1943 (2) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the sum received by the company (capital or revenue account).
2. Applicability of income-tax and surtax on the sum received.
3. Relevance of insurance policy terms.
4. Comparison with similar cases and precedents.

Detailed Analysis:

1. Nature of the Sum Received by the Company (Capital or Revenue Account):
The core issue is whether the sum of Sterling Pound 15,000 received by the company under an insurance policy is to be treated as a receipt on capital account or revenue account. The payment was received due to the death of Mr. Crawford, a director with special expertise valuable to the company's business. Despite the absence of a binding contract between Mr. Crawford and the company, his services were deemed likely to continue, and the insurance was intended to compensate the company for the loss of these services.

The judgment emphasized that the nature of the receipt should be evaluated based on its purpose. The insurance policy was intended to cover the loss of services, not to compensate Mr. Crawford directly. The court reasoned that the benefits derived from service contracts fall into the same broad class as those derived from goods in trading companies, which are typically of a revenue character. Therefore, the receipt of Sterling Pound 15,000 was determined to be of a revenue nature.

2. Applicability of Income-Tax and Surtax on the Sum Received:
Given that the sum was classified as a revenue receipt, it was subject to income-tax and surtax. The court highlighted that the agreement between the company and the Inland Revenue to treat the sum as a revenue receipt does not bind the appellants (shareholders' executors). The judgment concluded that since the sum was a revenue receipt in the company's hands, it should be taxed accordingly.

3. Relevance of Insurance Policy Terms:
The court examined the terms of the insurance policy, which included a compensation schedule for death or disabling injuries and a weekly payment for temporary disablement. The policy's objective was to compensate the company for the loss of Mr. Crawford's services, not to cover temporary losses or make payments to Mr. Crawford himself. The judgment noted that the lump sum payment upon Mr. Crawford's death should be treated similarly to periodical payments for temporary disablement, reinforcing the classification of the sum as a revenue receipt.

4. Comparison with Similar Cases and Precedents:
The judgment referenced several cases to support its conclusion. It distinguished the present case from Chibbett v. Robison & Sons and Du Cros v. Ryall, where the sums received were not considered part of the profits of the business or derived from employment, respectively. Instead, the court aligned the present case with instances where insurance moneys received to cover the loss of profits or services were treated as revenue receipts. The case of Mitcheil v. Noble Ltd. was cited to illustrate that expenditures to get rid of a servant were admissible deductions, implying that receipts for the loss of a beneficial contract of service should be treated as revenue.

Conclusion:
The judgment concluded that the sum of Sterling Pound 15,000 received by the company under the insurance policy was a revenue receipt, subject to income-tax and surtax. The appeal was dismissed with costs, and leave to appeal to the House of Lords was granted.