Strong & Co., Ltd v. Woodifield [1906] UKHL 624

UKHL
Strong & Co., Ltd v. Woodifield
[1906] UKHL 624
(Before the Lord Chancellor (Loreburn) , Lords Macnaghten , Davey , James of Hereford , Robertson , and Atkinson ).44 SLR 624Strong & Company, Limited v. Woodifield.Subject_ Revenue — Income-Tax — Trade — Balance of Profits — Deductions — Income Tax Act 1842 (5 and 6 Vict. cap. 35), sec. 100, Schedule D. Facts:A firm of brewers were owners of an inn. A defective chimney fell and injured a guest, and the firm were found, in an action, liable in damages.Held that in estimating the balance of the profits of their business for the purposes of income-tax the firm were not entitled to deduct the amount of damages so paid.or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, or allowed to be set against or deducted from, such profits or gains on account of any sum expended for repairs of premises occupied for the purposes of such trade, manufacture, adventure, or concern … beyond the sum usually expended for such purposes according to an average of three years preceding the year in which such assessment shall be made, nor on account of loss not connected with or arising out of such trade, manufacture, adventure, or concern, nor on account of any capital withdrawn therefrom.”This was an appeal from a judgment of the Court of Appeal ( Collins , M.R., Mathew and Cozens-Hardy , L.JJ.), who had reversed a judgment of Phillimore , J., in favour of the appellants upon a case stated by the Commissioners for the General Purposes of the Income Tax Acts for the division of Romsey, in the county of Southampton.The question was whether the appellants, who carried on the business of brewers, maltsters, wine and spirit merchants, and manufacturers of mineral waters, were entitled, in computing the profits of their trade for income-tax purposes, to deduct a sum of £1490 which they had paid as damages to a person who had been accidentally injured by the fall of a defective chimney while a guest in a licensed inn owned and managed by the appellants.The enactments applicable are the Income Tax Act 1842 sec. 100, Sched. D, case 1, being the case relating to trades, manufactures, adventures, or concerns in the nature of trade.Case 1, rule 1, is as follows:—“The duty to be charged … shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade, manufacture, adventure, or concern upon a fair and just average … and shall be assessed, charged, and paid without other deduction than is hereinafter allowed …” “Rule 3. In estimating the balance of profits and gains chargeable under Schedule D,

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Rules applying to both cases 1 and 2—

“Rule 1. In estimating the balance of the profits or gains to be charged according to either of the first or second cases, no sum shall be set against or deducted from, or allowed to be set against or deducted from, such profits or gains for any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purposes of such trade, manufacture, adventure, or concern…”
The Commissioners disallowed the deduction.This decision was reversed by Phillimore , J., but was restored by the Court of Appeal.

At delivering judgment:—

Lord Chancellor ( Loreburn )—In this case the appellants are a brewery company who owned an inn and conducted it through a manager. A customer sleeping in the inn was injured by the falling of a chimney upon him, and the appellants had to pay 1490 in costs and damages, because the fall of the chimney was due to the negligence of the appellants' servants, whose duty it was to see that the buildings were in proper condition. The appellants claim a right to deduct this sum of £1490 from the amount of their profits and gains assessable to income-tax, and the question is whether the Commissioners were right in disallowing the deduction. The Court of Appeal held that the Commissioners were right, and I am of the same opinion. It is unnecessary to recite the different sections of the Income Tax Act 1842, which govern the present appeal. They are section 100, Schedule D, case 1, rules 1 and 3, and rule 1 of the rules applying to both the cases 1 and 2. That which has to be assessed is the balance of the profits or gains of a trade—that is to say, the sum left after subtracting the proper deductions from the profits and gains. A deduction may be allowed on account of loss, and this is a loss. The Act does not affirmatively state what losses may be deducted. It furnishes merely negative information. A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication. Beyond that the Act is silent. In my opinion, however, it does not follow that if a loss is in any sense connected with the trade it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I think that only such losses can be de ducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accident in travelling might be deducted. On the other hand, if a man kept a grocer's shop, for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising thereby to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case I think that the loss sustained by the appellants was not really incidental to their trade as innkeepers, and fell upon them in their character not of traders but of householders. Accordingly I think that this appeal must be dismissed.Lord Macnaghten —I am of the same opinion.Lord Davey —The question in this appeal is whether a sum of £1490 which the appellants have had to pay for costs and damages occasioned to a person staying in their inn by the fall of a chimney is a proper deduction in arriving at the profits of the appellants' trade for the purpose of the income-tax. The answer to that question, in my opinion, depends on the answer to be given to another question, whether the deduction claimed was a disbursement or expense wholly and exclusively laid out or expended for the purpose of the appellants' trade within the meaning of rule 1 applying to both cases 1 and 2 of Sched. D in sec. 100 of the Income Tax Act 1842. It has been argued that the deduction claimed was a loss connected with or arising out of the appellants' trade within rule 3 applying to case 1 only. Case 1 relates to trades, manufactures, adventures, or concerns in the nature of trade, and I think that the word “loss” in rule 3 means what is usually known as a loss in trading or in speculation. It contemplates a case in which the result of the trading or adventure is a loss, wholly or partially, of the capital employed in it. I doubt whether the damages in the present case can properly be called a trading loss. I prefer to decide the case upon rule 1, which applies to profits of trades and also to professions, employments, or vocations. I think that the payment of these damages was not money expended “for the purpose of the trade.” These words are used in other rules, and appear to me to mean “for the purpose of enabling a person to carry on and earn profits in the trade,” &c. I think that the

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Lord James of Hereford —I confess that I did entertain some doubts during the discussion of this case at the Bar, but they are not doubts sufficient to cause me to differ from the judgments which have been delivered. In order to explain my position I may say that I agree entirely with the principle laid down by the Lord Chancellor. The only question is as to the application of that principle in one small matter to the facts of this case. If the fact were that the accident had occurred to a stranger walking in the street, then I should have no doubt at all. The doubt that was raised in my mind was caused by the fact that the accident happened to a person who was a customer in the house, and would not have been injured if the business of an innkeeper had not been carried on, and when it was in the course of the carrying on of a portion of that business that the customer who was injured was there. In that case I think that a different principle might be appealed to, and consequently my doubts existed. But they are not strong enough in relation to the application of this principle, about which there is no question, to cause me to dissent from the judgment proposed.Lord Robertson —I am clearly of opinion that the judgment is right.Lord Chancellor —I have been requested by Lord Atkinson , who is unable to be present, to say that he concurs in the opinion which I have submitted to your Lordships.Appeal dismissed.Counsel for the Appellants— Danckwerts, K.C.— Bremner— P. G. Henriques. Agents — Metcalfe, Birkett, & Rowlatt, Solicitors.Counsel for the Respondent—The Attorney-General ( Sir J. Lawson Walton, K.C.)— Sir R. Finlay, K.C.— W. Finlay. Agent— Sir F. C. Gore, Solicitor of Inland Revenue.