- (1.) RATIO Decidendi: "Deduction in assessment shall be allowed unless contradictory to provision of law."
(2.) THESE are two appeals by Littlewoods Mail Order Stores Ltd. (which I shall call the company, one against assessments to income tax for the years 1960 -61, 1961 -62 and 1962 -63, the other against assessments to profits tax for chargeable accounting periods in the years 1959, 1960 and 1961. It is common ground that the decision in the profits tax case must follow that in the income tax case, and it is, therefore, with the latter that I will deal.
(3.) THE company carries on the business of selling a wide variety of goods in stores in London and the provinces. It also conduct a mail order business. This case relates to the profits of the companys trade. At all material times the company has had a large shop and offices in Oxford Street, London, in a building known as Jubilee House, which it has occupied exclusively for the purposes of its trade. Down to December 7, 1958, the company held the premises under a long lease from the freeholders, the Independent Order of Oddfellows. The term of the lease was 99 years from 1947. In 1958 there were, therefore, still 88 years to run. The rent was pound 23,444 a year. In December, 1958, a scheme was put into operation as a result of which, by December 11, the following transformation had taken place : the freeholders had become Fork Manufacturing Co. Ltd. (which I shall call Fork), a wholly owned subsidiary of the company; the Oddfellows had become lessees of Fork under a head lease for a term of 22 years and 10 days at a rent of pound 6 per annum; the company had become tenants of the Oddfellows for a term of 22 years at a rent of pound 42,450 per annum; and the companys 99 -years lease had been surrendered. The result, therefore, was that while the company remained in occupation of Jubilee House, it did so for a shorter term at a higher rent in place of its longer term at a lower rent; at the end of 22 years its liability for rent would case; and ten days latter the Oddfellows would disappear and the company would be in control of the freehold through its wholly owned subsidiary, Fork. It is common ground that the commercial rack rent of Jubilee House was at all material times not less than pound 60,000 per annum, and that the aggregate of the market values of the companys 22 -years underlease and Forks freehold immediately following the transactions to which I have referred was not significantly greater than the market value of the companys 99 -year lease immediately prior to those transactions. The question which I have to decide is whether, in computing the profits of its trade under Case I of Schedule D, the company is entitled to deduct the whole of the annual rent of pound 42,450 or only, as the Crown says, pound 23,444; that is to say, the amount of the rent payable under the lease which had been surrendered. Since the company had no right after December 11, 1958, to occupy Jubilee House except on the terms of paying pound 42,450 per annum rent, it is difficult to see why that rent should not be a proper, indeed a necessary, deduction from the companys receipts in order to ascertain the profits of its trade, since without paying it the company could not trade at all. The Crown, however, submits that the deduction of more than pound 23,444 is prohibited by section 137 of the Income Tax Act, 1952. The Crown relies on paragraph (a) and (f) of that section. [His lordships read section 137 (a) and (f).] What is said is that the difference between pound 42,450 and pound 23,444 - namely, pound 19,006 - was money spent for the acquisition of a capital asset - namely, the freehold - and was not, therefore money wholly and exclusively laid out or expended for the companys trade. Alternatively, and for similar reasons, it is said that pound 19,006 was capital withdrawn from or a sum employed or intended to be employed as capital in the companys trade. I see no justification for treating the rent of pound 42,450 payable by the company under the underlease as if it were attributable to two different things; namely, a true rent of pound 23,444 per annum payable for the right to occupy the property, and an additional sum of pound 19,006 per annum payable for the acquisition of a capital asset. The truth of the matter, as I have indicated, seems to me to be that the company became bound to pay pound 42,450 per annum - a rent which was only about two -third of the rack rent - for the right to occupy the property and to trade there, and that this payments has to be deducted before a proper balance of profit can be reached. It is true that the transaction in question resulted in the company through its subsidiary, acquiring a capital asset in the form of the freehold. But as Mr. Heyworth Talbot said, all that the company really did was to exchange one capital asset, its 99 -year lease, for another of approximately equal value; and why, he asked rhetorically, should it not be a sound commercial bargain from the point of view of the company, as traders, to pay a higher rent for a shorter term on the footing that after the expiration of the shorter term it paid no rent at all? I agree. Mr. Heyworth Talbot submitted that this view of the case was really concluded in his favour by a decision of the Court of Appeal in Inland Revenue Commrs. v/s. Land Securities Investment Trust Ltd. which is not yet reported. It was decided at first instance by Cross J. The judgments of the Court of Appeal were delivered on May 20, 1968, and I have been supplied with a transcript. I will read the headnote to the report in the Chancery Division for the facts and Cross J.s decision. The headnote is as follows : ;