McAdam (1) it was held that a colliery company were entitled, for the purposes of assessment to income tax under Sched. D, to a deduction from gross profits in respect of exhaustion of capital by working the coal. That decision proceeded on the footing that the colliery proprietors were by reason of the provisions of 29 & 30 Vict. c. 36 assessable under Sched. D and not Sched. A. This view was overruled in Coltness Iron Co. v. Black (2), and it was there held in the case of a coal mine in Scotland that no such deduction could be allowed. But in that case, the mine being in the United Kingdom, the assessment had to be made, in accordance with the rules laid down in Sched. A, Income Tax Act, 1842, s. 60, upon the annual value of the property, and not on the annual profits of the business. The decision does not govern the present case, in which the property is abroad and the appellants are being assessed on the profits of their business. [They also cited Scoble v. Secretary of State for India (3); Reid's Brewery Co. v. Male (4); Gowan v. Christie. (5)] Sir R. B. Finlay, A.-G., and S. A. T. Rowlatt, for the Crown. The appellants are really seeking to deduct from their profits for the purpose of assessment to income tax a sum which they put aside out of income for the replacement of capital exhausted. It is admitted that this deduction could not be made in respect of a mine in the United Kingdom under Sched. A. There is no distinction in point of principle for the present purpose between a mine in this country and one situated abroad. The consequences of the appellants' contention logically carried out would be most extraordinary. If the appellants are right, why should there not be a deduction in respect of deterioration of the company's offices and furniture, the cost of which may be considered as disbursements necessarily made in order to earn the profits? In many cases capital is taxed in taxing income. In the case of income tax on professional income, a professional man in earning his income may be said to be using up his capital of health and (1) (1877) 3 Ex. D. 23. (3) [1903] 1 K. B. 494; [1903] A. C. 299. (5) (1873) L. R. 2 H. L., Sc. 273. C. A. 1904 ALIANZA COMPANY V. BELL. C. A. 1904 COMPANY v. BELL. strength. A company working a mine of china clay in this country would have to pay income tax computed on the full ALIANZA profits of the mine without any deduction for exhaustion of the clay. It would be a most anomalous result, if such a deduction were admissible, because a mine was situated abroad. Every word of the argument for the appellants would be equally applicable to depreciation by wear and tear of machinery in respect of which no deduction can be made. There is no analogy as suggested between this case and that of caliche bought year by year as raw material for the purposes of manufacture. Caliche once severed from the soil cannot be distinguished from any other goods. In this case the land must be treated as real property, and not as raw material bought for purposes of manufacture. If the appellants' contention is correct, the same principle must apply to all cases of real property, and the difficulties of its application are obvious. How is it possible to say how much caliche the ground will yield before it is exhausted? On the principle contended for by the appellants a similar deduction must be allowed in respect of every real property of this kind, whether it is possible or not to say how much of it will be exhausted in each year, or what will be left at the end of each year, or whether it is capable, practically speaking, of being exhausted at all. Such a deduction as is here sought to be made is forbidden by the first and third rules of the first case of Sched. D of the Income Tax Act, 1842, s. 100. The third rule forbids any deduction for "any sum employed or intended to be employed as capital in such trade, manufacture, adventure, or concern." The sum employed in the purchase of the estate on which these deposits of caliche exist is really a sum employed as capital in the business, and the deduction claimed is in respect of exhaustion of capital. Mines fall, not under rule No. 1 of Sched. A, but under No. 3, in which the word "profits" is used. That word must bear the same meaning as it bears in Sched. D; and by s. 188 every provision which is applied to the duties in any particular schedule which is applicable to the duties in any other schedule is, unless repugnant to the provisions for ascertaining the same, to be applied thereto. It follows that, in the case of a mine whether abroad or in this country, in estimating the balance of profits and gains no sum employed or intended to be employed as capital can be deducted. On the question of deductions from gross profits in respect of exhausted capital there was a conflict of opinion between the English Court of Exchequer in Knowles v. McAdam (1) and the Court of Session in Addie v. Solicitor of Inland Revenue (2) and Coltness Iron Co. v. Black. (3) The last-mentioned case came before the House of Lords on appeal from the Court of Session (4), and the decision of the Court of Exchequer was held to be wrong, and those of the Court of Session were upheld to the effect that no deductions could be made in respect of a sum expended in sinking pits for a coal mine. That decision is conclusive in the present case, and it did not turn, as suggested, on any distinction between the application of the two schedules to a mine, but on general principles applicable to the estimation of profits on mines. The other cases cited in the argument on behalf of the appellants do not bear on the point raised in this case and decided in favour of the Crown in the House of Lords. Danckwerts, K.C., in reply. It has been suggested that the cases cited for the appellants are not in point; but they establish three things. First, that in taxing income under Sched. D the net profits and gains are to be arrived at from the point of view of the trader. Next, to draw attention to the fact that, under the guise of taxing income, capital must not be taxed. Lastly, to shew that what looks primâ facie like a capital charge must be examined to see if it is so in reality, and that such charges have been allowed to be deducted. There is a broad distinction between working and fixed capital by which every case can be solved. Cur. adv. vult. 1904. Dec. 16. COLLINS M.R. read the following judgment: The appellants are an English company who own a large tract of nitrate grounds in Chili. The upper stratum of C. A. 1904 ALIANZA COMPANY v. BELL. C. A. 1904 ALIANZA COMPANY V. BELL. these grounds consists of a substance called "caliche." This upper stratum, which contains about 30 per cent. of nitrate of soda, is loosened in the ground by explosives and is then dug up, carted away, and utilized for the production of nitrate and iodine. The appellants are assessed to income tax under Collins M.R. Sched. D, and claim, for the purpose of computing the balance of their profits and gains, to deduct a sum representing the cost price to them of the amount of "caliche" consumed in the year's working. Assuming that this sum can be calculated, as they contend it can, the question is whether they are entitled to make the deduction. They fully admit that if the tax was levied under Sched. A they could not support the deduction, but they claim that their position is radically different under Sched. D. Channell J., affirming the view of the Commissioners, has disallowed their claim, and against his decision they now appeal. Their contention is that the sum deducted represents only the cost of the raw material consumed in the year and stored in the ground till consumed, and that there can be no distinction in principle between raw material acquired once for all and stored and the like material acquired from time to time as it is wanted for the purpose of manufacture. In my opinion, this contention is concluded by authority. The point has been frequently discussed in other cases where capital has been embarked in a wasting subject-matter, such as a coal mine, and the same argument has been advanced and overruled. I think those cases establish that on this particular point the provisions of Sched. D are no more favourable to the appellants than those of Sched. A. The words of Sched. A, No. 3, under which this case would have fallen had the property been situate in England, are these: "The annual value of all the properties hereinafter described shall be understood to be the full amount for one year, or the average amount for one year, of the profits received therefrom within the respective times herein limited." The provisions of Sched. D, first case, rule 3, are as follows: "In estimating the balance of profits and gains chargeable under Sched. D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, or allowed to be set against or deducted from, C. A. 1904 ALIANZA COMPANY such profits or gains on account of any sum expended for repairs of premises occupied for the purpose of such trade, manufacture, adventure, or concern, nor for any sum expended for the supply or repairs or alterations of any implements, utensils, or articles employed for the purpose of such trade, manufacture, adventure, or concern, beyond the sum usually Collins M.R. expended for such purposes according to an average of three years preceding the year in which such assessment shall be (3) 6 App. Cas. 315. V. BELL. |