9911796707
TMI Blog1959 (6) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 less capital allowances of £ 5,148 on the ground that certain expenditure incurred by the respondents on knives and lasts in the material period qualified for an investment allowance under the provisions of section 16(3) of the Finance Act, 1954. The sole question in dispute in the appeal was whether the said expenditure did so qualify and this question involved the following issues, namely: (i) whether the knives and lasts constituted machinery or plant for the purposes of section 16(3) of the Act of 1954; and if so (ii) whether the expenditure incurred thereon by the respondents was of a capital or a revenue nature. The case stated on the appeal from the commissioners, so far as material, was as follows: 1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on April 2 and 3, 1957, the respondents appealed against an assessment made upon them for the year 1955/56 in the sum of £ 8,290 less capital allowances £ 4,836 in respect of their profits as shoe and slipper manufacturers. The sole question for our determination was whether certain expenditure incurred by the respondents on knives and lasts in the material period qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ph (ii) above, a last, though readily detachable, is an essential and indispensable part of the machine. (iv) The next process is the "Pounding Machine" which, simulating the cobbler's action of hammering the leather flat, performs this function on the back lasted shoe, which must be secured during the process on a last of the required size and pattern. (v) The next process, that of attaching the prepared soles by chain stitching (Blake Sewing), requires no last, but in all the operations up to this stage the machines could not be used without either knives or "making lasts." (vi) after chain stitching (Blake Sewing), the stitching channels on the sole are closed and the sole is levelled to the correct shape on a levelling machine. On this machine metal feet and forms being exact replicas of the shape of the making last are used in conjunction with the hydraulic pressure of the machine to mould the sole to the correct shape. The shoe then gores to the finishing room, where the heel is attached on a finishing last inserted. The sole and heel edges are pared and then set. If such an operation were performed without a last the shoe would lose its shape. So t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s one-quarter of the total cost in the four succeeding half yearly accounts on the view that an average life of two years for the combined total expenditure on new knives and lasts was a fair estimate. The actual expenditure on new knives and lasts and the amount so charged against profits in the two half years' accounts ending respectively on April 3 and October 2, 1954. Forming the basis of the facturing units of the respondents' business. Thus the figure of £ 8,022 5s. appearing in the balance sheet at October 2, 1954, is the balance after crediting total additions in the half year of £ 1,856 8s. 5d. and after debiting to profit and loss account a sum of £ 3,542 19s. 1d., being the writing off at 25 per cent. of expenditure on knives and lasts in the preceding four half years. 5. The expenditure on knives and lasts during the basis year and the six years immediately preceding the basis year were as follows: Half Year to March, 1948 2,075 ,,,,,, September, 1948 1,451 ,,,,,, March, 1949 3,706 ,,,,,, September, 1949 3,868 ,,,,,, March 1950 4,659 ,,,,,, September, 1950 1,151 ,,,,,, March, 1951 3,527 ,,,,,, September, 1951 1,026 ,,, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the wear and tear of the machinery or plant which belonged to the respondents and was used for the purposes of the respondents' trade," for, whether the expenditure on knives or lasts was properly described as expenditure on plant and machinery or not, the Revenue had allowed and the company had accepted deductions in computing their profits arrived at by the method described in paragraph 6 above, so that in any event any claim for annual allowances would be excluded by section 330(1)(a) of the Income Tax Act, 1952. The sole issue before us was whether in addition to the said deductions the respondents were entitled for the said year 1955/56 to an investment allowance under the provisions of section 16(3), Finance Act, 1954, equal to one-fifth of the expenditure on knives and lasts, on the view that such expenditure was "for the provision of new machinery or plant." 8. It was contended on behalf of the appellant-- (i) that the expenditure on knives and lasts incurred by the respondents in carrying on their trade was not expenditure on capital account but on revenue account; (ii) that on the evidence the said knives and lasts were not parts of the machines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there might be trades employing knives and lasts in circumstances which would make it inappropriate to describe them as machinery or plant. But in the case before us we thought we should give weight to the facts (1) that the knives and lasts performed an indispensable function in the process of manufacture, (2) that in performing that function they were used (and could only be used) in conjunction with machines, which themselves could perform no useful function in the said process unless used in conjunction with the lasts and knives, and (3) that (as was not disputed) the said machines themselves were machinery or plant within the meaning of the relevant sections. "(ii) We found as a fact on the evidence that the knives and lasts were machinery or plant within the meaning of the said sections and we held that the [respondents were] entitled to the investment allowance claimed. "(iii) In coming to this conclusion we did not consider it material to decide whether the knives and lasts were 'implements, utensils or articles' within section 137(d). Income Tax Act, 1952, or whether the allowances referred to in paragraph 6 of this case were or were not made under and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in relation to the person incurring any expenditure or paying the sums,do not include any expenditure or sum which is allowed to be deducted in computing, forthe purposes of income tax, the profits or gains of a trade, profession, office, employmentor vocation carried on or held by him ; ..."Finance Act, 1954. s. 16: "(1) In the cases provided for by this section, anallowance (in this Act referred to as an ' investment allowance ') shall be made in respectof capital expenditure on new assets incurred after April 6, 1954 ... (3) An investmentallowance equal to one-fifth of the expenditure shall be made instead of an initialallowance under Chapter II of the said Part X in respect of expenditure on the provisionof new machinery or plant, and any provision of the Income Tax Acts applicable to initialallowances under that Chapter, so far as it is applicable in relation to allowancesfor new assets, shall apply also to investment allowances under this subsection,except that . . . (c) where the expenditure on new machinery or plant is allowed to bededucted in computing profits or gains for the purposes of income tax, it shall neverthelessbe treated as capital expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied for an investments allowance under the provisions of section 16(3), Finance Act, 1954... 3. The respondents use a number of machines in the course of carrying on their business of shoe and slipper manufacturers: (i) An "Ideal Clicking Press" for cutting upper components, fittings, etc., from leather, plastic, fabric, or other materials. The cost of this machine at the material time was ? 423, exclusive of the cost of any knives. Its sole function is to be cut the leather or other fabric to the size required for shoes or slippers and it can only function when provided with knives of the shape required for the several parts of the particular shoe. Different knives are required for uppers from those used for cutting soles, and different sets of knives are required for right and left shoes. The respondents also use a "Revolution Press" performing similar functions, the cost of which at the material time was ? 1,096 if worked from a line shaft, or ? 1,164 if used with its own motor. More upper knives are required than sole knives. But different sole knives would be needed to the type of soling material used and soling design and finish required. At any given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, known as a "finishing last", is used in conjunction with the machines, e.g., an "Edge Trimming Machine." (vii) The next processes of edge setting and heel burnishing are performed on a machine, and as good pressure is required a last to hold the shoe steady is still essential. (viii) The shoe bottom is then scoured, pointed and polished, on machines and the shoe remains on the last for these processes, only leaving it after the final finishing processes. (ix) The lasts described above thus fall into two classes, the making and the finishing lasts, the former having a metal base to enables tacks to be clenched over. Lasts are made of maple, beach or hornbeam. The respondents attempt to use their lasts as long as possible, but fashions change and every change of fashion involves a change of last. (x) Summarising the processes employed by the respondents in carrying out its trade it can be broadly stated that the respondents utilise either knives or lasts (the latter, making or finishing) in 90 per cent. of their manufacturing and finishing processes and that the machines that they use can only function when furnished with the knives or lasts appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1952 1,404 ,,,,,, March, 1953 5,131 ,,,,,, October, 1953 3,476 ,,,,,, April, 1954 4,160 ,,,,,, October, 1954 1,856 No dissection of the figures of expenditure between knives and lasts had been attempted by the respondents, and we were satisfied that such a dissection, if not actually impossible, was not reasonably practicable. 6. The Revenue had taken the view that for income tax purposes the respondents' estimate of the life of knives and lasts was too conservative, but had agreed that an average life of three years instead of two years was reasonable. The respondents had accepted the Revenue's contention for income tax purposes, and in the result a sum equal to one-sixth of total expenditure on knives and lasts has been, for a number of years, allowed as a deduction in the following six half-years, as such accounts came unto the computation of the respondents' profits for income tax purposes. This deduction was regarded by the Revenue as the nearest practicable and just estimate of the sum expended by the respondents "for the supply, repairs or alteration of any implements, utensils or articles employed for the purposes of the respondents' t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chattels; (iii) that on the evidence the said knives and lasts were implements, utensils or articles employed for the purposes of the respondents' trade within the meaning of section 137(d), Income Tax Act, 1952; (iv) that the said knives and lasts being implements or utensils employed for the purposes of the respondents' trade were not plant or machinery eligible for an investment allowance within the meaning of section 16(3)(c), finance Act, 1954. 9. It was contended on behalf of the respondents-- (i) that on the true construction of sections 137, 279 and 280, Income Tax Act, 1952, and of section 16, Finance Act, 1954, the words "implements, utensils and articles" and "plant or machinery" were not mutually exclusive, but to some extent overlapping; (ii) that on the evidence in this case the knives and lasts employed for the purposes of the respondents' trade were both "implements or utensils" within section 137(d) and "plant or machinery" within sections 279 and 280, Income Tax Act, 1952, and section 16(3)(c), Finance Act, 1954; (iii) that on the evidence in this case the expenditure on knives and lasts, although they had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew, even if the said allowances were made, and properly made, by virtue of section 137(d), nevertheless, having regard to the decision in Inland Revenue Commissioners v. Great Wigston Gas Co.(1) and to the provisions of section 16(3)(c), Finance Act, 1954, that did not prevent our coming to the conclusion set out in sub-paragraph (ii) hereof. "(iv) Accordingly, we determined the assessment for the said year 1955/56 in the sum of ? 8,290 less ? 5,148 capital allowances, these being the figures agreed by the parties following our decision in principle." Viscount Bledisloe Q.C. and Alan Orr for the Crown F. Heyworth Talbot Q.C. and G.B. Graham for the respondents The following cases, in addition to those referred to in their Lordships' opinion, were cited in argument: Edwards (Inspector of Taxes) v. Bairstow(2); Daphne v. Shaw(3); Dumbarton Harbour Board v. Cox (Surveyor of Taxes)(4); Watts v. Enfield Rolling Mills (Aluminium) Ltd.(5); Atherton v. British Insulated and Helsby Cables Ltd.(6); John Smith & Son v. Moore(7); Ducker v. Rees Roturbo Development Syndicate Ltd.(8); Mallett (Inspector of Taxes) v. Staveley Coal and Iron Co. Ltd.*; Associated Portland Cement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge assortment of knives. It appears that each knife costs about ? 1. Two types of machine are used: one costs over pound 400 and the other over ? 1,000. In most of the further stages of manufacture lasts are used. These cost about ? 1 2s. per pair. For the earlier stages making lasts are used, and for the later stages finishing lasts. These lasts, too, are not parts of the machines. For each process a last with the pieces of leather which go to make the shoe is fed into the appropriate machine. Again, not only are different lasts necessary for right and left shoes and for different sizes, but different types of shoes require different lasts. It is stated in the case that every change of fashion involves a change of last. It appears that about 12,000 pairs of making lasts and 24,000 pairs of finishing lasts are required for a production of 1,200 dozen pairs of shoes a week. The life of each last is about three years, though some may be used for four or five years; it is not stated whether they mostly wear out or become obsolete through change of fashion. The life of the sole knives is about the same, but upper knives only have a life of about a year. The facts set out in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure" must be considered as an ordinary expression in untechnical English. So treating it, my first inquiry would be: What would a reasonable business man understand by the expression, and would he regard this expenditure as capital expenditure or not? On that question the decision of the commissioners would be most important. But we must do our best to interpret these words without expert assistance. I am certainly not going to attempt a definition of capital expenditure on the one hand or of revenue expenditure on the other. Like most ordinary English words or expressions they are probably incapable of exact definition, and I must look at the whole circumstances and determine as a matter of construction into which class this expenditure falls. As the first step I would ask what is the practical difference between treating an item of expenditure as capital or as revenue expenditure. I claim no expert knowledge of accountancy or of business methods, and the only practical difference that occurs to me--and none other was suggested in argument--is that if you treat a sum as capital expenditure you do not write it all off in one year or set it all against the income of one year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only to be available in the case of revenue expenditure. Secondly, section 16(3)(c) appears to recognise at least the possibility of this provision being used in the case of capital expenditure. And thirdly, on one reading of section 137(d) its provisions were not correctly followed in making deductions in respect of this expenditure. I take these three points in turn. At first sight, section 137(f) may appear to prohibit deductions under this section in respect of capital expenditure, for it prohibits any deduction in respect of "any sum employed or intended to be employed as capital in such trade." But "any sum employed as capital" may mean new capital put into the business and is not a very happy; equivalent of "any capital expenditure," and I think that it is legitimate to look at the history of this provision. Similarly worded provisions were included in the old rule 3, which goes back at least as far as 1842. Before 1878 there was nothing in the Income Tax Acts corresponding to the modern wear and tear allowance or annual allowance in respect of capital expenditure, and unless rule 3 applied when there was capital expenditure to replace worn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case was not in accord with the provisions of the section, because the sums deducted were arrived at by taking into account expenditure in three consecutive years--in effect, by writing off each year's expenditure over a period of three years, which is an appropriate method for capital expenditure. I do not in the least criticise this procedure. It was convenient, it could not cause loss to the Revenue, and it was unlikely to cause loss to the taxpayer. But it does emphasise the fact that neither party saw fit to treat this expenditure in the ways in which revenue expenditure is normally treated, and it appears to me to go far to remove any presumption that expenditure in respect of which section 137(d) has been applied is revenue expenditure. There appears to be no clear authority on this matter. The authority most strongly founded on by the appellant was the opinion of Lord President Clyde in Hyam v. Inland Revenue Commissioners There, shop fittings were scrapped and new fittings were purchased, and a claim for a deduction under rule 3 of the Rules applicable to Cases I and II of Schedule D was disallowed. Before the rule was amended in 1927 deduction was prohibited "b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t I cannot regard this reasoning as a satisfactory criterion of whether expenditure is or is not capital expenditure. Let me suppose that a large business has 20 machines each of which lasts 20 years, and that it buys a new one annually to replace one worn out, and let me suppose a small business with only one such machine: it buys a new one once in 20 years. It may be that it is proper for the large business to save a lot of calculation by treating its annual purchase as revenue expenditure and claiming under section 137, whereas that would not be proper for the small business. But it would seem to me odd, and indeed absurd, that the Revenue should be able to say that the buying of a new machine by the large business is not capital expenditure and carries no investment allowance, whereas the buying of a similar machine by the small business is capital expenditure carrying a right to an investment allowance. I cannot accept the view that the regularity with which a particular type of expense recurs in a particular business throws much or any light on whether it is really capital or revenue expenditure. On the material available I am of opinion that the respondents have made out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of these articles. When Lindley L.J. used the phrase "permanent employment in the business" he was using it in contrast to stock-in-trade which comes and goes, and I do not think that he meant that only very longlasting articles should be regarded as plant. But the word does, I think connote some degree of durability and I would find it difficult to include articles which are quickly consumed or worn out in the course of a few operations. There may well be many borderline cases, but these articles have an average life of three years, and if their cost can fairly be called capital expenditure I cannot refuse to them the description of "plant" unless the Act discloses some special reason for doing so. The word "investment" may indicate a rather longer duration than what might be sufficient in other cases, but it seems to me that machinery could not be disqualified for investment allowance because it only had a life of three years, and I see no reason why a stricter test as to durability should be applied to plant than to machinery when the Act appear to treat them on an equal footing. I am therefore of opinion that the respondents are entitled to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure attaching to sums which have been allowed by way of deduction for income tax in computing the profits or gains of a trade, etc., this leaves the expenditure in question to be judged free from any consideration of how it has or should be dealt with under section 137 of the Income Tax Act, 1952. The fact that under that section it has been allowed as a deduction is not to prejudice it in qualifying for treatment as capital expenditure for the purposes of section 16 of the Finance Act, 1954. My Lords, there is, as previously stated, no express finding by the special commissioners, but the contrary view was urged by the Crown in the first of their contentions set out in paragraph 13 of the case stated and it is, I think, implicit in their decision that they must have regarded it as capital expenditure. The manner in which the taxpayer keeps his accounts is, of course, often quite irrelevant to the question how a particular item should be treated for tax purposes, but when we find, as in this case, that both the taxpayer and the Inland Revenue authorities have treated this expenditure in the manner set out in paragraphs 4 and 6 of the stated case, namely, by creditin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther they could be conclusive, for the matter must, I think, be determined on a consideration of the statutory provisions in relation to the nature of the operations carried on by the company. We had a display of a sample of the knives and lasts and a demonstration of how they operated, without objection from the appellant's counsel or challenge of the accuracy of the demonstration. From this it seems that some error or misunderstanding must have crept into the findings of the Commissioners. The knives and lasts would not seem to be attached to any machine so as to be "readily detachable." The machines perform the cutting, stretching, stitching, and hammering functions which might be carried out by a cobbler by hand. They in fact are just mechanical cobblers and the knives and lasts are the implements which they use, the knives being hollowed metal shapes with sharp cutting edges. It would be perfectly accurate to describe them as "implements" or "articles" employed for the purposes of the trade within the meaning of section 137(d) of the Income Tax Act, 1952. That may not dispose of the question whether they are "machinery or plant" wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired than sole knives and we are told that the average life of an upper knife is 12 months. The limit of the life for sole knives and lasts would appear, with possible exceptions, to average three years. The company itself in its own accounts treated its whole stock of knives and lasts as having a life of only two years and wrote off the total costs in two years. In my opinion it is quite unreal to regard constantly recurring expenditure on such articles, having so short a life, as capital expenditure. It can hardly be said to be expenditure on assets of an enduring nature. This, to my mind, is a typical case of the type referred to by Lord President Clyde in Hyam v. Inland Revenue Commissioners*, where he said: "The propriety, and the practice, of charging the cost of supplying 'implements, utensils, or articles employed for the purposes of the trade' to revenue must vary according to the character of the trade and--partly perhaps--according to the financial circumstances of the trader. Trading implements, utensils, and similar articles--taking these descriptions in the ordinary connotation--have to be supplied, repaired and altered from time to time, in order to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... policy to lay in supplies of things, other than raw material of manufacture, used in a manufacturing process in quantities sufficient to last for longer than a year and other cases where expenditure on single items which are going to endure for perhaps many years is accepted and properly accepted as revenue expenditure. Expenditure an all consumable or quickly expendable things used in industry would seem naturally to be chargeable against revenue. Nor is it always necessary to stop there. Repairs to premises or machinery may last for many years and, so long as these do not fall to be classed as improvements, are, so far as I am aware, always a charge against revenue, as in recognised indeed in section 137(d) of the Income Tax Act, 1952. Replacements generally may be said, I think, to fall into this category and that is what the knives and lasts are here. The company has in reality charged then against revenue. Initially charging them against capital it writes them off in two years. It may be said it charges half of them agaisnt revenues in the first year and the other half against revenue in the second year. The company and the Revenue has reached an agreement on the amounts to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of new plant" so as to qualify for an investment allowance? The special Commissioners said nothing in particular on this point. Nor did Vaisey J. The Court of Appeal found it difficult. Your Lordships are, I believe, divided in opinion. My Lords, I cannot think that this ? 6,000 a year is the sort of expenditure which should qualify for an investment allowance. It is a running expense which is incurred, year in and year out, in the course of the ordinary conduct of the business. The sum actually expended can clearly be deducted in computing the profits of the business: because it is a sum expended for the supply of "implements, utensils or articles employed for the purposes of the trade" within section 137(d) of the Act of 1952. So that the manufacturers can no doubt get 100 per cent. allowance on account of it. But I do not see that they should get an additional 20 per cent. on the ground that it is capital expenditure. Test it this way: If this ? 6,000 a year were capital expenditure, the manufacturers would be entitled, not only to an investment allowance on this expenditure, but also to an annual allowance for wear and tear. But in order to get th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of a "straight-line writing down" on an estimated three years' life. The only thing that is perhaps significant is that there was never any claim made for an initial allowance. My Lords, I am of opinion that the expenditure of the company on renewing knives and lasts was not a capital expenditure so as to qualify far an investment allowance and I would allow the appeal. LORD JENKINS. My Lords, I agree with my noble and learned friends, Lord Reid and Lord Tucker, in their conclusion that the respondent company is entitled under section 16(3) of the Finance Act, 1954, to an investment allowance in respect of its expenditure of knives and lasts during the period relevant to its assessment to income tax for the year 1955-56. In order to make good its claim to this allowance the company had to show that the expenditure in question was "capital expenditure on new assets" within section 16(1) and also that it was "expenditure on the provisions of new machinery or plant" within section 16(3). The knives and lasts were new assets (see section 16(10), which defines "new" in relation to machinery and plant as meaning "unused and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be seen that the definition of "capital assets" implicit in Mr. Heyworth Talbot's submission is closely akin to Lindley L.J.'s definition of "plant." Both postulate that the assets in question should possess some degree of permanence, Lindley L.J., speaks of goods and chattels kept by the business man for permanent employment in his business, while Mr. Heyworth Talbot speaks of assets retained by a manufacturer for use again and again in his manufacturing operations. But neither of them attempts to define the degree of permanence required, and, indeed, it would, as I think, be impossible to do so. I accept Mr. Heyworth Talbot's submission, not as embodying a hard-and-fast rule of universal application, but as providing so far as it goes a reasonably adequate guide to the solution in the present case of the question whether the expenditure on the assets here concerned, that is to say, the knives and lasts, was capital expenditure for the purposes of section 16. The company does not deal in knives and lasts. It acquires knives and lasts for retention and use as part of its means of manufacturing shoes and slippers. In point of function the knives ..... X X X X Extracts X X X X X X X X Extracts X X X X
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