Scottish Court of Session Decisions

This was a Case stated by the Income Tax Commissioners for the lower ward of Lanarkshire at the instance of the Surveyor of Taxes for the 3d district of Glasgow.

James Farie of Farme, the respondent, who carried on business as a coalmaster at Farme Colliery, near Rutherglen, had appealed to the commissioners against an assessment of £3500 made upon him under Schedule D of the Act 5 and 6 Vict. cap. 35, and subsequent Income Tax Acts referring thereto. Mr Farie was proprietor of the estate of Farme and occupier of the Farme colliery, forming part of that estate, to both of which he succeeded upon the death of his father on 30th September 1876.

The Act 29 Vict. c. 36, sec. 8, enacted—“The several and respective concerns described in No. III. of Schedule A of the Act 5 and 6 Vict. c. 35, shall be charged and assessed to be duties hereby granted in the manner in the said No. III. mentioned, according to the rules prescribed by Schedule D of the said Act, so far as such rules are consistent with the said No. Ill,” &c.

No. III. of Schedule A of 5 and 6 Vict. c. 35, sec. 60, contained “Rules for estimating the lands, tenements, hereditaments or heritages hereinafter mentioned which are not to be charged according to the preceding general rule.

The annual value of all properties hereinafter described shall be understood to be the full amount for one year, or the average amount for one year of the profits received therefrom within the respective times herein limited.

2d Of mines of coal …. on average of the five preceding years, subject to the provisions concerning mines contained in this Act.”

Schedule D of 5 and 6 Vict. c. 35, sec. 100, contained the following enactments:—“First case—Duties to be charged in respect of any trade, manufacture, adventure, or concern in the nature of trade not contained in any other schedule of this Act.

Rules.

1st, The duty to be charged in respect thereof shall be computed on a sum not less than the full amount of the balance of the profits or gains of such trade upon a fair and just average of three years.

3d, In estimating the balance of profits and gains chargeable under Schedule D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from … such profits

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or gains on account of . . . any capital withdrawn therefrom (i.e., from ‘such trade’); nor for any sum employed or intended to be employed as capital in such trade, manufacture, adventure, or concern.”

The 4th of the “rules applying to both the preceding cases” ( i.e., Cases I. and II.) under Schedule D was—“If amongst any persons engaged in any trade, manufacture, adventure, or concern, or in any profession in partnership together, any change shall take place in any such partnership, either by death or dissolution of partnership, as to all or any of the partners, or by admitting any other partner therein before the time of making the assessment or within the period for which the assessment ought to be made under this Act, or if any person shall have succeeded to any trade, manufacture, adventure, or concern, or any profession within such respective periods as aforesaid, the duty payable in respect of such partner or any of such partners or any person succeeding to such profession, trade, manufacture, adventure, or concern, shall be computed and ascertained according to the profits and gains of such business derived during the respective periods herein mentioned, notwithstanding such change therein or succession to such business as aforesaid, unless such partner or such person succeeding to such business as aforesaid shall prove to the satisfaction of the respective commissioners that the profits and gains of such business have fallen short or will fall short from some specific cause to be alleged to them since such change or succession took place or by reason thereof.”

Section 133 of 5 and 6 Vict. c. 35, enacted—“That if within or at the end of the year current at the time of making any assessment under this Act, or at the end of any year when such assessment ought to have been made, any person charged to the duties contained in Schedule D, whether he shall have computed his profits or gains arising as last aforesaid on the amount thereof in the preceding or current year or on an average of years, shall find and shall prove to the satisfaction of the Commissioners by whom the assessment was made that his profits and gains during such year for which the computation was made fell short of the sum so computed in respect of the same source of profit on which the computation was made, it shall be lawful for the said Commissioners to cause the assessment made for the current year to be amended in respect of such source of profit as the case shall require, and in case the sum assessed shall have been paid, to certify,” &c. This enactment was amended by section 6 of 28 Vict. c. 30.

Section 159 of 5 and 6 Vict. c. 35, enacted—“That in the computation of the duty to be made under this Act in any of the cases before-mentioned, either by the party making or delivering any list or statement required as aforesaid or by the respective assessors or commissioners, it shall not be lawful to make any other deductions therefrom than such as are expressly enumerated in this Act, nor to make any deduction … on account of diminution of capital employed or of loss sustained in any trade, manufacture, adventure, or concern, or in any profession, employment, or vocation.”

The following questions were raised on the construction of these enactments:—(1) To what extent did 29 and 30 Vict. cap. 36, sec. 8, bring mines, originally under Schedule A, within the rules of Schedule D? In particular, was the rule of a five years' average in Schedule A superseded by that of a three years' average in Schedule D? The surveyor of taxes contended for the five years' average—Mr Farie for that of three years. (2) Was Mr Farie's case within the exception mentioned in the fourth of the “rules applying to both the preceding cases” of Schedule D? Fairie maintained that it was on the ground of an extensive depression in the coal trade, which was, he averred, a “specific cause” within the meaning of the Act. The surveyor denied that this was such a specific cause. (3) Admitting that there was a “specific cause,” What was the effect of the exception? Did it leave the actual profits of the year to be the rule, or did it, as the surveyor maintained, bring the case under sec. 133, as amended by sec. 6 of 28 and 29 Vict. cap. 30? (4) Was Mr Farie in computing the profits of the year entitled to deduct a sum in respect of loss of capital by reason of the partial exhaustion of his mines?

The case stated—“The appellant was allowed by the Commissioners to prove his averments, and he accordingly proved by witnesses that there was a great depression in the coal trade, and that the profits and gains of the said colliery for the year 1877–8 had thereby fallen short of the average yielded during the three years ending 5th April 1878; that the net return yielded by the said colliery on said average was £1289, 16s. 11d. after deducting working expenses, and that the net return for 1877–8, after deducting working expenses, was £843, 8s. 11 1 4d. But these sums were arrived at without making a deduction, which he claimed, corresponding to the partial exhaustion of the mine, or diminution of the capital value thereof, by reason of the output of coal therefrom; and he proved by witnesses that the extent and rate of exhaustion and diminution amounted to 5 1 2d. per cart of 13 cwts. of coals taken from said mine, while he established that the average output for said three years was 60,718 carts per annum, and the output for 1877–8 57,725 carts. The Commissioners gave effect to the appellant's contentions—1st, That he was entitled to the ease or benefit to successors conferred by the said fourth rule of Rules applying to both First and Second cases, Schedule D, of 5 and 6 Vict. cap. 35, sec. 100; and 2d, allowed said deduction of 5 1 2d. per cart, and as that deduction more than exhausted said net returns, whether taken for 1877–8 alone or upon said average of three years, therefore granted the appellant relief from said assessment.”

A case was thereupon, at the request of the surveyor, stated for the opinion of the Court of Exchequer, and the Lord Ordinary on Exchequer ( Curriehill) appointed the cause to be heard before the Judges of the First Division.

Argued for the Surveyor—(1) 29 and 30 Vict. cap. 36, sec. 8, did undoubtedly transfer mines from Schedule A to Schedule D, but only to certain intents and purposes. Section 8 distinguished “the manner in the said No. III.” of Schedule A from “rules prescribed by Schedule D.” The question was, What fell under the head of “the manner in the said No. Ill,” for whatever did so fall was not supplanted by “the rules prescribed by Schedule D?” No. III. was from the general structure of the Act and of the various schedules plainly to be taken as a whole,

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and to be distinguished on the one hand from heads No. I. and No. II. of the same schedule, which applied to other classes of property, and on the other hand from No. IV., which applied to the three preceding heads alike. That being so, the intention of the Legislature in enacting 29 and 30 Vict. cap. 36, sec. 8, was to save No. III. itself, i.e. all the rules and regulations which were peculiar to and constituted that head of the schedule, but as regarded the rules in No. IV., which were common to Nos. I. II. and III. alike, it was intended to substitute for these, in respect to No. III., the rules of Schedule D. That had been the practice of the Income-Tax Office, and was the only reasonable construction. The three numbered rules in No. III. were essential to the “manner of assessing” under that head. (2) Depression of trade was not a “specific cause” in the sense of the fourth of the rules applying to both the first cases of Schedule D. “Specific” means a cause which affected the successor qua successor, not one which would have affected his ancestor. Besides, it must be a cause which had arisen since the succession, and that this was the fact in the present instance had not been proved. (3) Even if there was a specific cause, it did not follow that the actual profits of the year were to be taken. That matter was regulated by sec. 133 of 5 and 6 Vict. cap. 35, as amended by sec. 6 of 28 and 29 Vict. cap. 30. (4) But the most important question for the Crown was that in reference to the deduction in respect of the loss of capital which Mr Farie alleged he had suffered from the partial exhaustion of his mine. The case of Knowles was not a binding authority here; but it was not necessary to impugn it. It was the case of a simple commercial transaction—of buying and selling—and it was held that for income-tax purposes a proportion of the price, corresponding to the output of coal for the year, was to be deducted before the profit could be ascertained. That was very different, and was expressly distinguished from a case like the present. Mr Farie was neither seller nor purchaser, and no purchase money had passed in the matter. It did not appear on what basis the calculation of the rate of exhaustion had proceeded. And however reached, there was this strange result, that a landlord who undoubtedly would pay tax on his lordship was to pay nothing at all when he worked his own mine, unless he made more than what he would have made by letting his mine at a lordship in the usual way. But though the question was one on the Income-Tax Acts, the common law was clearly in the same direction. Ferguson's Trustees appeared contrary, but that was a very special case, depending on a testator's intention. As a general rule, liferenters, even by constitution, were entitled to work mines already opened at the rate at which they had been previously worked. Minerals were therefore treated as fructus soli.

Authorities referred to— Knowles v. M'Adam, 5th December 1877, Law Reports, 3 Excheq. Div. 23; Ferguson's Trustees, 23d February 1877, 4 R. 532; Addie & Sons v. Inland Revenue, 30th January 1875, 2 R. 431.

Argued for Mr Farie—(1) Within No. III. itself the “manner” was to be distinguished from the “rules.” The latter were the three numbered rules at the commencement, and the manner made up the remainder of the head. And as sec. 8 of 29 and 30 Vict. c. 36, did not say “so far as such rules are consistent with the rules in the said No. III.,” these rules were repealed and those of Schedule D substituted. The case of Knowles was absolutely clear upon this point. The three years' average must therefore be adopted. (2) But in any view, the second question still remained, because in regard to it there was no repugnancy between the two schedules. Mr Farie came within the exception, because he was making less profit—was making no profit at all—through an extensive depression in the trade, and this was a specific cause within the meaning of the Act. The word “specific” meant “assignable.” It was not necessary to show that the cause was owing to the succession—that was covered by the words “or by reason thereof.” Nor was it necessary that the cause should have occurred since the change of business. The considerations of equity which gave rise to the exception applied equally whether the cause occurred before or after the change. (3) The effect of the exception was that the profits were to be assessed as they were actually found to be. This was the common law which must be held to prevail in all cases under rule 4; the excepting clause did not introduce any test applicable to the cases under it, and therefore the common law was preserved as regards these cases. Section 133 referred to a totally different matter — the rectification of erroneous assessments. (4) Knowles would be a direct authority if it had been the case of an owner working his own mine. It was, however, similar in principle. The principle was, that when working a coal mine you were in selling coal parting with capital as well as, in most instances, making a profit; but before you could settle what the profit was, you must deduct a certain sum in respect of capital lost. [ Lord President—That is quite true in theory—the question is whether that is the meaning of the Income Tax Acts.] It was held in Knowles it was, in reference to a lessee. But could it make any difference that Mr Farie inherited and did not purchase his coal. Some one of his ancestors must have made the purchase. In Ferguson's Trustees it was held that a widow who was life-rentrix was not entitled to the profits, but only to the interest on the profits, of certain coal mines, on the ground that there was really an exhaustion of capital in working a mine. But no doubt that case went partly on the testator's intention. There was nothing either in sec. 100, rule 3, or in sec. 159, to lead to the conclusion the Crown contended for. That was the reasonable and just construction. The policy of the Income Tax Act was to tax the balance of profits; and if in certain respects it extended what on the usual principles of political economy was regarded as profits, that extension ought not to be made wider than the expressions of the statute required.

At advising—