9911796707
TMI Blog1940 (5) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... f a number of preference shares and also of 400,000 new ordinary shares of 5s. each, out of which 10,000 shares were to be reserved for issue to employees of the company at such time or times and upon such terms and conditions as the directors should determine. Six months later the directors passed a resolution authorising the chairman and vice-chairman of the company to allot and issue on such terms and conditions as they should determine up to a total of 6,000 ordinary shares to employees under the special resolution of December 6, 1933. Accordingly a letter was written on June 15, 1934, to certain members of the staff of the company in the following terms: "The directors desire to show their appreciation of special services you have rendered to the company by giving you an opportunity to acquire a share interest in the company on favourable terms. If you will kindly fill up and return to the secretary the enclosed form of application forshares together with a remittance for ? being payment in full at par namely 5s. per share, you will in due course receive an allotment." In response to this invitation applications were made for the whole of the 6,000 shares so offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same result. The payments could no doubt have been made out of the ordinary resources of this prosperous company. If some special provision of funds to meet the payments were required, shares to the necessary amount could have been issued on the open market at the full price obtainable. This course would have allowed the company without question to treat the payments as trading expenses, and to deduct them from its gross receipts in making up its trading account. The company chose to take another course which did not involve any expenditure of its money, or realisation of any of its assets. It was perfectly entitled to take that course, even though the result might have been to divert into the pockets of its employees the equivalent of the cash profit, which it might otherwise have obtained. In fact, the company did not obtain the cash profit. It is none the less said on its behalf that it is entitled to make up its trading account as if it had expended a sum of money equivalent to the premium value of the shares in the remuneration of its employees. I find no guidance from the fact that the employees have had to pay income-tax on the premium value of their shares. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forgone" in the present case, it is unnecessary to say more about the propositions contained in the passage I have quoted from Lord Sumner's speech than that they may require very careful examination if they are relied on as having the authority of your Lordships' House. The Master of the Rolls, however, did not refer to these observations for the purposes of supporting the argument which counsel for the company was at pains to disclaim. On the contrary, the Master of the Rolls expressly rejected the argument. I agree with him so far as I understand the argument, but in any case the word "forgone" as used by Lord Sumner was no more than an apt word to describe the result of a simple arithmetical calculation, namely, the deduction of amounts of the rent received by the brewery company from amounts of the annual value or of the rent paid by the brewery company in respect of premises used by the brewery company in selling its liquor. It is clear that any attempt to build upon the use of the expression "rent forgone" any such argument as was, apparently without justification, fathered by the Crown on the respondents' counsel must fail. It is said, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not preclude a deduction for the annual value of premises used wholly for the purposes of the trade, though the annual value is not money expended in the ordinary sense of the word. Applying that construction your Lordships' House decided that the deduction claimed was properly made in ascertaining the balance of profits and gains. The brewery company was treated in the case both of its freehold and of its leasehold premises as incurring an outlay. The deduction of the outlay, once it had been decided to have been incurred, was not more than an application of the elementary principle stated by Lord Herschell in the case of Gresham Life Assurance Society v. Styles [1892] 62 L.J.Q.B. at p. 47; [1892] A.C. at p. 321: "Profits are ascertained by setting against the income earned the cost of earning it". With the greatest respect to the Court of Appeal I am unable to find any principle laid down in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 which can be applied to the facts of the present case, even assuming that the view of those facts taken by the Master of the Rolls was the one which commended itself to me. I come back to the facts of this case, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ults might follow in many cases in which for one reason or another an opportunity of securing some financial advantage is not used. That, however, does not in any way affect or alter the view I take of this case on the facts. The plain fact as it appears to me is that the cost to the company of earning its trading receipts was not increased by the issue of these shares at less than their full market value. In my view this appeal should be allowed and I move accordingly. Viscount Maugham stated the material facts and continued: What we have in effect to consider is whether, since the company has not in fact received any part of the sum of ? 11,625, the premiums which the company might have got and expended, but never did get or expend, can be treated as an expense or deduction laid out or expended in some artificial but legitimate sense for the purpose of the trade of the company. This is a rather difficult proposition to establish in the affirmative. We are invited to consider something which did not take place; and it is to be remembered that in Blott v. Inland Revenue Commissioners [1921] 90 L.J.K.B. 1028; [1921] 2 A.C. 171 this House declined to be influenced by the argument th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying it to some account in the profit and loss account would not have affected the matter. It would not be an item of profit of the trade. Indeed the issue of shares by a limited company is not a trading transaction at all. The corporate entity becomes pro tanto larger; but the receipts of the trade on the one hand and the amount of the costs and expenditure necessary for earning these receipts on the other remain unaltered; and it is the difference between these two sums which is taxable under Schedule D. It is well stated that profits and gains must be ascertained on ordinary commercial principles, and this fact must not be forgotten Gresham Life Assurance Society v. Styles [1892] 62 L.J.Q.B. at pp. 44, 47; [1892] A.C. at pp. 316, 321; Usher's Wiltshire Brewery v. Bruce [1914] 84 L.J.K.B. at p. 429; [1915] A.C. at p. 458. There is one other fact of importance which must be borne in mind. It is that the company was not discharging a debt or liability to the employees when it issued the 6,000 shares to them at par. The word "remuneration" has been more than once mentioned in this case as if it described the advantages which the employees were obtaining by the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the Court of Appeal I must now deal, I fear at some length, with some at least of the matters and the cases which have, as I think, led them to a wrong conclusion. I think it is clear that the premiums obtained on an issue of shares are not items of receipt in the account of profits and gains. It must then be asked, what is the event which is alleged in this case to entitle the respondents to treat the amount of these premiums as a disbursement or expense wholly and exclusively laid out or expended for the purposes of the trade (rule 3 of the Rules applicable to Cases I and II)? The contentions of the taxpayer are set out in para. 13 of the case stated. It is said in effect that the amount of the premiums is "an amount forgone" by the tax-payer because the shares were issued at less than their market value to the employees as "remuneration" for their services, or, alternatively, that if the company has issued the shares in the open market it could have utilised "the premiums" for the purpose of paying "the aforesaid remuneration" and could then have debited the amount for the purpose of computing its profits for income-tax purposes. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t p. 425. The third point decided was that "the first part of the rule 3(a) which prohibits deductions for disbursement and expenses, not being money wholly and exclusively expended for the purposes of the trade, does not preclude a deduction for the annual value of premises used wholly for the purposes of the trade, though such annual value is not money expended in the ordinary sense of the word" (the italics are mine). The main reason for this decision, surprising as it is at first sight, is to be found in Lord Herschell's speech in Russell v. Town and County Bank [1888] 58 L.J.P.C. at p. 10; 13 App. Cas. at p. 425. It depends on the particular provisions of the Income Tax Acts. "It is quite true," Lord Herschell said, "that, strictly speaking, the annual value where the premises are owned and not rented is not money laid out or expended for the purposes of the trade; but it is admitted, and must, I think, have been admitted, that in either the one way or the other that deduction is to be made, because inasmuch as it is clear that even in the case of a dwelling-house a part of which is used for purposes wholly unconnected with the trade, the annual va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Rolls that the company has remunerated its employees to its own financial prejudice by giving to them the money's worth of the premiums on the shares allotted to them. I would prefer to say "has made a present to its employees". The words "to it's own financial prejudice" do not, I think, advance the argument, for all they mean is that certain shares have been issued at par while they might have been issued at a higher price. How does that lead us to the conclusion that moneys have been "laid out or expended" for the purposes of the trade? For myself I do not think the premiums which might have been obtained are "money's worth" in the sense in which those words are generally used, that is, as an equivalent for cash paid by the company; and in my opinion that view is supported by the case I must next refer to. But whether or not that is so, I repeat that in this case the sum of ? 11, 625 which the company never obtained was not in any sense laid out or expended for the purposes of the trade. I think this House in the case of Hilder v. Dexter [1902] 71 L.J. Ch. 781; [1902] A.C. 474 decided by necessary inference that alth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give" the person promising to subscribe for shares "a possible benefit at the expense of the company in this sense, that it forgoes the chance of issuing them at a premium". Here we come across precisely what is said in this case. Lord Davey, however, deals with the point by saying that there is no law "which compels a company to issue its shares above par because they are saleable at a premium in the market", and that "the benefit to the shareholder from being above to sell his shares at a premium is not obtained by him at the expense of the company's capital". If this House had regarded the transaction as one in which the company was giving "money's worth" in the sense of an equivalent for cash in consideration of the promise to subscribe for shares the decision would have been the other way. The words "directly or indirectly" would have been in point. On the other hand there is no doubt at all that a man who gets a share standing in the market at ? 2, 3s. 9d. for the sum of 5s. is himself getting an advantage of considerable value. The point of Hilder v. Dexter [1902] 71 L.J. Ch. 781; [1902] A.C. 474 for the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at par to certain employees in order to give them an interest in the company, but not in payment of any sum contractually due to them. In these circumstances the respondents have failed to establish that any sum has thus been expended or laid out for the purpose of the trade of the company. It follows, in my opinion, that the appeal should be allowed. Lord Russell of Killowen. The respondents in this case claim that in computing the profits of their trade assessable to income-tax, there should be deducted a sum which they have not disbursed, and in respect of which they have incurred no liability. I will not recount all the facts, they have already been stated. I must, however, call attention to one important matter. The claim is made upon the footing that the sum in question represents remuneration paid by the respondents to their servants, but the transaction as evidenced by the documents does not, I think, warrant this terminology. the sum in truth represents the premium on certain shares which the respondents might have issued to the public at a price above par, but which they elected to offer to their servants at par, in order to induce them to become shareholders, and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include, in addition to the cost of the whole stock-in-trade, an item representing the whole amount of that salary. I am throughout assuming that the cost is lower that the market value. But transactions such as that do not represent what in fact happened in this case. Here the respondents in my opinion parted with nothing; they transferred no asset of theirs to the servants. The power of a limited company to issue and allot shares is not an asset of the company; it is only a power to increase its issued capital and, it may be, the number of the corporators. It is not bound to issue its shares for more that their nominal value. The words of Lord Davey in Hilder v. Dexter [1902] 71 L.J. Ch. at p. 784; [1902] A.C. at p. 480 may be quoted: "... the argument seems to be that the company, by engaging to allot shares at par to the shareholder at a future date, is applying or using its shares in such a manner as to give him a possible benefit at the expense of the company in this sense, that it forgoes the chance of issuing them at a premium. With regard to the latter point, it may or may not be at the expense of the company. I am not aware of any law which obliges a company to iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... features, it is a plain case of entering actual income and actual outgoings; (2) the great difficulty arose as to the freeholds in regard to which no actual disbursement or expense was made or incurred by the brewery, which could be described as money laid out or expended for the purposes of the trade; and (3) it was never suggested that anything beyond the Schedule A assessment (that is, the amount of a potential rackrent) could be charged as an expense. It is in regard to the decision concerning the annual value of the freeholds that I propose to consider the case. This House decided that the annual value could properly be entered as an expense, or (to put it in other words) that the difference between the larger amount of the brewery's assessment under Schedule A and the smaller amount of the rent received from the tied tenant was deductible in ascertaining the brewery's profits for the purposes of income-tax. It is important to see how this result was achieved because it is upon the authority of Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 that the Court of Appeal has relied. Just as in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 "rent f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predecessor came into consideration as a reason for allowing the annual value to be treated as a permissible deduction. Neither is an authority extending beyond that, an in my opinion Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433, founded as it is on Russell v. Town and County Bank, [1888] 58 L.J.P.C. 8; 13 App. Cas. 418 does not justify the deduction which is claimed by the respondents. It is true that the language used by Lord Sumner, and quoted by the Master of the Rolls, is far reaching and extends even to chattles; indeed if taken literally it would lead to some startling results. The other members of this House who took part in the debate use no such wide language and I, for one, and not prepared to extend the decision so as to cover the wholly different facts of the present case. Both these decisions relate to the annual value of land, to which peculiar considerations are applicable, and I am unable to see how the reasoning in either of these two decisions of your Lordships' House can be applied to a case like the present, in which the claim is to deduct a sum which never came into existence because the respondents, in order to achieve a desired result, elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd which they could transfer without any payment at all. The only difference is that in such a case the full market value of the shares, and not the market value less 5s. a share, could be reckoned as the sum paid. I cannot see any distinction between the case supposed where the shares are used to discharge a pre-existing debt for salary and where they are utilised to pay a bonus or extra remuneration. No doubt in the former case the value attributable to the share is expressly liquidated on the footing of the amount of the debt. In the case of the bonus remuneration the amount of the bonus is only determined by ascertaining what is the value to the employee of the share which he receives, which in the present case is the market value less 5s. a share. But I see no difference. In fact, the recipient is taxed on precisely this basis, as in respect of profits of his office. This practice, which was followed in the present case, has the authority of this House in Weight v. Salmon, [1935] 153 L.T. 55; 19 Tax Cas. 174; 51 T.L.R. 333 where directors who had been allotted at par by way of remuneration fully paid shares which stood at a premium in the market, were taxed on the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear on one side and the difference in value on the other side of the account. It has been notionally received on capital account, and is being utilised on revenue account, just as would have been the case if it had been used to pay an ordinary debt. It is true that unissued shares are not an asset in any sense of the company. What value they have only comes when and by the fact that they are issued, just as a deed has no value or indeed existence until it is signed, sealed and delivered, or a negotiable instrument until it is issued. Unissued share capital was described by Lord Davey in Hilder v. Dexter [1902] 71 L.J. Ch. at p. 784; [1902] A.C. at p. 480 as potential capital. The power to issue further capital is only a potentiality. But the fact of issue makes it actual capital, and creates the fasciculus of rights and liabilities between the company and the shareholder which flow from the share when issued. If the share stands at a premium, the directors prima facie owe a duty to the company to obtain for it the full value which they are able to get. It is true that it is within their powers under the Companies Acts to issue it at par even in such a case, but their duty to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only another way of saying that the appellants let their tied houses at low rent solely and exclusively for the purpose of promoting their trade and enhancing the profits of it." Later on (84 L.J.K.B., at p. 429; [1915] A.C., at p. 457) he compares what would have been the position if the brewery company instead of putting in the tenant into the tied house had put in a manager. Inthe latter case, on the authority of Russell v. Town and County Bank [1888] 58 L.J.P.C. 8; 13 App. Cas. 418, the full annual value of the house would have been deductible. "But", Lord Atkinson proceeds, "the balance of the profits and gains of the brewer's trade would, according to the methods of practical business men, be ascertained in the same way in both cases, that is, by deducting from the receipts what is cost to earn them. Part of the cost to the brewer is, in the manager's case, his salary, and possibly a discount on profits. In the case of the tenant it is the difference between the annual value of his, the brewer's freehold house and the rent he receives for it, and in his leasehold house the difference between the rent he receives for it and the rent he pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romote their trade. They were held entitled to a deduction of the true value, subject to allowance for the rent which they actually received. Here the respondents are parting with their shares at an undervalue for the purposes of their trade. They are accordingly, it seems to follow, entitled to a deduction of the market value of these shares, subject to an allowance for the par value which they actually receive. The sacrifice in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 was of the rents, in the present case of the market value of the shares, less in either case the credits. The fact that Schedule A applies to property in land does not, in my opinion, affect the position, save that the annual value under Schedule A takes the place of market value. Lord Sumner puts this principle very cleary (84 L.J.K.B. at p. 435; [1915] A.C., at p. 469): [His Lordship read the passage already set out in the judgment of the Lord Chancellor.] If the "expense" of letting houses at an undervalue for purposes of the trade is a deductible expense under Schedule D, I cannot see why in principle the expense of allotting shares at an undervalue for purposes of the trade should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade, profession, employment or vocation". One major question debated both in Russell's Case [1888] 58 L.J.P.C. 8; 13 App. Cas. 418 and Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 was whether there could be a deductible expense when there was no outlay in money, but merely the sacrifice or surrender of something of value wholly for the purpose of the trade. This was true of the rent of the manager's residence in Russell's Case [1888] 58 L.J.P.C. 8; 13 App. Cas. 418 where the whole rent was forgone, and of the rent in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 where only a part was forgone. The decision was in both cases that the money value of the rent forgone was deductible, and that in Usher's Case [1914] 84 L.J.K.B. 417; [1915] A.C. 433 the partial payment made no difference, save that the amount deducible had to be reduced pro tanto. Lord Herschell in Russell's Case [1888] 58 L.J.P.C. at p. 10; 13 App. Cas at p. 425, after examining the rules, thus concludes: "The annual value" [of the premises occupied buy the bank manager] "is, therefore, to be deducted somehow. It is to be deducted either by taking it as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quote the language of Lord Atkin (101 L.J.K.B., at p. 278; [1932] A.C., at P. 416): "Whether the expense allowed in Usher's Case is based upon a deduction of the Schedule A valuation as on premises used in the brewers' business, mitigated by the sum received from the tied tenant, or whether it is regarded as a notional sum paid for the advantage of the tie, it is allowed as an expense incident to the particular house in respect of which it is incurred. It in no way differs from expenses for repairs or compensation levy or insurance premiums on particular houses such as are also authorised by the same decision". Lord Tomlin (101 L.J.K.B., at p. 279; [1932] A.C., at p. 419) said: "In Usher's Wiltshire Brewery Ltd. v. Bruce, where tied houses of a brewery company were held by the tenants at rents below the Schedule A valuation, your Lordships' House, as I understand the case, treated the difference between the rent and the valuation in the case of each house as rent forgone, or money spent exclusively for the purpose of earning profits, and held that expense to be one which could be deducted for the purpose of ascertaining profits and gains under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received a be efit from his employment may not be assessable in regard to the value of it. Thus in Tennant v. Smith [1892] 61 L.J.P.C. 11; [1892] A.C. 150, H.L. (Sc.) a bank manager or agent, who was in the same position as the manager or agent in Russell's Case [1888] 58 L.J.P.C. 8; 13 App. Cas. 418, was held not to be assessable in respect of the privilege of free residence, in particular because he was not free to dispose of that advantage or turn it into cash. "Schedule E", said Lord Macnagh ten (61 L.J.P.C., at p. 17; [1892] A.C., at p. 163) "extends only to money payment or payments convertible into money", or in Lord Watson's words (61 L.J.P.C., at p. 15; [1892] A.C., at p. 159), "Money or that which can be turned into pecuniary account". The decision of this House in Weight's Case# clearly involves that the acquisition by the recipient of the shares involved a benefit convertible into money, that is to the extent of the difference between the par value and the market value. It seems to follow that an equal sacrifice expressible in terms of money must have been suffered by the respondents. To that extent Weight's Case [1935] 153 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion either does not throw any light on the question whether in this case the company has incurred an expense or, perhaps more accurately, supports my view, for the reason which I stated in citing it above. The sole question there was whether an allotment of shares at par fell, on the facts of the case, within Section 8(2) of the Companies Act, 1900, which prohibited a company from applying either directly or indirectly any of its "shares or capital money" to the payment of commissions and similar matters, save as provided in the Act. A shareholder who had taken up sharers did so in the terms of an agreement that he should have the option at a later date of taking up a certain number of shares at par. He exercised the option when the market price was above par. The company fulfilled its contract and it was held that the section was not contravened. Lord Davey (71 L.J. Ch., at p. 784; [1902] A.C., at p. 480) construed the words "shares or capital money" as meaning "its capital, either in the form of shares before issue, when they may be described as potential capital, or in the form of money derived from the issue of its shares". He concluded, " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company, therefore, had the power of acquiring such a sum. I have never consciously committed, and I trust that I may never commit, the great sin in a lawyer's eyes of confusing property with power. It a man has a general power of appointment over a sum of money, the sum does not strictly speaking form part of his assets. Should he release the power voluntarily, his assets will be in no way diminished. He will not have parted with a farthing. But he will nevertheless be the poorer for having released the power. So too in the case of a company whose shares stand at a premium in the market. The directors may, if they think fit, and if they act in good faith, issue the shares at par. In such a case they in effect voluntarily release the power of the company to acquire the premium. The company parts with none of its money, but it is nevertheless the poorer for the release. For not only does the company give up by the release the opportunity of adding to its assets a sum in cash, it also gives up the opportunity of utilising the possession of the power for the purpose of adding directly to its stock-in-trade, or for the purpose of preventing a diminution of its existing assets. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to subscribe at par for those shares and so become members of the company. It is found that this was done solely in the interests of the company's trade, which means that it was done solely for the purpose of enabling the company to earn its income. In these circumstances I should, but for the fact that some of your Lordships are of the contrary opinion, have thought it plain that in ascertaining the trading profits of the company on commercial principles the deduction now sought to be made was permissible as part of the cost of earning the company's income, a like sum being, of course, credited to its capital account. It may be convenient at this stage to say something about a passage in the judgment of the Master of the Rolls in the present case that has been the subject of much misunderstanding. The passage in question is as follows (108 L.J.K.B., at p. 376) [1939] 7 I.T.R. at p. 446: "If an employer having two receptacles, one containing cash and the other containing goods, chooses to remunerate his employee by giving him goods out of the goods receptacle instead of cash out of the cash receptacle, the expenditure that he makes is the value of those goods, not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... himself with that value as a trade receipt. The Master of the Rolls no doubt thought it was unnecessary to say so. And so it was. Having arrived at the conclusion that the deductions in the present case would on commercial principles be permissible as part of the cast of earning the company's income, I must now inquire whether such a deduction is expressly prohibited by the Income-tax Act and Rules. I can deal with this matter quite shortly. The only rule that by any possibility can be regarded as prohibiting the deduction is rule 3(a) of the Rules applicable to Cases I and II of Schedule D. But if the sum now in question is to be regarded as a disbursement or expense at all, it can only be done by treating the company by a stretch of the imagination as having received the sum and passed it on to the employees. In that case, however, the sum must be treated as money, and, as it would have been wholly and exclusively laid out or expended for the purposes of the trade, the deduction is not prohibited. I should therefore have arrived at the conclusion that the deduction in question is permissible, even if there were no authority to be found in the books to lend support to that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent or expense which is money wholly and exclusively laid out or expended for the purposes of the trade." He then referred to the exception contained in the predecessor of rule 3(c) (which was substantially the same as the exception contained in rule 3(c) but, as I read his judgment, merely as being confirmatory of the conclusion he had reached without that exception. If he had thought that the exception was itself an enactment impliedly justifying the deduction he would have said so, and would not have given other reasons for arriving at his conclusion which seems to be based on quite general principles. The annual value of the part occupied by the manager was also allowed as a deduction, it being held that the part so occupied was not a dwelling-house within the rule. Lord Fitzgerald also based his decision on general principles relating to the ascertainment of profits, and made on reference at all to the rule relating to dwelling-houses. He said this (58 L.J.P.C., at p. 12 ; 13 App. Cas., at p. 429): "'Profits' I read on authority to be the whole of the incomings of a concern after deducting the whole of the expenses of earning them that is that what is gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the actual cash disbursements made by the company in connection with the tied houses were allowable deductions upon ordinary commercial principles and not prohibited by the Income-tax Acts then in force. But the important thing to be noticed for the present purpose is that none of their Lordships who were parties to the decision drew any distinction between the freehold and leasehold properties, that is to say, between the rents paid for the leaseholds and the annual values of the freeholds. Both the annual values in the case of the freeholds and the rents paid in the case of the leaseholds were treated as forming part of the cost of the brewery business and for precisely the same reason, namely, that both the rents paid for the leasehold properties and the rents that would have been received for the freeholds had they been let, instead of being used for the business, formed part of the costs incurred in earning the receipts of the business, and that the deduction of them was not prohibited by the Act. Lord Loreburn, referring to both classes of property together, said (84 L.J.K.B., at p. 423; [1915] A.C., at p. 446): "On ordinary principles of commercial trading such l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. Lord Atkinson said that the decision in that case was obviously right and just, because if the trader abstains from letting his premises and devotes them to the purposes of his trade, he must be taken to have dedicated to that trade a sum equivalent to the annual sum which he might have obtained in the shape of rent if he had let them to an untied tenant. Lord Parker enumerated three points which he said had been decided in Russell's Case [1888] 58 L.J.P.C. 8, 13 App. Cas. 418. Of these I need only mention the second, because that one alone dealt with the prohibition of deductions in respect of the annual value on rent of dwelling-houses. He said this (84 L.J.K.B., at p. 430; [1915] A.C., at p. 460): "Secondly, it decides that the rule refers only to a dwelling-house or domestic offices, or part of a dwelling-house or domestic offices, occupied by the person to be assessed; so that the fact that a bank manager resides in part of the bank premises does not bring that part of the premises within the prohibition or prevent the whole premises from being considered as used for the purposes of the trade." Observe what follows: "In other words, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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