1965-VIL-190--DT

HOUSE OF LORDS

Date: 27.07.1965

REGENT OIL CO. LTD.

Vs

STRICK (INSPECTOR OF TAXES)

BENCH

Lord Reid, Lord Morris of Borth-Y-Gest, Lord Pearce, Lord Upjohn And Lord Wilberforce

JUDGMENT

LORD REID

My Lords, two consolidated appeals are before your Lordships. It is admitted by all parties that any decision in the first must necessarily govern the second, so I do not propose to say anything about the second appeal. The first arises out of assessments to income tax for the years 1957-58 and 1960-61. The appellants import and refine oil and sell petrol and other oil products to garages and service stations for resale to motorists. During those years they made arrangements of various kinds with those retailers under which they paid substantial lump sums to them. This case is only concerned with one such arrangement in the former year under which £ 5,000 was paid and with three in the latter year under which a total of £ 195,699 was paid. The question to be decided is whether these payments can be taken into account so as to diminish the appellants' profits for income tax purposes. The special CIT held that they could, but their decision was reversed by Pennycuick, J. and the Court of Appeal dismissed the appellants' appeal.

It is necessary not only to consider the circumstances in which these payments were made but also to have regard to the manner in which the appellants had been and were conducting their business. It appears that for some time past almost the whole of the petrol sold in this country has been the product of three oil companies, and the appellants' share of the market has generally been in the neighbourhood of 13 or 14 per cent. During the last war petrol was not sold under brand names but after 1945 the three companies began to prepare for resumption of selling under the well-known brand names. It had been the custom for most garages to have pumps from which they supplied the petrol of more than one of these companies. But in 1950 one of the other companies started what has been called the exclusivity war. The appellants did not want to join in it, but they were forced to because within a few months a large proportion of garages had accepted a tie of some kind.

There was intense competition between the oil companies, each trying to induce each garage or service station to sell its own products exclusively. At first they were able to obtain such ties at comparatively small cost. But soon garage owners found themselves in a strong position so that they were able as time went on to obtain better and better terms for accepting ties. At first the appellants were able to obtain agreements of that character by offering a rebate of as little as . per gallon or offering to make small payments towards improvements of the service station, and the ties were then generally for a year or less. But soon garage owners were able to insist on lump sum payments in advance for longer ties-if one company would not pay another would. The appellants attach importance to the fact that they always calculated the lump sum which they were prepared to offer by estimating the gallonage likely to be sold during the period of the tie and multiplying by their current rate of rebate. But that rate continued to increase and had soon passed 1d. per gallon. The earlier history is set out in the case stated in Bolam vs. Regent Oil Co. Ltd. (1956) 37 Tax Cases 56, and by agreement the relevant parts of that stated case are incorporated in the case stated in the present case. By the time that Bolam's case (1956) 37 Tax Cases 56 was raised the ties then current varied in duration from a few months to five or six years.

Having succeeded in obtaining rather large lump sums for granting ties, garage owners naturally wished to ensure if they could that the lump sums were received by them as capital receipts so as not to attract income tax, and someone appears to have devised the form of tie which appears in the four instances in the present case. The appellants were unwilling to adopt it, but they had to yield because otherwise they would have lost these outlets for the sale of their petrol : some other oil company would have accepted the garage owners' demands, or at least so they feared.

The essence of this new form of tie is that the garage owner grants to the oil company a lease of his premises (or at least of that part containing the petrol pumps and storage tanks) for the agreed period of the tie. The consideration for this lease is the agreed lump sum payment plus a nominal rent of £ 1 per annum. On the same day the oil company then grants to the garage owner a sublease of the same premises for the period less three days, the consideration for the sublease being the same nominal rent of £ 1. But the sublease contains covenants or conditions whereby the garage owner is bound to buy the petrol which he needs for resale from that oil company and from no one else. The net result is that no money passes except the agreed lump sum and the oil company gets its tie. But this machinery is not a sham. There is no difference from the old form of a tie by agreement so long as all goes well : but if the garage owner defaults this new form of tie gives the oil company a better way of enforcing its rights by bringing the sublease to an end and standing on its rights under the lease. I should add that in two of these four cases the lump sums are expressly stated to be premiums while in the other two they are not, but I do not think that this makes any difference.

Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind-in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case. The true view appears to me to be that stated by Lord Macmillan in Van den Berghs Ltd. vs. Clark (1935) 19 Tax Cases 390 ; 3 ITR (Eng. Case) 17, HL :

"While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem."

One must, I think, always keep in mind the essential nature of the question.The IT Act requires the balance of profits and gains to be found. So a profit and loss account must be prepared setting on one side income receipts and on the other expenses properly chargeable against them. In so far as the Act prohibits a particular kind of deduction it must receive effect. But beyond that no one has to my knowledge questioned the opinion of Lord President Clyde in Whimster & Co. vs. IRCs (1926) SC 20 ; 12 Tax Cases 813, where, after stating that profit is the difference between receipts and expenditure, he said (1926) SC 20, 25 :

"The account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting so far as applicable . . ."

So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the Court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.

The purpose of any commercial account must be to give as fair and accurate a picture as possible of the trader's financial position. But the provisions of the Act as they have been interpreted make that difficult where a wasting asset has been acquired. As explained in Kauri Timber Co. Ltd. vs. CIT (1913) AC 771 ; 29 TLR 671 PC, it had long been settled that if capital has been expended in acquiring or producing a wasting asset, it is not permissible to bring into the profit and loss account for tax purposes a part of that capital corresponding to the wasting or depreciation of the asset during the year ; no part of the expenditure can be set against income in any year. These old cases were dealing with expenditure made to acquire or improve tangible assets and as regards a great many of them, such as machinery, plant, buildings and mines, the severity of this rule has been relaxed by statutory provision for annual and other allowances. But the rule still stands as regards matters not particularly dealt with by the Act.

If a trader acquires a rapidly wasting assets not covered by these statutory provisions he would not generally strike his balance of profits and gains without taking account of the annual wasting or diminution of value of that asset. But if his expenditure in acquiring it has to be regarded as capital expenditure he cannot do that for income tax purposes.

When one is dealing with tangible assets it is generally not very difficult to reach a decision. Things which the trader uses in his business to produce what he has to sell are part of his fixed capital and their cost is a capital outlay although their useful life may be short, as in Hinton (Inspector of Taxes) vs. Maden and Ireland Ltd. (1960) 39 ITR 357 HL Things which he turns over in the course of his trade are circulating capital and their cost is a revenue expense. The things in respect of which the Act permits allowances are fixed capital. Difficulties can arise when a capital asset is improved, e.g., in distinguishing between repairs which are a revenue expense and renovation which is not, but I do not think that much assistance can be got in this case from cases dealing with tangible assets and I need only mention two. In Vallambrosa Rubber Co. Ltd. vs. Farmer (1910) SC 519 ; 5 Tax Cases 529 the expense of maintaining a rubber plantation was allowed as a revenue expense although the trees would yield no rubber for some years to come. Lord Dunedin said (1910) SC 519 :

"In a rough way I think it is not a bad criterion of what is capital expenditure-as against what is income expenditure-to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."

And in Ounsworth vs. Vickers Ltd. (1915) 3 KB 267 ; 31 TLR 530, 6 Tax Cases 671 Rowlatt, J. held that the expense of making what was in effect a new means of access was capital expenditure. With regard to the passage in Lord Dunedin's opinion which I have just quoted, he said (1915) 3 KB 267 :

"I take it, and indeed both sides agree, that no stress is there laid upon the words ‘every year' : the real test is between expenditure which is made to meet a continuous demand as opposed to and expenditure which is made once for all."

When one comes to intangible assets there is much more difficulty. To help the conduct of his business a trader obtains a right to do something on someone else's property or an obligation by someone to do or refrain from doing something or makes a contract which affects the way in which he conducts his business. And the right or obligation or the effect of the contract may endure for a short or a long period of years. The question then arises whether the sum which he has paid for that advantage is a capital or revenue expense. As long ago as 1914 it was settled in Usher's Wiltshire Brewery Ltd vs. Bruce (1915) AC 433 : 31 TLR 104 : 6 TC 399 HL that in determining profit a deduction. "is to be made or not to be made according as it is or is not, on the facts of the case, a proper debit item to be charged against incomings of the trade when computing the balance of profits of it" (per Lord Sumner, (1915) AC 433.

Where the wasting asset is a right to some benefit for a period of years and the consideration given for it is the payment of an annual sum during the continuance of the right there is generally no difficulty. Rent payable under a lease or under an agreement for the hire of a machine is treated as a proper debit against incomings and the same must, I think, apply to an annual (or quarterly or monthly) payment for a tie. The difficulty begins to arise when a lump sum is paid to cover several years. If that is so, then it is not so much the nature of the right acquired as the nature of the payment for it that matters. It was argued that a rent and a premium paid under a lease are paid for different things-that the premium is paid for the right but that the rent is paid for the use of the subjects during the year. I must confess that I have been unable to understand that argument. Payment of a premium gives just as much right to use the subjects as payment of a rent and an obligation to pay rent gives just as much right to the whole term of years as payment of a premium. A lessee who only pays rent has the same right to assign the rest of the term-perhaps for a large capital sum if values have gone up-as has the lessee who has paid a premium. But his right to assign is less valuable in so far as the amount of the rent to be paid in future is greater than it would be in a case where a premium has been paid. Both lessees are liable to have their rights terminated if they do not fulfil their obligations under the lease-but not otherwise.

One reason at least for refusing to allow a lump sum payment as a debit against incomings and therefore treating it as a capital outlay is that to allow it as a debit would distort the profit and loss account. Counsel agreed that a taxpayer is always permitted to bring the whole of any item of revenue expenditure into the profit and loss account of the year in which the money was spent. Counsel for the Inland Revenue suggested that the taxpayer might be permitted to spread it over more than one year, but certainly the Revenue cannot insist on that. So, if the whole of a payment made to cover several years is brought into one year's account, the profit for that year will be unduly diminished.

But the effect of that will be rather different according to the length of time covered by the lump sum payment. Suppose that in order to achieve a continuing advantage like a tie, the taxpayer makes a series of agreements each for three years and each for a lump sum. Then if the lump sum payments are allowed as revenue expenses the effect will be that in the first year of each agreement the profit will be too small but in the next two years it will be rather too large, and so on. So over each period of three years there will be a fair result. But on the other hand suppose that the taxpayer makes an agreement for a tie for 20 years or more then the lump sum will be presumably be much larger, and the distortion in the first year much greater if the payment is allowed as a revenue expense ; and, even if one could assume fairly constant conditions for so long a period, it would be only after 20 years that a fair result would be reached. That would seem to justify refusing to treat a payment covering so long a period as a revenue expense. And on more general grounds I must say that I would have great difficulty in regarding a payment to cover 20 years as anything other than a capital outlay. Ever since the Vallambrosa case (1910) SC 519 in 1910 recurrence as against a payment once and for all has been accepted as one of the criteria in a question of capital or income. I would regard a payment which has to be made every three years to retain an advantage as a recurrent payment, whereas for practical purposes I would not think that the fact that another payment will have to be made after 20 years if the situation does not change in that time would prevent the first payment from being regarded as made once and for all.

If the asset which is acquired is in its intrinsic nature a capital asset, then any sum paid to acquire it must surely be capital outlay. And I do not see how it could matter that the payment was made by sums paid annually. But it appears to me that an asset which is nothing more than a right to enjoy a certain advantage over a period is intrinsically of a different character from a thing which a person buys and can immediately use or consume in any way he chooses. If it were not so I can see no reasonable ground for allowing annual payments for such a right as revenue expenses.

I must now turn to the authorities. In CIT of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) Viscount Radcliffe said :

"Courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations. Probably this is as illuminating a line of distinction as the law by itself is likely to achieve."

Perhaps it is, but the illumination is very dim, and as Lord Radcliffe goes on to say (1964) AC 948 , it "leads to distinctions of some subtlety between profit that is made ‘out of' assets and profit that is made ‘upon' assets or ‘with' assets." I must say that I distrust as a guide any criterion which leads to verbal distinctions of that kind, but fortunately it is not the only guide. The "structure" of the profit-making apparatus was dealt with in Van den Berghs' case (1935) AC 431 ; 3 ITR (Eng. Case) 17, but the facts there were very strong, as explained by Lord Macmillan. This company and a Dutch company had long before bound themselves to "work in friendly alliance" by an elaborate scheme and on the cancellation of their agreement Van den Berghs received a sum of £ 450,000.

This was held to be a capital receipt because "the three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade ; they were not contracts for the disposal of their products, or for the engagement of agents or other employees necessary for the conduct of their business nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business." (1).

I would think that the two most important of these considerations were that the contracts were not ordinary commercial contracts made in the course of carrying on the trade, and that, by defining what the company might do and might not do, they affected the whole conduct of the business. I think that in some later cases the metaphor of structure has been used with far less justification.

Van den Berghs' case (1935) AC 431 : 3 ITR (Eng.Case) 17 can be contrasted with Anglo-Persian Oil Co. Ltd. vs. Dale (1932) 1 KB 124 : 47 TLR 487 : 16 TC 253. CA when the company paid a large sum to cancel an agency contract for a very wide area with the result that they were thereafter able to deal directly with their customers in that area. This certainly entailed an extensive change in the organisation of their business. But the payment was held to be a revenue expenses because the cancellation of the agreement "merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched" (per Lawrence L. J. (1932) 1 KB 124. It was argued that these ties had become part of the profit-earning structure of the company. I do not think so. Let me take the matter stage by stage-almost as it in fact arose. First an oil company promises a rebate so long as the garage orders all its petrol from that company. Clearly there is no change in structure, however many garages accept that arrangement. It is just an ordinary commercial contract. And there can be no difference if the arrangement that £ 100 will be paid at the end of each quarter if the garage owner has bought all his petrol during that quarter from the company. Then suppose the parties agree to such a tie being binding for one year. That does not seem to make any relevant difference. Then suppose they agree to a three-year tie. As regards the profitearning or capital structure of the company I do not see how it can matter how the tie is paid for-whether by lump sum or by periodical payments or by rebates. Either the tie is itself an addition to the capital structure or it is not. And I do not see how it can matter whether the company entered into such arrangements because it had to do so to keep its customers, or because it hoped thereby to attract new customers, or merely because the ties made distribution more economical. When we reach the stage that the greater part of the company's business is done with garages under long-term ties it could be said that the company has altered its business methods perhaps with some internal reorganisation but that is not the same thing as altering its profit-making or capital structure. Nevertheless lump sum payments for these long-term ties may have to be treated as capital and not revenue expenses.

Reverting to the distinction to which Lord Radcliffe referred (1964) A.C. 948,960: (1965) 58 ITR 247, between profits made out of or upon or with the asset, that distinction is to my mind meaningless when applied to these ties. It was argued that when there is a tie the profits are not made out of the tie but out of the orders given by reason of the existence of the tie, that the tie is used as part of the capital structure of the company in order to get the orders. I do not think that that is right. When A is under a contractual obligation to B to do or refrain from doing a certain thing-here to give all his orders to B and give none to anyone else-B does not "use" his right under the contract when A does or refrains from doing that thing : he simply waits for A to fulfil his obligation. He might be said to use his right if A fails to fulfil his obligation and he then sues for damages or seeks an injunction, but that is another matter. There may be many kinds of contract under which the company has taken an obligation that the other party shall do something or a series of things in a future year but that is no reason for saying that the company's chose in action is in addition to its capital structure. The distinction between a right and something done under it or in exercise of it no doubt exists in other kinds of cases and it may be of importance, but it does not seem to me to exist in cases like the present case.

The case which is generally cited and relied on, often by both sides, is British Insulated and Helsby Cables vs. Atherton (1926) AC 205 ; 42 TLR 187 ; 10 Tax Cases 155. HL. In order to understand the passage in Viscount Cave L. C.'s speech, which is always quoted, it is essential to have the facts in mind. The company laid out a sum to assist in the setting up of a pension fund for its staff. It was intended that the fund would endure for the whole life of the company and it was not expected that the company would have to lay out any further sum for this purpose. So when Lord Cave referred (1926) AC 205 to expenditure. "made not only once and for all, but with a view to bringing in to existence an asset or an advantage for the enduring benefit of a trade . . . ," he was dealing with a case where the payment was made literally once and for all and where the asset or advantage was to last as long as the company lasted. I can find nothing in his speech to indicate that he had in mind or intended to deal with a case where the asset or advantage would only last for a short period of years after which further money would have to be spent if a further corresponding asset or advantage was sought. And when in Vallambrosa (1940) SC 519 Lord Dunedin contrasted a thing going to be spent once and for all with a thing going to recur every year, I do not think that he had such a case in mind either.

But so much has been built on Lord Cave's words that I must try to see how they could be applied to a case like the present. In the first place what is the meaning of once and for all ? Suppose that an advantage has been achieved by acquiring an asset which will only last for three years so that it will be necessary at the end of that time to acquire another similar asset if the advantage is to be retained. I would not think that a lump sum paid for that asset is paid once and for all, and I see nothing to indicate that either Lord Cave or Lord Dunedin would have thought so. If once and for all is merely to be related to the fact that only one payment, a lump sum, is made for the particular short-lived asset, then the only contrast is between paying a lump sum for it and making a periodical payment for it. Surely that cannot have been all that was meant. If a further payment to retain the advantage, in this case the outlet for sale of oil resulting from the tie of a particular garage, is necessary in the near future I would hold that the first payment was not once and for all.

There is a good deal of authority on the question of what kind of asset or advantage Lord Cave's words will cover. Broadly it seems to have been accepted that they will not extend to cover a payment to get rid of a handicap or disadvantage. But I do not think it necessary to explore this matter because I am satisfied that the words must cover a tie such as we are concerned with whether it is constituted by a simple obligation or by covenants in a sublease.

Lastly what is meant by "enduring" ? I think that Lord Cave intended to link that with once and for all. He was thinking of a single payment for an advantage which would last for an indefinite time. I do not think he had in mind an advantage of limited duration, and I think that any decision about such an advantage must be reached without reference to or reliance on what Lord Cave said.

But it was argued that "enduring" has come to be interpreted so as to include any benefit which lasts for more than one year and that this was recognised in the Nchanga case (1964) AC 948 ; (1965) 58 ITR 241. If this is an interpretation of Lord Cave's words where "once and for all" is coupled with "enduring" then the supposed rule must be that any lump sum paid for a benefit enduring for more than one year must be treated as a capital outlaynot that any asset conferring an enduring benefit is intrinsically a capital asset. For if it were intrinsically a capital asset then any payment for it whether by a lump sum or by a series of periodic payments must be a capital outlay, and so far as I know it has not been suggested that, say, monthly payments for any asset the benefit of which endures for more than a year must all be treated as capital outlays. Certainly that could not be spelled out from Lord Cave's words. I have searched in vain for any rational explanation of this supposed rule, so apparently it must just be an arbitrary rule. But, as I have already explained, arbitrary rules are quite out of place in this matter of capital or income.

One argument has been put forward to justify the rule. When a trader's accounts come to be made up at the end of his financial year and the trader is then found to own an asset other than circulating capital or stock in trade, it is said, if I understand the argument, that that asset must go into the balance sheet as a capital asset and the price paid for it must therefore have been a capital outlay. But even if correct that argument would not support this alleged rule. Let me suppose that in the first month of his financial year the trader acquired an asset conferring a benefit lasting for 15 months and that in the last month of that year he acquired a precisely similar asset conferring a benefit lasting for six months. Then at the end of the financial year he has two similar assets, the first of which will last for a further four months and the second of which will last for a further five months. Why should they be treated differently ? But if this supposed rule exists they must be treated differently. The first being "enduring"bringing a benefit lasting more than a year-must go in the balance-sheet ; but the second not being "enduring" need not and the price paid for it can be treated as revenue expense. A variant of this argument is that a right which comes to an end during the financial year current when it is acquired is not enduring, but that any right which persists into the next financial year must be regarded as enduring. But that would mean that a right lasting for ten months would not be enduring if it was acquired during the first month of the financial year ; whereas a similar right lasting for only three months must be held to be enduring if it was acquired in the last month of the financial year. But that would be absurd. These arguments, far from justifying the rule, merely go to show how arbitrary it is. I am satisfied that no such rule exists or could be supported.

In the Nchnaga case (1965) 58 ITR 241 their Lordships sought to distinguish John Smith & Son vs. Moore (1921) 2 AC 13 ; 37 TLR 613 12 : Tax Cases 266 HL, and some of Lord Radcliffe's observations are said to support the supposed rule. I do not think they do. Smith's case (1921) 2 AC 13 ; 37 TLR 613 : 12 Tax Cases 266 HLwas not relied on by the respondent in this appeal but I must try to show why it does not affect this matter. A son bought the whole assets of his father's business at a valuation and continued to carry on business as a coal merchant. Those assets included contracts by which he was entitled to buy coal in future at a fixed price. As the price of coal had risen since the contracts were made the rights under the contracts had become very valuable-they were valued at £ 30,000. The trader claimed that this sum had been spent to acquire stock in trade but that claim failed. Lord Cave held that there was a continuing business and his reasons are not material in this connection. But Lord Haldane and Lord Sumner appear to have regarded the son as setting up a new business. Their reasoning is not always easy to follow but on that basis the essence of the matter appears to me to be this. What a person spends to set up a business must be capital ; there cannot be a revenue expense until trading commences, and the son did not claim this sum as a revenue expense. But the prospective merchant buys two things, stock in trade which he intends to sell-circulating capital-and other property or assets which must be regarded as fixed capital. The sum he spends on buying stock in trade goes into his first profit and loss account as the value of stock in trade at the beginning of his first year. But the rest can only go into his balance-sheet. So the former sum is taken into account in determining his first year's profit but the latter is not. All that the case (1921) 2 AC 13 decided was that, if a new trader acquires goods which he intends to resell, those goods are stock in trade ; but if he acquires rights to buy such goods those rights cannot be treated as part of the stock in trade with which he begins trading. That seems to me to be perfectly sound.

In my view the decision in Smith's case (1921) 2 AC 13 has no application to what a trader does once he has started trading. Suppose that a merchant, instead of buying goods direct from the manufacturer, takes from another merchant an assignment of his contract to buy such goods. The goods may be for delivery next week (or next year). It would be ridiculous to say that the sum which he pays to the other merchant is a capital outlay and not a revenue expense, and I can find nothing in the speeches in Smith's case (1921) 2 AC 13 to indicate that anyone though otherwise. Lord Sumner indeed indicated that it would be different from a going business. He said Ibid 39, dealing with an earlier similar case :

"The Court held that this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business ; the sum was not paid as an outlay in a business already acquired, in order to carry it on and earn a profit out of this expense as an expense of carrying it on."

It must be observed that the contracts purchased by the son in Smith's case (1921) 2 AC 13 were all very short term contracts. As Lord Finlay said Ibid 27, "the contracts purchased all expired by the end of the current year." So Smith's case (1921) 2 AC 13 is no authority for drawing a distinction between assets which last less than a year or which come to an end during the current accounting period and assets which last longer. On the contrary if Smith's case (1921) 2 AC 13 had any application to the acquisition of short-lived assets by a going business it would require us to hold that even the cost of acquiring assets which cease to exist before the end of the current year is a capital outlay.

I do not think it necessary to survey all the cases cited in argument. Many deal with matters in no respect analogous to this case. There is, for example, the group of cases where payments to obviate competition were held to be capital outlays. If you buy a business either to operate it or to close it down, if you pay a competitor to close down, or if you buy off a potential competitor the cost may well be a capital outlay. And so may certain preliminary expenses which you must incur before you can begin trading. In these and other cases cited I can find no established doctrine contradicting the observations which I have already made. But there are some cases on which I must comment.

Both sides in this case argued that Bolam vs. Regent Oil Co. Ltd. (1956) 37 Tax Cases 56 was rightly decided but they drew entirely different conclusions from it. The appellants used it to support an argument that any payment for any tie, however long, is a revenue payment. The respondents argued from it that any payment for a tie in the form of rebate-even a lump sum paid in advance for a long period of years-is a revenue payment but that any other kind of lump sum payment must be a capital payment even if only paid for a tie for two or three years. I cannot agree with either argument. The respondents' argument appears to me to lead to an irrational result. It is true that form as well as substance is often important, but I cannot think that the way in which the price paid for an asset is calculated can make so much difference as their argument requires. And the appellants' argument totally ignores the practical differences between allowing as a revenue expense a lump sum to cover the next two years and a lump sum to cover the next 20.

The longest ties in Bolam's case (1956) 37 Tax Cases 56 were for five or six years. A business cannot simply be managed on a day to day basis. There must be arrangements for future supplies and sales, and it may not be unreasonable to look five or six years ahead-one hears of five-year plans in various connections. So I would think that making arrangements for the next five or six years could generally be regarded as an ordinary incident of marketing and that the cost of making such arrangements would therefore be part of the ordinary running expenses of the business. Moreover, a payment which will have to be repeated after five years to retain the tie can, I think, be regarded as a recurring payment. And there is no serious distortion of the profit and loss account for that period if payment for a five-year advantage is made in a lump sum instead of being spread over the period. For these reasons I think that the decision in Bolam's case (1956) 37 Tax Cases 56 was right.

It was argued that Henriksen vs. Grafton Hotels (1943 11 ITR (Suppl.) 10 CA was authority for the proposition that a payment, which is made for an asset lasting three years and which will then have to be repeated to acquire a new asset for the same purpose, is not a recurring payment and must be treated as a capital outlay. But Lord Greene M. R. laid stress on the special features of that case (1943) 11 ITR (Suppl.) 10 CA and I need not consider whether they were sufficient to justify the decision. If and in so far as the ratio decidendi was based on any such general proposition I would not agree with it.

There was reference in the judgments below to Rorke (H. J.) Ltd. vs. IRC (1962) 44 ITR 394 and earlier similar cases. But as counsel did not found on them before your Lordships I shall only say this. I think that the decision of my noble and learned friend Lord Upjohn in Knight (Inspector of Taxes) vs. Calder Grove Estates (1954) 35 Tax Cases 447 was right because there land was purchased. But there are expressions of opinion in other cases which appear to conflict to some extent with what I have already said. Again, I need not consider whether the decisions were right.

In two of the four arrangements with which the present case is concerned (including much the largest transaction) the ties were for 21 years ; in one the tie was for 10 years ; and in the fourth it was for five years. I would have no doubt that the lump-sums paid for the 21-years ties could not be treated as revenue outgoings even if there were no lease and sub-lease. These ties were not obtained in order to facilitate planned marketing or because the appellants thought it desirable to have them. The lump sums paid for them were only paid because garage owners were in a strong bargaining position : they wanted and were able to get large sums paid immediately and they were willing to grant long ties in return.

But with regard to the other two cases I must consider what difference it makes that the transaction took the form of a lease and sublease. This is not a mere matter of form because this form of transaction gave to the appellants much better security for the performance by the garage owner of his obligation and it gave to them interests in land which afforded that security. So the quality of their asset is different from what it is under the older form of tie. I have already said that all relevant factors must be considered in each particular case and I regard this as a highly relevant factor. Premiums paid for leases have always been regarded as capital but we were not referred to any case where a premium had been paid for a very short lease-say two or three years, and I do not wish to decide whether even in such a case a premium would necessarily be treated as a capital outlay. But I am satisfied that the weight of this factor in the present cases is sufficient to turn the scale if otherwise there were doubt, and I would therefore hold that in each of the four cases the lump sums paid by the appellants cannot be allowed as revenue outgoings. It follows that these appeals must be dismissed.

LORD MORRIS OF BORTH-Y-GEST.:

My Lords, on the facts as found in the special case I consider that the lump sum payments which were made by the appellants were of a capital and not of a revenue nature. I am of this opinion for two reasons. The first is that each payment was made as the price of acquiring an interest in land which was an asset of a capital nature. The leases were granted to and accepted by the appellants on the basis that there would be subleases to the lessors and that in the subleases there would be covenants which obliged the lessors to obtain all their supplies of petrol from the appellants. There were other covenants, such as those which compelled the lessors to carry on business or to bring it about that an assignee would likewise be compelled and would obtain all his supplies from the appellants. The circumstance that in taking a lease and in granting a sublease the concern of the appellants was to secure a purchaser for the petrol which they, as wholesalers, wished to sell, does not alter the fact that there was a real, and not a sham, transaction under which in return for the payment of a sum of money (it matters not whether it be called a lump-sum payment or a price or a premium) a lease of land for a period of years (at a nominal rent) was obtained. The leases were of considerable value to the appellants because they (the appellants) were as a result enabled to grant subleases containing the covenants which for trade reasons they were anxious to obtain. Provisions in regard to forfeiture gave a measure of security to the appellants.

I agree with the view expressed by the learned judge and by the Court of Appeal that the appellants acquired interests in land and that such interests were of a capital nature : I agree also that in the circumstances of the present case the payments made to acquire those interests must be regarded as being payments of a capital nature. The fact that the payments were agreed upon after calculations made by reference to estimated gallonage does not alter the fact that they were lump sum payments in order to acquire interests in land which, though they were only to endure for periods of years, should be regarded as capital assets. The fact that the "lease-sublease" arrangements made by the appellants were few in number as compared with the other arrangements which were comparably motivated I regard as irrelevant.

I also arrive at the conclusion that the payments were of a capital nature for a second reason. It is one which I understand does not commend itself to the majority of your Lordships. In the case stated it is said :

"At the end and as a result of the two transactions of lease and sub-lease, which were firmly linked together, Regent had paid a sum of money for a valuable right, namely, the exclusive right to have its oil sold at the station for a given period."

If in a business sense each "lease-sub-lease" arrangement is to be regarded as the method whereby for a lump sum payment the appellants acquired an exclusive right to a dealer's custom for five years or for 10 years or for 21 years, then I consider that such lump sum payment was of a capital and not of a revenue nature. I agree with Lord Denning M. R. when he said (1964) 1 WLR 166 :

"Regent say to the retailer ‘We will pay you £ 5,000 if you will sell our products exclusively at this point for five years' or 10 or 21, as the case may be. Regent make a payment once and for all. In return they get an advantage which is of enduring benefit to them. It brings in revenue to Regent week after week, and month after month, from the petrol they supply to the retailer. I have no doubt this advantage is a capital asset and the payment for it is capital expenditure."

The facts recounted in the case stated show that in recent years the large suppliers of petrol, being impelled by the stern thrust of competition, have felt obliged to secure exclusive outlets for their petrol. In what has been called the "exclusivity war" there have been arrangements of varying nature. For the purposes of the present case it will suffice to examine the nature of a payment made if there were acceptance by a garage owner of an offer expressed in some such terms as :

"If we pay you £ 5,000 will you promise to obtain all your petrol from us next for the five years."

The payment would, in my view, be of a capital nature.

In arriving at this conclusion no recourse can be had to statutory definition, for such there is not. The decided cases, carefully marshalled in argument, show that in the diverse and varying sets of circumstances in which decision has been called for as to whether payments have been of capital or of revenue nature no all-embracing formula has been evolved. No touchstone has been devised. Where definition is lacking then description must do its best. In giving the judgment of the Privy Council in CIT of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 Viscount Radcliffe in referring to phrases used in earlier cases said that it had to be remembered that they were "essentially descriptive rather than definitive." The decided cases are to be scanned because they contain pointers and mention factors and give indications and provide descriptions. Care must, however, be taken not to take phrases which are uttered in relation to particular facts and then to promote them to be of universal application.

In some cases payments can by general assent be recognised at once as being either of capital or of revenue nature. Where dispute arises a Court must do its best to assess the value and the weight for all the particular features which may point to one conclusion or the other and, in doing so, to have in mind the legal image which a wealth of judicial utterance reveals.

In this approach there must be a measure of reluctance in referring to some only of the decided cases least it be thought that the guidance afforded by others is being neglected. The well-known words of Viscount Cave L. C. in his speech in British Insulated and Helsby Cables vs. Atherton (1926) AC 205 are perhaps so often quoted because in a single sentence reference is made to a number of features or attributes. Some of these may be valuable as pointers some of the time provided it is not assumed that all are useful all the time. It may in some cases be of some significance that a payment is made "once and for all." This thought was earlier expressed by the Lord President (Lord Dunedin) in Vallambrosa Rubber Co. Ltd. vs. Farmer (1910) SC 519, when he said that "In a rough way" (the words denote that he was speaking in general terms) "I think it is not a bad criterion of what is capital expenditure, as against-what is income expenditure-to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."

The notice of a payment being made "once and for all" may perhaps in some cases suggest the payment of the price of something of a capital nature but like any other individual phrase it must be of only limited application and helpfulness. It must be remembered also, as Lord Dunedin pointed out in the Vallambrosa case Ibid 524, that it would be wrong to say that each year must be taken absolutely by itself and that nothing could ever be deducted as an expense unless it was purely and solely referable to a profit reaped within the year. The necessary annual outgoing to cover the necessary annual weeding of a rubber estate would seem essentially to be of the nature of a revenue outgoing.

It may further be of some significance, as Viscount Cave pointed out, if as a result of a payment, something is brought into existence which is an "asset or an advantage" and if it is "for the enduring benefit of a trade."

The process of description as opposed to that of definition may sometimes be aided by noting contrasts. There is a difference between a business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay. There is a difference between the profit yielding subject and the process of operating it. There is a difference between the instrument for earning profits and the continuous process of its use or employment for that purpose. These contrasts were noted in 1938 by Dixon, J. in his judgment in Sun Newspapers Ltd. vs. Federal CIT of Taxation (1938) 61 CLR 337. In much the same way in 1946 in his judgment in Hallstroms Property Ltd. vs. Federal CIT of Taxation (1946) 72 CLR 634, Dixon, J. distinguished between the acquisition of the means of production and the use of them : between establishing or extending a business organisation and carrying on the business : between the implements employed in work and the regular performance of the work in which they are employed : between the enterprise itself and the sustained effort of those engaged in it. In his judgment in that case Ibid 644 Starke, J., while emphasising that none of the so-called definitions or tests or any other definitions or tests suggested by the cases are decisive, pointed out that an asset or advantage need not have a tangible existence and expressed the view that expenditure to acquire the goodwill of a business or to acquire restrictive covenants against competition in business may be of a capital nature. In agreement with what was said by Starke, J., I consider that no different result is reached according as to whether an asset or advantage is of a tangible or of an intangible nature.

The contrast has been observed between expenditure forming "part of the cost of improving or adding to the income- earning plant or machinery" and "part of the cost of performing the income-earning operations" (see New State Areas Ltd. vs. IRC (1946) SALR AD 610

An analogous contrast may be that between plant, on the one hand, and stock in trade, on the other. In his speech in Hinton (Inspector of Taxes) vs. Maden & Ireland Ltd. (1960) 39 ITR 357, Lord Reid said that the word "plant" might have a more or less extensive meaning according to its context but that as a general statement of its meaning he would adopt the words of Lindley, L. J. in Yarmouth vs. France (1887) 19 QBD 647 ; 4 ILR 1 :

"in its ordinary meaning it includes whatever apparatus is used by a business man for carrying on his business-not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business."

In like manner it can be said that there is a difference between money spent in creating or acquiring a source of profit and money spent in working it.

In the Nchanga case (1965) 58 ITR 241 Lord Radcliffe said that "Courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations."

In Robert Addie & Sons Collieries Ltd. vs. IRCs (1924) SC 231 : 8 TC 671 the Lord President (Clyde) posed the question :

"Is [the expenditure] part of the company's working expenses ; is it expenditure laid out as part of the process of profit earning ? Or, on the other hand, is it a capital outlay ; is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?"

The contrast so noted was referred to in deciding, the case of IRCs vs. Adam (1928) SC 738 ; 14 Tax Cases 34. In that case (1928) SC 738 ; 14 Tax Cases 34 a carting contractor found it expedient for the purposes of his business to acquire a site for the deposit of waste soil removed from building foundations. He achieved his purposes, without purchasing the site, by means of a contract with the owner of the site. He was given the right (and he undertook the obligation) to deposit soil on a defined area at a stated rate per annum for a period of eight years. For the right he agreed to pay the owner the sum of £ 3,200 payable in "instalments" ("to account thereof in advance") of £ 200 each in June and December of each year. It was held that the £ 3,200 was a payment for a capital asset and that no deduction by reference to it was admissible for income tax purposes. The lump sum of £ 3,200 though payable by instalments over a period of eight years was of a capital nature. In his judgment the Lord President (Clyde) said (1928) SC 438, 743 :

"A great deal has been said about form and substance. I think that, in a question of this sort, both form and substance must be considered ; because the form of the transaction by which the respondent acquired the right to dump waste soil may bear very materially on the question of the capital or revenue character of the outlay made to acquire it. Suppose that the consideration for the right had been an annual rent of the site stipulated for as such, it would, I think, have been difficult to displace the view that the rent was a proper revenue charge. But, the contract taking the form it does, it is equally difficult to put out of view the fact that the consideration is not a rent but a capital price."

In a case in which the nature from the retailer's point of view of a money payment received by a retailer for a tie was being considered (IRCs vs. Coia 38 T. C. 334, the Lord President (Clyde) said that it was "as the consideration for his giving up his freedom of trading and changing the structure of this part of his business." Lord Patrick said 38 T.C. 334, that "he parted with what I regard as a valuable asset of a capital nature, the right to obtain the supplies of fuel oils which were his stock-in-trade from such sources as he might consider most suited to the varying nature of the demands made by his customers . . . ."

Lord Mackintosh said Ibid 340, that the tie plainly "affected the overall structure of Mr. Coia's garage business. He became henceforth for a 10-year period tied to . . . for all his supplies instead of being at liberty from 1953 onwards to buy and sell all the particular brands of motor fuel which were then on the market."

The decision in Bolam vs. Regent Oil Co. Ltd. 37 T.C. 56, has not been assailed by the Crown. That case (3) differs from the present ones if the payments in that case can be regarded as having been rebates or discounts made in reference to the amount of petrol sold to the retailers in each year. In his judgment Danckwerts, J. said Ibid, 68 :

"It seems to me that there would have been no doubt if the payments had been made by reference to the amount of petrol sold to the retailers in each year ; it would plainly have been expenditure, particularly if paid in the form of a rebate, which was expended by the Regent Oil Co. in the course of its trade in the making of its profits. Does it make a difference because in the circumstances of the case there has to be some lump sum fixed which is paid to secure the same result, and even if payment is made in advance for several years ?"

In examining the nature of the payments which were made and which are in issue in this case it is important to consider not so much why the payments were made but for what they were made. If the motive in making payments is noted or becomes manifest the more relevant inquiry must be made as to whether some asset or advantage was acquired and, if so, what was its nature. It is said that the appellants, as a matter of hard business necessity, were forced, in the instances now being considered, to do what they did. Their rivals and competitors would or might have made "lease-sub-lease" arrangements with the particular garage owners had the appellants, somewhat reluctantly, not acted as they did. So also it is said that "tie" arrangements had become a necessity for the petrol selling companies and had become a regular and customary part of the pattern of business arrangements. Accordingly so the argument runs, the payments made were reasonably to be classified as being selling or marketing costs and as such to be regarded as of revenue nature. My Lords, in my view the conclusion does not follow from the premise. The fact that a payment must in prudence be made does not show that it is of income rather than of capital nature. Nor is the inquiry in any way advanced by saying that a payment was necessarily made in the course of the process of marketing or was made in conformity with the accepted or customary pattern of trading. It is common ground that the sums of money now under consideration were expended wholly and exclusively for the purposes of the appellant's trade. It can also be taken for granted that all sums that the appellants spent in the course of marketing were spent because they considered that it was necessary to spend such sums in order to help them to sell their petrol. But to call such sums marketing costs is merely to apply a neutral or generic description which in no way distinguishes between payments of a capital nature and payments of a revenue nature. Some marketing costs are of the one kind and some are of the other. It may become imperative for the purpose of effecting sales to acquire a building which is to be used solely for such purpose : the cost of acquiring the building would not be an expense of a revenue nature. What falls to be considered is the nature of that for which payment has been made. In the selling side of their business the appellants were marching in step with their competitors and had to embark upon much expenditure. In one sense all of it was a selling or marketing expense. It all took place in the hope and the expectation that sales would be induced. Some of it however would be of a capital nature and some of a revenue nature. The important consideration is the character of the advantage which, by the expenditure, it is sought to obtain (see Dixon, J. in Sun Newspapers Ltd. vs. Federal CIT of Taxation 61 CLR 337).

In considering the nature of a payment it may well be relevant to know whether similar payments will recur and whether the payment is but one of a number of periodic payments. Here again it becomes important to consider what it is that the items of payment will produce. Some capital assets may last but a short time. They do not for that reason lose their character as capital assets. If they are much needed so that a succession of them must be obtained there will be periodic or constantly recurring payments of money. Yet each of these payments will be of a capital nature. If the nature of what is acquired makes it a capital asset the payment for it will be a capital payment. If tangible assets (such as the knives or lasts in Hinton (Inspector of Taxes) vs. Maden & Ireland Ltd. (1959) 1 WLR 875; (1960) 39 ITR 357, are clearly capital assets then the payments for them are capital payments even if the useful life of the assets is shorter than the length of an accounting period.

The fact that there are payments seemingly of the same nature which appear to be recurrent may be a circumstance to be examined in deciding as to the nature of the payments. If in a business a particular capital asset must be acquired then the fact that in a similar but larger business many of such capital assets will be needed will be an immaterial circumstance. So also will it be immaterial whether a number of such capital assets are bought all at one time or whether they are bought over a period of time. Their character as capital assets will not change if many are bought rather than few or if they are periodically bought and periodically paid for. The fact of recurrences of payments will be of no consequence : nor will recurrences of orders. Similarly if for the purposes of some manufacturing process articles are purchased which are to be worked upon in a factory so that when fashioned and altered they will be finished products which are then to be for sale the sums paid to purchase such articles will have a revenue nature which will not change even if instead of there being successive or periodic purchases there are occasional purchases of large quantities.

If a tie of the nature that I am examining is properly to be regarded as an asset of a capital nature and if the payment made for it is to be regarded likewise then I cannot think that these conclusions are altered or affected by the circumstance that some thousands of ties may be acquired.

Although a Court must not be deluded if by the mere form of a transaction its substance is masked or shrouded there are some transactions which may be done either in one way or in another way and in which form may denote and point to substance. There may well be a difference between a case where a lump sum payment is made to acquire the right to occupy premises for a period say of 21 years and a case where by contract a right is acquired to occupy premises for 21 years with an obligation to make periodic payments for such right to occupy. In the latter case the periodic payments (being periodic payments for the use of premises) would probably be payments of a revenue nature. In such a case the right itself to go on occupying the premises (subject to make the periodic payments or subject to conditions) might be or become of considerable value. It would be a capital asset-but as no lump sum price would have been paid for it there would be no payment of a capital nature : there would be no payment calling for any inquiry.

Aided by the word pictures or descriptions of a capital asset which the decided cases contain I consider that a tie of the kind now being examined is a capital asset. If a lump sum is paid for such a tie for five years (or for a lesser number of years) it would give a false and unreal picture if the whole sum were debited to the profit and loss account for the first year or for the year in which the payment was made. If it is said to be hard that no part of the lump sum can be a debit in the profit and loss account that is merely to voice a regret that there is no statutory provision which enables periodic allowances to be made. That however is not a matter for the Courts.

If regard is had to the language of metaphor which is found in some of the cases a tie would seem to appertain to the "structure" of the selling organisation or income-earning machine of the appellants. If it is argued that a tie for a shorter period than a year may seem to possess the same nature as a tie for a longer period I think that it can be said that a tie for a period of less than a year (being a right which so to speak evaporates within the year) is so closely linked with the selling operations during that year that it becomes different in nature and does not qualify to attain "the dignity of a capital asset." (See Henriksen vs. Grafton Hotel Ltd. (1943) 11 ITR (Supp.) 10 In that case (1) it was held that payments in respect of the monopoly value payable upon the grant of a licence for a period of three years were of a capital nature. Du Parcq, L. J. said Ibid 196 that "the right to trade for three years as a licensed victualler must be regarded as attaining to the dignity of a capital asset." Lord Greene M. R. said Ibid 192 :

"A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease, which is admittedly not deductible. In the case of such a premium it is nothing to the point to say that the parties, if they had chosen, might have suppressed the premium and made a corresponding increase in the rent. No doubt they might have done so, but they did not do so in fact. The lessee purchases the term for the premium. There is no revenue quality in a payment made to acquire such an asset as a term of years."

The appellants were doubtless reluctant to have to incur the expense of purchasing a number of ties but they saw no alternative. They felt obliged, on certain sites, to purchase an "umbrella" within and under the protection of which they could conduct their selling operations for a period of years. Further, to vary the metaphor they felt obliged to purchase a "tree" which would live for a period of years : its "produce or fruit" would be the orders that would result year by year during the period.

If the appellants had paid a sum of money to a rival company or to rival companies, i.e., to one or more of the other big petrol selling whole-salers in exchange for promises that it or they would not over a period of years sell petrol to a particular retailer, such payments would I consider be of a capital nature. (Compare United Steel Co. Ltd. vs. Cullington (No. 1) (1939) 23 Tax Cases 71 CA, Collins vs. Joseph Adamson & Co. (1939) 7 ITR 92 and Sun ewspapers Ltd. vs. Federal CIT of Taxation CLR 337. The position must surely be the same if instead of the payment being made to the rivals it is made to the retailer. (I enter into no consideration of any contentions not now relevant that might possibly be raised in regard to any such arrangements.)

For the reasons that I have indicated I consider that the payments were of a capital nature. I would dismiss the appeals.

LORD PEARCE.

My Lords, it is contended that the transactions here in question can be equated to the payment by a wholesaler to a retailer of a lump sum in advance to secure his entire custom for a period. If that were possible, the considerations pointing towards a revenue expenditure would, in my opinion, have prevailed on balance in the transaction where only a five-years period is involved. But they would probably have failed to do so in the two transactions which relate to periods of twenty-one years and which thereby acquire a more enduring and structural quality. But no such equation is possible. A lease-sub-lease transaction is materially different both in form and in substance. By it the wholesalers obtain for a premium an interest in the land from which their goods are retailed to the public. Admittedly they have bound themselves to sublet and therefore their right to possession, like that of any leaseholder who sublets for all save three days of his lease, will probably be minimal. Breaches of covenant, however, might put them into possession ; and in that case they would be in possession of land which they could sublet. And throughout the period of the lease, although not in possession, they have, not merely a personal covenant by a retailer, but an interest in land through which they can enforce its use in a way beneficial to themselves.

The acquisition of such an interest in land points strongly to a capital expenditure and, on the facts of these cases, dominates other indications. This indication of a capital expenditure is not diminished by the argument that the wholesalers might have obtained the substance of what they wanted by a revenue payment and without purchasing an interest in the land. They did not do so. Instead they chose to enter into these particular arrangements which were not shams but genuine commercial transactions. They entered into them in order to satisfy insistent customers who were anxious to produce genuine transactions which would render the sums paid to them capital receipts in their hands. There seems no justification for regarding these transactions as other than in fact they were, or for treating them as anything but acquisitions of leases for premiums with the object of obtaining trade ties. The fact that they were acquisitions of leases tilts the balance in favour of regarding the premiums as capital payments.

I agree, therefore, with your Lordships and with the Courts below that the sums in question could not be deducted from the appellants' assessable income for tax purposes and I would dismiss the appeals.

LORD UPJOHN.

My Lords, the relevant facts are set out fully in the case stated and in the judgments in the Courts below and it is unnecessary for me to say more than a few words as a background to my judgment. Ever since the war there has been intense competition between the importers and suppliers of petrol in this country. From 1951 onwards a system of trading has grown up, so that it is now admitted to be a custom of the trade, whereby each of the great oil companies supplies to garage proprietors supplying the public exclusively its own brand of petrol and in return the garage proprietor (to whom I will refer as the dealer) under-takes to buy all his petrol requirements from that particular supplier. This is known in England as the exclusively system and in Australia as the solo site system. So intense is the competition between suppliers that the dealers have the whip hand, in that post-war unusual thing, a strong buyer's market. The suppliers have to pay the dealers sums of money in order to persuade them to take their own particular petrol exclusively in preference to that of their competitors. This has developed over the years and the history of the matter is set out fully in the judgment of the Master of the Rolls (1964) 1 WLR 1166 and I do not propose to repeat it.

For the relevant years of assessment, 1957-58 and 1960-61, this stage had been reached. The appellant company to whom I will refer as Regent were supplying petrol to rather over 4,500 stations of which some 90 per cent. were tied exclusively to Regent. Of this 90 per cent. or roughly speaking 4,000, there were but four dealers who were tied to take Regent's petrol exclusively by means of a transaction known as lease and sub-lease which I shall have to examine in a little detail later. All the rest were bound by what I may describe as long-term trading agreements, that is to say, Regent paid to the dealer a lump sum down upon the terms that he would buy his petrol requirements exclusively from Regent for a term of years. This term varied from three to ten or more years, but the average seems to have been about five years. These ties were no more than longterm trading agreements and Danckwerts, J. had decided in Bolam's case 37 Tax Cases 56 that the lump sums paid by Regent in respect of those agreements were trading expenses of a revenue nature which were deductible in ascertaining Regent's profits for the year. The correctness of the decision in Bolam's case 37 Tax Cases 56 was not challenged by the Crown before your Lordships.

The lease-sub-lease method of tie may be explained by taking one example from the case stated, that of Green Ace Motors Ltd. This arrangement was made by two documents, admittedly all part of one transaction. The first document was a lease dated June 11, 1956, between Green Ace Motors Ltd., referred to as the dealer of the one part and Regent of the other part, whereby the dealer in consideration of the sum of £ 5,000 then paid by Regent demised to Regent the dealer's garage premises at Ipswich for a term of ten years at the nominal rent of £ 1 per annum. Regent entered into a number of covenants usual in a lease. The second document of the same date was a sub-lease made between Regent on the one part and the dealer of the other part, whereby Regent in consideration of the rent reserved and of the dealer's covenants demised to the dealer the garage premises for the term of ten years less three days at a rent of £ 1 per annum. The dealer entered into a number of covenants usual in a lease and in addition a number of special covenants to continue to carry on the premises the business of a dealer, to have Regent's brands of motor fuel available at all reasonable times so long as Regent was willing and able to supply him with fuel, to purchase its total requirements of motor fuel from the company, and not sell any motor fuel supplied by any other company from those premises or any adjoining premises owned or occupied by the dealer.

The dealer also entered into certain covenants with regard to advertising Regent's products on the premises. There was the usual proviso for re-entry on breach of any covenant. It was an essential part of this agreement and a circumstance strongly relied upon by counsel for Regent that the sum of £ 5,000 was calculated by reference to the gallonage which it was expected would be sold at the station during the currency of the sub-lease. At the date of that transaction the petrol suppliers were in general granting a rebate of a penny a gallon for exclusive rights and the sum of £ 5,000 was based on an anticipated sale of 1,200,000 gallons at the station during the period of the sub-lease. By a supplemental agreement it was provided that if the dealer did not sell as much he would not have to repay anything, but if more was sold he would get an extra penny per gallon on the extra amounts sold.

It is only with the four lease-sub-lease transactions that this appeal is concerned and it will be convenient if I set them out.

Company	Lump-sum payable on executing the lease to Regent	Term of the lease
1. Green Ace Motors	5,000	10 years
2. C. V. Clapp Ltd.	2,083	5 years
3. Stadium Motor Works, Belfast	10,416	21 years
4. Murphy	27,000	21 years

There were differences of detail between these transactions which are examined fully in the case stated but these differences are immaterial ; the premium was in every case calculated according to gallonage anticipated to be sold during the period of the tie. The transaction with Mr. Murphy was a little different ; he owned a number of sites in South-east London where he was proposing to build petrol sites. He covenanted to build petrol stations on these sites ; this circumstance, however, has not been treated in argument as relevant to the question of capital or income. The Murphy case I have stated above was typical of a number (about a dozen) of lease-sublease transactions between Mr. Murphy and Regent which were carried out at about this time (1959) between a number of subsidiary companies promoted by Mr. Murphy and Regent.

Why was this new form of transaction invented in these few cases ? For the simple reason, as appears quite clearly from the case stated, that these particular dealers were not content to receive lump sums under the Bolam 37 Tax Cases 56 form of trading agreement which had been decided to be deductible expenses in the hands of Regent and might, therefore, have to be treated as trading receipts of a revenue character in the hands of the dealer. We were referred to a number of authorities on the taxable character of the receipt ; they are not entirely satisfactory and it is not necessary to review them. So strong was the position of the dealers, however, that they could insist that the lump sum to be received by them should be received in a form which they believed would clearly be non-taxable ; that is a premium for the grant of a lease, and Regent reluctantly accepted this type of transaction.

It was fundamental to Mr. Borneman's argument on behalf of Regent that these transactions, although taking the form of lease and sub-lease, were in fact nothing more than a continuation of the ordinary trading methods common to the trade, and it was said that these premiums paid upon the execution of each lease were nothing more than ordinary marketing costs incidental to the ordinary operation of day-to-day selling of Regent's petrol. He submitted that the lease procedure where the premium was tied arithmetically to anticipated gallonage was no more than a vehicle to provide for payment to the dealer of sums analogous to a rebate on the price which the dealer would in any event obtain for exclusivity. He submitted that Regent had no interest in obtaining an interest in land and that the three days reversion at the expiry of each sub-lease was purely nominal. He therefore invited your Lordships to say that this lease and sub-lease procedure was no more than a cloak which you must pierce when you would find that the true nature of the transaction was no more than a perfectly ordinary trading arrangement which provided a rebate over a long trading period. He submitted that it matters not whether the tie was for three months or twenty years. That was only a measure to fix the premium by an arithmetical calculation to work off the rebate estimated upon the anticipated gallonage over the agreed trading period.

My Lords, I am quite unable to accept these submissions. No one has suggested that the transaction of lease and sub-lease was a sham. It was a real transaction representing the realities of the situation which, in this buyer's market, some tough dealers were able to impose upon Regent in its anxiety to maintain, and no doubt if possible to expand, its sales of petrol in this country. Pausing there, I may add parenthetically that I cannot see any conceivable difference for any relevant purpose from an anxiety merely to preserve and maintain Regent's share of sales of petrol in this country and an anxiety to increase their sales if possible. It is all part of the fight to remain in the market. These transactions were not a mere cloak for a trading operation. Of course, in a sense the whole operation was intended to promote trade because Regent realised that exclusivity was the only way of remaining in the market and they must give a corres ponding consideration to a dealer who was willing to buy exclusively the products of Regent for a period. So in the end both parties had their eyes solely upon trade. But that does not entitle the Court to disregard the agreements that the parties have made with a view to carrying out their arrangements and it is impossible to disregard the four leases and to dismiss them as a mere cloak. It was not merely a matter of form. These transactions were as a matter of substance and reality forced upon Regent to their regret by these few tough dealers as the price of the exclusive tie. It is therefore necessary to examine those transactions to see whether Regent is entitled to succeed in its claim that these lump sum payments were in fact in the nature of a revenue expenditure being really in the nature of rebates.

My Lords, in the field of real property in relation to taxation certain matters are so fundamental as now to be axiomatic. Thus in cases other than those where a man is a property dealer so that property is his stock-intrade it is quite clear that the purchase of a fee simple for a purchase price by a trader is the acquisition of property for the purposes of trade and the purchase cannot be regarded as a cost of carrying on the trade, it is therefore capital.

This is so though the trader may desire to acquire the property for the purpose of providing himself with circulating capital by mining operations on the property acquired even if he is intending to acquire the property only for a short time : see Knight vs. Calder Grove Estates 35 Tax Cases 447. Exactly the same principle applies if the purchase price is payable by instalments spread over a period ; it is a capital payment. But if the trader acquires a property on lease and pays a rent reserved by that lease that rent is not regarded as merely the acquisition of property de die in diem, but as payment for the use of property and the rent therefore is treated as a revenue expenditure and is deductible for purposes of tax. If in Knight vs. Calder Grove Estates 35 Tax Cases 447 the trader had leased the property for a dead rent and royalty that rent and royalty would have been deductible as a revenue outgoing. This is as well settled as anything in the law of taxation. But it frequently happens that the trader, anxious to acquire a leasehold property, has to pay a premium for the acquisition of a lease or possibly on renewal of a lease on its expiry ; there can be no difference between the two situations. In such a case it is quite clear that the payment of a premium is regarded as the cost of acquiring the property for the purposes of the trade and not as part of the carrying on of the trade, and hence the premium although paid for a property of a wasting character is capital. If authority for that elementary proposition is required it is to be found in the Scottish case of MacTaggart (Inspector of Taxes) vs. Strump (1925) SC 599 ; 10 Tc 17. There is no magic in the use of the word "premium" ; it merely means a lump sum paid as a consideration for the acquisition of the lease. And so also, if the premium or lump sum is paid by instalments spread over the term of the lease it still remains of a capital nature. It may be very difficult as a practical matter in a particular case to ascertain whether, on the true construction of the documents, such periodical payments are rent or payment of a lump sum by instalments, but once that question has been answered the distinction is clear. If it is a premium, that is to say, a lump sum payable by instalments it is capital. If it is rent or royalty it is an outgoing deductible for the purposes of tax.

My Lords, having stated those elemental propositions which it is not possible to doubt then the problem in this case is clearly answered. It is plain that the premium or lump sum paid by Regent in order to acquire the lease is a lump sum payment for the acquisition of an asset for the purpose of carrying on a trade thereon and is therefore capital. With all respect to the argument that the three days' reversion gave to Regent only a nominal interest in the land which could really be ignored, this entirely overlooks the point that the nominal reversion (valueless, of course, as enjoyment of the land for three days) gave the most valuable advantage to Regent because the transaction made them the immediate lessor of the dealer. That fact gave Regent very substantial advantages which it would not have acquired under the ordinary contract of the Bolam 37 Tax Cases 56 type, though no doubt those advantages were as a matter of finance outweighed by the consideration that there was a grave risk that the premium might be considered to be capital and not deductible for the purposes of tax. The countervailing advantages were, of course, that Regent throughout the term of the lease was in a much better position to enforce the covenants in the lease than if the matter had merely rested in contract. For example, had the matter remained in contract it might have been possible for a distributor to go out of business in breach of contract and to dispose of his garage to an innocent purchaser and then Regent would be left with no more than a possibly arid claim for damages against the dealer. As a lessor under the lease Regent was under no such difficulty. Regent could at once re-enter subject always to giving proper notices under s. 146 of the Law of Property Act, 1925.

My Lords, as I understand their judgments, Pennycuick J. and Danckwerts and Diplock, L. JJ. reached the same conclusion solely on the ground that the premium was a lump sum payment for the acquisition of a lease. I do not think that Diplock L. J. (1964) 1 WLR 1166 was making any alternative finding. I think he was only criticising, and if I may say so, rightly criticising, the mistaken findings of the CITs. Lord Denning M. R. decided the case on the same ground, but he also decided it on an alternative ground. He said (1964) 1 WLR 1166 that even if one looked at the transaction in a business sense one gets the same result, and he then posed a case where Regent said to the owner of the piece of land that they would pay £ 5,000 for the exclusive right to sell petrol for five or 10 or 21 years. That payment, the Master of the Rolls thought, would be clearly capital and he thought it could make no difference if the payment was for exclusivity by the dealer. My Lords, in view of that statement and of the elaborate arguments that have been addressed to your Lordships I propose now to examine the situation upon the footing that there was no transaction of lease and sub-lease in these four cases, but they were ordinary trading contracts for the considerations and for the term of years which I have set out earlier in this judgment, the dealer agreeing to buy all his petrol requirement during the term from Regent and no other. Would such payments be lump sum payments of a capital nature, as the Master of the Rolls clearly thought they would be, or would they be trading expenses having regard to the custom of the trade to enter into these long-term contracts to preserve and maintain their trading position and to the fact that the lump sums were arithmetically calculated by reference to anticipated gallonage ?

I suppose that no part of our law of taxation presents such almost insoluble conundrums as the decision whether a receipt or outgoing is capital or income for tax purposes. Parliament, wisely, has never given any general statutory guidance in this matter. It has been content to leave the determination of these difficult matters to the common sense of the Tribunals and judges before whom these matters are brought.

Naturally, therefore, many judicial decisions were cited to your Lordships ; so many of them so far removed from the facts of this case that I can gain no assistance from them and shall not discuss them, apart from three which I shall mention presently. I only desire to say that I regard the decision in Henriksen vs. Grafton Hotels Ltd. (1943) 11 ITR (Supp.) 10 as a very special case, a decision which if it can be supported at all can be justified solely upon its own particular facts within the realm of licensing laws. Of the cases which I must discuss, the first in point of time is British Insulated and Helsby Cables vs. Atherton (1926) AC 205, where Viscount Cave L. C. made his celebrated statement that if an asset or an advantage is brought into existence "for the enduring benefit of a trade . . . there is very good reason (in the absence of special circumstances to an opposite conclusion) for treating such an expenditure as properly attributable . . . to capital." In many cases this will be a valuable criterion, but it does not help in this case for it only invites the further question, how long does it take to be an "enduring benefit" if you are dealing with a purely long-term trading agreement ? I am sure that Lord Cave when he made these observations did not have in mind anything in the nature of a long-term trading agreement. Therefore, I gain no real assistance from that case (1926) AC 205.

The next case in point of time is the Australian case of Sun Newspapers Ltd. vs. Federal CIT of Taxation 61 CLR 337, where Dixon, J. Ibid 359 et seq, sitting in the High Court of Australia, had some very useful observations to make on this general question. That, however, was a very different case ; the question there was whether a large sum paid out to stifle competition permanently was capital or income and it is not surprising that it was held to be capital, and I cannot for my part obtain much help from those observations in the very different circumstances of this case.

Finally, Viscount Radcliffe in CIT of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 selected as probably the most illuminating line of demarcation between the cost of creating, acquiring or enlarging the permanent structure of which income was to be the fruit and the cost of earning that income itself.

This brings me at once to the argument addressed to your Lordships on behalf of the Crown, when it was submitted that the contract for the exclusive supply of petrol for a term of years was a chose in action creating a right which, provided it lasted for more than an annual accounting period, was necessarily part of the permanent profit-making structure and, therefore, capital, while the exercise of the right thereby granted to supply petrol was part of the income-earning activities of Regent.

When dealing with tangible assets the distinction between the profit-earning structure and the cost of earning the income may not be difficult to draw. It becomes very difficult when dealing with a purely commercial contract and I do not think it useful to endeavour to dissect such a contract in this manner for the purpose of tax ; that is too artificial an operation and is divorced from the realities of the situation.

I do not for one moment think that these long-term trading contracts can possibly be described as part of the profit-earning structure of Regent. But that does not mean that it necessarily follows that the lump sums paid under that contract are necessarily to be regarded as the expenses of carrying on the trade ; it merely means that I do not think that the demarcation suggested by Lord Radcliffe in the Nchanga case (1965) 58 ITR 241 is of assistance in the completely different circumstances of this case.

How, then, is this problem to be solved ? My Lords, there is one matter upon which counsel on both sides are agreed. That it is the duty of the Court to consider every relevant fact, giving it its due weight, and then to reach a conclusion upon the whole matter. I cannot but recall the observations of Lord Greene M. R. in IRCs vs. British Salmson Aero Engines Ltd. (1939) 7 ITR 245 CA where he said :

"There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons."

Somewhat cynical but true. It is a question of fact and degree and above all judicial common sense in all the circumstances of the case and, while no one regrets it more than I, I do not believe it is possible to lay down any principle when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases.

I certainly approach the problem with this in mind, that in modern conditions trading contracts become more and more complicated, and those responsible for the affairs of large companies have to look much further into the future and to plan for the future in a way unthought of years ago. A company may reasonably require and be prepared to pay for secured outlets for its products for some years ahead especially when dealing with a product like oil which costs so much to extract, transport and refine. Another company executing a long contract to supply a number of complicated machines, e.g., aeroplanes, may want to assure itself of a constant supply of some vital component and be prepared to pay some supplier a lump sum to assure that supply.

Such payments are not lightly to be held to be capital. But the amount of the payment and the length of the tie are important elements among all the other relevant facts. I part company at once with the submissions of counsel on both sides on the one hand that a lump sum payment for a tie for more than an annual accounting period is necessarily capital and, on the other, that it is a trading expense and the length of the tie is utterly immaterial save as a factor in calculating the anticipated gallonage and so the amount of the lump sum payment. The lump sum payments here are large. But one must not attribute to that too much importance because after all the lump sum payment is calculated on the basis that it represents no more than one penny per gallon on the expected sales over the length of the tie. So I approach this matter as one of judicial common sense and I start with the case of Murphy ; it seems to me that to pay substantial sums for a tie for as long as 21 years is quite plainly, as a matter of common sense, a tie which must be described as of a capital nature, so that the sums paid under the Murphy agreements must be regarded as capital. So, too, must be the sum of £10,416 paid under the agreement for the Stadium Motor Works, Belfast, for a tie of a similar length.

On the other hand, one has the agreement with C. V. Clapp Ltd. for a payment of a sum for five years. The sum, of course, is much less, as is the tie, but I would think the length of the tie plainly puts it into the character of a merely long term trading contracts and this would have been an ordinary trading expense deductible for tax had it not been for the fact that the company was able to drive a hard bargain with Regent to ensure that it was capital. The interesting case, of course, is that of Green Ace Motors where the tie was for ten years for payment of a sum of £ 5,000. This is a borderline case and I shall say no more about it than that I think it was very wise of that company also to drive a hard bargain with Regent which quite plainly made the sum a capital sum. I would dismiss these appeals.

LORD WILBER FORCE.

My Lords, these appeals raise the question whether certain payments made by Regent Oil Company Ltd. to dealers in petroleum products were for the purposes of income tax, in the one case, and of profits tax in the other, of a capital or of a revenue character. The issue is the same as it relates to either tax. Moreover, although there are some differences of detail as regards the individual payments, it is agreed that, with one exception, these are not significant. The payments were made under agreements which typically provided for (a) a lease of a filling station site by the site owner to Regent for a nominal rent but in consideration of a sum or premium, (b) a sub-lease granted on the same day by Regent to the site owner for the whole term of the lease less a few days, (c) covenants contained in the sub-lease on the part of the site owner to take the whole of his requirements of petroleum from Regent during the term of the sub-lease, (d) provisions enabling Regent to enforce these covenants by re-entry and restricting the right of the site owner to part with his garage without ensuring that the assignee was bound by the covenants. Finally, (e) the sum paid for the lease was calculated by reference to the amount of petrol expected to be sold at the station over the period of the lease at so much per gallon-with, in certain cases, provision for an extra payment if more than this was sold. There was to be no reduction in the sum if less was sold, but in one case the lease, in that event, was to be extended.

The possibly significant difference between the agreements lies in the length of the term of the lease. In most cases this was for 21 years, but in one case the term was 10 years and in another five years. It is the nature of the sum or premium (the name does not matter) paid for the lease that is in question, Regent seeking to establish that this is revenue expenditure and so deductible before arriving at net or taxable profits.

The nature, capital or revenue, of the expenditure is primarily to be determined from a consideration of the transactions in respect of which it was made, but it is right to look at these against the general commercial background of Regent's trading business. These are explained in considerable detail in the case stated. The general features of the "exclusivity" war which developed in the early part of the decade 1950-60 between the major oil companies are by now well known. The lease-sub-lease transaction was a stage in the intense competition to gain or maintain retail outlets which put retailers in the position of being able to demand from the companies payments or concessions of varying kinds as the price of tying their sites to a single supplier ; in the particular case of Regent it represented a development from the granting of rebates-first paid periodically and later in lump sumswhich during the relevant years continued to constitute the majority of the payments agreed to. Some of these arrangements were considered in the case of Bolam vs. Regent Oil Co. Ltd. 37 Tax Cases 56 and there held to be revenue payments. In 1957-58, the first of the years whose income tax assessment is now under appeal, of the 4,886 stations at which Regent's oil was sold, 4,483 (i.e., 91.7 per cent.) were tied stations and of these only 12 were tied by the lease-sub-lease method. The sums paid, though in themselves considerable, were not large in relation to the total expenditure of Regent in securing solus sites, at any rate were not so large that the amount of them could support a suggestion that they exceeded normal revenue expenditure.

In the course of the numerous decisions which have distinguished between capital and revenue expenditure in relation to widely different trades and varying circumstances, certain "tests" have emerged. These may be useful, so long as it is recognised that they have emerged a posteriori from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I begin by asking two questions, which may be said to be generally relevant : what is the nature of the payment, and for what was the payment made ? These, together with a third question, namely, how that, for which the payment was made, was to be used, were stated by Dixon, J. in his classic judgment in Sun Newspapers Ltd. vs. Federal CIT of Taxation 61 CLR 337. There are, he said, "three matters to be considered. (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it ; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."

I may add to this another statement by the same learned judge in the later case of Hallstorms Proprietory Ltd. vs. Federal CIT of Taxation 72 CLR 634:

"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process."

I start, then, with a consideration of the nature of the relevant payments made by Regent in the light of the criteria stated by Dixon, J. under paragraph (c). This formulation is useful in pointing the distinction (as to which much discussion arose in the argument) between a premium paid for a lease-which produces an asset for future use-and rent paid under a lease-which is for current use ; the first being a capital and the latter a revenue payment. I find it helpful here. The distinction is clear and intelligible, and though a complication may arise where a premium or payment for an asset is made payable periodically by instalments or when a single payment is made which is, or is described as, of rent in advance, that need not concern us here, for the payments were neither described as, nor were they of, this latter nature. They were lump sums, paid at the start of the transactions to procure the immediate emergence of an asset or advantage, enjoyment of which was secured for a period. They were not, and did not represent the aggregation of, current payments made for the day-to-day use of or continuation of an advantage. They appear at first sight to bear the character of capital payments for an asset.

The appellants bring forward two arguments at this stage. First, they say (truly enough) that the sums or premia were calculated by reference to the gallonage of petrol expected to be sold at the sites, the suggestion being that this made them resemble, or be, rebates on the price. An effective answer to this was given in the Court of Appeal where Lord Denning M. R. said (1964) 1 WLR 116 that it confuses the measure of the payment with the payment itself. A more elaborate form of the argument was that the sums were circulating capital because Regent expected to get its money back out of current profits as sales, gallon by gallon, day by day, were made. Of course they did; many traders who lay out capital expect to get both a return on the capital and the amortisation of the capital expenditure out of the profits of the periodical sales and, whether consciously or not, they calculate the amount they are willing to lay out accordingly ; but the fact that they have this expectation and so calculate their expenditure does not enable them to claim that the expenditure is of a revenue character.

Then it was said that the payment, though in a sense of a "once-for-all" nature (in that it was a single payment for a particular advantage), was really of a recurrent character because the necessity was evident (though the evidence is not very apparent in the case of a 21-years lease) that as the leases expired they would have to be renewed and fresh expenditure of the same kind incurred. Sometimes an argument of this kind may have some force : for example, in the Vallambrosa case (1910) SC 519, the expenditure, though described by Lord Dunedin as "once for all," was accepted as revenue expenditure because it related to a subject-matter, namely, weeding, which in its nature "does occur every year," or in the Rhodesia Railways case (1933) AC 368 ; 49 TLR 376 ; 1 ITR 227 PC where the expenditure related to the, obviously continuous, matter of repairs. Conversely, in other cases, the argument fails because the expenditure is clearly capital in character-as, for example, when it-is on plant such as the knives in Hinton (Inspector of Taxes) vs. Maden and Ireland Ltd. (1960) 39 ITR 357 ; , and mere repetition of capital expenditure cannot turn it into revenue expenditure.

There may be an intermediate situation in which the nature of the expenditure is not clear, or near the borderline, or where the possibility of recurrence may tip the scales : whether this is such a case must await an appraisal of the other factors. Subject only to this point, in my opinion at this stage the character of the payment points to capital.

Next, as regards the nature of the asset or advantage gained. There are possibly two ways of regarding this. The first is to treat the payment as made for a lease of from five years to 21 years, i. e., for a legal estate in land ; the second, which I prefer, and which fits most closely to what Dixon, J. said in the Hallstroms case 72, CLR 634 is to treat it as made for the granting of a lease which was (as part of the single bargain) to be subject to a sub lease containing an exclusivity covenant by the sublessee with provisions making that covenant effective. So regarded, the payment was for a solid recognisable asset, evidently (to my mind) of a capital nature. It was transferable, in a limited market no doubt, but in that market it was valuable : it was a source or foundation for the earning of profits, through orders for petrol to be placed under it : it can fairly be described as a piece of fixed capital which is to be used in order to dispose of circulating capital.

I find of assistance here the case, decided in 1959, of IRCs vs. Coia 38 Tax Cases 334 where a payment was made for a tie (by way of personal covenant) for 10 years. The Court of Session held that this payment was capital in the hands of the recipient. Lord Patrick said Ibid 339 : "he parted with what I regard as a valuable asset of a capital nature, the right to obtain the supplies of fuel oils which were his stock-in-trade from such sources as he might consider most suited to the varying nature of the demands made by his customers." and held that the transaction should be entered in a capital and not in a profit and loss account. The character of a payment in the recipient's hands may differ from that which it bears to the maker of the payment, but here it seems to follow naturally and logically that the valuable asset given up by the garage owner was acquired by the supplier and so acquired as a capital asset. The addition in the present case of the lease-sub-lease transaction does nothing to weaken the force of this argument.

On behalf of the appellant it was said that we must look through the transparent form of the lease-sub-lease to some underlying commercial reality and that, having performed this penetration, we should see that this was merely part of Regent's normal marketing operations, or, alternatively, that the payments were nothing but disguised rebates. I cannot accede to this. Without embarking here upon the question how far it is permissible in taxation matters to go behind the legal forms which the parties have chosen, where these forms are not a mere sham, I am satisfied that in this case form and substance fully coincide. The garage owners, so the CITs find, desired (possibly for fiscal reasons of their own) to use the particular method of lease and sub-lease, and Regent agreed with it : the transaction, in this form, was neither a sham nor commercially unreal : it secured for the site owner a lump sum payment and it gave to Regent the tie which it desired buttressed and given efficacy by the privity of estate which the lease-sub-lease created.

This brings me to consideration of the durability of the advantage acquired. As Dixon, J. said 61, CLR 337 when considering the nature of the advantage sought, "its lasting qualities may play a part." In English law the term most commonly employed in this part of the argument is "enduring"-ever since Viscount Cave L. C. in the Atherton case (1926) AC 205 spoke, without intending to lay down a test, of "the enduring benefit of a trade." It might be enough to decide this case in favour of the Revenue to say that in relation to an "asset" of so concrete a character as a lease, or as a lease accompanied by a sub-lease, at any rate when the term of the lease amounts to five years or more, the test of durability is satisfied, but I do not wish to rest on this narrow ground ; indeed, I do not think that it is sound reasoning to do so. I agree entirely with Lord Denning M. R., that if one considers the business reality here or, in the words of Dixon, J. 72, CLR 634 what the expenditure is calculated to effect from a practical and business point of view, the payments were made for rights (reinforced by the lease- sub-lease method) of exclusive supply of petrol to certain filling stations for periods varying from five years to 21 years. It is the endurability of this complex right which has to be considered, and we must squarely face the question whether such an advantage is sufficiently enduring in the context of Regent's trade to qualify as a capital asset or whether it has such transient qualities that it ought properly to be regarded as "day to day" or "current" and, so, revenue expenditure. It seems to me an undue abstraction to segregate the leasehold or real element in this complex and to apply to it a special rule or test which may exist in relation to such assets in other contexts : and, relevant no doubt though the lease- sublease framework is, it requires to be demonstrated that a different endurability test is to be applied in cases where that framework exists and in cases where the advantage consists of a simple tie unsupported by it. The commercial reality is substantially the same, for it is not suggested that Regent paid any more in the lease-sub-lease cases than in those cases where there was a simple tie, or that Regent had any desire for the lease-sub-lease method : on the contrary the evidence is that Regent disliked it and that the retailers forced it on Regent. Surely, therefore, the test should be identical.

Is there, then, any line which can be drawn below which expenditure for a short-term asset has, or can have, a revenue character ? It is noticeable, and I think significant that, with one possible exception, there is no authority in favour of the view that, though an advantage has been identified, expenditure to gain it should be treated as revenue expenditure because of the short-term character of the asset. That one possible exception is the case of Nchanga (1965) 58 ITR 241, where the agreement was for the period of a year. Although there were other, possibly more important, considerations which led the Judicial Committee to consider the payment as having a revenue character, the contrast was pointed out between the payment in question which exhausted itself and was created to exhaust itself within the 12 months' period "within which profits were ascertained" and a "contractual right to last for years" payment for which may be capital expenditure. Some other cases on short-term assets are of interest. MacTaggart (Inspector of Taxes) vs. Strump (1925) SC 599 was a case of a premium paid for renewal of a lease for five years-this was held a capital expense-which the trader would probably make good out of his profits when earned.

IRCs vs. Adam (1928) SC 788 was concerned with a right for eight years to deposit earth and slag on another's land : the right was held to be a capital asset, Lord President Clyde considering it as equivalent to any other capital asset of a "relatively permanent character." John Smith & Son vs. Moore (1921) 2 AC 13 is a delusive case : it appears to involve precisely the critical area which we must consider here-namely, very short term contracts but no clear conclusions can be drawn from the decision. The difficulties inherent in it have been so fully analysed by the Judicial Committee in the Nchanga case (1965) 58 ITR 241 and by others of your Lordships that I shall not take up time by a further discussion of them. More comprehensible is Henriksen vs. Grafton Hotel Ltd. (1943) 11 ITR (Supp.) 10, where it was held in the Court of Appeal that a payment in respect of so-called monopoly value on the renewal for three years of a licence was a capital payment. The subject-matter of the payment there though of a special character (but what assets is not ?) was in the same area as the ties in the present case, and Lord Greene M. R. said Ibid 192 : "The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of term, is short-lived" : and he regarded the fact that the licence had to be renewed every three years as irrelevant-there was "a false appearance of periodicity" (1942) 2 KB 184 about them. Lastly, there are certain cases concerned with opencast mining : (1942) 2 KB 184 Knight vs. Calder Grove Estates 35, Tax Cases 447 (2) Stow Bardolph Gravel Co. Ltd. vs. Poole (1955) 27 ITR 146 CA, (3) H. J. Rorke Ltd. vs. IRCs (1962) 44 ITR 394. In two of them the question of transience was raised and in each it was decided that once the conclusion was reached, on other considerations (the validity of which need not be here considered) the asset acquired was fixed and not circulating capital, the fact that the asset was of a transient character is irrelevant.

These authorities do little more than provide illustrations of the character of various types of assets in various trades. The principle seems to emerge that if, on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, the brevity of its life is an irrelevant circumstance. But it would still be correct, in my opinion, where the nature of the asset, taken together with other relevant factors, leaves the matter in doubt, to have regard, amongst other things, to its transient character. No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum permissible period for an item of stock or circulating capital, though obviously the more closely the period of endurance is related to an accounting period the easier it is to argue for a revenue character, but no doubt there is a penumbra the width of which may vary according to the nature of the trade.

I return, then, to the expenditure in this case. Here the nature of the payments-lump sums-the nature of the advantages obtained- security in respect of the placing of orders for a period-the substantial periods involved, the shortest being a period of five years, more than adequately establish the expenditure as made for the acquisition of capital assets. Conversely, I can see no basis upon which such assets can be given such a character that payments for them can be treated as revenue payments, whether as stock or as circulating capital or by any other description. To say, as the company does, that it has become the custom of the trade to make them, appears to me as indecisive as to say that the vast size of modern industrial enterprises, and particularly of oil companies, forces them to engage in long-term contracts. All this may be true, but it is still necessary to look at the actual means adopted to conform with the custom or to secure the long-term trading advantages before it is possible to attribute a capital or a revenue character to the payments. The two obvious alternatives are to offer rebates as orders are given or to offer lump sums in exchange for security for a period : the one-like rent-qualifies as revenue, the other- like a premium-as capital. As to the critical period. I can see no logical basis for saying, for example, that 21 or 10 years, is good enough but five or three years is too short, or for saying that five years or three years may be long enough when there is a lease and not long enough where there is merely a personal covenant, and there is nothing in the evidence in this particular case to justify these distinctions. Nor is there any factor here which enables me to relate any of the payments to an accounting period however, flexibly that criterion be applied.

I must, however, say something of Boam's case (supra) which was concerned with ties varying from six months to six years. The decision was not the subject of an appeal; and counsel for the Revenue did not seek to attack it. But he made it plain that his acceptance of it was upon the basis that it can and should be regarded as a case of a current payment, through rebates or compounded rebates, for current enjoyment of the advantage conferred by the ties. I think that Danckwerts, L.J. so regarded it both when he decided the case-for he made the comparison with rent-and also in the appeal in the present case. So regarded, it falls well within the alternative formula in Hallstroms' case (supra) and I fully accept it. If it is sought to use it as authority of general application in he trade that payments for ties of six years or lesser periods are revenue payments I cannot agree with it.

There is no other argument on which some observation is necessary, namely, that based on accountancy considerations. It was argued, generally, that an asset of this kind-a short- term advantage-ought more appropriately to appear in the profit and loss account than in the balance-sheet. This is, in part, to beg the question, but it may be useful to use this way of stating the issue as a cross-check. So doing, I know of no reason why a short-term lease, for which a sum has been paid, or the benefit of a short-term covenant, should not rank as a capital asset. Of course, its value ought in prudence to be written off over its life out of revenue, and it is no doubt fiscally unpleasant for the trader that (the income tax code allowing no depreciation of such assets to be charged) he must do so out of taxed income. But this taxable disadvantage cannot be used as an argument against the insertion of the item in the balance-sheet rather than the profit and loss account : it is merely an argument against resorting to this type of transaction.

Even if a trader prefers for reasons of his own to charge the cost of a short-term asset wholly against the revenue of the year of acquisition, that decision cannot affect his liability for tax. Then, more particularly, it was said that accountancy evidence given in this actual case supported the charge against revenue. But all that the CITs say is this :

"Auditors and accountancy advisers of Regent who gave evidence before us took the view that such payments were made to preserve turnover, that no fresh asset was acquired as a result of such payment and that accordingly such payments were properly chargeable to revenue."

This is either irrelevant or wrong : it is irrelevant that the expenditure was made to preserve rather than to create turnover : wrong to say that no fresh asset was created ; the contrary is clearly the cast : this evidence does not deal with the question of transience at all. So I cannot obtain any guidance from accountancy considerations.

I would add that in Bolam's case (supra) also some reliance was placed on accountancy evidence but that evidence was inconclusive and, as I read the judgment of Danckwerts, J., he did not rely upon it.

I come, therefore, to the conclusion that the indications derived from the nature of the payments, the commercial and legal nature of the advantage gained, and the use to be made of the advantage, all point in the direction of capital and that they do so with a clarity which is more than sufficient to countervail such slight indication in favour of revenue (and I repeat that in this case the indication is slight) as is to be derived from the possible recurrence of the expenditure.

I would dismiss the appeals.

 

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