1966-VIL-170--DT

Equivalent Citation: [1968] 70 ITR 460 (CA)

COURT OF APPEAL

Date: 14.12.1966

LONDON AND THAMES HAVEN OIL WHARVES LTD.

Vs

ATTWOOLL (INSPECTOR OF TAXES).

H. H. Monroe Q. C.and J. E. Holroyd Pearce, for the Appellant
W. A. Bagnal Q. C.and J. Raymond Phillips, for the Respondent.

BENCH

WILLMER, HARMAN and L. DIPLOCK, JJ.

JUDGMENT

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

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

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

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

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

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

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

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

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

The sum of ? 21,404 can only attract a charge to income-tax under Case I of Schedule D if, upon the true view of the facts, it should properly be regarded as part of annual profits or gains arising or accruing to the company in respect of its trade. This sort of question has been considered by the court in a variety of cases. Where the sum received is of the nature of compensation for the compulsory purchase of a capital asset or for an outand-out embargo on the exploitation of a capital asset, it has been held to be a capital receipt and not revenue, although calculated by reference to the amount of profit lost: See Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners 1922 S.C. (H.L.) 112; 12 Tax Cas. 427 and Inland Revenue Commissioners v. Glasgow and South-Western Railway Co. [1887] 12 App. Cas. 315

Where the receipt has been in compensation for the expropriation of stock-in-trade, it has been held to be a trading receipt: see Inland Revenue Commissioners v. Newcastle Breweries Ltd.( 1927] 43 T.L.R. 476; 12 Tax Cas. 927.) Where the asset, to compensate for the loss or modification of which the sum is paid, is the benefit of a contract or of some right under a contract, a distinction has been drawn between (a) contracts which regulate the recipient's business, or to borrow Lord Macmillan's language in Van den Bergh's Ltd. v. Clark(1935] A.C. 431; 19 Tax Cas. 390; [1935] 3 I.T.R. (Eng. Cas.) 17), relate to the whole structure of the recipient's profit-making apparatus, in which case the receipt is not treated as income but as capital; and (b) contracts made in the course of the recipient's business, as in Kelsall Parsons & Co. v. Inland Revenue Commissioners(1938] S.C. 238; 21 Tax Cas. 608), and Short Bros. Ltd. v. Inland Revenue Commissioners(1927] 12 Tax Cas. 955), in which case the receipt is treated as a revenue receipt of the trade. (See, for a review of the authorities, John Mills Productions Ltd. v. Mathias.( 1964] 43 A.T.C. 262))

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

For instance, a mere interruption or suspension of a trader's power to pursue his business activities, or some part of them, which does not involve the destruction or involuntary alienation of any asset, whether of fixed or circulating capital, may be the antithesis of anything done in the course of the business. Nevertheless, compensation for such interruption or suspension may fall to be treated as a trade receipt. Thus in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners(1928] 12 Tax Cas. 1169), where during coal strike two ships of the appellant company's fleet which were ready to proceed to sea with cargoes of coal were retained in port by the order of the Government, the compensation received was held to be a trading receipt for the purposes of excess profits duty. Rowlatt J. expressly declined(Ibid. 1175) to regard the compensation in the same way as demurrage or damages for detention arising out of a contract made in the course of appellant company's trade.

Rowlatt J. said 1928] 12 Tax Cas. 1169, 1175:

"Now it is quite clear that if a source of income is destroyed by the exercise of the paramount right I have described, and compensation is paid for it, that is that not income, although the amount of the compensation is the same sum as the total of the income that has been lost. As Lord Buckmaster pointed out 12 Tax Cas. 427, 464 with a clearness that could not be surpassed, the nature of the measure of the sum has no relation to the quality of the payment, but in this case I have got to decide the case of a temporary interference, and at first sight I thought that opened up a very wide question. Of course a source of income, whether from property or business, may be temporarily interrupted, and the owner of it may be entitled to have his loss of profits replaced either by a claim against the tortfeasor or by recourse to an insurance company if he has been insured; and if the question were whether sums of that kind could be treated as income for taxation purposes, I should feel that I was on the threshold of a very wide and difficult field of inquiry, but with the best consideration I can give, I do not think this case does raise that question. Here these ships remained as ships of the concern. Their expenses were quite properly brought into the revenue expenditure of the concern (Mr. Latter suggested they might be taken out again); they merely could not sail for a certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit-earning capacity during those days, in lieu of that receipt, this money was paid to the owners, although they were not requisitioned, as if requisitioned.

Now under those special circumstances I do not think I can treat this as being a sum paid by way of compensation for the temporary interruption of the trade. I think I ought to regard this sum, as the Commissioners have obviously regarded it, as a sum paid which to the shipowners stands in lieu of the receipts of the ship during the time of the interruption."

In the Court of Appeal, Lord Hanworth M.R. approved this view of the matter. 12 Tax Cas. 1169, 1180

In Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners 1931] S.C. 156; 16 Tax Cas. 67 two shipping companies, acting jointly, bought a ship in need of repair and immediately placed it in the hands of repairers for overhaul. The time stipulated for the completion of the overhaul was exceeded, and the owners claimed damages calculated by reference to the estimated profit which the ship would have earned had she been trading during the excess time taken for overhaul. It was held that the appellant company's share of the agreed damages was income for the purpose of income tax. Lord President Clyde said*:

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

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

The present case appears to me to involve a question of the kind which Rowlatt J. said in Ensign Shipping Co. Ltd. v. Inland Revenue Commissioners.12 Tax Cas. 1169 would result in embarking on a wide and difficult field of inquiry; a question of the kind which Lord Clyde in Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioner 1931] S.C. 156, 159, 160 found to be irrelevant to the decision of that case. The damage to the taxpayers' jetty was undoubtedly damage to a capital asset. That damage occasioned not only the need to incur expense in repairing the physical damage but also an interruption in the profitable use of the jetty. Both these consequences of the physical damage were natural and direct results of that physical damage. The taxpayers had but one cause of action against the owners of the ship which caused the damage, but the damages recoverable in respect of that cause of action involved two distinct elements requiring two distinct inquiries and calculations.

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

The same would, it seems to me, be true of the sale or destruction of a distinct section or department of a business. If, in the present case, the jetty, instead of being damaged, had been entirely destroyed by an explosion, the amount recoverable as damages would have included an element related to the profitability of the jetty, but no part of such damages would, in my opinion, have fallen to be treated as a matter of sound accountancy or for fiscal purposes as profit of the taxpayers' business. Can it make any difference in this respect that, instead of being wholly destroyed, the jetty was only partially damaged, and that, instead of losing all future profit from the jetty, the taxpayers lost the profitable use of the jetty for only 380 days? In my judgment, none. The damage which the taxpayers suffered all flowed directly from physical injury to a capital asset of their business, the jetty, inflicted by the negligent handling of a ship. The amount of damages which the taxpayers might have recovered consititutes relief, whole and indivisible, to which the taxpayers became entitled in consequence of that injury, subject only to the owners statutory right to limit their liability. Although some part of that amount related to the loss of use of the jetty for 380 days, this fact does not, in my judgment, make that part of the damages proper to be brought into account as a revenue receipt of the business.

As Lord Buckmaster observed in Glenboing Union Fireclay Co. Ltd. v. Inland Revenue Commissioners 1922 S.C. (H.L.) 112, 115, the measure that is used for the purposes of a calculation does not determine the quality of the figure that is arrived at. The questions are: what was the nature of the taxpayers' claim against the shipowners, and what was the quality of any sum recovered by them in respect of that claim?

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

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

There were two other authorities which were brought to my attention about which I should perhaps say a word. In Morahan v. Archer and Belfast Corporation* the plaintiff sued for damages in respect of a taxi-cab which had been in collision with an omnibus. On an interlocutory application for leave to deliver interrogatories, the question arose whether damages for loss of profits during the time when the taxi was under repair would be liable to tax in the hands of the plaintiff. Curran L.J., following Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners**, held that this would be so. 1957] N.I. 61 In so doing the Lord Justice must, as it seems to me, either have proceeded upon the assumption that the cab was not to be regarded as a capital asset of the plaintiff's business or have interpreted the Burmah Steam Ship Co. Ltd. Case** differently from the way in which I, regard it, for it is, as I understand the decision in the Burmah Steam Ship Co. Ltd. case, 1931] S.C. 156 basic to that decision that no damage to a capital asset was there involved. Moranah v. Archer*, I think, clearly distinguishable on its facts, and accordingly does not seem to me to be in point in the present case.

The plaintiff in Pryce v. Elwood* owned a car-hire business. One of his motor cars suffered damage in an accident, as a result of which it was under repair for 30 weeks. The plaintiff claimed damages for loss of profits during this period. The only question was whether tax should be deducted in assessing the damages. Atkinson J. held that the damages for loss of profits would themselves be taxable, so that tax should not be deducted in estimating those damages in accordance with British Transport Commission v. Gourley 1956] A.C. 185, H.L.; [1956] 2 W.L.R. 41; [1955] 3 All E.R. 796. There is no report of the argument, and the judgment itself is briefly reported. It does not appear why the judge held that the damages for loss of profit would have to be entered into the plaintiff's profit and loss account. It seems to me probable that this view was perfectly correct upon the ground that the risk of accidents of this kind is an inherent feature of a car-hire business, so that any resulting loss should be brought into the trading profit and loss account of the business, with the consequence that any receipt to be set against any such loss should likewise be brought into that account.

Had the plaintiff in that case insured against loss of profits resulting from such accidents, it might have been very difficult to contend that the cost of so insuring was not an expense which ought to be brought into the profit and loss account. If this would have been so, this might well have provided support for an argument that the loss of profit which was in fact incurred ought to be similarly treated. Similar reasoning might well have applied in Morahan v. Archer [1957] N.I. 61.

A risk of that kind, however, seems to me very different in character and degree from such risk as the taxpayers were exposed to, of having their jetty damaged as it was by the negligent handling of a ship. Pryce v. Elwood 1963] 108 S.J. 583 accordingly appears to me to be distinguishable from the present case.

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

The Crown appealed.

WILLMER L.J.--In the course of the argument this has been made to appear to be a difficult and complicated case, but it is in fact a very simple case, and in my judgment a very plain case. It comes before us on appeal from a judgment of Buckley J. given on April 27, 1966, on a case stated by the special commissioners in relation to an assessment to income tax made against the taxpayer company under Case I of Schedule D for the year 1955-56 in the sum of ? 21,404. This sum represented damages which had been recovered from a wrongdoer in respect of loss of profits in connection with the taxpayer company's business as a wharf-owner.

The special commissioners decided that this sum, recovered in respect of loss of profits, was taxable as a trading receipt. Buckley J. came to the opposite conclusion, holding that the sum recovered was in respect of a capital loss, so that it constituted a capital receipt, and as such was not taxable. The Crown has now appealed to this court.

The essential facts of the case are extremely simple. The respondent company owns a number of jetties at its Thames Haven oil installation, where tankers bringing oil can berth for purposes of discharge. On April 22, 1953, a tanker, while coming alongside one of these jetties, was so negligently navigated that she struck the jetty in such a way as to cause serious damage thereto. The physical damage to the jetty necessitated repairs at a cost of ? 83,167. But in addition, it is said, the company sustained consequential damage through loss of use of their jetty during the period while it was under repair, a period which amounted in all to 380 days. That loss was quantified at the figure of ? 32,450. That figure was the result of a quite arbitrary calculation based on a percentage of the capital cost of the jetty. But no question has been raised in this appeal with regard to the method of quantifying this damage; it may well be that it was adopted for the reason that the jetty had been only newly built, so that no figures were available to show what rate of profit would ordinarily be expected to accrue from the use of the jetty. It will be seen from the figures I have given that the taxpayer company's total loss was ? 115,618. The owners of the tanker admitted liability; but they were able to limit their liability in pursuance of the Merchant Shipping Acts to a sum of ? 77,875, which sum they duly paid together with the appropriate interest thereon.

The taxpayers were insured against physical damage to their property, but were not insured against consequential damage. In these circumstances they reached an agreement with their underwriters to the effect that the sum recovered from the owners of the tanker should be apportioned rateably as between the physical damage and the consequential damage, and that the underwriters should pay to them the unrecovered balance in respect of the physical damage.

The final result of it all was as follows. The respondents recovered in full the physical damage to their jetty, amounting to ? 83,167. They recovered by way of contribution towards their consequential loss the sum of ? 21,404, and they also recovered the sum of ? 2,325 by way of interest making a grand total of ? 106,897. The question is whether that sum of ? 21,404 recovered from the tanker-owners in part satisfaction of the claim for loss of use is taxable as trading receipt in the hands of the taxpayer company.

In the course of the argument we have been referred to a considerable number of authorities, to some of which I shall have to refer in the course of this judgment. But it does seem to me that the question which we have to decide is eminently a question of fact, which depends on the answer to the question: What did the sum of ? 21,404 represent? To adopt a phrase used in one of the authorities to which we have been referred, what place in the economy of the taxpayers' business does this payment take?

I have said that the taxpayer company is the owner of these wharves and jetties, and in the ordinary way earns profits by the use of the jetties for the purpose or berthing tankers. In my judgment the same principle must apply to a jetty constructed for commercial use as applies to a ship which is engaged in commercial trading. In this connection I venture to read the oft-quoted words of Bowen L.J. in The Argentino 1888] 13 P.D. 191, C.A, where he said Ibid. 201:

"A ship is a thing by the use of which money may be ordinarily earned, and the only question in case of a collision seems to me to be, what is the use which the shipowner would, but for the accident, have had of his ship, and what (excluding the element of uncertain and speculative and special profits) the shipowner, but for the accident, would have earned by the use of her?"

In this case, if there had been no collision, the taxpayers would have had the use of their jetty, and by the use of their jetty they would ordinarily have earned profits. Having lost those profits, they were entitled to recover from the wrongdoer such a sum of money as would, so far as possible, put them back in the same position as that in which they would have been but for the collision. Owing to the tanker-owners' right to limitation of liability, the amount actually recovered did not in fact provide full indemnity, but so far as it went it gave back to the taxpayers part of what they could have expected to earn by the use of their jetty. If there had been no collision, the profits which the taxpayer company would have earned by the use of the jetty would plainly have been taxable as a trading receipt. Why, it may be asked, should not the same apply to the sum of money recovered from the wrongdoer in partial replacement of those profits?

In that connection we were referred to the report of The Argentino 1889] 14 App. Cas. 519, H.L in the House of Lords. I should explain that that was a case where the owners of a ship damaged in collision were held to be entitled to recover the loss of profit which they would have made out of a charterparty which had been fixed, and which was lost in consequence of the collision. But in the House of Lords, Lord Herschell pointed out Ibid. 524. that, if the owners got back their ship from the repairers before the date when the charterparty voyage (if it had taken place) would have been completed, they would have to give credit for any profits that they could have earned during the unexpired period. Any such profits would clearly, I think, have constituted a revenue receipt; and it might be thought to follow from that that the damages for loss of the charterparty, against which any such actual earnings would have to be set off, should also be regarded as a revenue receipt.

In the present case, however, Buckley J. came to the conclusion in the event that it was not possible to separate the damages recovered in respect of the loss of use of the jetty from those recovered in respect of the physical injury. He treated the whole as damages for physical injury to a capital asset, and, therefore, as a capital receipt. I am bound to say, however, that I have felt some difficulty in following his reasoning, and it does seem to me that in the course of delivering his judgment he rather contradicted himself.

In his judgment, the judge is recorded as saying this*:

"The damage to the taxpayers' jetty was undoubtedly damage to a capital asset. That damage occasioned not only the need to incur expense in repairing the physical damage but also an interruption in the profitable use of the jetty. Both these consequences of the physical damage were natural and direct results of that physical damage. The taxpayers had but one cause of action against the owners of the ship which caused the damage, but the damages recoverable in respect of that cause of action involved two distinct elements requiring two distinct inquiries and calculations."

Then a little later* the judge went on:

"If, in the present case, the jetty, instead of being damaged, had been entirely destroyed by an explosion, the amount recoverable as damages would have included an element related to the profitability of the jetty, but no part of such damage would, in my opinion, have fallen to be treated as a matter of sound accountancy or for fiscal purposes as profit of the appellants' business."

So far I wholly agree with everything that the judge said.

But then he continued Supra p. 474; [1966] 3 W.L.R. 325, 339:

"Can it make any difference in this respect that, instead of being wholly destroyed, the jetty was only partially damaged, and that, instead of losing all future profit from the jetty, the taxpayers lost the profitable use of the jetty for only 380 days? In my judgment, none. The damage which the taxpayers suffered all flowed directly from physical injury to a capital asset of their business, the jetty, inflicted by the negligent handling of a ship. The amount of damages which the taxpayers might have recovered constitutes the relief, whole and indivisible, to which the taxpayers became entitled in consequence of that injury, subject only to the owners' statutory right to limit their liability. Although some part of that amount related to the loss of use of the jetty for 380 days, this fact does not, in my judgment, make that part of the damages proper to be brought into account as a revenue receipt of the business."

It seems to me that in this passage, particularly where the judge referred to "the relief, whole and indivisible, to which the taxpayers became entitled", he was forgetting what he had said (in my view quite correctly) earlier, namely, that the damages recoverable in respect of the cause of action "involved two distinct elements requiring two distinct inquiries and calculations."

Moreover, it appears to me, with all respect to the view of Buckley J., that there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing lost is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing its capital value. In such a case the owner's right is a right to recover the value of the thing which has been lost, and this can no doubt be properly described as "whole and indivisible", even though it includes some element of profitability of the thing lost; in such circumstances what is recovered is properly treated as a capital receipt.

But where there is only a partial injury, as there was in the present case, there are necessarily two elements to be considered if the owner is to be put back, so far as money can do it, in the same position in which he would have been but for the tortfeasor's wrongdoing. First, he can recover the whole cost of repair, which is without doubt a capital receipt. Secondly, he can also recover something in respect of the loss of use during the period of repair, which the judge, in the first of the passages which I have read Supra p. 474; [1966] 3 W.L.R. 325, 339 quite rightly held to be a distinct element.

I repeat, therefore, the question which I asked before: Why should not damages recovered under this head be regarded as a trading receipt, in that they represent the trading profit which the owner would have earned if he had had the use of his ship, or of his jetty? If that is not a correct view of the law, then I would venture to say that there is something very much wrong with the law, for the consequence would be that a jetty-owner such as the taxpayer company, would be better off by being subjected to a casualty of this sort (that is, losing the use of his jetty and recovering damages therefor) than he would be if he were able to use it continuously for the purpose of making profits. That, as it seems to me, would be a very strange result indeed. The respondent company's case has been very largely founded on the decisions of the Court of Session and the House of Lords in Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners 1922 S.C. (H.L.) 112; 1921 S.C. 400; 12 Tax Cas. 427, in which a company was the lessee of a fireclay bed, part of which lay under a line belonging to a railway company. The railway company commenced an action against the lessees of the fireclay bed to restrain them from working their fireclay under the railway, and pending the decision of the action they obtained an interdict from the Scottish court restraining the company from working under the railway. That litigation eventually went to the House of Lords, taking three years to get there, and in the event was decided in favour of the fireclay company. But the railway company thereupon exercised its statutory power to require that the part of the fireclay bed which lay under their line should be left unworked on payment of compensation. The compensation was duly paid to the fireclay company. The company, however, presented an additional claim for damages against the railway company, the damages consisting of the expenses to which the company had been put during the three years' litigation in keeping open the fireclay field, and in due course the company received a sum of money by way of damages in addition to the compensation.

The question then arose whether the compensation and the damages recovered, or either of them, constituted trading receipts which rendered the company liable to tax, or whether, on the other hand, the constituted capital receipts. It was decided in the result that both the compensation and the damages were capital receipts, the compensation because it was a payment made (to use the words used in the case) for the sterilisation of a capital asset, and the damages because the claim was a claim for expenditure incurred in protecting a capital asset, which turned out in the event to be unproductive because of the railway company's exercise of its statutory powers.

It seems to me that the result of that case in all the circumstances was hardly surprising. The fireclay in which the company was interested was a capital asset, but it was a capital asset which could be turned into profit only by consuming it. When the railway company exercised its statutory powers, the fireclay company lost its capital asset; it could no longer consume the fireclay. In those circumstances it appears to me to be a natural result that the compensation recovered should be regarded as a capital receipt. It seems to me, however, that loss of such a consumable capital asset was something very different from the loss of use of the jetty in this case; for a jetty is a thing which is enjoyed, not by consuming it, but by using it for the purpose of berthing ships. With regard to the damages claimed in the Glenboig case 1922 S.C. (H.L.) 112, the ratio of the Court of Session decision** was that the expenditure proved in the event to be unproductive and, to use the words of Lord President Clyde, turned out to be a dead loss. It was, for this reason, held to be a capital loss, and the damages recovered in respect thereof were held to be a capital receipt. But Lord President Clyde at least made it clear that the result would, in his view, have been different if the expenditure had turned out to be productive, in the sense of enabling the fireclay company to resume working the fireclay, and thereby to make a profit.

This appears from the following passage in his judgment 1921 S.C. 400, 407:

"If they were successful in the law courts, and the railway did not exercise the powers of section 71, the expenditure would turn out productive, at least to some extent, because it would enable the fireclay, temporarily under interdict--to be eventually worked. If, on the other hand, they were unsuccessful in the law courts, or if (notwithstanding their success) the railway ultimately fell back on the powers of section 71, it would turn out to be money thrown away, and the loss of the money would be attributable, not to any commercial misadventure, but to the exercise by the railway of the rights and powers belonging to it under statute. In the former case, the expenditure would be shown to form a proper trading expenditure, and to be a legitimate deduction from gross profit in estimating the 'profit arising or accruing from the company's trade'. In the latter case, it would be shown to be money spent without the possibility of return, and would therefore constitute just a loss of so much capital."

Once that case is fully understood, I am bound to say that I find it difficult to see how it really helps the taxpayer company in the present case.

Most of the other cases to which we have been referred seem to me to be wholly favourable to the Crown's contention. I certainly do not find it necessary to refer to all the cases cited, but some of them I think I should mention. There are, for instance, the two cases referred to in the judgment, namely, Enasign Shipping Co. Ltd. v. Inland Revenue Commissioners*** and Burmah Steam Ship Co. Ltd. v. Inland Revenue Commissioners 1931] S.C. 156; 16 T.C. 67.. Buckley J. himself quoted at some length from the judgment in both these cases, and I do not find it necessary to set out the quotations again.

Neither of these cases is by any means on all fours with the present, but in so far as they are relevant they seem to me to afford a good deal of support for the Crown's contention. The first of them 1928] 12 Tax Cas. 1169, C.A related to compensation recovered by shipowners from the Government for the detention of two ships by order of the Government during a coal strike, and it was held by Rowlatt J.( 1928] 12 Tax Cas. 1169, 1176), and approved by the Court of Appeal(Ibid. 1180), that the sum recovered was a sum paid to the owners in lieu of the profits which the ships would have earned during the period of detention, as if they had been requisitioned. Rowlatt J. was careful to point out(Ibid. 1176) that it was not the same as a requisition, but he dealt with the sum recovered as if there had been a requisition.

In the second case(1931 S.C. 156) the shipowners recovered from ship repairers agreed damages for exceeding the stipulated time for the repair of their ship, and those damages had been calculated by reference to the profit which the ship would have earned had she been delivered in time. That was held to be a trading receipt. That again was a case which came before the Court of Session, and Lord President Clyde (who, it will be remembered, had also been a party to the decision in the Glenboig case(1922 S.C. (H.L.) 112) delivered a judgment in which he said(1931 S.C. 156, 159, 160) that the damages were to be treated as "filling the hole" in the shipowner's trading profits which had been caused by the repairer's delay in completing the repairs.

Lord Clyde specifically referred(Ibid. 160.) to the Glenboig case,( 1922 S.C. (H.L.) 112) and then went on:

"But, as the case just referred to shows, it is very relevant to inquire whether the thing, in respect of which the taxpayer has recovered damages or compensation, is deprivation of one of the capital assets of his trading enterprise, or, short of that, a mere restriction of his trading opportunities." I cite that sentence as stating in very succinct form the problem which has to be solved in a case of this sort.

I must next mention Rex v. British Columbia Fir and Cedar Lumber Co. Ltd.,( 1932] A.C. 441; 48 T.L.R. 284, P.C) where a timber company had taken out fire policies to cover themselves against loss of profit due to interruption of their business by fire. Upon a fire occurring, the question arose whether the moneys recovered under those policies should be treated as a capital or a revenue receipt. The matter eventually found its way to the Privy Council, where it was decided that the sum recovered was to be treated as a revenue receipt.

I think that the ratio of the decision is really summarised in the judgment of the Board delivered by Lord Blanesburgh, where he said(Ibid. 450):

"In view of the nature and origin of the receipt, as they have traced these, their Lordships have reached the conclusion that within the meaning even of the interpretation clause this receipt was 'income from a business', and that in ordinary parlance it was income or gain derived from the business of the respondents which had necessarily to be brought into receipt as such in the profit and loss account of the business referred to" in the section of the statute.

That decision was referred to and followed by this court in Williams' Executors v. Inland Revenue Commissioners 1943] 59 T.L. R. 204; [1943] 1 All E.R. 318; 26 Tax Cas. 23, C.A, which again was a case of money recovered under an assurance policy (in that case a life policy). Lord Greene M.R., in delivering the leading judgment, referred to the British Columbia Lumber case 1932] A.C. 441, and said 59 T.L.R. 204, 206:

"A manufacturer can, of course, insure his factory against fire. The receipts from that insurance will obviously be capital receipts. But supposing he goes further, as the manufacturer did in that case, and insures himself against the loss of profits which he will suffer while his factory is out of action, it seems to me it is beyond question that sums received in respect of that insurance against loss of profits must be of a revenue nature."

It appears from the way in which he expressed himself that was a matter about which Lord Greene had no sort of doubt whatsoever. Unless it can be said that moneys recovered from insurers are to be viewed differently from moneys recovered from a wrongdoer, it seems to me that those cases really conclude this case in favour of the Crown's contention.

It has been sought to argue that moneys received from insurers are in a different category from moneys recovered from wrongdoers; but, with all possible respect to the argument which has been advanced in that respect, it seems to me to be quite without foundation. In either case the question must be, what does the sum recovered represent, and in either case the answer to that question must be that it represents profit which would otherwise have been earned by the use of the thing concerned.

I should mention also the cases, Morahan v. Archer and Belfast Corporation 1957] N.I. 61 and Pryce v. Elwood 1963] 108 S.J. 583, both of which were decisions at first instance. Both related to damages recovered from a wrongdoer for the loss of use of a motor car which had been damaged in collision, and which was ordinarily used for commercial purposes. In both cases only a very brief report is available, but in each case the judge who dealt with the matter had no difficulty in deciding that the damage recovered in respect of loss of use would constitute a revenue receipt. As I said when I started to review these cases, they all appear to me to point in the same direction.

It has, however, been very strenuously argued on behalf of the taxpayer company that the ? 21,000-odd recovered from the tanker owners was really all part of the damages recovered for injury to the jetty. It was pointed out to us, quite fairly, that the jetty was not a construction which was going to be there for all time, but had a life of only some 25 years. Consequently, because of the time occupied in effecting the repairs, it had only a depreciated value at the end of the repair period. It was submitted that it was quite irrelevant that this part of the damages recovered was quantified by reference to loss of use, for the way in which a loss is quantified cannot affect the quality of the loss. What was said was that the sums recovered, whether from the insurers or from the wrongdoer, should be regarded, as one whole, amounting in total to compensation for the physical injury to the jetty. It was said, to use the phrase that was used in the Glenboig case 1922 S.C. (H.L.) 112, 115, that during the period of repairs the jetty was a sterilised asset, just like the fireclay in that case. As I understood the argument, it was conceded that, if there had been no collision, and therefore no physical damage to the jetty, but the tanker had sunk just outside it so as to block access to it and prevent its use, a different result might be arrived at. It seems to me that it would be strange indeed if the quality of the damages recovered for loss of use should be held to depend upon the accidental circumstance whether or not there happened also to be physical injury to the jetty.

I think that the argument presented on behalf of the taxpayer company was fallacious in two respects. In the first place, it appears to me to proceed on the basis that the cause of action in a case such as this is the damage to the jetty. But in truth, as was pointed out during the argument, the cause of action in a case negligence is the injury to the plaintiff. In the present case the injury to the taxpayer company was a two-fold injury. They not only suffered damage to their jetty, but they also suffered loss of the profits which they would have earned from its use. Secondly, I think that the argument which was presented to us was fallacious in so far as it was sought to equate damages for loss of use of the jetty with depreciation of the capital value of the jetty. It seems to me that the two things are quite distinct.

I am left in no doubt that in this case the damages recovered in respect of the physical injury to the jetty are quite separate from, and governed by quite different consideration from, the damages which were recovered in respect of the loss of profitable use of the jetty. It appears to me that both on principle and on the authorities, to some of which I have referred, the sum recovered for loss of use of the jetty must be treated as revenue receipt, and, therefore, properly taxable.

For these reasons I would allow this appeal and would restore the decision of the special commissioners.

HARMAN L.J.--Questions relating to capital and income are among points that in my experience arise no less in the region of fiscal law, in which we are here involved, than in that of inheritance, where they are as thick as autumn leaves; and it is tempting to try to classify them and to decide whether they fall on one side of the line or the other.

The judge in the court below seems at one time to have been tempted to farm out the authorities in this way. But, as he rightly reminds himself in his judgment Supra p. 471; [1966] 3 W.L.R. 325, 327:

"Judges have from time to time been careful to say that no clear and comprehensive rule can be formulated and no clear line of demarcation can be drawn by reference to which it can be determined in every case whether the sum received should be regarded as a capital receipt or as a revenue receipt to be taken into account in arriving at the profits or gains of the recipient's trade. Each case must be considered on its own facts."

As my lord says Supra p. 478, this is in the end a question of fact. How then do the facts stand ? There is no doubt that the ? 21,000-odd, which is the subject of the controversy here, was arrived at between the parties by a highly arbitrary' process based on the estimated loss of profit during the time in which the jetty was out of use. But that does not carry one much further, for as Lord Buckmaster said in the course of his judgment in the Glenboig case#: "There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test." He then goes on to say that he is unable to regard the sum of money recovered in that case as anything but capital money, and that it was erroneously entered in the balance-sheet of the company concerned as a profit. So that so far one is not advanced any further forward by finding out how the sum has been arrived at, or in relation to what.

The taxpayer company's case here, as I have understood it, is that the total sum recovered is damages for the tanker-owners' negligence--one cause of action, one answer in damages--which, though measured in two ways, is nonetheless one sum. They argue further that this is compensation, and not profit from carrying on a trade; and this, they say, is the very antithesis of the annual profits and gains of the trade within which it must fall in order to bear tax under Case I of Schedule D, which is the claim that was made.

Buckley J. in the end (by a process which I must confess that I do not altogether follow) accepted that view. I find myself unable to agree with him. It does seem to me that there is at least one valid test, namely, has there been the destruction of some capital asset of the company.

That is well illustrated by the Glenboig case1922 S.C. (H.L.) 112 with which my lord has dealt in his judgment Supra p. 481. In that case the pillar of fireclay left to support the railway, under the railway company's statutory rights, was permanently lost to the mining company. That was a capital asset which had been destroyed, and, therefore, compensation for it was a capital receipt. Similarly, damages which they had received for maintaining the mine during the period of interdict, which turned out to be useless, was a sum of money employed in preserving what would have been (or what was at the time) a capital asset, and, therefore, partook of the nature of a capital receipt. Accordingly, Glenboig(1922 S.C. (H.L.) 112) seems to me to be a clear enough case.

The other cases, or very many of them, are either instances of the disposal of stock-in-trade, or money recovered under a contract for instance, on an insurance policy made in the course of trade with a view for providing against the very event which had happened.

The last one, Inland Revenue Commissioners v. Newcastle Breweries Ltd.( 1927] 43 T.L.R. 476; 12 Tax Cas. 927, H.L), dealt with goods requisitioned by the Government, and the Ensign Shipping case(12 Tax Cas. 1169) was concerned with what would have been compensation received by shipowners for compulsory detention of ships by the Government. In that case there was no destruction of the ships, which were capital assets; they were merely put out of commission.

The Burmah(1931 S.C. 156) case related to a sum paid for delay in delivery, and that fell under the head of income as being a mere trading receipt; see the observations of Lord Morison(Ibid. 164). In the British Columbia Fir and Cedar Lumber Co. case(1932] A.C. 441 in the Privy Council, the receipts were receipts under a fire insurance policy; and, as was pointed out(Ibid. 444), in so far as they were receipts for destruction of assets by fire, they were, of course, capital receipts but in so far as they were related to loss of profit for those assets if they had not been burned, they were revenue receipts.

Crabb v. Blue Star Line [1961] 1 W.L.R. 1322; [1961] 2 All E.R. 424; 39 T.C. 482.related to an insurance against late delivery of ships, and this was similar to diminution in the price of capital asset. Lastly, there is Short Bros. Ltd. v. Inland Revenue Commissioners([1927] 12 T.C. 955) where the sum received was compensation for the cancellation of a contract to build a ship, and that was held to be an ordinary trading receipt of the company's business.

On the whole, therefore, such attention as I have been able to give to the cases seems to me to show them holding a fairly consistent result when looked at in the light of the particular circumstances of each case when those are borne in mind individually. In my opinion Buckley J. mistook the effect of them and was wrong.

I agree that this decision should be reversed, and this appeal allowed.

DIPLOCK J.--I agree.

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

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

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

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

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

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

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

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

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

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

An alternative way in which Mr. Monroe puts it is that the ? 21,000 compensation was paid to the taxpayers for not using their capital asset, the jetty. But I think that this is no more than ingenious semantics designed to bring this case within some of the words used in the Glenboig case.* It was paid for the loss which they suffered because, owing to the wrongful act of the tanker-owners, they were unable to use the jetty, just as the taxpayer in the Ensign case 12 Tax Cas. 1169 was unable to use his ship by reason of the exercise of paramount power of the Crown, in the Burmah case 1931 S.C. 156 by the ship repairers' breach of contract, and in the British Columbia Fir and Cedar Lumber Co. case [1932] A.C. 441 because the taxpayer was unable to use his premises because of the occurrence of the risk insured against.

These cases are to be contrasted with cases where compensation is paid for the destruction or permanent deprivation of the capital asset used by a trader for the purposes of his trade. There the asset thereafter ceased to be one by the use or exploitation of which the trader carries on his trade. As a result of such destruction or deprivation the trader ipso facto abandons that part of his trade which involves the use of the capital asset of which he has been deprived by destruction or otherwise, and profits which he would, but for its destruction, have made by its use or exploitation will thereafter no longer form part of the profits arising from the trade which he continues to carry on. Even if the compensation payable for loss of the capital asset has been calculated in whole or in part by taking into consideration what profits he would have made had he continued to carry on a trade involving the use or exploitation of the asset, this does not alter the identity of what the compensation is paid for, to wit, the permanent removal from his business of a capital asset which would otherwise have continued to be exploited in the business: see the Glenboig case 1922 S.C. (H.L.) 112.

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

I agree with the order proposed by my lord.

 

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