070-NLR-NLR-V-58-COMMISSIONER-OF-INCOME-TAX-Appellant-and-THE-GLASGOW-ESTATE-CO.-LTD.-Respond.pdf
1956Present: Basnayake, C.J., and Gunasekara, J.C03D1ISSI0NEK OF INCO^IE TAX, Apjiellant, and THE GLASGOWESTATE CO., LTD., Respondent
S. C. 5—Income Tax Case slated BRAjPT 4
Income lax—Profits Tax Act, 2o. 5 of 19-IS—Section 9—“ Capital employed in thebusiness.•
^Tioro a limited company engaged in producing tc& retained in tho form ofcash the equivalent of the amounts that were likely to bo needed for the paymentof (a) the income tax that would shortly fall duo and (6) dividends that wouldshortly bo declared—
Held, that tho sum of money so retained was “ capital employed in thebusiness " within tho meaning of section 9 of tho Profits Tax Act, No. 5 of 1913.
(^/ASE stilted under section 74 of the Income Tax Ordinance (Cap. I8S)read with section 14 of the Profits Tax Act, No. 5 of 194S.
M. Tiruchelvam, Deputy Solicitor-General, with A. Mahendrarajah,Crown Counsel, and I. F. B. Wickremanayake. Crown Counsel, for thoappellant.
H. V. Perera, Q.C., with S. Ambalctvanar, for tho respondent.
Cur. ado. vult.
October 26, 1956. Go.n'asekaba, J.—
This is an appeal by the Commissioner of Incomo Tax by way of aCase Stated under section 74 of tho Income Tax Ordinance (Cap. I8S)read with section 14 of tho Profits Tax Act, No. 5 of 1948. Section 9 ofthe latter enactment provides that tho chargeable surplus of profitsor income of any person for each profits tax year shall bo ascertainedby deducting from tho taxable profits or incomo of that person for thatyear an allowance equal to the larger of the two following amounts :—
(а)an amount equal to six per centum of tho capital employed
in tho business of that person at the conuuoncement of theaccounting period of which the profits are assessed to taxin that year, or
(б)an amount of fifty thousand rupees.
Tho main question that arises upon the appeal is the. meaning of thoexpression “ capital employed in the business ” that is used in thissection.
– Tho respondent is a limited company engaged in ■ producing tea.In an_appeal-to the Commissioner of Income Tax against an assessmenttoprofits tax-for the year 1951 it'claimed that ah item of cash'amounting■ 13-—-Lvm.; ……
J. 2f. B 64243—1,693 (3757)
to Ks. 475,162 should have been included in the computation of thecapital employed hi its business at the commencement of that year.This item, according to the company’s balance sheet for 1950, was madoup as follows :—
l?s. c.
..40S,25S55
. .5,13735
..1,G2462
..14130
National 7'ank of India, Ltd.—Current Account ..Dividend AccountEstate Current AccountCash on Estate . .
475,161 82
The assessor had reduced the amount to Rs. 375,162, on the groundthat that was “ a reasonable estimate of the amount of cash used bythe company for the purpose of the business ”. Upon a reference backto the assessor the question was discussed between an assistantcommissioner and the company, and the former offered to fix the amountat Rs. 320,000. At the hearing of the appeal before the commissionerthe assessor contended that the amount must be further reduced by asum of Rs. 140,632, made up as follows :—
Jts.
Net dividend paiel in respect of 1950. .73,125
Income tax for 1951—1952. .. .67,507
140,632
The commissioner agreed with this contention and fixed the amountof the cash to be included in the computation of the capital employedin the business at Rs. ISO,000. Upon an appeal by the company theEoard of Review increased the amount by Rs. 190,000. The commissionerhad included in the sum fixed by him a sum of Rs. 120,000 as the equiva-lent of 2 months’ estate expenditiue, which he held would be sufficientfor the current requirements of the business. The Eoard increased thissum by Rs. 50,000, on the ground that " a prudent Tea Estate Co. wouldkeep more than 2 months’ costs of upkeep in ready cash, becauseunforeseeable contingencies like a slump, strike accompanied by violenceor an unusual pestilence, may suddenly demand abnormal expenditureThey held that they should allow under this head the equivalent of the-“ costs of upkeep ” for 3 mouths, which they estimated at Rs. 170,000.They also held that it was plainly necessary for the appellant companyto have in deposit on 1.1.1951 the cash required (1) to pay tho incometax which would shortly fall due. i.o. 67,507, (2) the dividend of 73,125 ”,and that tho commissioner ** was wrong in reducing tho ca pital employedby the amount of those two items
Tho questions of law that are said to arise for decision upon thisappeal aro formulated in the stated case as follows :—.
*r (1) Can the monies held in deposit (a) for tho payment of IncomeTax which will fall due and (6) for tho payment of dividends,amount in law to capital employed in the business of theGlasgow Estates Co., Ltd., for the accounting period inquestion ?'
Wore the Board of Review justified in holding, in the absenceof evidence, that three months cost of upkeep be held asworking expenses in place of tho two months cost fixed bythe Commissioner ? ”
At the commencement of tho chargeablo accounting period, that isto say on tho 1st January, 1951, the income tax for 1951—1952 had notbeen assessed and tho dividend in question had not been declared.Tho Board took the view that “ the company was well advised to havec-ash in hand to meet those claims ” and that therefore the cash thatwas necessary for the purpose must be taken to have been capital em-ployed in tho business. It is contended for the Crown that tax anddividends must be paid out of profits and that therefore the sum ofIts. 110,000 camiot be treated as capital. It is also contended that in anyevent cash that was reserved for these payments was monoy that wasto be paid out and not money that was to be employed in the business.
On the question of the meaning of “ capital employed in the business ”the learned Deputy Solicitor-General cited, among other cases, thoseof Liberty <L- Co., Ltd. v. The Commissioners of Inland Revenue1 andJames TV aid ie cfc Sons, Ltd. v. The Gotnmissioners of Inland Revenue2.The question that was considered hi each of these cases was whethercertain sums forming part of the capital employed in a business weroalso investments and should therefore be excluded in the computationof tho amount of the capital employed in the business for the purposesof Excess Profits Duty under certain provisions of the Finance (No. 2)Act, 1915. The sums in question in the former case were held to beinvestments and in tho latter not. The question whether they wereinvestments arose, however, only upon the assumption that they formedpart of the “ capital employed in tho business Those cases, therefore,throw no light on the question whether this expression means anythingmore than the cc capital of the business”. The same comment may bemade on the case of Inland Revenue Commissioners v. Laurence Philipps& Co. (Insurance), Ltd.3, which too is relied on by tho learned DeputySolicitor-General. The question ’ there was whether certain loans wereinvestments and should therefore be left out of account, as provided inScliedulo YTI to the Finance (No. 2) Act, 1939, in tiie computation'ofthe capital employed in a business hi the relevant period. ' ''.
It is contended for the Crown that the expression means capital thatis actually earning profits ” and docs not include capital in the formof .cash lying idle in the bank.. The learned Deputy. Soiicitor-Gfeneral
1 {1924)12 T. C. 630.* {1919) 12. T- C. 113. .
[ 1917) 2 All E. R. 144. .
cited in support of this contention an observation made by Lord GreeneM. R., in Northern Aluminium Go., Ltd. v. Inland Revenue Commissioners'1,as to the meaning of " capital employed in the trade or business in anychargeable accounting period ” in the proviso to section 13 (3) of theFinance (No. 2) Act, 1039. But the distinction drawn there is not betweencapital actually earning profits and capital lying idle, but- betweencapital actually- earning profits in the relevant period and “ notionaland artificial capital which had no real existence ” during that period.What Lord Greene said was :.
“ That (i.e. 1 capital employed ’) seems to me quite clearly to referto capital actually employed, not to some item which is artificiallygoing to be written back into the capital in some future year, butcapital which is in fact being employed for the purpose of earningprofits. You earn profits with real capital, not with something which,on a subsequent re-opening of the account, is going artificially to be' attributed to a particular period. ”
The question whether there is any distinction that can be drawn betweenone part of the capital of a business as being employed in the businessand another as not being so employed did not arise for consideration.The learned judge was only concerned to point out that the capitalprovisions of the Act “ are dealing with realities, things which are reallyassets and really liabilities, and not with something which is for profitpurposes (which is quite a different conception) to be artificiallyregal'ded as a liability to be written back into the accounting period ”.
It was pointed out in the case of Laurence JPhilijjps cG Co. (Insurance),Lid. 2 that “ there is never any difficulty about regarding money lyingidle in the bank as money employed in the business providing there isa reasonable probability of it being wanted in the accounting year orin a short space of time thereafter ”. The qualification that there mustbe such a reasonable 2>robabiIity was necessary in view of a provisionin the Finance (No. 2) Act, 1039.. Schedule VII, Part IJ, para. 3 thatany moneys not required for the purposes of the trade or businessshall bo left out of account in the computation of the capital employedin the trade or business in any chargeable accounting period. OurProfits Tax Act, No. 5 of 19IS, contains no such provision, althoughthere was a similar provision in section 10 (5) of the Excess Profits DutyOrdinance, No. 3S of 1911, as amended bv Ordinance No. G of 1912.Under our law, therefore, there is no ground for limiting to an amountthat -will probably be “wanted in the accounting year or in a shortspace of time thereafter the amount of any cash in the bank that canbo regarded as employed in the business, but the entirety of such anasset must be regarded as being so employed inasmuch as it is availablefor any purpose of the business. "
Tlic case of IBirmiwjJiam Small Arms-Co., Ltd. v. Inland- RevenueCommissioners3 was cited by the learned counsel for the Crown. Thequestion that arose for decision there was whether a right of claim tocompensation for war damage, under the War Damage Act, 1911, wa3
i [JOIGj 1 All E. R- 010 at 6-50, 552.3 [1017J'2 All E. R. 111.
3 llOoil 2 All E. R. 200.
an asset the value of which, .during a chargeable accounting- period,formed part of the capital employed in the trade or business of .theappellant. company, within the meaning of the ^Finance' (No.;2); Act,1939, Schedule VfT, Part II, jjaragraph 1 (1) ; which provides for thevaluation of various kinds of assets in the computation of “ the-.nmountof the caj>ital emjjloycd in a trade or business (so far as .it does notconsist of money) ”. When the company was assessed to excess profitstax for tho period 1st August 1940 to 31st July 19-41 no account wastaken of this claim in tho computation of the amount of the capitalemploj-ed in their trade or business. The company appealed againstthe assessment, contending that tho right of claim, which was in respectof damage caused before the 31st Way 19-41, became an asset of thetrade or business on that day upon the coming into force of Regulationsunder the War Damage Act. The appeal was dismissed by the Commis-sioners for the Special Purposes of the Income Tax Acts, who heldthat the claim, regarded as an asset, did not appear to them to boemployed in the trade. An appeal from their determination to theICing’s – Bench Division was dismissed, and further appeals takensuccessively to the Court of Appeal and the House of Lords were alsodismissed. The ajjpeal to the House of Lords was heard b3r Lord Simonds,Loi-d Normand, Lord Oaksey, Lord Radcliffe and Lord Tucker. Theground upon which Lord Simonds based his conclusion was that a rightwhich is assumed to be an asset belonging to a limited company “ cannotbe capital employed in its trade unless it is an asset so employed ”, andthat he saw no reason for disturbing the finding of the commissionerswho had determined as a fact that the right in question had not beenso employed ; Lord Norm and, Lord Radcliffe and Lord Tucker wereof the' view that the dismissal of the appeal should be based on a differentground, that the right was not an asset of the kind contemplated by therelevant provision of the Finance (No. 2) Act, 1939 ; and Lord Oakseysaid that he was not prepared to dissent from tho conclusions at whichthe rest of their Lordships had arrived.-
The opinion of Lord Simonds is relied upon by the learned DeputySolicitor-General as supporting a view that an asset can form part ofthe capital employed in a trade or business only if it “ is actually earningprofits ” or is tc actively ” employed in the trade or business. I amunable to agree that support for this view can be found in that opinion.Having pointed out that the right in question “ consisted of. a right,subject to proof which might he difficult, to an indeterminate sum payableat a future and uncertain date ”, and that that was the position duringthe two montlrs cf the relevant accounting period with which alonethe appeal. was concerned, Lord Simoiids formulated, as follows thequestion that arose :-
" — – ..- . . . . . ……..
– “ The question, then, is what was the average amount pf capital
cmpIo3red by. .the trade or business of the… appellants during theaccounting period, or, more precisely, was it .right, in order to bringup that average, to include at any, and what, figure the value of theright to which I have referred for the last two months of the period ? ”
Discussing the answer to this question, he rejected a contention that“ every' asset of a trade or business is part of the capital employed inthe trade or business unless expressly excepted by statute ”, and thattherefore the commissioners must be held to have misinterpreted theword “ employed ” ; but he did not hold that an asset is not “ employedin a trade or business ” unless it was “ actually earning profits ” orwas “actively employed”. On the other hand, the opinions of LordNormand, Lord RadclifFe and Lord Tucker definitely negative such aview. Lord Normand held that “ para. 1 (1) of Part II of schcd. VIIto the Finance (No. 2) Act, 1939, does not call for an inquiry ■whetheran asset (within the meaning of the paragraph) was ‘ actively ’employed in the company’s trade or business in the relevant year ” ;Lord liadcliffe that he did not think that the words “ capital employedin a trade or business ” bore any significant difference, of meaning fromthe words “ capital of a trade or business ” ; and Lortl Tucker that “ thewords ‘ capital employed ’…. do not refer to the actual use
made of a particular asset in the relevant accounting period oneo it isshown to have been a form of capital put into the business and stillthere ”.
I do not think there can be any' question that the Board of If eviewwere right in regarding the item of cash with which the present case isconcerned as being “ a form of capital.put into the business and stillthere A decision by the company' to retain in the form of cash theequivalent of the amounts that were likely to be needed for the paymentof the income tax that would shortly' fall due and dividends that wouldshortly be declared would not be a withdrawal of that amount of cashfrom the cajntal or even an earmarking of any money' for these purposes ;for the sum so retained in the form of cash would continue to be availablefor any' purpose of the business. I am therefore unable to accept thecontention that the sum of Rs. 140,000, which the commissioner regardedas representing the amount needed for the payment- of the income taxfor 1951—1952 and the dividend declared in 1951, cannot be treated ascapital.
In my opinion there is no ground for limiting to what is required forthe purposes of a trade or business the amount of cash that can beregarded as capital employed in it. But assuming that it was necessaryin this case to determine what sum the appellant company' needed tohave available in cash for working expenses, I am unable to agree thatthe Board determined this question without evidence when it heldthat a reasonable sum would be the equivalent of the c-ost of upkeepfor 3 months rather than 2 months. The Board had before it sufficient -material hi the form of evidence as to the nature and extent of thebusiness done by the company.
The appeal must be dismissed with costs.
. . ' . – – – -BASNAYAKE, C.J.—Commissioner of Income Tax y. The Glasgow 203-’ Estate Co., Ltd."
Bas.vayake, C.J.
– I have had the advantage of reading the Judgment prepared by mybrother Gunasekara with which I agree.-
The Board of Be view lias held as a. question of fact that there was areasonable probability of a sum of Rs. 370,000 out of the money in thecash account of the Company being required by the assessce for Jusbusiness. That is a finding of fact which falls within the province of theBoard and is final under our Income Tax Ordinance.■
The statement of Atkinson J. in the Acme Flooring Co. case 1 in regardto the-manner-in which this question of the capital employed in- abusiness should be approached appeals to me and I quote his words :—
“A man could not be allowed to retain veiy, very large sums ofmoney where the possibilities of their being required were so unlikelyor so remote that no reasonable man would retain the money lyingidle in order to meet such vague possibilities. I imagine (the SpecialCommissioners) have to ask themselves this question : * What woulda reasonable business man regard as sufficient money to retain lyingidle to meet his future commitments—certainly the commitmentsin the near future ? ’ The Commissioners say : ‘ We accept that. ’
– I think they have said : * We go beyond that ’ but we do not thinkthat he ought to be allowed to look too far ahead. ’ To my mind,where the line is to be drawn is obviously a question of fact. I cannotinterfere merely because I think I would have drawn the line some-where more favourable to the trader. It is for the Commissioners tosay. ”.
In the later case of Inland Revenue Commissioners v. LaurencePhilipps'& Co. 2 the same. Judge said :
“There is never any difficulty about regarding money lying idle inthe bank as money employed in the business providing there is areasonable probability of it being wanted in the accounting year orin a short space of time thereafter. ”
The view that it is the function of the Special Commissioners to’determine as a fact whether an asset belonging to a Company is anasset employed in its trade has never been doubted. It was re-assertedin the Birmiiigham Small Arms case3. Though the questions statedby the Board for the opinion of this Court have been answered they,are strictly not- questions, of law which arise on the stated ease."
: Appeql dismissed■ ;■
1 1945 l) All E. R. 516."1 * 19/7 (2) All E. Rl 141. ’ V –
a 1951 2) All E. It. 296.