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

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(Judgment by: BUCKLEY J.)

London & Thames Haven Oil Wharves Ltd
versus; Attwooll (Inspector of Taxes)

Court:

Judges: Willmer
Harman
Diplock

Buckley L.JJ

Hearing date: 1966 Dec. 14, 15, 16
Judgment date: 27 April 1967

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Judgment by:
BUCKLEY J.

read the following judgment: The taxpayer company was assessed to income tax under Case I of Schedule D in a sum of £21,404 for the fiscal year 1955-56 in respect of profits of its business as a wharf owner. The company appealed to the special commissioners against this assessment, the special commissioners dismissed the appeal, and the company now appeals from their decision to this court.

The company owns and operates one of the largest oil storage installations in Europe. Part of its undertaking consisted at the relevant time of five deep-water jetties at Thames Haven, including one which was completed in the year 1952 at a cost of £346,323 to accommodate what are described as supertankers drawing up to 34 feet of water. In April, 1953, owing to the negligent handling of a ship, this jetty was seriously damaged. Its repair cost £83,167, and it was out of use for 380 days. The company consequently suffered damage which exceeded £83,167 by the amount of the loss resulting from the fact that the jetty was out of use for 380 days. I shall refer to the damage suffered by loss of use as "consequential damage." This consequential damage was agreed by the company and its insurers (to whom I will refer as the underwriters) to amount to £32,450. The total amount of the damage suffered by the company, as agreed between the company and the underwriters, was accordingly £115,617.

The owners of the ship were entitled under the Merchant Shipping Act, 1894, s. 503 , as extended by the Merchant Shipping (Liability of Shipowners and Others) Act, 1900, s. 1 , to limit, and did limit, their liability to a sum of £77,875 - a sum less than the cost of repairing the physical damage to the jetty. The company was insured with the underwriters against physical damage to the company's property, but not against consequential damage. The underwriters agreed that, for the purpose of ascertaining the extent of their liability to indemnify the company in respect of physical damage to the jetty, the amount received from the owners should be apportioned rateably to the physical damage and the agreed amount of consequential damage.

The £77,875 was accordingly treated by the company and the underwriters as received as to £55,083 in respect of physical damage and as to £22,792 in respect of consequential damage. The underwriters therefore paid the company £26,696 in respect of physical damage plus £42 in respect of legal expenses relating to the claim in respect of physical damage, making together £26,738. The company consequently received from the owners and the underwriters an aggregate amount of £104,614, which exceeded the amount of the physical damage, including the legal costs, by £21,404. It was in respect of this sum that the assessment in question was made.

The estimate of the consequential damage - that is to say, of the value of 380 days' profitable working of the jetty in an undamaged state - was arrived at in an artificial manner. It was not related to any profit which the company had earned by the use of the jetty or to any profit which the company expected or hoped to earn by its use. By agreement between the company and the underwriters, the estimate was made by adding to the figure for depreciation of the jetty for 380 days, calculated on its cost price of £346,323 at 4 per cent. per annum (the company's normal rate of depreciation), a further 5 per cent. per annum on the same capital sum for the same period. Thus the total claim for loss of use of the jetty for 380 days was quantified at 9 per cent. per annum for that period upon its capital cost; i.e., at £32,450. The possibility of the company being liable to tax on any compensation received for loss of profit did not figure in the calculation.

The taxpayer company accepts that the amount of £21,404 is attributable to the loss by the company of profitable use of the jetty, but submits that it was not a profit arising from the company's trade but part of one entire capital sum of £104,614 received in respect of damage to a physical capital asset. Alternatively, the company submits that if the damages should be regarded as consisting of two distinct parts, physical damage and consequential damage, the latter part is compensation for the sterilisation of a capital asset, and, so far from being profit earned by using that asset, is compensation for not using it, so that it cannot be a profit arising from the company's trade.

In the further alternative, it has been submitted on behalf of the company that, in so far as the £21,404 is attributable to depreciation, it can only be a capital expense. I can dispose of this last argument briefly, for I think it is untenable. No part of any claim by the company for loss of profit could, as I think, consist of depreciation, which could never be a credit item in an account of the company's profits. The rate of depreciation adopted by the company in its accounts figures in the present case merely as an element in arriving, by what seems to me to be a very arbitrary method of calculation, at an estimate of the profitability of the jetty. The resulting figure of £32,450 has been accepted, and must for present purposes be accepted, as an estimate of the profit which the company might reasonably be expected to have made by the use of the jetty, if it had not been damaged, during the 380 days when it was in fact out of use. The method of calculation is, I think, irrelevant.

Another alternative contention before the commissioners, which is recorded in paragraph (d) of the company's contentions in the case stated, was not pursued in this court.

The Crown, on the other hand, submits that the consequential damage was suffered on account of the disruption of the company's trading activities resulting from the damage to the jetty and that the damages attributable to this are a receipt designed to fill a hole in the company's revenue receipts, and should therefore themselves be regarded as a trading receipt.

The sum of £21,404 can only attract a charge to income tax under Case I of Schedule D if, upon the true view of the facts, it should properly be regarded as part of the annual profits or gains arising or accruing to the company in respect of its trade. This sort of question has been considered by the court in a variety of cases. Where the sum received is of the nature of compensation for the compulsory purchase of a capital asset or for an out-and-out embargo on the exploitation of a capital asset, it has been held to be a capital receipt and not revenue, although calculated by reference to the amount of profit lost: see Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners and Inland Revenue Commissioners v. Glasgow and South-Western Railway Co.

Where the receipt has been in compensation for the expropriation of stock-in-trade, it has been held to be a trading receipt: see Inland Revenue Commissioners v. Newcastle Breweries Ltd. Where the asset, to compensate for the loss or modification of which the sum is paid, is the benefit of a contract or of some right under a contract, a distinction has been drawn between (a) contracts which regulate the recipient's business, or, to borrow Lord Macmillan's language in Van den Bergh's Ltd. v. Clark, relate to the whole structure of the recipient's profit-making apparatus, in which case the receipt is not treated as income but as capital; and (b) contracts made in the course of the recipient's business, as in Kelsall Parsons & Co. v. Inland Revenue Commissioners and Short Bros Ltd. v. Inland Revenue Commissioners, in which case the receipt is treated as a revenue receipt of the trade. (See, for a review of the authorities, John Mills Productions Ltd. v. Mathias.

Those contracts which fall within the former category can perhaps be equated with fixed physical capital assets as forming part of the basic and enduring structure within or by means of which the business is carried on, whereas contracts of the latter kind can appropriately be equated with the circulating capital or stock-in-trade of the business as belonging to a class of things, not being capital assets, by the exploitation of which, or by the turning of which to account, the profit of the business is made. But not every case can be classified as analogous to the sale of a capital asset on the one hand or a sale of stock-in-trade or some other transaction in the course of the recipient's business on the other. Judges have from time to time been careful to say that no clear and comprehensive rule can be formulated and no clear line of demarcation can be drawn by reference to which it can be determined in every case whether the sum received should be regarded as a capital receipt or as a revenue receipt to be taken into account in arriving at the profits or gains of the recipient's trade. Each case must be considered on its own facts.

For instance, a mere interruption or suspension of a trader's power to pursue his business activities, or some part of them, which does not involve the destruction or involuntary alienation of any asset, whether of fixed or circulating capital, may be the antithesis of anything done in the course of the business. Nevertheless, compensation for such interruption or suspension may fall to be treated as a trade receipt. Thus in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners, where during a coal strike two ships of the appellant company's fleet which were ready to proceed to sea with cargoes of coal were retained in port by the order of the Government, the compensation received was held to be a trading receipt for the purposes of excess profits duty. Rowlatt J. expressly declined to regard the compensation in the same way as demurrage or damages for detention arising out of a contract made in the course of the appellant company's trade.

Rowlatt J. said :

"Now it is quite clear that if a source of income is destroyed by the exercise of the paramount right I have described, and compensation is paid for it, that that is not income, although the amount of the compensation is the same sum as the total of the income that has been lost. As Lord Buckmaster pointed out with a clearness that could not be surpassed, the nature of the measure of the sum has no relation to the quality of the payment, but in this case I have got to decide the case of a temporary interference, and at first sight I thought that opened up a very wide question. Of course a source of income, whether from property or business, may be temporarily interrupted, and the owner of it may be entitled to have his loss of profits replaced either by a claim against the tortfeasor or by recourse to an insurance company if he has been insured; and if a question were whether sums of that kind could be treated as income for taxation purposes, I should feel that I was on the threshold of a very wide and difficult field of inquiry, but with the best consideration I can give, I do not think this case does raise that question. Here these ships remained as ships of the concern. Their expenses were quite properly brought into the revenue expenditure of the concern (Mr. Latter suggested they might be taken out again); they merely could not sail for a certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit-earning capacity during those days, in lieu of that receipt, this money was paid to the owners, although they were not requisitioned, as if requisitioned.

"Now under those special circumstances I do not think I can treat this as being a sum paid by way of compensation for the temporary interruption of the trade. I think I ought to regard this sum, as the commissioners have obviously regarded it, as a sum paid which to the shipowners stands in lieu of the receipts of the ship during the time of the interruption." In the Court of Appeal, Lord Hanworth M.R. approved this view of the matter.

In Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners two shipping companies, acting jointly, bought a ship in need of repair and immediately placed it in the hands of repairers for overhaul. The time stipulated for the completion of the overhaul was exceeded, and the owners claimed damages calculated by reference to the estimated profit which the ship would have earned had she been trading during the excess time taken for overhaul. It was held that the appellant company's share of the agreed damages was income for the purpose of income tax. Lord President Clyde said :

"Suppose someone who chartered one of the appellant's vessels breached the charter and exposed himself to a claim of damages at the appellant's instance, there could, I imagine, be no doubt that the damages recovered would properly enter the appellant's profit and loss account for the year. The reason would be that the breach of the charter was an injury inflicted on the appellant's trading, making (so to speak) a hole in the appellant's profits, and the damages recovered could not therefore be reasonably or appropriately put by the appellant - in accordance with the principles of sound commercial accounting - to any other purpose than to fill that hole. Suppose, on the other hand, that one of the appellant's vessels was negligently run down and sunk by a vessel belonging to some other shipowner, and the appellant recovered as damages the value of the sunken vessel, I imagine that there could be no doubt that the damages so recovered could not enter the appellant's profit and loss account because the destruction of the vessel would be an injury inflicted, not on the appellant's trading, but on the capital assets of the appellant's trade, making (so to speak) a hole in them, and the damages could therefore - on the same principles as before - only be used to fill that hole. If the damages recovered included, not only the value of the sunken vessel, but loss of trading profits pending the acquisition of a substituted vessel, I understand that a question might arise with regard to the latter constituent of the damages recovered, assuming that it was capable of separate quantification which it might easily not be. But it is not relevant to the decision of the present question to pursue that matter to a solution."

The example which the Lord President gave there but found it unnecessary to pursue comes very close to the present case. Lord Clyde went on to say that as the appellant company in that case had suffered no injury to a capital asset but had lost trading opportunities, the damages recovered must go, as a matter of sound commercial accounting, to fill the resulting hole in their profits. Lord Blackburn and Lord Morison viewed the matter in a similar way. Lord Sands found more difficulty in doing so, but did not dissent. The company having in that case suffered no damage on capital account, the amount recovered could not sensibly have been carried to capital account.

The present case appears to me to involve a question of the kind which Rowlatt J. said in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners would result in embarking on a wide and difficult field of inquiry; a question of the kind which Lord Clyde in Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners found to be irrelevant to the decision of that case. 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.

If a profitable business be sold as a going concern, the price will include an element related to the prospective profitability of the business in the hands of the purchaser, who will be prepared to pay a higher price the more profit he conceives the business to be likely to bring him. If the same business were to be wholly destroyed in consequence of some tortious act, the damages which the owner could recover would be measured by reference to the value of the business, and would likewise include an element related to the profitability of the business. The whole of the price in the one case or the damages in the other which the owner of the business would receive would, in my judgment, be capital; no part of it should, as a matter of sound accountancy or for fiscal purposes, be regarded as profit of the business.

The same would, it seems to me, be true of the sale or destruction of a distinct section or department of a business. 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 damages would, in my opinion, have fallen to be treated as a matter of sound accountancy or for fiscal purposes as profit of the taxpayers' business. 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.

As Lord Buckmaster observed in Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners, the measure that is used for the purposes of a calculation does not determine the quality of the figure that is arrived at. The questions are: what was the nature of the taxpayers' claim against the shipowners, and what was the quality of any sum recovered by them in respect of that claim?

The taxpayers' claim did not arise out of any involuntary disposition of stock-in-trade of their business or of any involuntary rendering of any services or provision of any facilities in the course of their business. It did not arise out of any contract entered into in the course of their business or out of any abrogation, breach or modification of any such contract. Nor is it the result merely of the loss of trading opportunities. I can see no ground for treating any part of the damages received by the taxpayers as a receipt in the course of their trade or so connected with their trade as to make it proper to be treated as a revenue receipt of the trade.

On the contrary, it seems to me that the £21,404 received by the taxpayers in respect of the consequential damage is compensation for a capital asset, the jetty, having been sterilised - that is, made incapable of producing profit - for 380 days. The effect of that sterilisation in monetary terms can be appropriately measured by estimating the profit that might have been earned during that period, but the effect of the accident was to depreciate the value of the taxpayers' undertaking as a whole and as a going concern by an amount equal to the aggregate of the cost of repair and the loss of profit. Regarded in this way, the loss is seen as a capital loss, and in my judgment that is the proper way to regard it in the circumstances of this case.

There were two other authorities which were brought to my attention about which I should perhaps say a word. In Morahan v. Archer and Belfast Corporation the plaintiff sued for damages in respect of a taxi-cab which had been in collision with an omnibus. On an interlocutory application for leave to deliver interrogatories, the question arose whether damages for loss of profits during the time when the taxi was under repair would be liable to tax in the hands of the plaintiff. Curran L.J., following Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners, held that this would be so. In so doing the Lord Justice must, as it seems to me, either have proceeded upon the assumption that the cab was not to be regarded as a capital asset of the plaintiff's business or have interpreted the Burmah Steam Ship Co. Ltd. case differently from the way in which I regard it, for it is, as I understand the decision in the Burmah Steam Ship Co. Ltd. case, basic to that decision that no damage to a capital asset was there involved. Morahan v. Archer is, I think, clearly distinguishable on its facts, and accordingly does not seem to me to be in point in the present case.

The plaintiff in Pryce v. Elwood owned a car-hire business. One of his motor cars suffered damage in an accident, as a result of which it was under repair for 30 weeks. The plaintiff claimed damages for loss of profits during this period. The only question was whether tax should be deducted in assessing the damages. Atkinson J. held that the damages for loss of profits would themselves be taxable, so that tax should not be deducted in estimating those damages in accordance with British Transport Commission v. Gourley. There is no report of the argument, and the judgment itself is briefly reported. It does not appear why the judge held that the damages for loss of profit would have to be entered into the plaintiff's profit and loss account. It seems to me probable that this view was perfectly correct upon the ground that the risk of accidents of this kind is an inherent feature of a car-hire business, so that any resulting loss should be brought into the trading profit and loss account of the business, with the consequence that any receipt to be set against any such loss should likewise be brought into that account.

Had the plaintiff in that case insured against loss of profits resulting from such accidents, it might have been very difficult to contend that the cost of so insuring was not an expense which ought to be brought into the profit and loss account. If this would have been so, this might well have provided support for an argument that the loss of profit which was in fact incurred ought to be similarly treated. Similar reasoning might well have applied in Morahan v. Archer.

A risk of that kind, however, seems to me very different in character and degree from such risk as the taxpayers were exposed to, of having their jetty damaged as it was by the negligent handling of a ship. Pryce v. Elwood accordingly appears to me to be distinguishable from the present case.

For the reasons which I have given, the special commissioners were, in my opinion, wrong in law in holding, as they did, that the £21,404 was a trading receipt of the taxpayers. In my judgment, it was a capital receipt, and accordingly this appeal should be allowed.

Appeal allowed with costs. Case remitted to the special commissioners to adjust assessments in accordance with the judgment .

The Crown appealed.

W. A. Bagnall Q.C . and J. Raymond Phillips for the Crown. The taxpayers have contended that the total sum received was an indivisible sum paid for damage to a physical capital asset. The Crown contends that the sum can be severed and that it must be considered whether the payment was only for physical damage (when there would be no tax liability) or also for consequential loss. The case of Rex v. British Columbia Fir and Cedar Lumber Co. is very similar. In the present case the payment is in substitution for what the taxpayer would have earned. The Crown's case may be expressed in the following points: (1) The method of calculating the sum paid does not determine its character as capital or income. (2) It must be determined what place the payment occupies in the economy of the recipient. What hole in the company's finances is it designed to fill? (3) In the case of the total destruction of a capital asset, or the permanent discontinuance of the whole business or a distinct and separate part of the business, the whole of the compensation is capital even though a part represents the loss of future profit. (4) Where you have temporary damage to a capital asset which causes temporary discontinuance of its earning capacity, or if you have any discontinuance of part of the profit-making activities of a business, then compensation therefor is a revenue receipt. If, for instance, a shop were damaged, compensation for damage to the shop is capital, for damage to stock is revenue. If the principle in British Transport Commission v. Gourley is applicable to this case, then the jetty-owners were paid too much. The Gourley principle does not apply if the recipient of damages is liable to tax on them. The decision in West Suffolk C.C. v. W. Rought Ltd. was based upon the Gourley principle.

The important figure in this case (agreed by the Crown) is the sum of £21,404 consequential loss.

[WILLMER L.J. Had it been an old jetty, no doubt the company would have claimed on the basis of what the jetty had been earning. As it was they had to claim on a percentage basis.]

Exhibit 7 shows the basis of claim, described as "loss of revenue."

The decision of Rowlatt J. in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners was the same as the present case, mutatis mutandis. The jetty was a source of income which was temporarily interrupted, but then the lost profit was replaced. There is no distinction between this and the Ensign Shipping case, which was decided on unnecessarily narrow grounds. What is the £21,404 if not a payment in lieu of the receipts? Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners was a case of compensation for a total loss, and is not the same sort of case as this. It is fallacious to consider the temporary destruction of part of a profit-making structure on the same basis as the permanent destruction of the whole. The one thing that the present case does not concern is an out-and-out sale or the total destruction of an asset. The judge reached his conclusions on two grounds: first, having considered the cases on the destruction of a business, he then considered the case of permanent destruction of part of the assets of a business and concluded that there was no difference between permanent and temporary destruction or discontinuance of the whole or part of an undertaking.

[DIPLOCK L.J. I thought the judge's ratio was simpler, saying, "If you receive a lump sum in compensation for an income asset, then you are taxable, if you receive a lump sum in compensation for a capital asset, you are not taxable; if you receive a lump sum in compensation for an asset which is partly income and partly capital, you are not taxable.]

Buckley J. disregarded the dividing-line between temporary and permanent loss. Further, the judgment was illogical because if the mere fact that a lump sum was paid precluded dissection of the damages, then he could have decided the case on that point alone. Thirdly, if the ship had missed the jetty and sunk alongside it, rendering it unusable, the judge must have said that compensation for loss of use would be income. This would be illogical.

In The Argentino, in which the owners of a ship were held to be entitled to recover the profit lost on a charterparty which was fixed but lost as a result of a collision, Lord Herschell said this in effect : assume that a new contract is due to begin on day 1, and would keep the ship occupied for twenty days. The ship is damaged in a collision and the repairs are not completed by day 1, so that the contract is lost. Repairs are completed by day 10, so that the ship is usable from day 10 to day 20. If the owners use the ship between days 10 and 20 there can be a quantification of income. If not, the income must be estimated - a kind of quantification of mitigation of damages. If the ship is actually in use from day 10 to day 20 then the money so gained must be revenue.

Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners establishes that sterilization or permanent prevention from making a profit makes the compensation untaxable. That is totally different from the present case, although it is the case on which most of the case against the Crown is based.

In Inland Revenue Commissioners v. Newcastle Breweries Ltd., the question was one of stock-in-trade requisitioned by the Government. In Short Bros. Ltd. v. Inland Revenue Commissioners, a sum received by way of compensation for the cancellation of a contract to build a ship was held to be an ordinary trading receipt of the taxpayers' business. In Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners there was no destruction of the taxpayers' ships, which had been requisitioned and thus put out of commission as far as their existence as profit-earning assets were concerned. In the present case, the taxpayers had a jetty which would have produced revenue, and later received a sum of money because for a period the jetty was incapable of being put to profitable use.

[WILLMER L.J. What is the distinction between a sum paid by way of compensation for the temporary interruption of a trade and a sum paid which, to the ship-owners, stands in lieu of the receipts of the ship during that interruption?]

Rowlatt J. thought the problem much more difficult than it was. He said that although the case was not one of compulsory hiring to the Crown he could nevertheless treat it as though it had been. Lord Hanworth M.R. held that the result must be the same as if there had been a requisition, although there had not. The two cases are substantially the same, once it was decided that the damages did not arise out of contract.

The taxpayers' case is put the most clearly by Lord Sands in Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners. He said that it was not the ordinary business of a shipping company to earn profit by not having a vessel capable of earning freight. The nearest reported case to the present is Rex v. British Columbia Fir and Cedar Lumber Co. Ltd., where Lord Blanesburgh said that it was necessary to discover what place in the taxpayers' economy the compensation filled. There is no substantial difference between that case and the present, and to decide the present case differently would be incongruous. In the British Columbia case it was held that the compensation was paid to fill a hole in the taxpayers' economy left by a loss of profits caused by destruction of an asset. It was approved in Williams' Executors v. Inland Revenue Commissioners. In Crabb v. Blue Star Line, monies received under a policy of insurance against late delivery of ships were held to be of a capital nature as they were not compensation for loss of profit nor computed by reference to profits which the ships would have earned. The services of the shipbuilder were held to have been diminished in value by reason of the late delivery, and the insurance money took the place of a diminution in purchase price. In Higgs v. Olivier, a sum of money paid to Sir Laurence Olivier in consideration of his agreeing not to make any film for anyone other than Two Cities Films was held to be a capital receipt. However, that case, as Sir Raymond Evershed, M.R., said, depended upon its own peculiar facts. In Scott v. Ricketts it was suggested that the taxpayer might have been held liable to tax on the sum then in question on the ground that he had provided the service of not earning profits under a contract. The line of cases listed by Ungoed-Thomas J. in John Mills Productions Ltd. v. Mathias all dealt with the giving up of contractual rights.

All the cases of the Gourley type proceed on the basis that damages are not taxable. There are two differences between the present case and Gourley's case : (1) The Gourley principle applies only where a calculated sum when paid will not be liable to tax.

[DIPLOCK L.J. The only relevance here of Gourley's case is that there was a tacit assumption that the damages were capital.]

But not precluding the revenue from successfully assessing them, even though they were calculated on a non-taxable basis, or from contending that they were taxable. (2) At first instance it was held that the Gourley principle applies to damages for loss of use of a capital asset, i.e., a loss of the kind presently in issue. In another such case it was held that the Gourley principle did not apply. Gourley's case is of no assistance in the present case. But the decision in the present case might affect in future cases damages not as between subject and revenue but as between payer and payee.

The case of Morahan v. Archer and Belfast Corporation is on its facts indistinguishable from the present case, and that decision is consistent with the Crown's contentions here. Pryce v. Elwood and Diamond v. Campbell-Jones establish the Crown's propositions, that the test is whether the hole in the recipient's economy filled by the damages is a temporary or a permanent hole. It makes no difference if what comes in is received in an action sounding in tort or contract. That case was indistinguishable in any material degree from Rex v. British Columbia Fir and Cedar Lumber Co. Buckley J. misapplied that principle. At the end of the 380 days, the taxpayers' capital assets were exactly the same as before, and the taxpayers had been fully compensated since they had got a new jetty and £21,000. The £21,000-odd was to fiill the hole left by the profits not earned.

H. H. Monroe Q.C . and J.E. Holroyd Pearce for the taxpayers. Whilst it is unnecessary in this case to look in detail at the income tax Acts, one must have in one's mind the provisions of the Income Tax Act, 1952, s. 122 , as to "profits or gains arising ... from a trade." One has to be satisfied, for this receipt to be taxable, that the profit arises from the trade. In this case, no part of the sum received from the ship-owners and no part of the sum received from the underwriters (for repairs only) were sums to be taken into consideration in computing the taxpayers' profits arising from their trade. The whole sum was compensation for damages to a physical capital asset. Immediately before the accident the taxpayers had a special deep-water jetty costing £346,000. After the accident, they had a jetty which was going to cost £83,000 to repair and which had a truncated expectation of useful life. The expectation before the accident was that the jetty would have a useful life of about 25 years. After the accident it had lost about one year of useful life.

[WILLMER L.J. The principle would be no different if the jetty had been in use long enough to prove that it cost £21,000 a year.]

It would not. But we have to consider what that sum was paid for, and that was for damage to the jetty.

[DIPLOCK L.J. It was paid for the consequences of physical damage to the jetty, and it put the taxpayers in the position, as far as possible, that they would have been in had the accident never happened.]

You must start with those consequences. But you must ask, "In what was the hole made which is to be filled?" First of all, there was a hole in the jetty. Certainly the object of the damages was to put the taxpayers in the position they would have been in if the physical damage had never been done. They would then have had a jetty capable of contributing to the taxpayers' earnings for the next 380 days and which would have had an expectation of 25 years' useful life. But when in fact the jetty was next in use it was 380 days older, and they also had £21,000. It is true to say that that sum represented the consequences of physical damage only in so far as there was damage to a physical asset.

[WILLMER L.J. The jetty was 380 days older, but had been rejuvenated by the addition of new material.]

New material to the extent of £83,000 instead of £360,000. It was no doubt functionally as good as new, but had nevertheless had a year carved out of its life. Suppose that I have a ship with a fixture which is damaged and takes 380 days to repair. The consequences are that I shall spend money rendering it serviceable and shall then have a ship which lacks a valuable attribute. It is accepted that the £21,000 was calculated on the basis of consequential damage. But it was the result of physical damage to capital asset, and although you look to see how long the taxpayers were without that capital asset, what they were being paid for was the fact that they had a less valuable asset after the accident. That is the starting point of the argument. But it is not right to say that because loss of profit was an element of consequential damage it coloured the whole of the receipt.

[DIPLOCK L.J. What if there had been only trivial damage to the jetty but the ship had been sunk alongside it?]

The position then might be that the sum received would have been exclusively related to loss of profits. If the jetty had been blocked but not damaged it might have been possible to treat it as if the blocker had hired it for that length of time, on the basis of Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners. The crucial factor in that case was, as Rowlatt J. said that it was as though the Government had requisitioned the ships. The present case is, however, one of substantial physical damage and interruption for more than a year.

[DIPLOCK L.J. What is the significance of the physical damage? It was not the cause of action; that was negligence, causing damage of two kinds to the plaintiffs.]

Damage of two kinds to the plaintiffs' capital asset.

[DIPLOCK L.J. The damage is the way in which the taxpayers were injured in their pocket as a result of the negligent ship-handling. They suffered damage in two ways: the jetty was damaged physically as a result of which it had to be repaired. That was a capital sum. The other way in which the taxpayers suffered damage was that they were prevented from using the jetty. Compensation for that replaces what they would have earned. That is a revenue receipt.]

To say that the sum awarded was for physical damage could be short-circuiting the analysis. The expense of repairing is a revenue expense. But part of the damages was paid expressly for repairs and is nonetheless not income. The plaintiff in such a case says, "I have not been able to earn profit." He has suffered, but what he suffered was a damaged jetty.

[WILLMER L.J. Suppose a case with the same facts but where the jetty was owned by A Co. and managed by its subsidiary, B Co. A Co. has suffered damage, B Co. none, but cannot operate the jetty.]

If A Co. recovered damages on the basis of rent, it would be a capital sum. The jetty would still be an asset capable of earning income. After the accident it would be incapable. B Co.'s case might consist of one of two situations. Either, B Co. might have had a lease with a capital value, and might have said to the tortfeasor, "You have damaged my capital asset, the lease, so as to reduce the useful tract of time." Or, alternatively, it might be found that B Co.'s use of the jetty was interrupted. It could not then be said to be damage to a capital asset. The hole to be filled in the taxpayers' economy is certainly a hole in their profit. Nevertheless, the ground of complaint as a result of which the compensation was paid was damage to a capital asset. It was not to cover a sum of money which would have arisen from the taxpayers' trade. It is this feature which distinguishes the loss of profit insurance cases.

The Crown says, first, that the method of calculating the sum does not determine its character. This is so, but here the Crown is not following its own rule. The measure in this case is loss of profit, but it does not follow from that that the sum is revenue. Secondly, the Crown asks what place the compensation occupies in the taxpayers' economy? We say that the question should be this: in respect of what item in the economy did the sum arise?, to which the answer is, the capital asset. Thirdly, the Crown says that compensation for permanent destruction must be a capital receipt. But in the case of a total loss of business a part of that sum will have been in respect of stock-in-trade, and goodwill would have been measured by reference to future profits. Fourthly, the Crown contends that compensation for temporary discontinuance must be a revenue receipt. The use of the terms "permanent" and "temporary" may lead to a false analysis when dealing with a wasting asset. There may be a temporary interruption, but this might involve a real loss of a part of the wasting asset. It is accepted that depreciation is an element in practice in calculating compensation. Whether because the asset has a shorter life, or whether the asset was ready and available for use before the accident but not afterwards, the compensation is to cover damage to the capital asset. If you tried to sell the jetty the day after the accident you would get a less good price for it than the day before. The compensation should be accounted for as a capital receipt, but even if that is not accepted as following from the reasoning given, in order to say that it is a revenue receipt it must be shewn that it arises from the taxpayers' trade.

There are two elements to the Glenboig case. One is the "wrongous interdict." The other, more important, one is that the compensation was for the sterilisation of the part of the clayfield near the railway. The company's interest in the clayfield was a wasting asset. The compensation was measured on the basis that the clay was extracted. The argument in that case was that the compensation was taxable because that was the measure of compensation. It was based on profit. It was expressed in two ways: it was restoration of capital, and also it was not for profits earned but for profits which were never going to be earned. In relation to the accounting year, the company was totally deprived of the use of the jetty in the present case, and could and did make no profit therefrom. They were compensated for profits irretrievably lost. They could never go back and earn them. This is not the same as being put back to the original state then and there as if by a fairy.

[DIPLOCK L.J. Is there a significant difference between 365 days and 364?]

No. The crux of the matter is the being wholly out of use for a substantial period. What you get is not just a substitute for the profits but also compensation for the fact that the profits are gone for ever. In the Glenboig case, the taxpayers were excluded from their asset for the rest of the possible time. But why should there be a difference between the two cases because rn one deprivation is total and final and in the other deprivation is substantial but the asset may come into use after repair?

[DIPLOCK L.J. Isn't the difference that in one case it ceases to be an asset altogether, whilst in the other the asset is still there but ceases to earn profits for a period?]

Yes. In the second case the asset is sterilised, as the Scots put it. The profits which are never going to be earned in the Glenboig case are comparable with the situation in the present case. Unless there is a difference of character between the whole and the part, loss of use of part has the same character as loss of use of the whole. In the Glenboig case, compensation was calculated on the basis that the clayfield was worked out. It was held to be a capital receipt on the grounds that it was for loss of a capital asset and for not being able to use a capital asset. In this case the consequential damage is of a kind which affects the whole business. The Glenboig case shews that this sort of payment, for not being able to use a capital asset, is not treated as a profit arising out of the trade. The dissenting opinion of Lord Salvesen states clearly the argument against me. To adopt the words of Lord MacKenzie, the taxpayers were shorn of the opportunity of making profits quoad the jetty.

The whole damage is consequential on negligent navigation, which gave rise to two consequences: (1) the jetty was injured and must be repaired. The owner has incurred the cost. (2) The taxpayers' trading activities were interrupted, and they suffered loss and reduction of trading profits. It would be more accurate to say that from the negligent navigation followed injury to the jetty, from which followed the cost of repair and interruption of trading. The jetty is the crucial factor without which no analysis can be adequate. Even if that be wrong, the second head of damages was for not being able to use an asset, as in the Glenboig case. Lord Wrenbury said that the sum received for not being able to use an asset for three years is capital. In the present case the period was just over one year, but the principle remains the same. Phillimore J., in Thomas McGhie & Sons Ltd. v. British Transport Commission, said that in dealing with the tax aspect of the case the first question was, "Why are you entitled to compensation?" and when that has been answered, the second question is, "How is this to be measured?" Supposing that the right measure for compensation for loss of use is based on loss of profit, that is quite a separate matter from the question, "For what is the compensation paid?" In Inland Revenue Commissioners v. Newcastle Breweries, Rowlatt J. drew a distinction between compensation for stopping the trade and for compulsory acquisition of stock. The latter was held to be a profit of the trade, being much the same as the sale price of the rum. In that case there is on the one hand the taking of the rum - or the delay of the ships in the Ensign Shipping case (the compensation is the same as the sum which would have been received had the rum been sold or the ships fixed) - and on the other hand compensation for the fact that the asset is no longer so valuable, which is not the same as what the taxpayers would have received since it is paid for not using the asset. Lord Cave said in the Newcastle Breweries case that the transaction was a sale. In Short Bros. Ltd. v. Inland Revenue Commissioners, where a ship-owner, having contracted for the building of a ship, cancelled the contract and compensated the builder, the compensation was held to be a receipt of the trade. Sargant L.J. said that the ordinary conduct of the business included not only the making of contracts but also modification or alteration of those contracts. That was, in fact, a payment for not making a profit. In the Ensign Shipping case, Rowlatt J. again recognized the dividing line, distinguishing user by the Government and regarding this as hire. He said that the compensation was in lieu of receipts during the time of interruption, but that they were not necessarily taxable. Lord Hanworth M.R. said that the crucial factor in that case was that the ships were ready to sail and he cited Rowlatt J. when he said that the case must be regarded as if the ships had been requisitioned for that period. Lord President Clyde, in the Burmah Steam Ship case, said that it was relevant to inquire whether compensation was for interruption or for damage to a capital asset. He contrasted deprivation of a capital asset with mere restriction of profit-making trading without any injury. Lord Sands pointed out that when a vessel had been damaged and damages paid, even though the damages included a separable item for loss of use they were not taxable. He went on to examine the difference between detention cases and damage to ships. Crabb v. Blue Star Line was a case of fixed sums being payable if the delivery of ships was delayed. The delay in The Argentino affected the value of the ship. In Inland Revenue Commissioners v. Williams' Executors, Lord Greene M.R. regarded the British Columbia case as one where the insurance money constituted profit.

[WILLMER L.J. The fire insurance cases are conclusive against you unless you are right in saying that there is a difference between money received from a tortfeasor and money received from an insurance company.]

The insurance cases were decided on the basis that money was paid to take the place of what the traders would have gained by carrying on their trade. This element is absent in the present case.

[Reference was made to West Suffolk C.C. v. W. Rought Ltd. and Inland Revenue Commissioners v. West. ]

Bagnall Q.C . in reply.