COUNSEL: Macmillan K.C., Latter K.C. and Cyril King for the appellants.

Sir Thomas Inskip A.-G. and R. P. Hills for the respondent.

 

SOLICITORS: For the appellants: Ward, Perks & Terry.

For the respondent: Solicitor of Inland Revenue.

 

JUDGES: Lord Buckmaster, Viscount Dunedin, and Lord Warrington of Clyffe.

 

DATE: 1929 Feb. 22.

 

Revenue – Income Tax – Insurance against Fire – Loss of Stock in Trade by Fire – Insurance Money exceeding Amount at which Stock in Trade valued in Books – Inclusion of whole in Profit and Loss Account as a trading Receipt – Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. D, Case I.

 

A quantity of timber belonging to a company carrying on business as timber merchants was destroyed by fire. In the company’s accounts the timber was valued at cost or market value, whichever was the lower, and for this purpose large sums were in the last two years of account before the me written off the cost price in respect of depreciation in order to arrive at the closing stock values. The reduced sums so arrived at were adopted each year in order to arrive at the company’s profits for income tax purposes. The company kept its stock in trade insured against loss or damage by fire; and for the purpose of fire insurance the stock in trade was valued at replacement value. At the date of the fire the value of the stock destroyed was very high owing to a boom, and the insurance companies paid 477,838l. in respect of the replacement value. The sum of 160,824l. was the estimated book value of the timber destroyed. This sum was brought into the company’s accounts as a trading receipt, and the balance of the sum of 477,838l. (after some small deductions) was carried into the balance sheet as a reserve and was not brought into the profit and loss account:–

 

Held, that the company must bring the whole of the money received from the insurance companies in respect of the timber destroyed by [*382] fire into their profit and loss account as a trading receipt in order to arrive at the company’s profits for income tax purposes.

 

Decision of the Court of Appeal [1928] 2 K. B. 193 affirmed.

 

APPEAL from an order of the Court of Appeal (Lord Hanworth M.R., Sargant and Lawrence L.JJ.)(1) affirming a judgment of Rowlatt J.(2) reversing a determination of the Commissioners for the Special Purposes of the Income Tax Acts.

 

The facts are fully stated in the report of the case before the Court of Appeal and are summarized in the headnote.

 

The arguments in support of the appeal were the same as in the Court below.

 

The respondent’s counsel were not called upon.

 

Macmillan K.C., Latter K.C. and Cyril King for the appellants.

 

Sir Thomas Inskip A.-G. and R. P. Hills for the respondent.

 

LORD BUCKMASTER.My Lords, the appellants are timber merchants who carry on their business at Stratford, near London. In August of 1921 they had a large quantity of timber stored upon their premises, and on the 8th of that month a fire broke out and destroyed a considerable quantity of the appellants’ goods. The goods had, in the due course of their business, been insured, and as the result of the insurance the appellants received 477,838l. from the insurance companies. But the timber had stood in their books and balance sheets as representing the figure of 160,824l., and accordingly the appellants sought to bring only that latter figure in for the purposes of assessment to income tax, while the Inland Revenue authorities asserted that they were bound to bring in the larger sum.

 

The accounts of the appellants’ business are set out and they show that the ordinary method of accounting is followed. They bring in on the debit side of their balance sheet the stock in trade they have at the beginning of the year, the

 

(1) [1928] 2 K. B. 193.

 

(2) [1928] 1 K. B. 475. [*383]

 

amount they purchase, the various charges that they incur in connection with it, and, on the other side, their sales and their stock in trade at the end of the accounting period. It therefore follows that if, in the place of stock in trade that was brought forward on the credit side they introduced this 477,000l., there would be a large sum of profit which would be liable to assessment for tax. In point of fact the way in which they sought to bring it in was by entering the figure merely under the head of “Timber destroyed at estimated cost prices” at the lower sum of 16,000l.

 

My Lords, the Special Commissioners thought that they were right in that course: Rowlatt J. and the Court of Appeal have unanimously thought that they were wrong.

 

The appellants seek to fortify their argument by a consideration of the Rules that apply to Sch. D under the Income Tax Act, 1918. They point out that under that Schedule the tax is to apply to a trade and is to be computed on the amount of the profits and gains of the trade; and they say that whatever was received in relation to this fire was not a profit or gain of the trade, but that it was something received from the insurance, that the real business that they were carrying on was not that of insuring the timber, but its purchase and its sale. Further they say that by sub-head (k) under r. 3 of the rules applicable to Cases I. and II. there is an express provision that there shall not be deductible from the profits and gains any sum recoverable under an insurance or contract of indemnity, and they suggest that that means that by implication there is a prohibition against bringing in on the other side the moneys that are received under such a contract. My Lords, I am quite unable to take that view. All that sub-head (k) does is to prevent them from bringing in a loss which they have incurred that is covered by insurance, when, in fact, the amount of that loss is capable of being recovered by the policy moneys that they may receive; it goes no farther than that and, so far as it does extend, it is, I think, destructive of that part of the argument of the appellants which consisted in saying that, if they were [*384] bound to bring in the moneys that they received from the insurance company on the one hand, they could bring in the equivalent amount of losses on the other; this sub-section, which is in language not specially ambiguous, has expressly provided that they shall not do anything of the kind.

 

There remains this question: Ought the total amount of these insurance moneys to be regarded as part of the profits and gains of the trade? My Lords, in my opinion they ought, and for this reason: What has happened has been this, that the timber which the appellants held has been converted into cash. It is quite true it has been converted into cash through the operation of the fire, which is no part of their trade, but loss due to it is protected through the usual trade insurances, and the timber has thus been realized. It is now represented by money, whereas formerly it was represented by wood. If this results in a gain, as it has done, it appears to me to be an ordinary gain – a gain which has taken place in the course of their trade – none the less because, as Mr. Macmillan put it, and as I think Sir John Simon before him appears to have put it, it is no part of a timber merchant’s business to trade in fires. I think that a few words in the judgment of Sargant L.J. express the whole matter in a sentence, and to them it is unnecessary to add anything more. He says(1): “To my mind the book value of the timber in the company's books has nothing at all to do with the amount of the loss or with the amount which has been recovered in respect of the loss. The amount recovered is a gain of the company in the course of its business no less than the sale price of the timber would have been, if the timber had been sold in the course of ordinary sales during the continuance of the company's business; and in estimating the balance of the profits or gains which the company has to bring into account for the purposes of income tax, the amount of the excess of the sum recovered over the book value of the timber in the company’s books has to be brought into account just as fully and completely as if there had been a sale in the ordinary course of business at that price.”

 

(1) [1928] 2 K. B. 204. [*385]

 

My Lords, for these reasons I think that this appeal should be dismissed.

 

VISCOUNT DUNEDIN.My Lords, I agree. In these income tax cases one has to try, as far as possible, to tread a narrow path, because there are quagmires on either side into which one can easily be led, and I think into one of these quagmires we were tempted to be led when the argument turned upon the question of what you were entitled to debit or not. I do not think this case has anything to do with debiting losses. The whole point is that the business of the company is to buy timber and to sell timber, and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether that is a turnover in the ordinary course of their business. I think it was. They had that amount of timber, which they got rid of and for which they got a certain price, and then they could begin again. The more times you have a turnover – that is to say, the more sales you can get, provided that you are carrying on business at remunerative prices – the better for you. The result of this fire was that they got rid of so much timber and got the insurance money at that figure, and that seems to me precisely in the same position as if they got rid of it by giving it to a customer. If that is so, that is exactly the view of Rowlatt J., and I think he arrived at the right result.

 

LORD WARRINGTON OF CLYFFE. My Lords, I agree, and I have nothing to add except to say that to me, at all events, it is some comfort to think that the decision we are giving is in accordance with the commercial practice, because I notice that the chartered accountant who alone gave evidence on the point says that in his experience as a chartered accountant extending over twenty years the normal commercial method of dealing with moneys recovered by a trader under a policy of insurance in respect of stock destroyed by fire was to include [*386] the actual amount received in the accounts as an ordinary trading receipt in the same way as the proceeds of an ordinary sale of stock.

 

Order of the Court of Appeal affirmed, and appeal dismissed with costs.

 

Lords’ Journals, Feb. 22, 1929.