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: DIPLOCK L.J.)

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

Court:

Judges: Willmer
Harman

DiplockBuckley L.JJ

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

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Judgment by:
DIPLOCK L.J.

I agree.

The question whether a sum of money received by a trader ought to be taken into account in computing the profits or gains arising in any year from his trade is one which ought to be susceptible of solution by applying rational criteria. and so I think it is. I see nothing in experience as embalmed in the authorities to convince me that this question of law, even though it is fiscal law, cannot be solved by logic, and that, with some temerity, is what I propose to try to do.

I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation.

The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise.

But the source of a legal right is relevant to the first problem involved in the application of the rule to the particular case, namely, to identify what the compensation was paid for. If the solution to the first problem is that the compensation was paid for the failure of the trader to receive a sum of money, the second problem involved is to decide whether, if that sum of money has been received by the trader, it would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the date of receipt, that is, would have been what I shall call for brevity an income receipt of that trade. The source of the legal right to the compensation is irrelevant to the second problem.

The method by which the compensation has been assessed in the particular case does not identify what it was paid for; it is no more than a factor which may assist in the solution of the problem of identification.

I will not again traverse the cases. They seem to me to be directed to the solution of one or other of these two problems, which are not always distinguished in the judgments. In the course of these judgments different metaphors and similes (appropriate, no doubt, to the particular facts of the case) have been used. But I do not think that any of these conflict with the rule as I have expressed it.

In the present case the source of the legal right of the respondent trader was his right to recover from the owners of the tanker damages for the loss caused to him by the negligent navigation of the tanker. Damages for negligence are compensatory. His right was to recover by way of damages a sum of money which would place him, so far as money could do so, in the same position as he would have been in if the negligent act had not taken place. The negligent act had two consequences: (1) it caused physical damage to the respondent trader's jetty, and (2) it prevented him from using his jetty for the purposes of his trade for 380 days. Each of these consequences caused him loss, the first the expense to him of repairing the jetty, and the second, the loss of the balance of the amounts that he would have received from customers for the use of the jetty, less the expenses he would have incurred in earning those sums during the 380 days while the jetty was out of use. For the loss sustained under each of these heads he was entitled to recover compensation from the owners of the tanker as damages for negligence. Under the second head he recovered £21,000-odd. This is the compensation with which the present appeal is concerned.

The solution to the first problem is that the £21,000 is identified as compensation received by the taxpayers from the owners of the tanker for the taxpayers' failure to receive the balance of the amounts which they would have received from customers for the use of the jetty less the expenses that they would have incurred in earning these sums during the 380 days while the jetty was out of use. If this be the true identification, the answer to the second problem is that such balance, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the taxpayers' trade. Prima facie, therefore, the £21,000 is to be treated for income tax purposes in the same way.

Mr. Monroe has sought to escape this conclusion in the first instance by expressing the identity of what the compensation was paid for as the diminution in value of a capital asset, namely, the jetty, resulting from the physical harm done to the jetty. By that physical harm, he says, it was transformed from a jetty which (a) required no repairs, and (b) could be used for the next 380 days, into a jetty which (a) required repairs costing £83,168, and (b) could not be used for the next 380 days.

I think that this analysis starts too late. It assumes that the cause of action was based on the physical harm done to the jetty and on nothing else. But I do not think that is so. The cause of action was based upon the loss sustained by the taxpayers by the negligent navigation of the tanker, and the loss sustained because the jetty could not be used for 380 days would have been recoverable even if there had been no physical harm to the jetty as, for example, if the tanker had sunk alongside the jetty, so preventing its use. I do not see how the identity of what the £21,000 was paid for can be affected by whether or not the loss of use was accompanied by physical damage.

An alternative way in which Mr. Monroe puts it is that the £21,000 compensation was paid to the taxpayers for not using their capital asset, the jetty. But I think that this is no more than ingenious semantics designed to bring this case within some of the words used in the Glenboig case. It was paid for the loss which they suffered because, owing to the wrongful act of the tanker-owners, they were unable to use the jetty, just as the taxpayer in the Ensign case was unable to use his ship by reason of the exercise of paramount power of the Crown, in the Burmah case by the ship repairers' breach of contract, and in the British Columbia Fir and Cedar Lumber Co. case because the taxpayer was unable to use his premises because of the occurrence of the risk insured against.

These cases are to be contrasted with cases where compensation is paid for the destruction or permanent deprivation of the capital asset used by a trader for the purposes of his trade. There the asset thereafter ceased to be one by the use or exploitation of which the trader carries on his trade. As a result of such destruction or deprivation the trader ipso facto abandons that part of his trade which involves the use of the capital asset of which he has been deprived by destruction or otherwise, and profits which he would, but for its destruction, have made by its use or exploitation will thereafter no longer form part of the profits arising from the trade which he continues to carry on. Even if the compensation payable for loss of the capital asset has been calculated in whole or in part by taking into consideration what profits he would have made had he continued to carry on a trade involving the use or exploitation of the asset, this does not alter the identity of what the compensation is paid for, to wit, the permanent removal from his business of a capital asset which would otherwise have continued to be exploited in the business: see the Glenboig case.

Furthermore, even if any part of the compensation so calculated were treated as paid for the trader's failure to receive such profits, the claim to treat it for income tax purposes as profits from the use or exploitation of the asset would fail in the course of solving the second problem, since the use or exploitation of the asset has ex hypothesi ceased to form part of the trade carried on at the time of receipt.

I agree with the order proposed by my lord.Appeal allowed with costs in the Court of Appeal and below. Leave to appeal refused. [Reported by ANGUS NICOL, ESQ., Barrister-at-Law.]