Locke,
J.
(concurred
in
by
the
Chief
Justice)
:
The
appellant
is
Incorporated
by
letters
patent
under
the
Dominion
Companies
Act.
Its
declared
objects
are
many
in
number
including
the
carrying
on
of
a
contracting
and
construction
business
and
that
of
financial
agents
and
brokers
but,
of
these,
its
activities
have
been
confined
to
the
former.
Its
authorized
capital
stock
when
incorporated
in
1925
was
$100,000.00:
this
was
later
increased
to
$250,000.00,
of
which
as
of
October
31st,
1942,
shares
to
the
par
value
of
$136,320.00
had
been
issued.
Joseph
G.
Bennett
was
one
of
the
original
incorporators
and
a
large
shareholder.
In
the
year
1934
Bennett
informed
his
sons,
John
G.
and
A.
G.
Bennett
that
he
wished
to
substantially
retire
from
the
business
and
the
sons
then
acquired
larger
interests
in
the
company
and
carried
on
the
business.
A.
G.
Bennett
found
when
he
applied
to
the
bank
for
a
loan
that
the
company’s
credit
was
very
low
and
asked
his
father
to
give
a
guarantee
to
the
bank
to
enable
the
company
to
borrow
money
for
its
business
purposes
and
it
was
arranged
that
he
would
do
so
for
a
consideration
and
this
was
agreed
upon
as
being
an
annual
amount
equal
to
the
amount
of
interest
paid
to
the
bank.
One
of
the
amounts
required
at
this
time
was
for
a
deposit
of
$15,000.00
for
a
tender
on
the
Calgary
Administration
Building.
During
the
years
1934
to
1939
inclusive
Joseph
G.
Bennett
continued
his
guarantees
to
the
bank.
In
1937
and
thereafter
John
G.
Bennett
gave
his
guarantees.
<A.
G.
Bennett
guaranteed
the
loans
for
the
year
1938
and
thereafter.
In
June
of
1940
Joseph
G.
Bennett
died
and
thereafter
his
widow
gave
her
guarantees
to
the
bank.
In
respect
of
these
guarantees
varying
amounts
were
paid
to
all
of
the
persons
named
during
the
years
1935
to
1940
inclusive
and
apparently
the
sums
so
paid
were
allowed
by
the
Department
of
National
Revenue
as
expenses
of
the
business.
Apparently
no
written
agreement
was
made
at
any
time
concerning
these
payments
but
on
June
19th,
1955,
a
resolution
of
the
Executive
Committee
of
the
company
fixed
"‘the
rate
of
interest”
to
be
paid
to
Joseph
G.
Bennett
for
his
guarantee
at
five
per
cent
on
the
amounts
borrowed.
Similarly
in
1940
the
payments
to
be
made
to
the
guarantors
for
the
fiscal
year
ending
October
31st,
1940,
were
authorized
by
the
directors
and
designated
as
interest
and
like
resolutions
were
passed
by
the
Board
in
the
years
terminating
on
October
31st,
1941,
and
1942.
For
the
fiscal
year
ending
on
October
31st,
1941,
$20,969.84
were
paid
to
the
guarantors
and
for
the
year
following
$23,984.15
and
these
were
disallowed
by
the
Department,
giving
rise
to
the
present
litigation.
In
the
interval
between
the
giving
of
the
first
guarantee
by
Joseph
G.
Bennett
and
those
given
in
later
years
the
business
of
the
company
was
largely
increased.
In
the
year
1938
contracts
undertaken
by
it
amounted
to
$1,116,652.15.
In
1940,
1941
and
1942,
due
to
the
company
obtaining
large
war
contracts,
these
amounts
were
respectively
$3,267,148.13,
$3,581,019.49
and
$4,458,108.59.
The
bank
loans
and
overdrafts
secured
by
the
guarantees
which
when
given
by
Joseph
G.
Bennett
in
1935
had
approximated
some
$46,000.00
totalled
as
of
the
date
of
the
preparation
of
the
balance
sheet
in
1940
some
$588,000.00,
in
1941
some
$534,000.00
and
in
1942
$505,000.00.
Upon
these
advances
interest
was
paid
to
the
Bank
of
Montreal
in
amounts
slightly
in
excess
of
the
amount
paid
to
the
guarantors:
such
interest
was
claimed
as
a
deductible
expense
and
allowed
by
the
Department.
A.
G.
Bennett,
Vice-President
of
the
company,
giving
evidence
at
the
trial
said
that
it
was
not
possible
for
the
company
to
carry
on
its
business
without
substantial
loans
from
the
bank
and
these
could
not
be
obtained
without
having
satisfactory
guarantors:
he
estimated
that
without
the
loans
from
the
bank
the
company
could
not
have
done
more
than
twenty-five
per
cent
of
the
business
which
was
carried
on
during
these
years.
In
view
of
the
comparatively
small
subscribed
capital
of
the
company,
it
is
apparent
that
this
would
be
so.
The
evidence
is
not
very
clear
as
to
all
of
the
purposes
for
which
these
large
amounts
were
required
:
a
statement,
filed,
however,
shows
that
as
of
October
31st,
1940,
approximately
$196,000.00
was
deposited
on
contracts
that
were
either
completed
or
in
progress
and
as
of
October
31st,
1942,
the
total
amount
of
funds
so
deposited
approximated
$122,000.00.
These,
it
was
shown,
were
amounts
paid
as
deposits
to
ensure
the
company’s
performance
of
contracts
undertaken
and
were
presumably
retained
until
the
completion
of
the
work
in
accordance
with
the
terms
of
the
various
contracts.
In
addition
to
these
large
sums
which
were
thus
rendered
inactive
for
extended
periods,
the
moneys
were
required
for
payrolls,
the
purchase
of
materials
and,
part
of
it
at
least,
for
the
purchase
of
bulldozers
and
other
equipment,
though
to
what
extent
they
were
used
for
this
latter
purpose
is
not
disclosed.
While
the
amounts
paid
to
the
guarantors
were
described
as
interest
in
the
various
resolutions
which
authorized
their
payment,
this
was
clearly
inaccurate.
Interest
is
paid
by
a
borrower
to
a
lender
:
a
sum
paid
to
a
third
person
as
the
consideration
for
guaranteeing
a
loan
cannot
be
so
described.
Section
6(a)
prohibits
the
deduction
of
disbursements
or
expenses
not
wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income
and
the
first
matter
to
be
determined
is
whether
amounts
such
as
these,
paid
to
enable
the
company
to
obtain
the
necessary
working
capital
for
its
operations
by
way
of
loans
from
the
bank,
are
properly
so
described.
In
Addie
v.
Commissioners
of
Inland
Revenue,
[1924]
S.C.
821,
325,
the
Lord
President,
considering
the
meaning
to
be
assigned
to
the
expression
"‘money
wholly
and
exclusively
laid
out
for
the
purposes
of
the
trade’’
in
the
Income
Tax
Act
of
1918
(8
&
9,
Geo.
V,
cap.
40)
said
in
part:
*
4
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
?
Or,
on
the
other
hand,
is
it
a
capital
outlay;
is
it
expenditure
necessary
for
the
acquisition
of
property
or
of
rights
of
a
permanent
character,
the
possession
of
which
is
a
condition
of
carrying
on
its
trade
at
all.
It
was
pointed
out
by
Lord
Davey
in
the
case
of
Strong
v.
Woodifield,
[1906]
A.C.
448
at
p.
453,
and
it
has
long
been
recognized
that
in
order
to
make
deduction
of
a
disbursement
admissible
‘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
be
made
for
the
purpose
of
earning
the
profits’.’’
In
Tata
Hydro-Electric
Agencies,
Ltd.
v.
Commissioner
of
Income
Tax,
[1937]
A.C.
685,
the
appellant
company
sought
to
have
deducted
from
its
profits
as
an
expense
twenty-five
per
cent
of
the
annual
commissions
earned
by
it
which
it
had
agreed
to
pay
as
part
of
the
purchase
price
of
the
agency
under
which
the
amounts
became
payable.
Under
the
Indian
Income
Tax
Act
of
1922
the
deduction
was
allowable
if
it
had
been
incurred
‘‘solely
for
the
purpose
of
earning
income,
profits
or
gains’’
in
the
business.
In
delivering
the
judgment
of
the
Judicial
Committee
upholding
the
disallowance
of
the
claim
Lord
Macmillan
said
in
part,
p.
695
:
"
"
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
the
present
case
their
Lordships
have
reached
the
conclusion
that
the
payments
in
question
were
not
expenditure
so
incurred
by
the
appellants.
They
were
certainly
not
made
in
the
process
of
earning
their
profits;
they
were
not
payments
to
creditors
for
goods
supplied
or
services
rendered
to
the
appellants
in
their
business
;
they
did
not
arise
out
of
any
transactions
in
the
conduct
of
their
business.
That
they
had
to
make
those
payments
no
doubt
affected
the
ultimate
yield
in
money
to
them
from
their
business,
but
that
is
not
the
statutory
criterion.
They
must
have
taken
this
liability
into
account
when
they
agreed
to
take
over
the
business.
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.
‘
‘
and
approved
the
above
quoted
statement
of
the
Lord
President
in
Addie’s
case.
In
Montreal
Coke
and
Mfg.
Co.
v.
Minister
of
National
Revenue,
[1944]
C.T.C.
94,
[1944]
A.C.
126,
the
right
of
the
appellant
company
to
charge
as
a
disbursement
expenses
incurred
in
redeeming
certain
of
its
bonds
before
maturity
and
borrowing
again
at
lower
rates
of
interest
and
less
onerous
conditions
as
to
payment,
these
including
the
payment
of
premiums
on
redemption,
disbursements
on
account
of
exchange,
discount
to
underwriters
and
legal
and
other
expenses,
was
considered.
The
passage
from
the
judgment
of
Lord
Macmillan
quoted
in
the
judgment
of
the
learned
trial
Judge
clearly
points
out
the
distinction
to
be
drawn
between
expenditures
made
in
providing
capital
for
an
enterprise
and
those
for
the
carrying
on
of
the
trade
from
which
its
earnings
are
derived.
I
think
the
character
of
the
payments
in
the
present
case
does
not
differ
in
essence
from
those
which
were
disallowed
in
the
Montreal
Coke
case.
They
were,
in
my
opinion,
simply
expenditures
incurred
in
obtaining
the
capital
to
make
the
large
deposits
required,
to
purchase
equipment
and
generally
to
finance
the
operations.
A
sum
expended
as
interest
for
the
use
of
capital
is
clearly
to
be
distinguished
from
expenditures
such
as
these,
being
the
cost
of
obtaining
guarantees
without
which
the
loans
would
not
have
been
made
by
the
bank,
expenditures
of
the
same
character
as
the
cost
of
floating
issues
of
bonds
or
debentures
or
of
selling
shares
for
the
purpose
of
obtaining
capital.
Section
6(b)
prohibits
the
deduction
of
"‘any
payment
on
account
of
capital”.
The
subsection
did
not
appear
in
the
Income
Tax
Act
of
1917:
it
was
enacted
by
cap.
52,
Statutes
of
1923,
sec.
3,
and
was
not
taken
from
the
English
Act.
While
the
expression
"'any
payment
on
account
of
capital”
is
capable
of
meaning
any
return
of
capital,
I
think
it
obvious
that
this
cannot
have
been
intended
since
no
statutory
prohibition
of
deducting
amounts
so
paid
could
be
required.
In
Montreal
Coke
and
Mfg.
Co.
v.
Minister
of
National
Revenue,
[1942]
C.T.C.
1,
[1942]
S.C.R.
89,
94,
Duff,
C.J.
and
Kerwin,
J.
were
of
the
opinion
that
the
deductions
there
claimed
were
payments
on
account
of
capital
within
the
meaning
of
this
subsection.
I
am
of
the
opinion
that
expenditures
such
as
these
made
by
reason
of
the
necessity
of
obtaining
working
capital
are
payments
of
the
same
nature.
The
appeal
should
be
dismissed
with
costs.
KELLOCK,
J.:—For
the
reason
given
by
my
brother
Locke
I
am
of
opinion
that
the
amounts
sought
to
be
deducted
by
the
appellant
fall
within
section
6(a)
of
the
Income
War
Tax
Act
and
are
therefore
not
deductible
in
ascertaining
the
taxable
income
of
the
appellant.
I
would
dismiss
the
appeal
with
costs.
RAND,
J.:—The
company
carries
on
general
construction
work.
In
doing
so,
its
current
outlays
are
in
part
financed
by
temporary
bank
loans.
For
the
years
in
question
the
bank
required
as
collateral
the
guarantee
of
three
shareholders
who
held
a
controlling
interest
in
the
company.
These
persons
in
turn
agreed
to
give
the
guarantees
on
terms
that
they
should
be
paid
a
sum
equal
to
the
amount
of
interest
in
each
year
paid
to
the
bank.
In
calculating
the
net
profit
of
the
business
for
income
tax
purposes,
the
company,
in
addition
to
the
interest
paid
to
the
bank,
deducted
the
amounts
so
paid
to
the
guarantors.
The
latter
deductions
were
disallowed
and
the
question
is
whether
the
company
is
entitled
to
have
them
restored.
The
case
for
the
company
is
that
the
payments
were
"wholly,
exclusively
and
necessarily’’
paid
out
to
earn
the
income.
In
a
remote
sense
that
is
so;
but
the
same
can
be
said
for
almost
every
outlay
in
the
organization
of
the
company.
The
conception
of
the
statute
however
is
an
earning
of
income
through
the
use
of
capital
funds
which
in
one
form
or
another
constitute
the
means
and
instruments
by
which
the
business
is
prosecuted
;
but
that
providing
or
organizing
them
must
be
clearly
differentiated
from
the
activities
of
the
business
itself
has
been
lately
reaffirmed
by
the
Judicial
Committee
in
Montreal
Coke
and
Manufacturing
Company
v.
The
Minister
of
National
Revenue,
[1944]
C.T.C.
94,
[1944]
A.C.
126.
The
acquisition
of
capital
may
be
by
various
methods
including
stock
subscriptions,
permanent
borrowings
through
issues
of
securities,
or
term
loans;
and
ordinarily
it
should
make
no
difference
in
taxation
whether
a
company
carried
on
financially
by
one
means
or
another.
In
the
absence
of
statute,
it
seems
to
be
settled
that
to
bring
interest
paid
on
temporary
financing
within
deductible
expenses
requires
that
the
financing
be
an
integral
part
of
the
business
carried
on.
That
is
clearly
exemplified
where
the
transactions
are
those
of
daily
buying
and
selling
of
securities:
Farmer
v.
Scottish
Trust,
[1912]
A.C.
118:
or
conversely
lending
money
as
part
of
a
brewery
business:
Reid’s
Brewery
v.
Mail,
[1891]
2
Q.
B.
I.
Now
the
Crown
has
allowed
the
deduction
of
interest
paid
to
the
bank,
and
it
must
have
been
either
on
the
footing
that
the
day-to-day
use
of
the
funds
was
embraced
within
the
business
that
produced
the
profit,
or
that
the
interest
was
within
section
5,
paragraph
(b).
But
setting
up
that
credit
right
or
providing
the
banking
facilities
is
quite
another
thing
from
paying
interest;
it
is
preparatory
to
earning
the
income
and
is
no
more
part
of
the
business
carried
on
than
would
be
the
work
involved
in
a
bond
issue.
The
lender
might
insist
on
being
furnished
‘with
premises
near
the
scene
of
the
works;
it
might
exact
any
other
accommodation
as
the
price
of
its
willingness
to
provide
funds;
but
all
that
would
be
outside
the
circumference
of
the
transactions
from
which
the
income
arises.
Within
the
meaning
of
the
Act,
the
premiums
create
part
of
the
capital
structure
and
are
a
capital
payment:
Watney
v.
Musgrove,
5
Ex.
D.
241.
They
furnish
a
credit
apparatus
to
enable
the
business
to
be
carried
on,
and
although
they
affect
the
distributable
earnings
of
the
company,
they
do
not
affect
the
net
return
from
the
business.
That
was
the
view
of
0
’Connor,
J.
below
and
I
agree
with
it.
I
would,
therefore,
dismiss
the
appeal
with
costs.
Estey,
J.:—The
appellant
borrowed
funds
from
the
Bank
of
Montreal
under
a
line
of
credit
secured
by
the
personal
continuing
guarantee
of
three
of
its
shareholders.
These
shareholders
received
in
consideration
of
their
giving
that
guarantee
an
amount
in
each
year
equal
to
the
interest
paid
to
the
bank
in
the
same
period.
In
the
year
1941
the
guarantors
were
paid
$20,813.06,
and
in
the
year
1942,
$23,455.07.
These
amounts
were
not
allowed
as
deductions
in
computing
the
profits
by
the
taxing
authorities.
In
the
Exchequer
Court
this
disallowance
was
confirmed.
The
appellant
contends
that
its
borrowings
from
the
bank
under
the
security
of
the
guarantee
were
not
capital
nor
were
the
payments
made
to
the
guarantors
part
of
its
‘‘financial
arrangements’’,
but
rather
that
these
payments
to
the
guarantors
were
disbursements
"‘wholly,
exclusively
and
necessarily
laid
out
or
expended
for
the
purpose
of
earning
the
income’’
and
therefore
should
be
deducted
under
the
provisions
of
para.
6(1)
(a)
of
the
Income
War
Tax
Act,
(1927
R.S.C.,
ce.
97).
The
appellant,
incorporated
by
Dominion
letters
patent
dated
February
25,
1925,
carries
on
a
general
construction
business
in
the
provinees
of
British
Columbia,
Alberta
and
Saskatchewan.
As
early
as
1934
its
paid-up
capital
and
surplus
was
such
that
in
relation
to
the
volume
of
business
available
it
required
additional
funds.
These
funds
were
advanced
in
1934
by
the
Bank
of
Montreal
under
a
line
of
credit
of
$10,000
secured
by
a
personal
continuing
guarantee
by
the
founder
of
the
company,
J.
G.
Bennett.
In
1935
the
guarantee
was
raised
to
$90,000,
and
in
1938
to
$150,000.
In
the
latter
year
J.
G.
Bennett
and
his
two
sons,
A.
G.
Bennett
and
John
G.
Bennett,
were
the
guarantors.
In
1940
it
was
raised
to
$300,000.
In
that
year
J.
G.
Bennett
died
and
when
later
in
the
same
year
the
amount
was
raised
to
$370,-
000
the
guarantors
were
Mrs.
Mabel
Bennett,
widow
of
J.
G.
Bennett,
and
her
sons,
A.
G.
Bennett
and
John
G.
Bennett.
This
last
guarantee
continued
throughout
the
fiscal
years
1941
and
1942
and
all
payments
here
in
question
were
made
to
the
guarantors
in
consideration
of
this
guarantee.
The
first
guarantee
given
in
1934
was
obtained
in
order
that
the
appellant
company
might
have
sufficient
funds
to
undertake
""some
prospective
business
that
was
offering’’.
No
other
reason
was
suggested
for
the
$90,000
or
$150,000
guarantees.
Then
came
the
war
and
the
government
required
"‘plants,
air
fields
and
that
sort
of
thing.
‘
‘
These
had
to
be
constructed,
the
appellant
desired
a
share
of
that
business,
and
as
the
vice-president
stated,
"
"
it
was
necessary
to
get
this
money
in
order
to
carry
those
projects
on’’.
He
made
it
clear
that
the
bank
would
not
have
granted
the
line
of
credit
without
the
guarantee,
and
without
the
funds
so
available
the
company
would
‘‘not
have
been
able
to
do
25%
of
the
business’’
that
it
did
in
1941.
The
guaran-
tee
was
therefore
the
asset
which
the
company
purchased
to
enable
it
to
borrow
the
necessary
funds.
The
importance
and
position
of
this
line
of
credit
in
the
finances
of
the
company
is
evidenced
by
the
following
figures:
At
the
end
of
the
fiscal
year
October
31,
1941,
the
paid-up
capital
of
the
company
was
$104,060,
while
at
the
same
date
the
bank
loan
under
the
guarantee
was
$424,882.50.
At
the
end
of
the
appellant’s
fiscal
year,
October
31,
1942,
the
paid-up
capital
was
$136,320,
and
the
bank
loan
at
the
end
of
that
year
was
$273,050.
Moreover,
at
the
end
of
each
fiscal
year,
October
31,
1935,
to
October
31,
1942,
the
appellant
company
showed
an
overdraft
at
the
bank.
In
1941,
at
the
end
of
its
fiscal
year,
this
overdraft
was
$109,978.09,
and
in
1942
it
was
$232,721.80.
These
figures
support
what
was
stated
at
the
trial
that
the
appellant’s
"paid-
up
capital
and
surplus
has
never
been
large,
compared
with
the
magnitude
of
its
operations’’.
In
these
circumstances
it
appears
to
have
been
the
settled
policy
of
the
company
to
provide
for
its
expansion
by
funds
made
available
under
these
guarantees.
The
money
borrowed
under
this
line
of
credit
was
treated
as
capital
and
the
interest
paid
to
the
bank
allowed
under
sec.
5(1)
(b),
which
provides:
"5.
(1)
'Income’
.
.
.
.
shall
.
.
.
.
be
subject
to
the
following
exemptions
and
deductions
:—
*****
(b)
Such
reasonable
rate
of
interest
on
borrowed
capital
used
in
the
business
to
earn
the
income
as
the
Minister
in
his
discretion
may
allow
.
.
.
.”’
No
exception
is
taken
to
this
allowance
of
interest
upon
capital
by
the
appellant
and
it
is
therefore
not
an
issue
in
this
appeal.
This
was
not
a
borrowing
of
money
on
a
temporary
or
shortterm
basis
such
as
is
necessary
and
incidental
to
the
ordinary
and
usual
transactions
in
the
course
of
the
appellant’s
business.
In
effect
this
line
of
credit
made
available
to
the
appellant
for
an
indefinite
period
the
ability
to
borrow
funds
for
the
purpose
of
accepting
contracts
beyond
the
volume
its
paid-up
capital
and
surplus
would
permit.
The
provision
for
the
cancellation
of
the
guarantee,
having
regard
to
the
relation
of
the
guarantors
to
the
company,
and
the
practice
since
1934,
does
not
detract
from
the
conclusion
that
this
line
of
credit
provided
a
long-term
basis
upon
which
the
company
might
obtain
the
funds
it
required.
In
Scottish
North
American
Trust
v.
Farmer
(1911),
5
T.C.
693,
Lord
Johnston
stated
at
p.
698:
"‘It
may
be
well
said
that
if
money
is
borrowed
on
a
permanent
footing,
as
from
year
to
year,
the
capital
of
the
concern
is
in
a
commercial
sense
enlarged
thereby,
and
the
business
extended,
whereas
no
commercial
man
would
consider
that
his
banking
facilities
were
part
of
his
capital,
or
the
consideration
he
paid
for
them
anything
but
an
expense
of
his
business.’’
That
the
bank
computed
the
interest
from
day
to
day,
that
payments
were
made
on
account
thereof
as
funds
were
available,
and
if
construction
contracts
were
at
any
time
not
available
this
loan
in
the
normal
course
would
be
paid
in
full,
do
not
of
themselves
require,
under
the
authorities,
the
description
of
the
borrowing
under
this
line
of
credit
as
temporary.
These
factors
are
here
but
the
details
of
the
way
in
which
the
loan
was
dealt
with
and
do
not
affect
its
character,
as
evidenced
by
the
reason
therefor
and
the
use
thereof
to
expand
and
increase
its
business.
A
company
engaged
in
the
construction
business
may
from
time
to
time
find
it
necessary
to
borrow
on
a
temporary
basis
as
necessary
and
incidental
to
its
business,
but
the
evidence
does
not
establish
that
such
obtained
in
this
case.
The
learned
trial
Judge
held
that
the
sums
as
borrowed
were
capital
and
the
evidence
fully
supports
his
finding.
The
appellant’s
position
is
similar
to
that
of
the
taxpayer
in
The
European
Investment
Trust
Co.
Ltd.
v.
Jackson
(1932),
18
T.C.
1,
where
it
was
engaged
in
the
business
of
financing
the
purchase
of
automobiles.
Its
paid-up
capital
was
relatively
small
and
when
that
and
the
proceeds
of
a
loan,
admittedly
capital,
from
the
Finance
Corporation
of
America,
were
exhausted,
in
order
to
finance
further
purchases
it
was
arranged
that
the
Finance
Corporation
of
America
would
make
further
advances.
It
was
contended
that
the
interest
on
these
further
advances
should
be
deducted
in
computing
the
profits.
These
advances
were
made
as
required
by
the
taxpayer
and
were
repaid
by
amounts
as
received
from
the
purchasers.
They
were
described
by
the
taxpayer
as
short
loans
and
the
interest
was
computed
upon
monthly
statements.
The
commissioners
found
as
a
fact
that
the
proceeds
of
these
additional
advances
were
"‘employed
or
intended
to
be
employed
as
capital
in
the
trade”
and
that
therefore
the
interest
paid
could
not
be
deducted
in
computing
profits.
On
appeal
this
decision
was
affirmed.
The
taxpayer
in
that
case,
as
the
appellant
here,
when
its
capital
was
exhausted
found
it
necessary
to
borrow
in
order
that
further
contracts
or
a
larger
volume
of
business
might
be
accepted.
The
Jackson
case
was
decided
since
that
of
Scottish
North
American
Trust
v.
Farmer
(1911),
5
T.C.
693,
so
much
relied
upon
by
the
appellant.
The
taxpayer
in
that
case
was
engaged
in
the
buying
and
selling
of
securities.
In
the
course
of
its
business
it
purchased
securities
in
New
York
in
amounts
beyond
its
available
cash.
Arrangements
were
made
with
a
New
York
banker
for
an
overdraft
(for
a
period
a
line
of
credit
was
arranged).
The
interest
paid
on
this
overdraft
was
held
to
be
a
deductible
expense.
In
the
Court
of
Sessions
their
lordships
stressed
that
these
were
short-term
loans,
or
as
stated
by
the
Lord
President
:
"
"
I
cannot
see
how
a
temporary
accommodation
in
the
course
of
business
ever
is
or
ever
can
be
capital’’.
Then
in
the
House
of
Lords
Lord
Atkinson
pointed
out
that
the
money
was
borrowed
in
a
""
fluctuating
temporary
manner”
and
the
daily
borrowing
and
lending
of
money
being
part
of
their
business
is
not
to
be
treated
as
capital.
Moreover,
in
discussing
this
case
in
the
Jackson
case,
Romer,
L.J.,
pointed
out
that
in
the
Farmer
case
the
money
was
found
by
the
commissioners
not
to
be
capital
and
after
reviewing
that
decision
and
others
in
relation
thereto,
concluded
that
in
each
case
:
C
is
a
question
of
fact
whether
the
capital
money
borrowed
is
or
is
not
capital
employed
in
the
trade
within
the
meaning
of
this
sub-paragraph,
and
if
the
Commissioners
have
decided,
as
a
question
of
fact,
that
it
is,
then
this
Court
cannot
interfere.”
In
Associated
Gas
Water
Heaters
Ltd.
v.
Duff
(1942),
24
T.C.
161,
it
was
held
that
the
commission
paid
for
a
guarantee
of
an
existing
debt
was
deductible
in
computing
the
profits
as
an
expense
wholly
and
exclusively
laid
out
for
the
purpose
of
the
trade,
while
the
commission
on
a
guarantee
of
a
loan
for
further
capital
facilities
was
not
deductible.
It
appeared
in
the
facts
stated
that
‘‘further
expansion
is
only
possible
if
an
adequate
long-term
credit
is
obtainable
and
sufficiently
large
liquid
assets
in
the
form
of
reserves
are
formed.’’
A
commission
of
3
per
cent
per
annum
was
paid
to
the
guarantor
and
the
loan
supported
by
this
guarantee
made
in
1935
was
due
in
1953.
See
also
Bridgewater
v.
King
(1943),
25
T.C.
385.
In
Southwell
v.
Savill
Bros.,
Lid.,
[1901]
2
K.B.
349,
expenditures
incurred
to
obtain
new
licenses
and
therefore
to
extend
the
business
were
held
to
be
capital
expenditures.
The
funds
borrowed
were
therefore
capital
and
the
payments
made
to
the
guarantors
constituted
a
part
of
the
"‘financial
ar-
rangements”
of
the
appellant.
They
are
in
principle
identical
with
those
dealt
with
by
the
Privy
Council
in
Montreal
Coke
and
Mfg.
Co.
Ltd.
v.
Minister
of
National
Revenue,
[1944]
C.T.C.
94,
[1944]
A.C.
126,
where
the
expenses
of
refinancing
a
bond
issue
in
order
to
effect
a
low
rate
of
interest
and
other
sav-
ines
were
disallowed
under
see.
6
(1)
(a).
Lord
Macmillan
stated
at
p.
133:
"
"
It
is
important
to
attend
precisely
to
the
language
of
s.
6.
If
the
expenditure
sought
to
be
deducted
is
not
for
the
purpose
of
earning
the
income,
and
wholly,
exclusively
and
necessarily
for
that
purpose,
then
it
is
disallowed
as
a
deduction.
If
the
expenditure
is
a
payment
on
account
of
capital
it
is
also
disallowed
.
.
.
.”’
And
again:
^Expenditures
to
be
deductible
must
be
directly
related
to
the
earning
of
income.’’
And
further
:
"‘Of
course,
like
other
business
people,
they
must
have
capital
to
enable
them
to
conduct
their
enterprises,
but
their
financial
arrangements
are
quite
distinct
from
the
activities
by
which
they
earn
their
income.
No
doubt,
the
way
in
which
they
finance
their
businesses
will,
or
may,
reflect
itself
favourably
or
unfavourably
in
their
annual
accounts,
but
expenditure
incurred
in
relation
to
the
financing
of
their
businesses
is
not,
in
their
Lordships’
opinion,
expenditure
incurred
in
the
earning
of
their
income
within
the
statutory
meaning”.
The
disbursements
of
the
guarantors
here
in
question
were
made
not
as
interest
on
the
money
borrowed
but
as
the
purchase
price
for
the
guarantee
that
made
borrowing
under
the
line
of
credit
possible.
The
appellant
upon
obtaining
this
line
of
credit
was
enabled
to
complete
its
financial
arrangements
at
the
bank,
which
enabled
it
to
undertake
the
larger
volume
of
business.
Sums
borrowed
under
such
circumstances
are
capital
and
the
sums
paid
are
not
deductible
under
the
provisions
of
6(l)(a).
The
judgment
of
the
Exchequer
Court
should
be
affirmed
and
this
appeal
dismissed
with
costs.