1992 (3) TMI 354 - HC - Income Tax

Summary

Issues Involved:
1. Whether the taxpayer, Victory Partnership, was engaged in a trade.
2. Whether the taxpayer incurred capital expenditure of $14 million or $3 1/4 million.
3. Whether the tax avoidance scheme was effective in generating the claimed first-year allowance.

Detailed Analysis:

1. Whether the taxpayer, Victory Partnership, was engaged in a trade:

The Court examined whether Victory Partnership's activities constituted a trade. The taxpayer claimed that Victory Partnership was involved in the trade of producing and distributing films, thus entitling it to capital allowances. The Court of Appeal had referred the matter back to the commissioners to determine if the activities were genuinely trading or merely a device for fiscal advantage.

The Court concluded that Victory Partnership was indeed engaged in the trade of producing and exploiting the film "Escape to Victory." The production and exploitation of a film were considered trading activities, and the expenditure of capital for these purposes was deemed a trading purpose.

2. Whether the taxpayer incurred capital expenditure of $14 million or $3 1/4 million:

The central issue was whether Victory Partnership incurred capital expenditure of $14 million, as claimed, or only $3 1/4 million. The taxpayer argued that the entire $14 million should be considered for the first-year allowance. However, the Court found that the true financial consequence of the scheme was the expenditure of only $3 1/4 million by Victory Partnership.

The Court held that the expenditure of $3 1/4 million was real and not merely a device to obtain a fiscal advantage. The remaining $10 3/4 million was provided by Lorimar Productions Inc. (LPI) and was not a liability of Victory Partnership. The Court emphasized that the non-recourse nature of the borrowing ensured that Victory Partnership was not liable for the cost exceeding $3 1/4 million.

3. Whether the tax avoidance scheme was effective in generating the claimed first-year allowance:

The Court scrutinized the tax avoidance scheme, which involved a series of complex, interdependent transactions designed to create an artificial tax benefit. The scheme included self-cancelling transactions where money was transferred from LPI to Victory Partnership and then immediately back to LPI, leaving no real financial effect.

The Court applied the principles established in previous cases, such as Ramsay and Burmah Oil, which require analyzing the entire series of transactions to ascertain their true nature and effect. The Court found that the scheme was a tax avoidance device and that the taxpayer's claimed first-year allowance of $14 million was inconsistent with the actual expenditure of $3 1/4 million.

The Court concluded that the taxpayer was entitled to a first-year allowance only for the $3 1/4 million genuinely expended. The scheme's artificial steps were disregarded for fiscal purposes, and the true financial consequence was the expenditure of $3 1/4 million by Victory Partnership.

Conclusion:
The appeal was allowed, and the case was referred back to the commissioners to determine the tax assessment based on a first-year allowance of $3 1/4 million. The taxpayer was ordered to pay the costs in this House and in the courts below.