Lord Davey in his speech in the
same case, however, laid down the principle that:—
It is not enough that the disbursement is
made in the course of, or arises out of, or is connected with, the trade, or is
made out of the profits of the trade. It must foe made for the purpose of
earning the profits.
Singularly enough, it was apparently upon this
dictum of Lord Davey, and not that of the Lord Chancellor, concurred in by
Lords Macnaghten and Atkinson, that Lord President Clyde of the Court of
Session in the Addie case
formulated the test, which the Judicial Committee adopted 13 years later in the
Tata case. See
Lord Clyde's judgment in the Court of Session, Session Cases (1924), at the
bottom of p. 235.
In any event, we must now recognize the rule as
expressly affirmed by the Judicial Committee of the Privy Council, and
determine whether the expenditure in question in this appeal was wholly and
exclusively made by the respondent as part of the process of profit earning.
Being unable to convince myself that the expenditure falls within this strict
formula, I have reluctantly concluded that the appeal must be allowed.
The judgment of Kerwin and Hudson JJ. was
delivered by
Kerwin J.—This is an appeal from a judgment of the Exchequer
Court allowing an appeal by the Dominion Natural Gas Company Limited from
a decision of the Minister of National Revenue whereby the latter disallowed
the sum of $48,560.94 claimed by the company as a proper deduction from its income.
This sum represents the company's solicitor and client costs in connection with
an unsuccessful action brought against it by the United Gas and Fuel Company of
Hamilton, Limited. As to that action, it is sufficient to state that the
Dominion Company had been supplying gas to the inhabitants of the City of Hamilton for some years and the United
Company attacked its right to continue so to do. If the claim had succeeded,
the Dominion Company would have lost the franchise it had enjoyed and would
have been prevented from earning any income from that part of its assets.
[Page 30]
The determination of the present dispute depends
upon whether certain well-known provisions of the Income War Tax Act apply
to the payment of the solicitor and client costs. Section 9 of the Act is the
charging section and by it a tax is to be assessed, levied and paid upon
"income" which by section 3 is defined as meaning "the annual
net profit or gain * * * being profits from, a trade or commercial or financial
or other business or calling." By section 6:—
In computing the amount of the profits or
gains to be assessed, a deduction shall not foe allowed in respect of
(a) disbursements or expenses not
wholly, exclusively and necessarily laid out or expended for the purpose of
earning the income;
(b) any outlay, loss or replacement
of capital or any payment on account of capital or any depreciation, depletion
or obsolescence, except as otherwise provided in this Act.
The appellant does not deny that the costs were
properly and reasonably incurred but contends that the payment falls within the
prohibitions of both clauses (a) and (b) and that it must not be
considered in fixing the annual net profit or gain.
The cases referred to on the argument deal with
expressions used in other statutes and certainly, so far as clause (a)
is concerned, I have been unable to derive any assistance from them. Ward
and Company, Limited v. Commissioner of Taxes was determined on the wording of the New
Zealand Act there in question "in the production of the assessable
income." In view of the fact that that wording is less liberal and
comprehensive than the wording in our statute "laid out or expended for
the purpose of earning the income," the decision is, I think,
inapplicable.
However, as to the other two contentions, there
are three decisions that may usefully be referred to. The first of these is Robert
Addie & Sons' Collieries Ld. v. Commissioners of Inland Revenue, where the Lord President stated:—
What is "money wholly and exclusively
laid out for the purposes of the trade" is a question which must be
determined upon the principles of ordinary commercial trading. It is necessary,
accordingly, to attend to the true nature of the expenditure, and to ask
oneself the question, Is it a part of the Company's working expenses; is it
expenditure laid out as part of the process of profit earning?
[Page 31]
The second is the decision in the House of Lords
in British Insulated and Helsby Cables Ltd. v. Atherton. In that case a sum had been irrevocably
set aside out of profits as a nucleus of a pension fund, but it was held that
the expenditure could not be deducted from the profits. Viscount Cave pointed
out that an expenditure though made once and for all may nevertheless be
treated as a revenue expenditure but he then added:—
But when an expenditure is made, not only
once and for all, but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade, I think that there is very good
reason (in the absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly attributable not to
revenue but to capital.
This speech of Viscount Cave has been referred to a number of times and particularly in two
decisions in the English Court of Appeal, Mitchell v. Noble, and Anglo-Persian Oil Company v. Dale, but it is unnecessary to consider the
applicability of either of these.
The third case is Tata Hydro-Electric
Agencies v. Commissioner of Income Tax,—valuable, in the present instance, not so
much for the actual decision as for the fact that their Lordships quoted with
approval the extract from the judgment of the Lord President in Addie's case set out above. The test established by him
is applicable to the case at bar, and I have concluded that the payment of the
costs was not an expenditure laid out as part of the process of profit earning.
It was a "payment on account of capital," as it was made (to use Viscount Cave's
words) "with a view of preserving an asset or advantage for the enduring
benefit of a trade."
The appeal should be allowed and the decision of
the Minister re-instated, with costs throughout.
Appeal allowed with costs.
Solicitor for the appellant: W. S. Fisher.
Solicitor for the respondent: Hon. George Lynch-Staunton.