1966 (12) TMI 69 - DSC - Income Tax

Summary

Issues Involved:
1. Nature of the sum of lb21,404 received by the taxpayer company.
2. Whether the sum is a capital receipt or a revenue receipt.
3. The appropriate tax treatment of the sum under Case I of Schedule D.

Issue-wise Detailed Analysis:

1. Nature of the Sum of lb21,404 Received by the Taxpayer Company:
The taxpayer company was assessed to income tax for the fiscal year 1955-56 in respect of profits of its business as a wharf owner. The sum of lb21,404 was received as part of the total compensation of lb104,614 from the owners of a ship and underwriters for damages caused to a jetty. This sum represented the excess amount received over the physical damage cost, including legal expenses.

2. Whether the Sum is a Capital Receipt or a Revenue Receipt:
The taxpayer company argued that the lb21,404 was part of a capital sum received for damage to a capital asset (the jetty) and should not be considered a profit arising from the company's trade. They contended that the amount was compensation for the sterilization of a capital asset, not for profit earned by using the asset. The Crown, however, submitted that the consequential damage was suffered due to the disruption of the company's trading activities, and the damages attributable to this should be regarded as a trading receipt.

The court considered various precedents:
- In Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners, compensation for the sterilization of a capital asset was held to be a capital receipt.
- In Inland Revenue Commissioners v. Newcastle Breweries Ltd., compensation for the expropriation of stock-in-trade was treated as a trading receipt.
- In Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners, compensation for the temporary interruption of trade was treated as a trading receipt.

The court concluded that the sum of lb21,404 was compensation for the loss of use of the jetty, which was a capital asset of the business. The damage to the jetty caused an interruption in its profitable use, and the compensation received was for the sterilization of this asset. Therefore, the court held that the sum should be regarded as a capital receipt.

3. The Appropriate Tax Treatment of the Sum under Case I of Schedule D:
The court examined whether the sum of lb21,404 should be treated as part of the annual profits or gains arising or accruing to the company in respect of its trade. The court emphasized that each case must be considered on its own facts and that no clear line of demarcation can be drawn to determine whether a sum received should be regarded as a capital receipt or a revenue receipt.

The court concluded that the lb21,404 received by the taxpayers in respect of consequential damage was compensation for a capital asset (the jetty) being sterilized for 380 days. The effect of this sterilization was to depreciate the value of the taxpayer's undertaking as a whole. Therefore, the loss was seen as a capital loss, and the sum received was a capital receipt.

Conclusion:
The court allowed the appeal, holding that the special commissioners were wrong in law in treating the lb21,404 as a trading receipt. The sum was determined to be a capital receipt and, therefore, not taxable under Case I of Schedule D. The decision of the special commissioners was reversed, and the judgment of Buckley J. was restored.