International Investment Ltd v. Comptroller-General of Inland Revenue Malaysia
Privy Council
Diplock J, Viscount Dilhorne J, Fraser J, Keith J, Sir Robin Cooke J
[Appeal No. 20 Of 1976]
19 June 1978
Viscount Dilhorne J: (delivering the judgement of the Board)
The issue raised in this appeal is whether the Special Commissioners of Income Tax in Malaysia were entitled on the facts before them to find, as they did, that a profit made by the appellant company on the realisation of immovable property was chargeable to income tax under the Income Tax Ordinance, 1947.
The appellant company appealed by way of a Case Stated against the determination of the Special Commissioners, and their appeal was dismissed by the High Court of Malaya (H S Ong J).
An appeal from his judgment was dismissed by the Federal Court of Malaysia (Gill CJ Malaya, Raja Azlan Shah FJ and Wan Suleiman FJ).
The present appeal is against the judgment of the Federal Court.
The appellant company was incorporated in 1962 with the objects inter alia of trafficking and otherwise dealing in or turning to account lands, buildings and immovable property of any description.
Its Memorandum of Association also included a wide variety of other objects, including developing land and investing in shares and securities.
Its authorised share capital was originally $500,000 in shares of $100 each, which increased in 1963 to $5 million.
On 31 December 1962, its issued share capital was $300,000 fully paid.
By 31 December 1963, this had been increased to $500,000, and application and allotment money of a further $500,000 had been received for shares which had not then been allotted.
In 1962 and 1963, it purchased several pieces of land in Penang Road, Penang, which together formed a block for a total price of $337,273.71.
After paying compensation to occupiers of some old houses on the part of the land, it demolished the existing houses.
It entered into contracts for the erection of a six-storey shopping arcade and hotel known as the International Building.
In 1962 it entered into negotiations for letting the proposed hotel, but the negotiations proved abortive.
In 1963 it received rent of $7,044.00 from the arcade.
On 16 October 1963, at an Extraordinary General Meeting of the members of the appellant company, the following Special Resolutions were passed:
1. That the business and undertaking of the Company be reconstructed and, after such reconstruction, to expand its business of investments in and the holdings of securities.
2. That the Company do convey its property known as Lots Nos 14(1), 14(2), 15(2), 16(1), 30, 31 and 32 TS 16 NED Penang together with the building erected thereon to Island Hotels’ & Properties (Malaysia) Limited in consideration of the issue of 2,846,300 shares of $1 each in the said Island Hotels & Properties (Malaysia) Limited all credited as being fully paid.
3. That the Company execute a Deed of Guarantee with Island Hotels & Properties (Malaysia) Limited whereby the Company undertake to complete the erection of the building now under construction on Lots [numbered as above] to construct a driveway and car park and to undertake the fittings, fixtures, escalators, lifts, furniture, telephone with PABX equipment and all other things according to all the detailed plans and specifications a copy of which will be annexed to the Deed of Guarantee in consideration of the issue of 903,700 shares of $1 each in the said Island Hotels & Properties (Malaysia) Limited as being fully paid.
4. …”
Under these Resolutions, the appellant company transferred the International Building and the land on which it stood to Island Hotels & Properties (Malaysia) Limited (“Island Hotels”) and undertook to complete the building.
In exchange, it received 3,750,000 shares of $1 each in that company.
This transfer to Island Hotels gave rise to the profit on which income tax has been assessed and is disputed.
The fact that the consideration was received in shares and not in cash is immaterial, as the Special Commissioners rightly held.
The profit is the difference between the cost of the property (including the expenditure on erecting the International Building) and the value of the shares in Island Hotels received in exchange for it at the time of the exchange.
The Comptroller of Income Tax assessed the profit at $1,704,061, which was included in a Notice of Amended Assessment dated 25 May 1967 for the year of assessment 1964. (The year of assessment is the calendar year.)
The appellant company appealed against the inclusion of that amount in the assessment.
No question is raised concerning the amount of the profit.
To complete this part of the narrative, it is convenient to set out here the following passage from the Findings of Fact by the Special Commissioners, the significance of which will appear later:
Subsequently, all of these shares in the Island Hotels and Properties (Malaysia) Limited were transferred by the Appellant Company as follows:
1,000,000 shares to Disco Limited on 2 December 1963;
1,500,000 shares to TST on 4 January 1964;
1,250,000 shares to Disco Limited on 4 January 1964.
No resolution was made by the Appellant Company that these shares held by Disco Limited or by TST on trust for the Appellant Company.”
At all relevant times, the shares in the appellant company were held 50% by TST and his wife and 50% by CMT and his wife. CMT was a principal shareholder in Disco Ltd.
In 1962 the appellant company held shares to a total nominal value of $175,000 in four other companies, but these holdings were all “transferred away” during 1963.
The appellant company has not constructed any other building similar to the International Building. So far as it appears, they have not constructed any other building of any kind.
The statutory provision under which the income tax was charged is the Income Tax Ordinance, 1947, s. 10(1)(a), which is in the following terms:
10(1) Income tax shall, subject to the provisions of this Ordinance, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from the Federation or received in the Federation from outside the Federation in respect of –
(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised;…
At the relevant date, there was no provision in Malaysian legislation corresponding to the definition of “trade” in what is now s. 526(5) of the United Kingdom Income and Corporation Taxes Act 1970, which provides that “`trade’ includes every trade, manufacture, adventure or concern in the nature of trade”.
Their Lordships were informed that the law of Malaysia had now been amended in this respect but that the amendment does not apply to the year of assessment with which this appeal is concerned.
The argument for the appellant company had two main branches.
First, it was said that the profit with which this appeal is concerned was not, and could not be, taxable as income under s. 10(1)(a) because the transaction from which it was received was an isolated transaction which did not constitute the carrying on of a trade or business.
It might have been an adventure in the nature of trade. Still, it could not have been trading because trading necessarily involves some repetition or continuity of operation, and that element was lacking here.
The second argument was that, in any event, the facts showed that when the appellant company acquired and developed the property at Penang Road, it was not trafficking or dealing in the land but was investing in land and that any profit made on the realisation of its investment was not of an income nature and was not assessable to income tax.
In support of the former argument, much reliance was placed on the cases of DEF v. Comptroller of Income Tax [1961] 1 MLRA 672; [1961] MLJ 55 and E v. Comptroller General of Inland Revenue.
The former case is a decision of the Court of Appeal of Singapore, and the latter is a decision of the Federal Court itself.
Both these cases decided that profits from isolated transactions, not part of the taxpayer’s ordinary business, were not taxable as income.
In both cases, however, the taxpayer was an individual and the cases were distinguished by Raja Azlan Shah FJ (with whose judgment the other members of the Federal Court concurred) on the ground that the relevant tests for individuals and companies were not the same.
Their Lordships agree with the learned judge.
In the very recent case of American Leaf Blending Co. Sdn. Bhd. v. Director-General of lnland Revenue [1978] 2 MLJ where Lord Diplock delivered the advice of this Board, attention was drawn to the contrast between a private individual, whose mere receipt of rents from property that he owns raises no presumption that he is carrying on a business.
A company incorporated to make profits is prima facie carrying on a business where it makes gainful use of its property by letting it out for rent.
The same contrast applies to receipts from other activities.
As their Lordships understood the argument of Mr Pinson for the appellant company, he did not dispute that this was a business transaction.
Still, he submitted that it was not in the course of carrying on the particular business of dealing or trading in the land because it was an isolated transaction and that it would not have been in the course of dealing in the land even if such dealing had been the company’s only object.
Their Lordships are unable to accept that submission.
In their view, a company whose business is, or includes, trading prima facie begins to trade as soon as it embarks upon the first transaction of a trading nature.
The same would apply to an individual who had set himself up as a trader and declared his intention of trading if the transaction fell within the scope of his trade; only if he had no business or if the isolated transaction was not within the scope of his trade, would the result be otherwise.
No doubt, trading normally involves an element of repetition or continuity. Still, it has to begin sometime.
Even if it only continues for a short time and only includes one transaction, that does not by itself mean that the transaction cannot constitute trading – see – Commissioner for Inland Revenue v. Leydenberg Platinum Ltd [1929] SALR 137.
The second argument on behalf of the appellant company was that the profit was derived from investing in land and was, therefore, of a capital nature.
The argument turns entirely upon the facts.
The most important facts which, in the opinion of their Lordships, the Special Commissioners were entitled to regard as indicating that the appellant company was carrying on the business of dealing in land and that the Penang Road transaction forms part of that business are as follows.
The importance, if any, to be attached to each item is entirely for the Special Commissioners to judge.
First, the appellant company’s accountants wrote on 16 August 1962, in reply to an enquiry on a standard form from the Inland Revenue, stating that “the nature of the business conducted by the company is dealing in immovable property and land development”.
In their Lordships’ view,, that statement can be read as a direct admission that the company was carrying on the business of dealing in land. Whether it should be so read, and, if so, what importance should be attached to it are questions for the Special Commissioners.
Second, the work in progress on the International Building was shown in the balance sheet on 31 December 1962 under Current Assets.
That is difficult to reconcile with another entry in the balance sheet showing the land on which the building was being erected as a Fixed Asset.
Still, it is consistent with the fact that the building work during 1962 and 1963 was entirely financed by bank overdrafts and other short-term loans.
The Special Commissioners were fully entitled to refuse, as they did, to regard the entry under Current Assets as a mistake and to regard it as an indication that the appellant company was treating the building as trading stock, not as an investment.
Third, how the appellant company dealt with the shares in Island Hotels is important.
The contention for the appellant company was that the Special Resolutions of 16 October 1963 showed that when the company accepted the shares in Island Hotels in exchange for the immovable property, it was merely reconstructing its business to expand its investments.
But this explanation was rejected by the Special Commissioners, who found that as the shares had been “transferred away” within about three months after the Resolutions had been passed it was “difficult to accept” that the true object of acquiring these shares was in order to expand its investments, and that was confirmed by the fact that its other investments of $175,000 nominal value were also “transferred away” by the end of 1963.
It was contended on behalf of the appellant company that the shares in Island Hotels had not been sold, but were “transferred away” merely to be held in trust for the company.
If that was indeed the case, the onus was on the appellant company to prove it – see Income Tax Act, 1967, Sch 5, para 13 , and Income Tax Ordinance, 1947, s. 76(3).
They did not do so.
The finding of fact by the Special Commissioners to the effect that there was no Resolution by the appellant company that the shares were to be held in trust for it has already been quoted.
Moreover, the balance sheet as of 13 December 1963 contains a statement (in Note 3) that 1 million shares of $1 each in Island Hotels had been “sold” to Mr CMT, and the balance sheet itself shows him as a debtor for $1,000,000.
The balance sheet as of 31 December 1964 is not among the annexure to the findings of the Special Commissioners.
It is somewhat remarkable that, notwithstanding the “sale” of 1,000,000 shares in Island Hotels in 1963, the balance sheets at 31 December 1965 and 1966 show the Fixed Assets of the appellant company as including 3,750,000 shares in Island Hotels; each of these balance sheet includes a note by the auditors stating that they “understood” that trust deeds had been executed in relation to these shares but that the deeds had not been produced for their inspection.
In these circumstances, where the manner of dealing with the shares remains so obscure and where the appellant company was the only party in a position to clear it up, their Lordships are not surprised at the Special Commissioners’ conclusion to the effect that the appellant company had failed to discharge the onus placed upon it.
There are no doubt considerations pointing the other way, and it may be that if the Special Commissioners had come to a conclusion in favour of the appellant company their determination could not have been successfully attacked. But their Lordships agree with and adopt the following statement from the judgment of Raja Azlan Shah FJ:
. . . there is no justification for reversing the determination of the Special Conunissioners unless they had misdirected themselves in law, or proceeded without sufficient evidence in law to justify their conclusion.”
In their Lordships opinion the determination of the Special Commissioners is not open to criticism on either of these grounds.
Their Lordships will advise His Majesty the Yang di-Pertuan Agong that the appeal be dismissed and that the appellant company pay the costs of this appeal.
Appeal dismissed.
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High Court Malaya, Johor BahruAbdul Malik Ishak J[Civil Appeal No: 12-18-1997]25 September 1997
JUDGMENTAbdul Malik Ishak J: This appeal came up to me because of a case stated by the Special Commissioners of Income Tax (‘special commissioners’) under para. 34, Sch. 5 of the Income Tax Act 1967 (Act 53).
Appeals from the decisions of the Special Commissioners in tax cases are made by way of case stated under the Income Tax Act 1967 Sch. 5, para. 34. The paragraph states clearly that any appeal is on a question of law. Hence, pure findings of fact may not be challenged on an appeal.
However, the court has clear and undoubted jurisdiction to reverse a decision on questions of law.
The Special Commissioners’ Findings of Facts
The respondent (“taxpayer”) was 40 years old and was at all material times the proprietor of a lorry transport business known as Syarikat Perniagaan dan Perwakilan Pengangkutan KTT which carried on business at Johor;
The taxpayer was assessed in income tax by the Director-General of Inland Revenue (“revenue”) on his income from:
his lorry transport business; and
dividends from shares in Hin Hin Plantations Co. Sdn Bhd as follows:
The taxpayer appealed against the abovementioned assessments because no deductions have been allowed by the revenue in respect of capital allowances which the taxpayer claimed were due to him under Schedule 3 to the Income Tax Act, 1967 (Act 53) on capital expenditure incurred by him on few motor lorries which were used for the purposes of his business.
The revenue conceded that the taxpayer financed the purchase of the motor lorries and trailers (in their generality hereinafter referred to as ‘the subject lorries’), but: the registered owners were at all material times the registered haulage permit holder, and not the taxpayer.
Most of the subject lorries were acquired on hire-purchases through finance companies in 1980, whilst one was acquired in 1982 by direct purchase from H Sdn Bhd.
Revenue rejected the taxpayer’s claim for initial and annual allowances on the subject lorries because the taxpayer was not the legal owner;
The taxpayer proved that he paid the hire purchase instalments and purchase price of the subject lorries and had thus incurred Capital Expenditure on the provision of the subject lorries, which were used for the purposes of his lorry transport business.
The Registered Owners of the subject lorries merely lent their names in consideration of earning monthly rentals for the Haulage Permits, which were in their respective names; they had no interest in or connection with the day-to-day running of the transport business that the taxpayer solely ran.
Under the Income Tax (Qualifying Plant Annual Allowances) (Amendment) Rules 1980 gazetted as PU(A) 346 dated 4.12.80 and effective from the assessment year 1981 et seq, ‘motor vehicles licensed for commercial transportation of goods and passengers – lorries, trucks … etc.’ and listed under ‘land transport equipment’ under the Schedule to the Rules are classified as ‘qualifying plant’ under the said Rules; the prescribed rate of Annual Allowance is 20%.
High Court’s Evaluation
A small but important point of law arose for determination. It was this:
Whether the taxpayer was entitled to capital allowances under schedule. 3 of the Income Tax Act 1967 (Act 53) in respect of the subject lorries acquired and used for the purposes of the taxpayer’s business?
The special commissioners heard the taxpayer’s appeal regarding the notice of assessment levied by the revenue and gave its decision in a deciding order dated 11 June 1988 in favour of the taxpayer.
The revenue, by a notice dated 29 June 1988, requested a case to be stated for the opinion of this court under para. 34, schedule 5 of the Income Tax Act 1967 (Act 53).
As the taxpayer purchased the said lorries, which necessarily made him incur capital expenditure, the special commissioners were of the view that the taxpayer was entitled to the capital allowances under schedule 3 of the Income Tax Act 1967 (Act 53).
The special commissioners must have arrived at that conclusion as the subject lorries were used for the purposes of the taxpayer’s business. At this juncture, it is opportune to refer to the relevant paragraphs to schedule 3 of the Income Tax Act 1967 (Act 53).
Schedule 3 of the Income Tax Act 1967 (Act 53). believed
These paragraphs would be as follows:
1. Subject to this Schedule, qualifying expenditure for the purposes of this Schedule is qualifying plant expenditure or qualifying building expenditure within the meaning of paragraphs 2 to 6.
2. (1) Subject to sub-paragraph (2) and paragraph 67, qualifying plant expenditure is capital expenditure incurred on the provision of machinery or plant used for the purposes of a business, including –
(a) …(b) …(c) …
(2) In the case of a motor vehicle (other than a motor vehicle licensed or permitted, by the appropriate authority, for commercial transportation of goods or passengers, such as lorry, truck, bus, minibus, van, station wagon, taxi cab or hire car) the qualifying plant expenditure incurred on or after the first day of the basis period for the year of assessment 1991 shall be limited to a maximum of fifty thousand ringgit.
10. Subject to this Schedule, where in the basis period for a year of assessment a person has for the purpose of a business of his incurred qualifying plant expenditure, there shall be made to him in relation to the source consisting of that business for that year an allowance equal to one-fifth of the expenditure or such other fraction as may be prescribed.
13. Notwithstanding paragraphs 10 to 12 –(a) no allowance shall be made to a person under paragraph 10 for a year of assessment in relation to an asset and a business of his if at the end of the basis period for that year he was not the owner of the asset or it was not in use for the purposes of the business or, where the asset was disposed of by him in that period, he was not the owner of the asset or it was not in use, prior to its disposal, for the purposes of the business at some time in that period.
15. Subject to this Schedule, where a person has for the purposes of a business of his incurred qualifying plant expenditure in relation to an asset and at the end of the basis period for a year of assessment he was the owner of the asset and it was in use for the purposes of the business, there shall be made to him in relation to the source consisting of that business for that year an allowance equal to such proportion of that expenditure as may be prescribed.
46. Where a person incurs capital expenditure under a hire purchase agreement on the provision of any machinery or plant for the purposes of a business of his, he shall, for the purposes of this Schedule, be taken to be the owner of that machinery or plant; and the qualifying expenditure incurred by him on that machinery or plant in the basis period for a year of assessment shall be taken to be the capital portion of any instalment payment (or, where there is more than one such payment, of the aggregate of those payments) made by him under the agreement in that period.
High Court’s Evaluation
The expression “qualifying plant expenditure” is further exemplified in r. 1(2) of the Income Tax (Qualifying Plant Annual Allowances) Rules 1980 vide P.U.(A)80, which states that:
These Rules shall have effect in respect of qualifying plant expenditure incurred from 1 January 1978 to 31 December 1982, which in these Rules is referred to as the relevant period, on the provision of machinery or plant used directly in the manufacture of any product or the subjection of goods or materials to any process.
The Income Tax (Qualifying Plant Annual Allowances) (Amendment) Rules 1980 amends. It substitutes the Schedule to the Income Tax (Qualifying Plant Annual Allowances) Rules 1968 and under category “B” with the caption “Rates For Particular Types of Plant Not Confined To Specific Industries”, the prescribed rate of 20% was accorded to:
Motor vehicles licensed for commercial transportation of goods and passengers – lorries, trucks, buses, minibuses, vans, taxicabs and hire cars.
This meant that the subject lorries would be subject to the 20% rate.
But such entitlement would only accrue if the taxpayer legally owned the subject lorries, submitted by the learned legal officer and federal counsel for the revenue.
This highlights the meaning attached to the word “owner” appearing in paras. 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53).
In the field of construction of the Income Tax Act 1967 (Act 53), one must not lose sight of the need to see the clear words employed therein to tax the taxpayer.
This seems to be the view echoed by Rowlatt J in The Cape Brandy Syndicate v. The Commissioners of Inland Revenue vol. X11, Reports of Tax Cases at p. 358, especially at p. 366 where his Lordship said:
Now, of course, it is said and urged by Sir William Finlay that in a taxing Act, clear words are necessary to tax the subject.
But it is often endeavoured to give that maxim a wide and fanciful construction.
It does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the Crown in such Acts.
It means this, I think; it means that in taxation, you have to look simply at what is clearly said.
There is no room for any intendment; there is no equity about a tax: there is no presumption as to a tax; you read nothing in; you imply nothing, but you look fairly at what is said and at what is said clearly and that is the tax.
The facts in The Cape Brandy Syndicate are quite interesting. Rowlatt J summarised the facts in this way:
In this case, the subject appeals against an assessment of Excess Profits Duty.
It appears that three gentlemen, who were members of three firms engaged in the wine trade, entered into speculation independently of their firms, forming together a little syndicate consisting of their three selves for that purpose, and their speculation was this.
They bought a large quantity of Cape brandy in South Africa from the Government there.
They did not buy it all at once because they did not know how much there was for sale, but they ultimately bought all.
I do not think that the circumstances that they bought it piecemeal in that way make very much difference in the case.
Having done so, they succeeded in selling some of it at a profit, as it was, for export to the East, and the remainder they brought home to this country,
I think ‘as ships offered’ is the wording of the statement in the Case, and when they had got it here, they caused it to be blended with a certain amount of French brandy.
For that purpose they employed their three respective firms and paid them.
They then re-casked it, of course, and re-casked it in more caskets or receptacles than it had originally been in. They then proceeded to dispose of it piecemeal through their three firms, and they disposed of it, I think, in about 100 transactions which lasted fourteen months.
The appellants in The Cape Brandy Syndicate contended that they carried out an isolated transaction of a speculative nature, which was not a trade or business within the meaning of s. 39 of the Finance (No: 2) Act 1915; and, alternatively, that if they carried on a trade or business, the profits arising from a business commencing after 4 August 1914 were not chargeable to Excess Profits Duty.
The special commissioners held that the profits in question arose from a trade or business carried on by the appellants, and excess profits duty was chargeable in respect thereof.
Rowlatt J dismissed the appellants’ appeal with costs.
The Court of Appeal (Lord Sterndale MR and Scrutton and Younger L JJ) affirmed the decision of Rowlatt J and dismissed the appeal with costs.
The Court of Appeal held that the question of whether the appellants carried on trade was one of fact and that there was evidence on which the special commissioners could arrive at their conclusion.
The Court of Appeal also held that on a true construction of the Finance (No: 2) Act 1915 and subsequent Acts, a trade or business commenced since the beginning of the war was liable to assessment to excess profits duty.
Chesterman and Others v. Federal Commissioners Of Taxation [1926] AC 128 was an appeal to the Privy Council from the High Court of Australia.
There, the Estate Duty Assessment Act 1914-1916, of the Commonwealth of Australia, by s. 8, sub-s. 5, exempted from the payment of estate duty so much of an estate as was bequeathed “for religious, scientific, charitable or public educational purposes.”
A testator bequeathed the residue of his estate upon trusts under which prizes were to be awarded to various classes of persons, military, naval and civil, of both sexes, the merit of the candidate to be ascertained by various physical, moral and literary tests.
Reversing the decision of the High Court, the Privy Council ruled that the word “charitable” in s. 8, sub-s. 5 of the Estate Duty Assessment Act 1914-1916 of the Commonwealth of Australia was used in its technical legal sense and not with the narrower meaning of “eleemosynary,” which it has in popular language; and that, accordingly, the residue of the estate was exempted from estate duty.
The Privy Council also held that it was unnecessary to decide whether the bequest was also for “public educational purposes.” Lord Wrenbury delivering the judgment of the Privy Council, said on p. 131 of the report:
In approaching this question, the starting point is found in Pemsel’s case [1891] AC 531 in the House of Lords, and in Lord Macnaghten’s words at p. 580: ‘In construing Acts of Parliament it is a general rule … that words be taken in their legal sense unless a contrary intention appears.
Again on the subject of statutory construction, in construing the Rating and Valuation (Apportionment) Act 1928, Scrutton LJ said in the case of Barton (Revenue Officer For The Stepney Assessment Area) v. R. Twining And Company, Limited (Occupiers) [1931] 1 KB 475 especially at p. 479:
We, however, have not to frame an equitable scheme of relief from taxation; our duty is to endeavour to interpret the words in which Parliament has expressed its intention; if the result does not satisfy Parliament, it can express its intention more accurately by amending legislation.
For guidance, reference should also be made to the case of Ormond Investment Company, Limited v. Betts (H.M. Inspector of Taxes) 13 TC 400 (also reported in [1927] 2 KB 326 and before the House of Lords in [1928] AC 143) in construing the Income Tax Act 1967 (Act 53) .
Ormond Investment Company, Limited
The brief facts, in that case, were these.
The Ormond Investment Company, Limited, was formed in June 1922 and incorporated under the Companies Acts.
It carried on the business of an investment company in Bradford.
In August of the same year, it acquired a large holding in shares in a company incorporated to carry on business in America; and in the course of the same financial year – that was, on 7 December 1922, the appellant company received a dividend of 601,717 pounds on its holding of these shares.
It received no further dividend on these shares or any other income from possessions out of the United Kingdom up to the close of the financial year on 5 April 1923, and it appeared that the sum of 601,717 pounds was a dividend arising from a distribution of two years’ profits.
The question that arose for the decision was this:
Was Ormond Investment Company, Limited, liable to assessment to Income Tax in respect of the sum it has received from its foreign investment for these two years?
Lord Hanworth MR, delivering a separate judgment for the Court of Appeal, made pertinent remarks which should be referred to.
In his illuminating judgment, his Lordship said on p. 410 of the report:
Mr Bremner has called our attention to the well-known words used in these Income Tax cases by many noted judges in the past.
It is well always to bear them in mind, and I refer to the passage to which he called our attention to show that in the judgment I am about to deliver I have not overlooked the words, which are the words of Lord Cairns. ‘If the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.
On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently, within the spirit of the law, the case might otherwise appear to be, (Partington v. Attorney-General [1869] 4 E. & I. App. 100 at p. 122). Equally, we must bear in mind the words which have been quoted, following those words of Lord Cairns, the words of Lord Justice Cotton (Gilbertson v. Fergusson 1 T.C. 501 at p. 519):
‘I quite agree we ought not to put a strained construction upon that section to make liable to taxation that which would not otherwise be liable, but I think it is now settled that in construing these Revenue Acts, as well as other Acts, we ought to give a fair and reasonable construction, and not to lean in favour of one side or the other, on the ground that it is a tax imposed upon the subject, and thereof ought not to be enforced unless it comes clearly within the words.
Lord Hanworth MR, in the same case, continued on p. 414 in these words:
In several cases in the Income Tax Act, it is not easy to give a precise or perfect definition of what the words may mean or do mean.
Still, many of these difficulties are overcome in the actual cases, which must be solved by determining the facts.
That determination of the facts is left to those entrusted with that duty, who are not unacquainted with business, whether of trade or of the receipt of profits from foreign possessions.
It must be noted that the Court of Appeal in the Ormond Investment Company, Limited v. Betts (H.M. Inspector of Taxes) (supra) handed down a unanimous decision in favour of the Crown with costs, thereby reversing the decision of the court below.
The dissatisfied company appealed to the House of Lords (Lord Buckmaster, Viscount Sumner, and Lords Atkinson, Wrenbury and Warrington of Clyffe).
On 24 February 1928, the House of Lords delivered its judgment against the Crown with costs (Lord Buckmaster dissenting), thereby reversing the decision of the Court of Appeal.
Lord Atkinson delivering a separate judgment for the House of Lords observed on p. 434 of the report:
My Lords, when it is remembered that it is well established that one is bound in construing Revenue Acts to give a fair and reasonable construction to their language without leaning to one side or the other, that no tax can be imposed on a subject by an Act of Parliament without words in it clearly showing an intention to lay down the burden upon him, that the words of the statute must be adhered to and that so-called equitable constructions of them are not permissible (Partington v. Attorney-General, 4 E. & I. App. 100 at p. 122; Gilbertson v. Fergusson 1 TC 501, 7 QBD 562; In re Micklethwait 11 Ex. 452; Tennant v. Smith 3 TC 158, [1892] AC 150,
I am, for the reasons I have mentioned, unable to conclude that the different provisions of sch. D of the Act of 1918, to which I have referred, clearly impose the burden of Income Tax on the appellants regarding the dividends they have received from their foreign securities.
Back to this case
Applying these principles of law enunciated by these eminent judges, I shall now proceed to determine whether the word “owner” in paras. 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53) must necessarily refer to “Legal Ownership” as opposed to “Beneficial Ownership.”
To recapitulate, it must be remembered that the taxpayer paid for the subject lorries.
Undoubtedly, most of the lorries were acquired on hire purchases through finance companies in 1980, whilst one was acquired in 1982 by direct purchase.
Yet, the taxpayer had proved that he paid for the hire purchase instalments and the purchase price of the subject lorries.
The learned legal officer made much fuss that the subject lorries were registered in the names of other personalities.
Consequently, these personalities became the legal owners of the subject lorries.
The learned legal officer argued that the person who incurred the qualifying plant expenditure concerning an asset must be the legal owner of the asset to qualify for the capital allowance.
But since the taxpayer incurred capital expenditure under the hire purchase agreements for most of the lorries, must the taxpayer then “be taken to be the owner of” those lorries within the meaning of para. 46 of sch. 3 to the Income Tax Act 1967 (Act 53)?
It is interesting to note that Strouds Judicial Dictionary at p. 1828 contains a short passage about the meaning of the word “owner”. It states as follows:
The ‘owner’ or ‘proprietor’ of a property is the person in whom (with his or her assent) it is for the time being beneficially vested, and who has the occupation, or control, or usufruct [sic] of it, e.g., a lessee is, during the term, the owner of the property demised (see judgment of Bramwell LJ, Eglinton v. Norman, 46 LJ QB. 559; see also Chauntler v. Robinson, 4 Ex. 163; Russell v. Shenton, 3 QB 449; Lister v. Lobley, 6 LJ KB 200). So, in Cook v. Humber (31 LJCP 75), Erle CJ spoke of the ‘occupation’ necessary to the franchise under Representation of the People Act 1832 (c. 45), s. 27, as equivalent to the ‘actual exercise of the rights of the owner of a house in possession.’ But in Re Crawley, Acton v. Crawley, 28 Ch.D 431), Pearson J, said, ‘the owner – that is, the person entitled to the rack-rent.
My research shows that the word “owner” has different meanings in different contexts. I will now proceed to demonstrate it by citing a few authorities.
In the context of s. 14 (1)(l) of the Control of Rent Ordinance No: 25 of 1947, Sir Charles Murray-Aynsley CJ was of the view that the word “owner” had no precise technical meaning, nor was it a term of art.
In construing the Employee’s Social Security Act 1969, Tan Chiaw Thong J needed to consider whether the defendant was owned by the State Government of Sarawak.
This was what his Lordship said:
In this connection, the Oxford English Dictionary defines ‘owner’, inter alia, as one who owns or holds something as their own; a proprietor; one who has the rightful claim or title to a thing (though he may not be in possession).
In Truman, Hanbury, Buxton & Co., Limited v. Kerslake [1894] 2 QB 774 the court, where a lessee of premises not let to him at rackrent had sublet, held it was the sub-lessee and not the lessee who was the “owner” of the premises within the meaning of the Public Health (London) Act 1891. This Act enacts that “owner” shall mean “the person for the time being receiving rackrent of the premises … or who would so receive the same if such premises were let at a rackrent”.
In Bowditch v. Wakefield Local Board [1871] LR 6 QB 567, it was argued for one of the three trustees of the school, the appellant:
“that he was not receiving, and never had received, any rent whatever from the property, either on his own account or as agent or trustee, nor could receive any rent in respect of the same property, having no power to let the same; that the property could not, in fact, be let at a rent.“
The sole question for the decision of the court was:
whether or not the appellant was an “owner” within the meaning of s. 2 of the Public Health Act 1848, which enacts that “owner” shall mean the person for the time being receiving the rackrent of the lands or premises, whether on his own account or as agent or trustee for any other person, or who would so receive the same if such lands or premises were let at a rackrent. Blackburn J delivering his judgment, said this:
However, the definition of ‘owner’ in s. 2 does not say ‘owner’ shall include but shall mean.
Now, though these premises are and must be held as a school and cannot be let for any purpose, yet, if they were let, the rent would come to the appellant. I think, therefore, he is an ‘owner’ within the meaning of the definition.
In Watts v. Battersea Corporation [1929] All ER Rep. 201, where a solicitor received rents as agent for the owner of three houses from a builder who the owner employed to collect the rents, Scrutton and Sankey LJJ (Greer LJ dissenting) held in the Court of Appeal, that the solicitor was the “owner” of the three houses within the definition in the Public Health (London) Act 1891 and the Public Health Act 1875.
This case has been referred to in the textbooks as authority for the proposition that more than one person, at any one time, maybe an “owner” of premises within the definition in the Public Health Acts. (See Lumley’s Public Health Acts, p. 2882; D.K. Walters at p. 17). Scrutton LJ, in his judgment on p. 206, gave a reason for the enactment of the definition in the form it was in:
Then came the question, who is the owner?
Parliament seemed to have contemplated that it might be difficult for the local authority to find the owner.
He may not be in the United Kingdom at all, but he may be of such kind of owner that it is difficult to get at, and so the statute defined “owner”…
Sankey LJ wrote a separate judgment in Watts, and this was what he said on p. 209 of the report:
Turning to the definition itself, it will be observed that it does not say ‘ ‘owner’ means the person for the time being receiving the rackrents from the tenant’.
The words ‘from the tenant’ inserted in other statutes do not appear in this statute. The words are at large, and the definition is left at large.
InIntercontinental Properties (Pte) Ltd & Ors v. Chief Assessor/The Comptroller of Property Tax [1981] 1 MLRH 432; [1982] 1 MLJ 119 at p. 121, Chua J had occasion to consider ss. 2, and 9(3) of the Property Tax Act (Cap 144, 1970 Edn) in regard to the word “owner”. This was what his Lordship said:
The term ‘owner’ under the Act does not mean legal owner …. The Act is concerned with beneficial ownership and not with legal ownership.
The term ‘owner’ in s. 9(3) must have the meaning given in s. 2.
In the context of an agreement for the purchase of 105 acres of land, Gill FJ speaking for the then Federal Court in the case of Lee Yew Hin v. Kow Lup Piow [1974] 1 MLRA 394; [1974] 1 MLJ 114 FC, explained the meaning of the word “owner” in this way:
As regards the word ‘owner’ in the preamble to the agreement, the learned judge found that this was the result of an oversight on the part of Seah.
Moreover, the same word appeared in several subsequent agreements the defendant had entered into with other people.
Furthermore, any wrong impression that the word ‘owner’ might have raised in the plaintiff’s mind should have been dispelled when cl. 3 of the agreement was explained to him.
Since the defendant had a valid contract with Loy to purchase the land, he was on the authority of Gordon Hill Trust Ltd v. Segall [1941] 2 All ER 379, the owner in equity and therefore entitled to describe himself as the owner.
In the result, the learned judge was satisfied that there was no misrepresentation on the part of the defendant or anyone acting on his behalf to induce the plaintiff to enter into the agreement.
The appellant in Gordon Hill Trust, Ltd v. Segall[1941] 2 All ER 379 had a valid contract to purchase the property. The Court of Appeal (Mackinnon and Luxmoore LJJ, and Stable J) held that, being the case, the appellant was, in fact, the owner of the property in equity and entitled to describe himself as the owner.
The House of Lords, in determining the liability of the owner of the chartered ship on the bills of lading signed by the master, had this to say in The Baumwoll Manufactur Von Carl Scheibler v. Christopher Furness [1893] AC 8, especially at p. 17 thereof:
The person who has the absolute right to the ship, the registered owner, the owner (to borrow an expression from real property law) in fee simple, may be properly spoken of, no doubt, as the owner.
Still, at the same time, he may have so dealt with the vessel as to have given all the rights of ownership for a limited time to some other person, who, during that time, may equally properly be spoken of as the owner.
When there is such a person, and that person appoints the master, officers, and crew of the ship, pays them, employs them and gives them the orders, and deals with the vessel in the adventure, during that time, all those rights which are spoken of as resting upon the owner of the vessel, rest upon that person who is, for those purposes during that time, in point of law to be regarded as the owner.
When that distinction is grasped, it appears that all the difficulties raised in this case vanish.
There is nothing in your Lordships’ judgment, as I apprehend, which would detract in the least from the law as it has been laid down concerning the power of a master to bind an owner or concerning the liabilities which rest upon an owner.
The whole difficulty has arisen from failing to see that there may be a person who, although not the absolute owner of the vessel, is, during a particular adventure, the owner for all those purposes.
Mr. Mah Weng Kwai, the learned counsel for the taxpayer, argued that this court should not be concerned that the interpretation of the word “owner” in favour of the taxpayer would open the floodgate as there was a built-in remedy for it in the form of an amendment.
Indeed in construing a statute, the court must give life to it.
The court must endeavour to do its best to interpret the statute and not to wring its hand and blame the poor draftsman.
In the words of Lord Denning LJ in Seaford Court Estates, Ltd v. Asher [1949] 2 All ER 155, 164:
Whenever a statute comes up for consideration, it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise. Even if it were, it is not possible to provide for them in terms free from all ambiguity.
The English language is not an instrument of mathematical precision.
Our literature would be much poorer if it were.
This is where the draftsmen of Acts of Parliament have often been unfairly criticised.
A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that or have been guilty of some or other ambiguity.
It would save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity.
In the absence of it, where a defect appears, a judge cannot simply fold his hands and blame the draftsman.
He must set to work on the constructive task of finding the intention of Parliament.
He must do this not only from the statute’s language but also from considering the social conditions that gave rise to it and the mischief passed to remedy it.
Then he must supplement the written word to give ‘force of life” to the legislature’s intention…
Now, the subject lorries were purchased and used by the taxpayer for purposes of his business.
The registered owners of the subject lorries were mere “dummies” used by the taxpayer to advance his business enterprise.
This was a typical “Ali-Baba” venture.
As to why the taxpayer did not register the subject lorries in his name, no reasons were advanced by either the taxpayer or the revenue.
At any rate, this was not the concern of the court.
In my judgment, the taxpayer incurred capital expenditure under the hire purchase agreements for most of the lorries and under para. 46 of sch. 3 to the Income Tax Act 1967 (Act 53), the taxpayer shall be taken to be the “beneficial owner” of these lorries.
The same would also be true regarding one of the lorries that were direct purchase by the taxpayer. I believe the word “owner” should not be confined to legal ownership.
It should be extended to cover the situation of the present taxpayer. It should therefore include beneficial ownership.
If the draftsman meant by using the word “owner” in paras. 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53) to mean “registered owner” or “legal owner”, then it should be clearly specified.
The English language is intricate. When drafting a statute, precision in using the English language cannot be overemphasised.
It is a necessary evil. Words used by the draftsmen do not always bear a plain meaning.
Judges, too, quite often differ on the issue of whether certain words are plain and even when there is an agreement that the words are plain, the difference of opinion may result in the question as to what the plain meaning is.
All the authorities referred to in the early part of this judgment concerning the meanings to be attached to the word “owner” in the context of different statutes singularly show that the courts were not concerned about the consequences.
The courts were more concerned about giving “life” to the statutes.
Equitable considerations are irrelevant in interpreting tax laws.
But tax laws, like all other laws, must and have to be interpreted reasonably and in consonance with justice and fair play.
As Lord Cairns said in Partington v. Attorney-General LR 4 A.C 100, 122:
On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free.
I repeat that clear words are necessary and should be employed when the taxing Act is designed to tax the taxpayer.
Can’t this court “read nothing in and imply nothing” in construing paras. 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53)?
Must this court interpret the word “owner” in the context of the present issue to mean “legal owner” and not “beneficial owner” or “registered owner”?
The additions of the words “legal” or “beneficial” or “registered” to the word “owner” would mean that there are additions to be read into the taxing Act.
This was the very thing that Rowlatt J in The Cape Brandy Syndicate v. The Commissioners of Inland Revenue (supra) was not amenable to.
Now, if the words in paras 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53) are to be taken in their legal sense as suggested by Lord Wrenbury in Chesterman and Others v. Federal Commissioners of Taxation (supra), the word “owner” may relate to “legal ownership” or “beneficial ownership” or “registered ownership”.
Am I supposed to give and put “a strained construction upon” those paragraphs in the taxing Act to make the taxpayer liable to pay where otherwise he would not be liable?
I am of the view that “a strained construction” in favour of the revenue should not be adopted as the word “owner” can be interpreted in so many ways.
It is not easy to give “a precise or perfect definition” to the word “owner” in the context of those paragraphs in the taxing Act.
The facts of the present case certainly put a different flavour to the meaning of the word “owner”, and by resorting to those facts, which have been done, the difficulties encountered have been reduced and curtailed.
It goes without saying that in construing those paragraphs in the taxing Act, I must adopt a fair and reasonable construction to the language employed therein without leaning to the side of the revenue or that of the taxpayer. I must be seen to be fair.
But of pertinence to note would be this. That clear words must be employed in the taxing Act before a taxpayer is ordered to pay his tax.
As Lord Cairns remarked in Arthur Hill v. East and West India Dock Co. [1884] 9 AC 448 HL:
I say that we must look at what the purpose is.
Sir John Nicholl remarked in Brett v. Brett [1826] 3 Add 210; 162 FR 456 that “the key to the opening of every law is the reason and the spirit of the law.“
In India, Mukherjea J observed in Poppatlal Shah v. State of Madras [1953] AIR 274that: “Each word, phrase or sentence is to be construed in the light of the general purpose of the Act itself.”
Still in India, Shah J remarked inBusching Schmitz Private Ltd v. PT Menghani [1977] AIR 1569 SC that the court should adopt a project-oriented approach, keeping in mind the principle that legislative futility is to be ruled out so long as interpretative possibility permits.
I gratefully adopt the approach enunciated in the case of Carew & Co v. Union of India [1975] AIR 2260to the effect that when two interpretations are feasible, the court will prefer that which advances the remedy and suppresses the mischief as the legislature envisaged. The paragraphs to the taxing Act are capable of three interpretations.
As I said, the word “owner” may mean “legal ownership” or “beneficial ownership” or “registered ownership” and to suppress the mischief, it should be read to mean “beneficial ownership” as it falls squarely within the factual matrix of the present case.
It is clear that the taxing Act is meant to levy tax on the taxpayer.
That being the case, clear and unambiguous words must be employed to tax the taxpayer so that the latter will be obliged to pay.
The purposes of the taxing Act are wider than those which have been called revenue enactments, and they are intended to ensure the systematic collection of revenue upon which the prosperity of this country is dependent.
Taxpayers must pay taxes, for that would be the country’s revenue.
But before the revenue calls upon taxpayers to pay their taxes, the provisions of the taxing Act must clearly provide for it. I cannot subscribe to the notion that the taxpayer must pay tax even though it is not provided for in the taxing Act.
The meaning which I give to the word “owner” in paras. 15 and 46 of sch. 3 to the Income Tax Act 1967 (Act 53) must not be such as to make those paragraphs capable of being made an instrument of oppression.
It must be construed in consonance with the preamble to the taxing Act, which would be to impose income tax on the taxpayer provided the words employed in those paragraphs are crystal clear.
Pollock on Jurisprudence, 6th Edn (1929) at pp. 178-180 contained passages germane to the present case.
These passages are adopted to give “life” to the paragraphs in the taxing Act, and they were worded thus:
Ownership may be described as the entirety of the powers of use and disposal allowed by law ….
The owner of a thing is not necessarily the person who, at a given time, has the whole power of use and disposal; very often, there is no such person.
We must look for the person having the residue of all such power when we have accounted for every detached and limited portion of it.
He will be the owner even if the immediate power of control and use is elsewhere.
On the facts, the taxpayer was the beneficial owner of the subject lorries, and he should therefore be entitled to the capital allowances under schedule 3 of the Income Tax Act 1967 (Act 53).
This was my judgment, and I so hold accordingly.
For the reasons above, the revenue’s appeal was dismissed with costs. This meant that the decision of the special commissioners was affirmed forthwith.
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The Appellant, a solicitor, claimed a deduction under Rules 6 and 7 of the Rules applicable to Cases I and II of Schedule D regarding wear and tear and obsolescence of books forming part of his law library.
Held
that the books were not machinery or plant within the meaning of the said Rules.
BUT……
In the UK, books will, in principle, qualify as a plant unless they have such a short shelf-life that they are an ordinary trading expense.
Authority was previously found for this in the HMRC manuals: ‘Books are plant if they satisfy the two-year test’. The current capital allowances manual is silent on the matter.
In practice, HMRC allows a deduction for new additions of and supplements to technical books already owned, for replacements of versions that have become obsolete, for technical periodicals and periodical parts of law reports, as well as for the cost of binding supplements and periodicals.
It is normally just the initial cost of setting up the library in the first place that will be claimed as a plant. Even in these cases, HMRC will only insist that the cost of the books should be capitalised where the amount of expenditure involved is considerable.
Concerning employees, HMRC guidance to inspectors is that they ‘only spend time in establishing whether an allowance is due as an expenses deduction or as a capital allowance in worthwhile cases’.
It was not always the case that books could qualify as a plant.
In the case of Daphne v Shaw, Rowlatt J appears to have reached the wrong conclusion. Certainly, his view has not stood the test of time.
He ruled:
‘I cannot bring myself to say that the books of a lawyer, whether a barrister or a solicitor or, I am sorry to say, a Judge … 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; it means apparatus, alive or dead, stationary or movable, to achieve the operations which a person wants to achieve in his vocation. But the books which he consults, on his shelves, and which he does not use as “implements”, really, in the direct sense of the word, at all, I cannot believe are included in it.’
This judgment was questioned but not overruled in the Arthur Sanderson case, in which Cross J felt constrained by the Rowlatt precedent. Cross clearly had difficulty with Rowlatt’s conclusion:
‘If a barrister has to buy a new edition of a textbook to help him to write his opinions, I cannot see as a matter of principle why the book should not be regarded as a tool of his trade just as much as the typewriter on which his opinions are typed.’
It was not until Munby v Furlong, however, that the issue of whether books are considered as a plant was comprehensively reviewed and the earlier judgment overturned.
In the course of the judgment, Lord Denning referred to the words of Lord Donovan (in a case not reported) in which he stated:
‘If you ask me for the ordinary meaning of the word "plant", I would not say that a horse and cart were plant, I would not call the partitions in a building separating a room "plant", but still, the cases show that they are plant for tax purposes.’
Lord Denning sitting in the Court of Appeal, emphasised that:
‘I do not think “plant” should be confined to things which are used physically. It seems to me that, on principle, it extends to the intellectual storehouse that a barrister or a solicitor or any other professional man has in the course of carrying on his profession. The difficulty has arisen because the Legislature when it extended this provision to professions, did not make clear the scope of the word “plant” in that context. It seems to me, in the context of a profession, the provision of “plant” should be so interpreted that a lawyer’s books – his set of law reports and his textbooks – are “plant”.’
In the same case, Sir John Pennycuick agreed with him:
‘[Plant] seems to me quite plainly to cover books purchased by a barrister for the purpose of his profession. Those books do indeed represent apparatus used by him for carrying on his profession, and that, to my mind, is the end of the case.’
The normal starting point when ascertaining the meaning of the word plant is the employers’ liability case of Yarmouth v France(1887) 19 QBD 647. There, Lord Justice Lindley held that:
‘… it includes whatever apparatus is used by a businessman for carrying on his business – not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.’
The Munby v Furlong case overturned 50 years of precedent and established once and for all that books and potentially other assets used in a less physical way can indeed qualify as a plant.
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This was an appeal by the Revenue from a decision of the special commissioners that the entire site on which stood a building incorporating car washing machinery and control equipment qualified as “plant” for the purposes of capital allowances.
Anduff’s trade was operating some 78 car wash sites throughout the UK, each site extending to about 20 metres by 6.5 metres.
On each site was a “washhall” incorporating the car wash machinery and control equipment, and surrounding tarmac areas used for circulation, queuing and parking.
The wash hall had an unusually shaped roof which enabled rain water to be retained and, after going through settling tanks and filters, to be used again for washing cars.
The sites were laid out in accordance with a special German system known as the “IMO” system which allowed for a very rapid throughput of vehicles, with provision for four vehicles to pass through the wash hall at one time.
The IMO system encompassed the design and layout of the whole site.
The site included pre-wash and post-wash pads, and vacuum machines for drivers to clean the interiors of their cars if they wished.
The company claimed capital allowances on the full cost of each site as a single item of plant. The Inland Revenue rejected this: they accepted that some of the facilities would constitute plant and machinery but not the entire site.
The evidence was that the site was crucial to the car wash operation, ensuring that cars passed round the site through the washhall, and out again on one continuous conveyor belt.
Case Stated
On 20, 21, 22, 23, 26 and 27 April and 1 November 1993 two special commissioners (Mr THK Everett and Mr DA Shirley) heard the appeals of Anduff Car Wash Ltd (“Anduff”) against seven assessments to corporation tax relating to accounting periods ended on 31 December 1984-1990 inclusive.
Two separate questions arose for decision in relation to the appeals and they were considered separately.
The first question concerned the status of the structures used by Anduff in its trade of operating car washes, claimed by Anduff to be plant; a claim rejected in large measure by the Inland Revenue.
The commissioners decided that question in favour of Anduff and issued a written decision in principle to that effect on 17 May 1993.
That decision set out the facts found on the evidence adduced and the commissioners’ conclusions.
Subsequently, on 1 November 1993 the commissioners were asked to decide the date on which the expenditure on part of the plant comprising car washing equipment imported from Germany was incurred by Anduff.
That question was decided in favour of the Revenue.
Anduff did not appeal the supplementary decision on that point, issued on 22 November 1993.
Accordingly it was only the first decision dated 17 May 1993 which was under appeal.
Figures were not agreed between the parties until 5 August 1994 and on 12 August 1994 the commissioners adjusted the assessments accordingly.
The Revenue immediately after the determination of the appeals declared dissatisfaction therewith as being erroneous in point of law and on 24 August 1994 required a case for the opinion of the High Court to be stated pursuant to the Taxes Management Act 1970 section 56.
The question of law for the opinion of the court was:
whether the commissioners applied the correct principles laid down in the relevant authorities to the facts found in reaching the conclusion that each Anduff site is one single unit of plant within the provisions of the Finance Act 1971 and the Capital Allowances Act 1990.
The only trade of Anduff is that of operating car washes.
It does not sell petrol nor does it operate its facilities on the forecourts of garages or petrol filling stations.
Its car wash sites are free-standing, each site being approximately 20 metres long by 6.5 metres wide, which contains the car washing equipment imported from Germany.
Most of the remainder of each site is covered in tarmacadam or similar material and laid out with signs and bollards to ensure the smooth progress of customers’ cars from the entrance, round the site, through the washhall and back to the entrance/exit.
Coin operated vacuum cleaners are also provided to enable customers to clean the interiors of their cars if they so wish, either before or after entering the washhall.
Judgement
HM Revenue and Customs (HMRC, a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, the administration of other regulatory regimes including the national minimum wage and the issuance of national insurance numbers) accept that a car wash system will contain items that will certainly qualify as plant or machinery.
The point of the Anduff case, however, was that the company claimed that the entire car wash site should qualify as plant.
The company was successful in front of the special commissioners in May 1993 but the decision was overturned in the Chancery Division, and HMRC successfully gained confirmation of their view in the Court of Appeal in July 1997.
In reaching their decision that the entire ‘wash hall’ should qualify as plant, the commissioners had regarded it ‘not as a building but as a structure akin to a machine which takes into its large maw motor cars at up to four at a time, washes them thoroughly, dries them and ejects them’.
They decided that any protection from the elements provided by the hall was merely incidental.
The commissioners also noted the various special features of the structure including its unusually shaped roof designed to collect rainwater.
The courts, however, would have none of it.
In the Chancery Division, the judge decided that the commissioners had failed to apply the ‘Premises Test’.
The site on which the car wash business was operated, as well as the building in which the various items of machinery were housed; all constituted the premises within which the trade was carried on rather than the apparatus.
The Court of Appeal agreed with the judge in the Chancery Division.
In the Court of Appeal judgment, it was pointed out that only 130 square metres out of the total of 1,150 square metres were actually occupied by the wash hall.
The judge rejected outright the view of the commissioners that most of the site was designed and operated as a conveyor belt.
He concluded that it was impossible to describe the whole site as a single unit of plant.
The judge went on to consider whether the wash hall alone could be treated as one composite unit of plant.
Even there, however, he concluded that such a view was untenable.
The wash hall contained a lobby and WC, a pump room, an inspection area and a store.
As such, the judge concluded that ‘quite plainly the building functions as premises, housing the machinery’. He found it ‘impossible to say that the wash hall as a whole was apparatus functioning as plant’.
What this Means
It was held that an item used IN carrying on the business passes the “business use” test but is excluded as being plant if it use is as the premises FROM which the business is carried on.
Anduff’s appeal was dismissed as it was clear that part of the site were the premises from which the business traded.
The fact that aspects of the building e.g. the water-efficient roof, performed a function in the business would not lead the entire building to be treated as plant.
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