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TMI Blog1935 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1928-29 under Schedule D of the Income Tax Act, 1918. The appellants say that the £ 450,000 was a capital receipt and ought not to be reckoned as forming any part of the profits arising from the carrying on of their trade. The Crown says that the £ 450,000 was a trade receipt which ought to be included in the computation of the appellants' profits or gains for income-tax purposes. The circumstances in which the appellants received the payment which has now to be examined are set out in the Stated Case, from which I select the salient facts. The appellants were incorporated as a limited company in this country in 1895 and have since carried on the business of manufacturing and dealing in margarine and similar products on a very extensive scale both here and abroad. They had as their keenest competitors the Dutch Company, which was engaged in the same business in Holland. On February 13, 1908, the two companies entered into an agreement whereby they bound themselves for the future to "work in friendly alliance" and to share their profits and losses in conformity with an elaborate scheme detailed in the agreement. Each of the two companies had a controlli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd subject thereto agreed to continue in force the relative provisions of the principal agreement until December 31, 1940. Provision was made for the formation of a committee to endeavour to devise the scheme of merger or unification mentioned in the recital, and, failing agreement upon such a scheme by December 15, 1913, the parties bound themselves to execute a contract confirming and extending to December 31, 1940, the provisions of the supplemental agreement and of a scheduled document setting out agreed alteration in their existing pool contract. According to the Stated Case "each company carried on its business independently, but in general the parties observed the terms of the said agreements for each of the years 1908 to 1913 and the profits of the two companies were accounted for for those years. Payments were in fact made by and to the appellants under the said agreements in these years. Such payments when made to the Dutch Co. were deducted as an expense and when made by the Dutch Co. were brought in as a receipt in making up the appellants' profit and loss accounts for the years in which the payments were made or received. In computing the appellants' inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of 1908, 1913 and 1920 for the years 1914 to 1927 inclusive, and both parties mutually discharged each other from any liability arising thereunder before December 31, 1927. Each party further undertook to do everything necessary to put an end to the arbitration. The Third of these agreements recited that the Dutch Co. had expressed to the appellants a desire to determine the agreements of 1908, 1913 and 1920, contrary to the provisions therein contained and that the appellants had consented thereto in consideration of the payment to them by the Dutch Co. of £ 450,000 "as damages". The agreement consists of two articles only. By the first article the parties agreed that the three agreements of 1908, 1913 and 1920 should be thereby determined as from December 31, 1927, and each party released the other party from all claims thereunder. By the second article the Dutch Co. undertook forthwith to pay to the appellants a sum of £ 100,000 and to hand to them promissory notes for a further sum of £ 350,000 payable as therein stated. In point of fact the total sum of £ 450,000 was paid in cash by the Dutch Co. to the appellants before the expiry of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem. The reported cases fall into two categories, those in which the subject is found claiming that an item of receipt ought not to be included in computing his profits and those in which the subject is found claiming that an item of disbursement ought to be included among the admissible deductions in computing his profits. In the former case the Crown is found maintaining that the item is an item of income; in the latter that it is a capital asset. Consequently the argumentative position alternates according as it is an item of receipt or an item of disbursement that is in question, and the taxpayer and the Crown are found alternately arguing for the restriction or the expansion of the conception of income. I propose to refer to the case of British Insulated and Helsby Cables, Ltd. v. Atherton. This case has been generally recognised as the leading modern authority on the subject, though I fear that Romer, L.J., was unduly optimistic when he said that it "placed beyond the realms of controversy" the law appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able seams included in its leasehold-Mallett v. Staveley Coal and Iron Co. Similarly, a sum received by a fireclay company as compensation for leaving unworked the fireclay under a railway was held to be a capital receipt-Glenboig Union Fireclay Co. v. Inland Revenue Commissioners. On the other hand, a sum awarded by the War Compensation Court to a company carrying on the business of brewers and wine and spirit merchants in respect of the compulsory taking over of its stock of rum by the Admiralty was held to be a trade or income receipt (Newcastle Breweries, Ltd. v. Inland Revenue Commissioners); so was a sum paid to a shipbuilding company for the cancellation of a contract to build a ship (Short Brothers, Ltd. v. Inland Revenue Commissioners); so was a lump sum payment received by a quarry company in lieu of four annual payments in consideration of which the company had relieved a customer of his contract to purchase a quantity of chalk yearly for ten years and build a wharf at which it could be loaded (Inland Revenue Commissioners v. Northfleet Coal and Ballast Co.); so was a sum recovered from insurers by a timber company in respect of the destruction by fire of their stock of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight be regarded as of the same nature as the ingredients of which it was composed. But even if a payment is measured by annual receipts, it is not necessarily itself an item of income. As Lord Buckmaster pointed out ([1922] S.C. (H.L.), at p. 115), in the case of Glenboig Union Fireclay Co. v. Inland Revenue Commissioners: "There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the test." The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellant's profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole condu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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