London & Thames Haven Oil Wharves Ltd v Attwooll (Inspector of Taxes)
[1967] Ch. 772[1967] 2 W.L.R. 743
[1967] 2 All E.R. 124
[1967] 1 Lloyd's Rep. 204
43 T.C. 491
(1966) 45 A.T.C. 489
[1966] T.R. 411
(1966) 110 S.J. 979 Times, December 17, 1966
(Judgment by: WILLMER L.J.)
London & Thames Haven Oil Wharves Ltd
versus; Attwooll (Inspector of Taxes)
Judges:
WillmerHarman
Diplock
Buckley L.JJ
Judgment date: 27 April 1967
Judgment by:
WILLMER L.J.
In the course of the argument this has been made to appear to be a difficult and complicated case, but it is in fact a very simple case, and in my judgment a very plain case. It comes before us on appeal from a judgment of Buckley J. given on April 27, 1966, on a case stated by the special commissioners in relation to an assessment to income tax made against the taxpayer company under Case I of Schedule D for the year 1955-56 in the sum of £21,404. This sum represented damages which had been recovered from a wrongdoer in respect of loss of profits in connection with the taxpayer company's business as a wharf-owner.
The special commissioners decided that this sum, recovered in respect of loss of profits, was taxable as a trading receipt. Buckley J. came to the opposite conclusion, holding that the sum recovered was in respect of a capital loss, so that it constituted a capital receipt, and as such was not taxable. The Crown has now appealed to this court.
The essential facts of the case are extremely simple. The respondent company owns a number of jetties at its Thames Haven oil installation, where tankers bringing oil can berth for purposes of discharge. On April 22, 1953, a tanker, while coming alongside one of these jetties, was so negligently navigated that she struck the jetty in such a way as to cause serious damage thereto. The physical damage to the jetty necessitated repairs at a cost of £83,167. But in addition, it is said, the company sustained consequential damage through loss of use of their jetty during the period while it was under repair, a period which amounted in all to 380 days. That loss was quantified at the figure of £32,450. That figure was the result of a quite arbitrary calculation based on a percentage of the capital cost of the jetty. But no question has been raised in this appeal with regard to the method of quantifying this damage; it may well be that it was adopted for the reason that the jetty had been only newly built, so that no figures were available to show what rate of profit would ordinarily be expected to accrue from the use of the jetty. It will be seen from the figures I have given that the taxpayer company's total loss was £115,618. The owners of the tanker admitted liability; but they were able to limit their liability in pursuance of the Merchant Shipping Acts to a sum of £77,875, which sum they duly paid, together with the appropriate interest thereon.
The taxpayers were insured against physical damage to their property, but were not insured against consequential damage. In these circumstances they reached an agreement with their underwriters to the effect that the sum recovered from the owners of the tanker should be apportioned rateably as between the physical damage and the consequential damage, and that the underwriters should pay to them the unrecovered balance in respect of the physical damage.
The final result of it all was as follows. The respondents recovered in full the physical damage to their jetty, amounting to £83,167. They recovered by way of contribution towards their consequential loss the sum of £21,404, and they also recovered the sum of £2,325 by way of interest, making a grand total of £106,897. The question is whether that sum of £21,404 recovered from the tanker-owners in part satisfaction of the claim for loss of use is taxable as a trading receipt in the hands of the taxpayer company.
In the course of the argument we have been referred to a considerable number of authorities, to some of which I shall have to refer in the course of this judgment. But it does seem to me that the question which we have to decide is eminently a question of fact, which depends on the answer to the question: What did the sum of £21,404 represent? To adopt a phrase used in one of the authorities to which we have been referred, what place in the economy of the taxpayers' business does this payment take?
I have said that the taxpayer company is the owner of these wharves and jetties, and in the ordinary way earns profits by the use of the jetties for the purpose of berthing tankers. In my judgment the same principle must apply to a jetty constructed for commercial use as applies to a ship which is engaged in commercial trading. In this connection I venture to read the oft-quoted words of Bowen L.J. in The Argentino, where he said :
"A ship is a thing by the use of which money may be ordinarily earned, and the only question in case of a collision seems to me to be, what is the use which the shipowner would, but for the accident, have had of his ship, and what (excluding the element of uncertain and speculative and special profits) the shipowner, but for the accident, would have earned by the use of her?"
In this case, if there had been no collision, the taxpayers would have had the use of their jetty, and by the use of their jetty they would ordinarily have earned profits. Having lost those profits, they were entitled to recover from the wrongdoer such a sum of money as would, so far as possible, put them back in the same position as that in which they would have been but for the collision. Owing to the tanker-owners' right to limitation of liability, the amount actually recovered did not in fact provide full indemnity, but so far as it went it gave back to the taxpayers part of what they could have expected to earn by the use of their jetty. If there had been no collision, the profits which the taxpayer company would have earned by the use of the jetty would plainly have been taxable as a trading receipt. Why, it may be asked, should not the same apply to the sum of money recovered from the wrongdoer in partial replacement of those profits?
In that connection we were referred to the report of The Argentino in the House of Lords. I should explain that that was a case where the owners of a ship damaged in collision were held to be entitled to recover the loss of profit which they would have made out of a charterparty which had been fixed, and which was lost in consequence of the collision. But in the House of Lords Lord Herschell pointed out that, if the owners got back their ship from the repairers before the date when the charterparty voyage (if it had taken place) would have been completed, they would have to give credit for any profits that they could have earned during the unexpired period. Any such profits would clearly, I think, have constituted a revenue receipt; and it might be thought to follow from that that the damages for loss of the charterparty, against which any such actual earnings would have to be set off, should also be regarded as a revenue receipt.
In the present case, however, Buckley J. came to the conclusion in the event that it was not possible to separate the damages recovered in respect of the loss of use of the jetty from those recovered in respect of the physical injury. He treated the whole as damages for physical injury to a capital asset, and, therefore, as a capital receipt. I am bound to say, however, that I have felt some difficulty in following his reasoning, and it does seem to me that in the course of delivering his judgment he rather contradicted himself.
In his judgment, the judge is recorded as saying this :
"The damage to the taxpayers' jetty was undoubtedly damage to a capital asset. That damage occasioned not only the need to incur expense in repairing the physical damage but also an interruption in the profitable use of the jetty. Both these consequences of the physical damage were natural and direct results of that physical damage. The taxpayers had but one cause of action against the owners of the ship which caused the damage, but the damages recoverable in respect of that cause of action involved two distinct elements requiring two distinct inquiries and calculations." Then a little later the judge went on:
"If, in the present case, the jetty, instead of being damaged, had been entirely destroyed by an explosion, the amount recoverable as damages would have included an element related to the profitability of the jetty, but no part of such damage would, in my opinion, have fallen to be treated as a matter of sound accountancy or for fiscal purposes as profit of the appellants' business." So far I wholly agree with everything that the judge said.
But then he continued :
"Can it make any difference in this respect that, instead of being wholly destroyed, the jetty was only partially damaged, and that, instead of losing all future profit from the jetty, the taxpayers lost the profitable use of the jetty for only 380 days? In my judgment, none. The damage which the taxpayers suffered all flowed directly from physical injury to a capital asset of their business, the jetty, inflicted by the negligent handling of a ship. The amount of damages which the taxpayers might have recovered constitutes the relief, whole and indivisible, to which the taxpayers became entitled in consequence of that injury, subject only to the owners' statutory right to limit their liability. Although some part of that amount related to the loss of use of the jetty for 380 days, this fact does not, in my judgment, make that part of the damages proper to be brought into account as a revenue receipt of the business."
It seems to me that in this passage, particularly where the judge referred to "the relief, whole and indivisible, to which the taxpayers became entitled," he was forgetting what he had said (in my view quite correctly) earlier, namely, that the damages recoverable in respect of the cause of action "involved two distinct elements requiring two distinct inquiries and calculations."
Moreover, it appears to me, with all respect to the view of Buckley J., that there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing lost is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing its capital value. In such a case the owner's right is a right to recover the value of the thing which has been lost, and this can no doubt be properly described as "whole and indivisible," even though it includes some element of profitability of the thing lost; in such circumstances what is recovered is properly treated as a capital receipt.
But where there is only a partial injury, as there was in the present case, there are necessarily two elements to be considered if the owner is to be put back, so far as money can do it, in the same position in which he would have been but for the tortfeasor's wrongdoing. First, he can recover the whole cost of repair, which is without doubt a capital receipt. Secondly, he can also recover something in respect of the loss of use during the period of repair, which the judge, in the first of the passages which I have read, quite rightly held to be a distinct element.
I repeat, therefore, the question which I asked before: Why should not damages recovered under this head be regarded as a trading receipt, in that they represent the trading profit which the owner would have earned if he had had the use of his ship, or of his jetty? If that is not a correct view of the law, then I would venture to say that there is something very much wrong with the law, for the consequence would be that a jetty-owner, such as the taxpayer company, would be better off by being subjected to a casualty of this sort (that is, by losing the use of his jetty and recovering damages therefor) than he would be if he were able to use it continuously for the purpose of making profits. That, as it seems to me, would be a very strange result indeed.
The respondent company's case has been very largely founded on the decisions of the Court of Session and the House of Lords in Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners, in which a company was the lessee of a fireclay bed, part of which lay under a line belonging to a railway company. The railway company commenced an action against the lessees of the fireclay bed to restrain them from working their fireclay under the railway, and pending the decision of the action they obtained an interdict from the Scottish court restraining the company from working under the railway. That litigation eventually went to the House of Lords, taking three years to get there, and in the event was decided in favour of the fireclay company. But the railway company thereupon exercised its statutory power to require that the part of the fireclay bed which lay under their line should be left unworked on payment of compensation. The compensation was duly paid to the fireclay company. The company, however, presented an additional claim for damages against the railway company, the damages consisting of the expenses to which the company had been put during the three years' litigation in keeping open the fireclay field, and in due course the company received a sum of money by way of damages in addition to the compensation.
The question then arose whether the compensation and the damages recovered, or either of them, constituted trading receipts which rendered the company liable to tax, or whether, on the other hand, they constituted capital receipts. It was decided in the result that both the compensation and the damages were capital receipts, the compensation because it was a payment made (to use the words used in the case) for the sterilisation of a capital asset, and the damages because the claim was a claim for expenditure incurred in protecting a capital asset, which turned out in the event to be unproductive because of the railway company's exercise of its statutory powers.
It seems to me that the result of that case in all the circumstances was hardly surprising. The fireclay in which the company was interested was a capital asset, but it was a capital asset which could be turned into profit only by consuming it. When the railway company exercised its statutory powers, the fireclay company lost its capital asset; it could no longer consume the fireclay. In those circumstances it appears to me to be a natural result that the compensation recovered should be regarded as a capital receipt. It seems to me, however, that loss of such a consumable capital asset was something very different from the loss of use of the jetty in this case; for a jetty is a thing which is enjoyed, not by consuming it, but by using it for the purpose of berthing ships.
With regard to the damages claimed in the Glenboig case, the ratio of the Court of Session decision was that the expenditure proved in the event to be unproductive and, to use the words of Lord President Clyde, turned out to be a dead loss. It was, for this reason, held to be a capital loss, and the damages recovered in respect thereof were held to be a capital receipt. But Lord President Clyde at least made it clear that the result would, in his view, have been different if the expenditure had turned out to be productive, in the sense of enabling the fireclay company to resume working the fireclay, and thereby to make a profit.
This appears from the following passage in his judgment :
"If they were successful in the law courts, and the railway did not exercise the powers of section 71, the expenditure would turn out productive, at least to some extent, because it would enable the fireclay, temporarily under interdict - to be eventually worked. If, on the other hand, they were unsuccessful in the law courts, or if (notwithstanding their success) the railway ultimately fell back on the powers of section 71, it would turn out to be money thrown away, and the loss of the money would be attributable, not to any commercial misadventure, but to the exercise by the railway of the rights and powers belonging to it under statute. In the former case, the expenditure would be shown to form a proper trading expenditure, and to be a legitimate deduction from gross profit in estimating the 'profit arising or accruing from the company's trade.' In the latter case, it would be shown to be money spent without the possibility of return, and would therefore constitute just a loss of so much capital." Once that case is fully understood, I am bound to say that I find it difficult to see how it really helps the taxpayer company in the present case.
Most of the other cases to which we have been referred seem to me to be wholly favourable to the Crown's contention. I certainly do not find it necessary to refer to all the cases cited, but some of them I think I should mention. There are, for instance, the two cases referred to in the judgment, namely, Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners and Burmah Steamship Co. Ltd. v. Inland Revenue Commissioners. Buckley J. himself quoted at some length from the judgments in both these cases, and I do not find it necessary to set out the quotations again.
Neither of these cases is by any means on all fours with the present, but in so far as they are relevant they seem to me to afford a good deal of support for the Crown's contention. The first of them related to compensation recovered by shipowners from the Government for the detention of two ships by order of the Government during a coal strike, and it was held by Rowlatt J., and approved by the Court of Appeal, that the sum recovered was a sum paid to the owners in lieu of the profits which the ships would have earned during the period of detention, as if they had been requisitioned. Rowlatt J. was careful to point out that it was not the same as a requisition, but he dealt with the sum recovered as if there had been a requisition.
In the second case the shipowners recovered from ship repairers agreed damages for exceeding the stipulated time for the repair of their ship, and those damages had been calculated by reference to the profit which the ship would have earned had she been delivered in time. That was held to be a trading receipt. That again was a case which came before the Court of Session, and Lord President Clyde (who, it will be remembered, had also been a party to the decision in the Glenboig case delivered a judgment in which he said that the damages were to be treated as "filling the hole" in the shipowner's trading profits which had been caused by the repairer's delay in completing the repairs.
Lord Clyde specifically referred to the Glenboig case, and then went on:
"But, as the case just referred to shows, it is very relevant to inquire whether the thing, in respect of which the taxpayer has recovered damages or compensation, is deprivation of one of the capital assets of his trading enterprise, or, short of that, a mere restriction of his trading opportunities." I cite that sentence as stating in very succinct form the problem which has to be solved in a case of this sort.
I must next mention Rex v. British Columbia Fir and Cedar Lumber Co. Ltd., where a timber company had taken out fire policies to cover themselves against loss of profit due to interruption of their business by fire. Upon a fire occurring, the question arose whether the moneys recovered under those policies should be treated as a capital or a revenue receipt. The matter eventually found its way to the Privy Council, where it was decided that the sum recovered was to be treated as a revenue receipt.
I think that the ratio of the decision is really summarised in the judgment of the Board delivered by Lord Blanesburgh, where he said :
"In view of the nature and origin of the receipt, as they have traced these, their lordships have reached the conclusion that within the meaning even of the interpretation clause this receipt was 'income from a business,' and that in ordinary parlance it was income or gain derived from the business of the respondents which had necessarily to be brought into receipt as such in the profit and loss account of the business referred to" in the section of the statute.
That decision was referred to and followed by this court in Williams' Executors v. Inland Revenue Commissioners, which again was a case of money recovered under an assurance policy (in that case a life policy). Lord Greene M.R., in delivering the leading judgment, referred to the British Columbia Lumber case, and said :
"A manufacturer can, of course, insure his factory against fire. The receipts from that insurance will obviously be capital receipts. But supposing he goes further, as the manufacturer did in that case, and insures himself against the loss of profits which he will suffer while his factory is out of action, it seems to me it is beyond question that sums received in respect of that insurance against loss of profits must be of a revenue nature." It appears from the way in which he expressed himself that that was a matter about which Lord Greene had no sort of doubt whatsoever. Unless it can be said that moneys recovered from insurers are to be viewed differently from moneys recovered from a wrongdoer, it seems to me that those cases really conclude this case in favour of the Crown's contention.
It has been sought to argue that moneys received from insurers are in a different category from moneys recovered from wrongdoers; but, with all possible respect to the argument which has been advanced in that respect, it seems to me to be quite without foundation. In either case the question must be, what does the sum recovered represent, and in either case the answer to that question must be that it represents profit which would otherwise have been earned by the use of the thing concerned.
I should mention also the cases Morahan v. Archer and Belfast Corporation and Pryce v. Elwood, both of which were decisions at first instance. Both related to damages recovered from a wrongdoer for the loss of use of a motor car which had been damaged in collision, and which was ordinarily used for commercial purposes. In both cases only a very brief report is available, but in each case the judge who dealt with the matter had no difficulty in deciding that the damage recovered in respect of loss of use would constitute a revenue receipt. As I said when I started to review these cases, they all appear to me to point in the same direction.
It has, however, been very strenuously argued on behalf of the taxpayer company that the £21,000-odd recovered from the tankerowners was really all part of the damages recovered for injury to the jetty. It was pointed out to us, quite fairly, that the jetty was not a construction which was going to be there for all time, but had a life of only some 25 years. Consequently, because of the time occupied in effecting the repairs, it had only a depreciated value at the end of the repair period. It was submitted that it was quite irrelevant that this part of the damages recovered was quantified by reference to loss of use, for the way in which a loss is quantified cannot affect the quality of the loss. What was said was that the sums recovered, whether from the insurers or from the wrongdoer, should be regarded as one whole, amounting in total to compensation for the physical injury to the jetty. It was said, to use the phrase that was used in the Glenboig case, that during the period of repairs the jetty was a sterilised asset, just like the fireclay in that case. As I understood the argument, it was conceded that, if there had been no collision, and therefore no physical damage to the jetty, but the tanker had sunk just outside it so as to block access to it and prevent its use, a different result might be arrived at. It seems to me that it would be strange indeed if the quality of the damages recovered for loss of use should be held to depend upon the accidental circumstance whether or not there happened also to be physical injury to the jetty.
I think that the argument presented on behalf of the taxpayer company was fallacious in two respects. In the first place, it appears to me to proceed on the basis that the cause of action in a case such as this is the damage to the jetty. But in truth, as was pointed out during the argument, the cause of action in a case of negligence is the injury to the plaintiff. In the present case the injury to the taxpayer company was a twofold injury. They not only suffered damage to their jetty, but they also suffered loss of the profits which they would have earned from its use. Secondly, I think that the argument which was presented to us was fallacious in so far as it was sought to equate damages for loss of use of the jetty with depreciation of the capital value of the jetty. It seems to me that the two things are quite distinct.
I am left in no doubt that in this case the damages recovered in respect of the physical injury to the jetty are quite separate from, and governed by quite different considerations from, the damages which were recovered in respect of the loss of profitable use of the jetty. It appears to me that both on principle and on the authorities, to some of which I have referred, the sum recovered for loss of use of the jetty must be treated as a revenue receipt, and, therefore, properly taxable.
For these reasons I would allow this appeal and would restore the decision of the special commissioners.