- (1.) RATIO Decidendi: "Assessee shall be liable to pay tax on expenses as part of income of company if some part of expense is apportionment." LORD , M. R. - Mr. Bryan holds a most important position with Josiah Wedgwood Ltd., the great pottery firm. He used to be the President of their subsidiary in the United States; but in 1962 the company brought him back to England to be their managing director. He would have preferred himself to live in London. But the company insisted on his occupying a suitable house in North Staffordshire, where he could entertain customers. The company spent a great deal of money in acquiring and equipping a house which is known as Parkfields, Tittensor, Stoke -on -Trent. It was a very large house, much bigger than Mr. Bryan would need for himself and his family. But the company regarded it as of paramount importance that visitors from overseas should be entertained in the home of its senior executive. So they provided the house and paid all the expenses of it. The question is whether those expenses are to be regarded as part of his income so that he is liable for tax on it.
(2.) THE law is contained in sections 160 and 161 of the Income Tax Act, 1952. Those sections deal with expenses allowance for directors, and also benefits in kind which the company provides for them. If a director is paid money as expenses allowance, it is to be regarded as director part of his income. If he is allowed benefits in kind. such as a flat which is paid for by the company, the expenses incurred by the company are like wise to be regarded as his income. but he is allowed to deduct so much of it as is expended wholly necessarily and exclusively in performing his duties (paragraph 7 of Schedule 9). The Crown have assessed Mr. Bryan to tax on the footing that all the actual expenses incurred by the company on Parkfield should be chargeable their view, he should be allowed no deduction from those expenses. The case, they say, does not come within paragraph 7 of Schedule 9. Mr. Bryan submits that he should not be charged with the whole of the expenses, but that they should be apportioned. He relies on section 161 (6) which says that : Any reference in this section to expense to expense incurred in or in connection with may matter includes a reference to a proper proportion of any expenses incurred partly in or in connection with that matter.
(3.) THE Commissioners held in Mr. Bryans favour on section 161(6). They found as a fact that there was a genuine business use of the house, and that Mr. Bryans personal occupation of it was rusticated in that he was not free to discriminate as to his guests. They allowed one quarter of the total expenses for business purposes. The allowed one quarter of the total expenses for business purposes. The Crown appealed to the judge (Pennycuick J.), who dismissed the appeal. The Crown now appeals to this court. In this court Mr. Rees, who appeared for Mr. Bryan, supported the finding of apportionment, but alternatively claimed a like deduction under paragraph 7 of Schedule 9. Mr. Phillips for the Crown submits that the companys expenses should all be charged against the director : and that they should only be apportioned when the benefit of the company is severable from the benefit to the director. He said that if one room of the house was used exclusively for the companys business, as for instance, it was used solely as the companys efface, there could be an apportionment. Likewise, if there was a bedroom set aside exclusively for the companys guests, there could be an apportionment. Similarly, if a particular room were used by two directors, each in alternate weeks, there would have to be an apportionment of the expense between each. But Mr. Phillips argued that if the benefit to the company was not severable from the benefit to the director, so that they both benefited jointly, there could be no apportionment. This argument did not stand up to discussion. We put to Mr. Phillips this instance : suppose Mr. Bryan gave a large dinner party at which half the guests were the companys customers and half his personal friends : and the company paid the cost. Would Mr. Bryan be charged with the whole expense as if it was his own income, and be allowed non deduction? Mr. Phillips conceded that in such a case there would have to be an apportionment. Yet in that case the expense of the food and wine, the cook staff, would be for the benefit of the director jointly with the company. I see no difference between entertaining a large party to dinner, and providing a large house for the director to receive visitors. It is provided for the joint use of the company and the director. It would not be fair or just that the director should be charged with the whole expense as if it were his own income. There should be an apportionment. We were referred to three cases. One was McKie v/s. Warner. Mr. Warner was an export sales supervisor. The company required him to live in London to carry out his duties. The company provided a flat for him where he entertained foreign buyers, and a bedroom was available for them. It cost the company 350 Pounds a year. Plowman J. held that he was chargeable with the 350 Pounds as if it were his income : and that he was not entitled to any reduction. All I need say about that case is that no point was raised about an apportionment under section 161(6). If it had been, the decision might well have been different. Another case was Butter v/s. Bennett, but that added little. The remaining case was Rendell v/s. Went. Mr. Rendell was a director of a company. He was driving the companys car on the companys business when the car left the road and killed a pedestrian. He was charged with causing death by dangerous driving. If he had paid for his own defence, he would have paid only 60 Pounds. But the company instructed the best lawyers at great expense and paid 641 Pounds for his defence. The House of Lords held that he was chargeable with the whole 641 Pounds as if it were part of his remuneration, with no deduction, Lord Radcliffe said at page 659 : ;