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Petitioner: H. J. RORKE LTD. VS Respondent: INLAND REVENUE COMMISSIONERSHonorable Justice Cross
1963 P T D 183
1963 P T D 183
[Chancery Division]
Before Cross, J
H. J. RORKE LTD.
versus
INLAND REVENUE COMMISSIONERS
(1960) 1 W. L. R. 1132, decided on 12th and 13th July 1960.
Income‑tax‑---
---Capital or income expenditure‑Opencast coal mining‑Payment for right of entry on land‑Compensation payment for diminution in value‑Payments normal and recurrent incident of trade‑Whether revenue or capital expenditure -Whether "wholly and exclusively laid out . . . . . for the pur poses of the trade "Profits tax‑Income‑tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), S. 137 (a).
A company which carried on the business of opencast coal mining entered into an agreement dated December 16, 1957, with a land‑owner, whereby certain land was let to the company for one year on payment of a royalty for every ton of coal won from the land, the company covenanting to restore the surface of the land on the completion of the opencast mining operations. The company further agreed to pay to the lessor 250 for the right to enter upon the land demised and a further sum of 250 as compensation for the diminution in value of the land and the destruction of land drains, etc. In 1958 the company made two further agreements with land‑owner in substantially the same terms. The pay ments for the right of entry and for diminution in value of the land provided for in all three agreements were a normal and recurrent incident in the trade of opencast coal mining as carried on by the company and others in the industry.
On an appeal by the company against assessments to profits tax on the ground that the whole of the payments made by them for the right of entry and for diminution in value pursuant to the agreements were revenue expenditure and fell to be allowed as deductions under section 137 of the Income‑tax Act, 1952 ["Income‑tax Act, 1952, section 137: " . . . . in com puting the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of‑(a) any disbursements or expenses . . . . . . exclusively laid out . . . . for the purposes of the trade, profession or vocation, .. ]
Held, that no distinction could be drawn between the payments for the right of entry and the payments for dimi nution in value, and that, since the company in making the payments were not buying circulating capital, i.e., coal, but were acquiring rights which enabled them to obtain circulating capital, the whole of the payments were marked as being of a capital nature, and, notwithstanding that the transactions were transient and recurrent, fell to be disregarded in computing the profits or gains of the company for profits tax purposes.
Stow Bardolph Gravel Co. Ltd. v. Poole (1954) 35 T C 459 applied.
Knight v. Calder Grove Estates (1954) 35 T C 447 considered.
STATEMENT OF CASE
The appellant company, H. J. Rorke Ltd., appealed to the special Commissioners against assessments to profits tax for the chargeable accounting periods, May 1, 1957, to March 31, 1958, and April 4, 1958, to April 30, 1958, in the sums of 2,550 and 200 respectively.
The grounds of the appeal were that in computing the amounts of the profits or gains of the company for the pur poses of the assessments, certain disbursements made by the company, i.e., lump sum payments made by the company under the terms of three leases entered into between the company and two land‑owners, in the course of carrying on its business of opencast coal mining and quarrying, had not been allowed as expenses contrary to law.
The following were among the facts found by the Com missioners : The company was incorporated on February 19, 1955. The memorandum and articles of association of the company contained, inter alia, the following objects : " (a) To purchase, take on lease, or otherwise acquire (either with or without the surface) for any estate or interest, any coal mines, iron mines, and other mines, mining ground and minerals, and any mining rights, grants, concessions and ease ments, and any lands or other property necessary or convenient for the advantageous possession and use of the mines or works for the time being owned or worked by the company or any interest therein and to search for, get, bring to surface, make merchantable, and sell and dispose of coal, ironstone and other ores, metals and minerals, and substances of the earth whatsoever. (b) To carry on business as colliery and mine proprietors, mining engineers, metallurgists, electricity manufacturers and suppliers, gas manufacturers and suppliers, coal masters, iron masters, smelters, engineers, ironfounders, patent fuel manufacturers, blast furnace proprietors, steel makers, steel converters, metal and alloy makers, tinplate' makers, and contractors for and dealers in coal, coke, iron, or ironwork in all the branches of such businesses and to carry on the business of brick makers and farmers, to make, purchase, hire, let out and sell, railway and other plant, fittings, machinery, rolling stock, stock‑in‑trade or any portions or parts of such articles or things."
During the period relevant to the appeal, the company's trade or business was opencast coal mining, and it was one of the leading companies in Yorkshire carrying on such business. Opencast coal mining became generally practised as a trade in the United Kingdom from 1942 to 1943 onwards, and at the relevant time comprised about 100 operators. The trade required specialised machinery, and the company owned all its own plant and machinery, different plant being used at different stages in operations. In order to employ economi cally and fully the staff, machinery and equipment of the company it was necessary to have three or four sites actively producing coal at the same time. The method of operating employed by the company was as follows. In order to find a beneficial site they first obtained information locally from farmers and miners of the presence of a coal seam. On occasions they made payments of introductory commission to persons who informed them of coal deposits. They also studied the geological maps to see if they could be checked up with the local information. There was no reliable geological survey covering the whole of the United Kingdom. Only about one in ten of the sites which thus came to their knowledge as potential coal‑bearing sites were eventually worked for coal. The sites which they used were all on agricultural land in Yorkshire. Having obtained information about a site and studied the geological survey, they approached the land‑owner concerned, usually a farmer, and endeavoured to enter into an agreement whereby in return for an immediate payment of 5 they were granted permission to prospect the site and an option to take a lease thereof if found suitable. Such an agreement having been made, not always in writing, the specialised staff went on to the land and bored it extensively. The boring machines were riot large machines, and the operations were done by hand. The preparations were lengthy and it might take any time between one and six months between the time they got to know of a possible site and the time they actually decided to work it. As soon as they decided that a cite was worth working they exercised their option and made an agreement for a lease with the land‑owner or farmer, such agreement being made either subject to the granting of the appropriate licence by the National Coal Board or after such had been obtained. Thereafter application was made to the local authority for planning permission. On obtaining the National Coal Board licence and the consent of the local authority, the company installed their plant and 'machinery on the site and removed and stacked up the topsoil and subsoils. A site normally produced coal within two to three weeks after being entered and weather permitting, the whole operation was completed in about six to nine months. After extracting the coal they were obliged to replace the topsoil, but could not replace hedges, trees, and walls, except at considerable expense, or the natural drainage. The result was a definite and permanent impairment to the site from an agricultural point of view.
The procedure leading to the winning of coal by opencast mining and the method of operating set out above was similar to that commonly and generally followed by other persons carrying on the trade or business of opencast coal mining.
On December 16, 1957, one Donald Parker, the lessor, entered into an agreement with, the company whereby it was provided, inter alia :
1. The lessor being the owner of a plot of land containing four acres and five perches or thereabouts situate at Netherton near Wakefield in the County of York . . shall let the same to the lessee from the fifth day of November, 1957, TO HOLD the same unto the lessee for the term of one year paying therefore a royalty of one shilling and threepence per ton for all coal recovered from the demised land and accepted by the Coal Sales Department of the National Coal Board or the sum of three hundred and twelve pounds ten shillings which ever is the greater such payment to be made by calendar monthly instalments. 2. It is the intention of the lessee to obtain coal from the demised land by opencast coal workings (hereinafter called `the said works') and the lessee shall within three calendar months after completion of the said works restore the surface of the said land .in a proper and efficient manner to the satisfaction of the lessor . . . 3. The lessee shall upon the signing hereof pay to the lessor (a) the sum of two hundred and fifty pounds for the right to enter upon the demised land for the purpose of working and getting the said coal (b) the further sum of two hundred and fifty pounds as compensation for the diminution in value of the demised land and the destruction of the land drains therein as a result of the working and getting of the said coal and of the adjoining land belonging to the lessor used as a means of access to the demised land and for the destruction of the roadway at present existing upon the demised land. 4. The lessee will within three calendar months from the completion of the said works re‑sow the whole of the demised land and replace the fencing disturbed by the said works in a proper and efficient manner and to the satisfaction of the lessor and as a guarantee for the due performance of the works in this clause set out the lessee will deposit with the lessor the sum of eighty pounds on the signing of this agreement AND on default of completion of the works in this clause set out within the time and in the manner aforesaid or otherwise howsoever the lessor shall be at liberty to give notice to the lessee of his intention personally to carry out the same and thereupon‑(i) the lessor shall be entitled to retain the said sum of eighty pounds on account of and towards the cost of such works and (ii) the lessee shall be released from all liability in connection therewith."
In or about 1958 the lessor entered into an oral agreement with the company with regard to another plot of land which was in substantially the same terms. It provided for a rental payment, and for lump sum payments of the same character as the first agreement‑that is to say, a payment for the right to enter and a payment for the diminution in value, each to be made on the signing of the agreement.
On January 18, 1958, one George Norton entered into an agreement with the company which again was on the same lines as the first two agreements.
The provisions contained in the first Parker agreement, the second Parker agreement and the Norton agreement were drawn in similar terms to those commonly and normally found in agreements for leases entered into between the company and farmers, and between farmers and other persons carrying on the trade or business of opencast coal mining, particularly the provisions relating to the payment of a sum of money by the lessee to the lessor upon the signing of the agreement for the right to enter upon the land for the purpose of working and getting the coal, and the payment of a further sum estimated as compensation for the diminution in the value of the land and damage likely to be caused as a result of working and getting the coal. The payments so provided to be made were a normal and recurrent incident in the trade or business of opencast coal mining as carried on by the company and other persons in the industry.
[The case then set out the total amounts as to which the dispute arose : legal and advisory expenses in connection with the granting of the leases, exploitation rights, that is, payments for the right of entry on the land and payment for diminution in value, amounting in total to 2,105.]
It was contended on behalf of the company that in computing on income‑tax principles the profits or gains of the company for the year ended April 30, 1958, the whole of the expenses incurred by the company under the provisions of the lease agreements fell to be allowed as deductions under the provisions of section 137 of the Income‑tax Act, 1952 ; that in computing for profits tax purposes the profits or gains of the company for the chargeable accounting periods relevant to the appeal, such expenses incurred by the company, as aforesaid, likewise fell to be treated as deductions ; that the agreements set out above and the payments made thereunder by the company constituted an ordinary incident of carrying on an opencast coal mining business and were of a kind so extensively adopted as to constitute a custom of that trade ; that, on the facts, the expenditure arising under those agreements was part of the ordinary expense of getting and mining the coal, was of a revenue nature and resulted in no benefit of an enduring nature to the company ; and that the appeal should be allowed and the assessments adjusted accordingly.
It was contended on behalf of the Commissioners of Inland Revenue that in computing on income‑tax principles the profits or gains of the company for the year ended April 30, 1958, the whole of the expenses set forth above, being expenses incurred under the provisions of the lease agreements, fell to be excluded under the provision of section 137(f) of the Income‑tax Act, 1952 ; accordingly, that in the computing for profits tax purposes the profits or gains of the company for the chargeable accounting periods relevant to the appeal, the expenses incurred by the company, as aforesaid, fell to be disregarded ; and that the appeal should be dismissed.
The special Commissioners in this decision distinguished between the payments for the exploitation rights and the payments in respect of compensation for diminution in value. They held that the right of entry payments were capital payments and could not be allowed as deductions but that the payments for diminution in value were of a revenue nature and could be allowed. Having drawn that distinction they considered it appropriate to apportion the legal and advisory expenses in connection with the leases and held that half of them should be treated as capital and half of them as income expenditure.
The company appealed and the Crown cross appealed.
R. Borneman Q. C. and P. W. I. Rees for the Company.
F. N. Bucher Q. C. and Alan Orr for the Crown.
JUDGMENT
CROSS, J.‑This case raises the familiar problem whether certain expenditure is to be regarded as expenditure on revenue account or capital expenditure. [His Lordship stated the facts and continued :] Unfortunately, the commissioners do not say in the case why they distinguished as they did between the two sorts of payments, and counsel have not been able to suggest to me any logical basis for drawing the distinction. I cannot see any reason for drawing it. If one of these sums is capital, I should have thought that it followed that the other was capital, and vice versa.
What is said now by Mr. Borneman on behalf of the company is that, having regard to the findings in the case as to the methods of operating and that the making of payments of this nature were normal and recurrent incidents of the trade, both payments should be treated as revenue payments. He referred me to Lord Dunedin's words in Vallambrosa Rubber Co. Ltd. v. Farmer ((1910) 5 Tax Cas. 529, 536); "but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year." These payments, he argued, were not going to be made once and for all. On the contrary, payments of the same nature were being made constantly, year in and year out. Then he referred me to another test suggested by Lord Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd. ((1925) 10 Tax Cas. 155, 192) After quoting the words of Lord Dunedin which I have just read, Lord Cave went on to say (2) : "But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think‑ that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." If you apply that test here, said counsel, how can you say that an asset or advantage has been brought into existence for the enduring benefit of the trade ? These leases were only for a year or, at the most, two years, and the work of extracting the coal only lasted for six to nine months. Then the soil was put back and the company went somewhere else. You cannot say that any asset or advantage had been brought into existence for the enduring benefit of the trade. From a common‑sense point of view, he argued, whether you look at the transient character of the operations or whether you look at the constant recurrence of similar operations and the making of similar payments, these payments should be regarded as of a revenue nature.
Mr. Bucher, for the Crown, does not dispute that the payments in question were within the words of section 137 (a) of the Income-tax Act, 1952, "wholly and exclusively laid out or expended for the purposes of the trade." But he says that notwithstanding the transient character of the operations and the constant recurrence of similar payments, they are nevertheless to be regarded as capital payments and so within section 137 (f). He says that here what was being acquired by these lump sum payments (or what these payments were helping to acquire) was not stock‑in‑trade but rights which would enable the company to obtain stock‑in -trade that is to say, coal. They were not payments for the purchase of coal but payments to put the company into the position to get coal. Lump sum payments of that character, he says, are necessarily of a capital nature, and the fact that the leases lasted only for a very short time, that the operations were transient, and that fresh leases were constantly being entered into and payments of this character constantly being made to farmers or land‑owners is nihil ad rem.
T he cases, the most recent of which is Stow Bardolph Gravel Co. Ltd. v. Poole ((1954) 35 T C 459), undoubtedly draw a distinction between payments made to acquire stock‑in‑trade and payments made to acquire rights which will enable you to get stock‑in‑trade for yourself. In the Stow Bardolph case the appellant taxpayers carried on the business of dealers in sand and gravel and, in order to supply themselves with sand and gravel, they entered into an agreement with a land owner, the Luddington Estates Ltd., under which the land‑owner was to sell and the company was to purchase the deposit of gravel and sand contained in and upon certain lands. The land‑owner was to allow the gravel company free access to the land with or without carts, lorries or vehicles for the purposes of removing the sand ballast, and there was a right for the gravel company to take machinery and haulage equipment into the land for the purpose of excavating and carrying away the gravel and sand ballast. Then there was an option given for a period of five years to purchase additional deposits of gravel and sand ballast on adjoining land of the land‑owner, and finally a provision that no legal estate in the land should be created by virtue of the agreement. The agreement, that is to say, gave a licence to enter and a right to remove the sand or gravel‑a profit a prendre. Harman, J., decided the case in favour of the taxpayer on the ground that the agreement amounted substantially to an agreement for the purchase of stock‑in‑trade from the land‑owner. The Court of Appeal, however, reversed that decision on the ground that the agree ment was not an agreement for the direct acquisition of circulating capital but an agreement giving rights under which the taxpayers could, if they chose to use them, obtain circulating capital, namely, gravel, for themselves. That case, which followed a number of earlier cases, illustrates the distinction for which Mr. Bucher argued. Jenkins, L. J., in his judgment (1954) 38 T C 473‑474, pointed out that it is not a distinction which would commend itself to all minds, but it is not a distinction which is clearly drawn in the cases. The present case is really a stronger case from this point of view than the Stow Bardolph case, because here there was a lease granting a legal interest in the land, not merely a lease and a profit a prendre. It is, however, to be observed that the Stow Bardolph case did not raise the problems of transience and frequent recurrence of the operations which are raised here. There was nothing in the facts of that case as reported to show how long the particular operation was going to last or whether the taxpayer was at the same time conducting similar operations under which they had to make similar payments to other landowners. Mr. Borneman therefore says that as that aspect of the matter was not canvassed in the case at all, it does not assist Mr. Bucher very much.
The questions of transience and recurrence in connection with operations of this character were raised before Upjohn J. in Knight v. Calder Grove Estates (35 T C 447). The headnote there reads; "The respondents, who carried on in partnership the trade of opencast coal mining, purchased the freehold in ten acres of land for 2,000. The conveyance included covenants under which they undertook after getting the coal to reinstate the land and the vendor undertook to repurchase the land for 500 after mining operations were completed." It is to be observed that there was considerable similarity between that case and this. Although the traders purchased the land and did not simply lease it, the conveyance contained a provision for the repurchase of the land by the land‑owner at a much reduced price after the operation was finished and the land reinstated as far as it could be. The difference in price, 1,500, represented in part at least the diminution in value of the land brought about by the operation. The headnote goes on : "On appeal against assessments to Income‑tax under Case I of Schedule D for the years 1948‑49 and 1950‑51, the respondents contended that the cost of the land was a revenue charge in the ordinary course of business, and that the price on resale was a receipt on revenue account." The General Commissioners accepted that contention, but the Crown appealed to the High Court, and Upjohn, J., held that the payments must be regarded as capital payments and the receipt as a capital receipt. Mr. Mustoe, on behalf of the taxpayer, put forward two arguments which have some bearing on this case. There was a finding in the case that the respondents had purchased other land for the purpose of carrying on their opencast mining business. The case referred to two other conveyances, but they were conveyances, which did not contain any provision for reconveyance by the purchasers to the vendor after the operations were concluded. In reliance on that paragraph in the case, Mr. Mustoe argued, as has been argued here, that it was a case of a recurring expenditure which ought to be treated as revenue expenditure. The Judge, however, decided that he had not enough facts to enable him to deal with that aspect of the matter and that in all the circumstances it would not be right to send the case back for a further finding of fact. The most, therefore, that Mr. Borneman can say about that aspect of the case is that it did not strike Upjohn, J., as hopeless to contend on suitable facts that the frequency of operations of this character might make the payments revenue payments rather than capital payments.
The Judge then dealt with another argument of Mr. Mustoe's based on the transience of the operation, on the footing that there was no question of recurrence in the case at all. The relevant…
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