- (1.) LORD EVERSHED M. R. These four cases have raised a single points for our consideration, which may be stated as follows : Where a company, which carries on the trade or business of property dealing, receives from the War Damage Commission a value payments in respect of a property held by the company in the course to its trade, is that value payment to be treated as part of the companys annual profits or gains arising to it from its business within the meaning of Schedule D, now incorporated into section 122 of the Income Tax Act, 1952 ? There is also raised in each case a question as regards profits tax, but we were information that the answer to this question as it is related to income tax necessarily involves also the answer as it relates to profits tax, and I shall therefore follow the judge, Upjohn J. in delivering a single judgment in all four cases, and I shall confine my observations to the impact of the Income Tax Acts upon the value payments.
(2.) I concaves that the case has been for me one of very great difficulty. One reason is that on either view of it the conclusion inevitably produces, or is capable of producing, anomalies. If, for example, the view of the Crown is correct, then the following might be the consequence. Suppose a case in which a property owned by a property company and of a value of pounds 5,000 is wholly destroyed by enemy action. Suppose that the sum of pounds 5,000 is in due course paid by the War Damages Commission as a value payments in respect of that property. Suppose, finally, that the company, though it is under no obligation so to do in the case of value payments elects to reconstruct or rebuild the premises and spends pounds 5,000 in doing so. As Mr. Senter for the company demonstrated, the result of the various relevant provisions of the War Damage Acts, and again on the hypothesis that the Crowns argument should prevail, would be that the company on the one hand could not deduct as a legitimate expense for income tax purpose the pounds 5,000 expended by it on reconstruction, but yet it would have to pay income tax in respect of the pounds 5,000 which it received from the commission. Thus, assuming for simplicity that income tax be taken as 10s. in the pounds the entire sum received from the War Damage Commission, in effect, would have to be repaid by way of tax. Mr. Senter, not unnaturally, stressed the obvious injustice, for I think it might be so described of such a result - which he described as being really a matter of double taxation, though I am not sure that, with all respect to him, strictly it ought to be so described. On the other side, if the example be taken that I haves already stated, but with the distinction that there is no rebuilding or reconstruction, the company (let it be assumed) sells the vacant site. In that case the pounds 5,000 remains, so far as can be seen perpetually franked from any possible impost in the way of income tax. Although I think it could not be suggested that that pounds 5,000 became part of the companys fixed capital, yet it would not be liable ever to be bought into account for tax purposes. That again would appear to be anomalous. One other matter of fact I will mention because to may mind it has an important bearing on the proper result to be reached in this case. Let me repeat that we are here dealing with a company whose trade or business is that of property dealing, so that property, be it freehold or leasehold property, will be the circulating capital of the stock -in -trade, in common parlance, of the companys trading operations. According to ordinary accounting practice, if I correctly apprehend it, there would at the beginning of each year be brought into account the value of the stock -in -trade on hand. After item giving sales and purchases there would be a corresponding item on the other side of the account showing at the end of the accounting period what remained in hand. If that is right, it would appear to follow that in the case of a property (and I will adhere to my hypothetical figure) worth originally pounds 5,000, which was destroyed and reduced to a value, say, of pounds 500 as a result of enemy action, that property for accounting and therefor for tax purposes would be reduced in the accounts from its figure of pounds 5,000 to its figure pounds 500 and in respect of that property there would have been loss in value of the stock -in -trade which would be reflected in the final liability for income -tax. As I have referred to value payments it would perhaps also be relevant to mention, though the matter is not directly before, us, the case of cost of works payments. The scheme of the war damage legislation, particularly to be found in section 6, and 7 of the Act of 1943, provides, on the one hand, that value payments are appropriate in cases of total loss, and I have already indicated that they do not proceed upon the footing that the payee, the recipient, will rebuild or reconstruct the damaged property. In the case, however, of cost of works payments which are payable in cases other than those of total loss, the payments are made in practice, and are contemplated plainly by the language of the statute as payable, only when work of reconstruction is done and by way, so far as they go, to recoupment of cost.
(3.) IT was a point made by Mr. Senter that, if the Crown is right in its contention, it would appear also to follow that cost of works payments would be liable to tax. For my part I am inclined to think that the answer to that particular criticism it to be found in the illustrative figures which Mr. Cross gave us, showing what in practice would happen in such a case. Without undue elaboration those figures indicate that the cost of repair, which as I have already said cannot be deducted, as such, for the purposes of income tax liability, would be offset by the costs of works payments received, so that the latter, in effect, eliminated the former, and no question on either side of the account in such a case would arise. Be that as it may, the problem with which we are concerned it that of a value payment, and I propose to confine myself strictly to that problem. I say that, perhaps with added emphasis, because when the matter was before the Special Commissioner they, in an attempt to mitigate the hardship of the type of instance which I have earlier stated, made a qualification upon their determination, in favour of the Crown. The qualification is expressed in these words : 'We hold What the company should in general include payments received under the War Damage Act, but that where a property has been, is being, or is intended to be repaired or rebuilt sum received in respect of it should not be include as receipts but should be deducted from the amount expended on rebuilding.' That form of words if I correctly follow it, suppose that in an account the War damage value payment would be treated in the way which I have tried to describe in the case of a cost of works payment; but Mr. Cross has observed that the laudable attempt of the Special Commissioners to achieve a just conclusion involves unfortunately certain grave administrative difficulties. Not thereby discouraged Mr. Cross for the Crown, at an earlier stage suggested what I might call a means of gilding the philosophic pill which, no less than the method adopted by the Special Commissioners, would, as I see it, if we adopted it, inevitably involve judicial legislation. It seems to me that the court cannot properly indulge in those exercises, however much they may be tempted so to do. We must in his case, I think decide, for better or worse, wholly in the favour of the Crown or wholly in favour of the company. Legislation to gild the pill is a matter for Parliament. Upjojn J. in his very full and careful judgment clearly indicated his own difficulty in the matter. He concluded at the end, contrary to the determination of the Special Commissioners, that these value payments ought to be treated, by the necessary implication of the war damage legislation, as exempt in the hands of the recipient in any capacity (as I think it follows) from liability to computation for income tax purposes).;