BIM37840 - Wholly & exclusively: expense of earning or application of profits?: legal costs in connection with an appeal

…having been expended to ascertain the true profits of the business distributable amongst the partners and assessable on the firm…

…no doubt they do run rather close to each other, but I cannot help thinking that there is a distinction between (a) and (e). Now a case might be put in which it was not very easy to say whether a thing was a disbursement or expense or was a loss. it is conceivable - such things sometimes happen - that there may be cases in which a thing might fall alternately - it might be either within (a) or within (e), but, none the less, I do think that there is a distinction to be drawn between the two.(a) relates to disbursements; that means something or other which the trader pays out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra. It is not very easy to formulate the thing, but it is easy enough to put illustrations falling on one side or the other of the line which may show what is, I think, the distinction, and the real distinction, between these things. Take the case of money being stolen from a till: I should say that that, quite plainly, was not a disbursement or an expense and, equally plainly, I should say it was a loss. Take, on the other hand,, a sum of money expended, let us say, for legal expenses. I am not, of course, on the immediate question in this case. A trader thinks that he requires legal advice, or he thinks he wants a conveyance, or something of that sort; that, I should say, could not possibly and properly be said to be a loss, but obviously was a disbursement or expense. Although, in some cases, there may be a difficulty in deciding under which head it comes and, although it is true to say that in most cases it does not particularly matter, and the things may be conveniently considered together, none the less, I think that it is perhaps useful just to consider the two things as being distinct and, if I am right in the distinction which I have suggested, it becomes reasonably plain, whether it is important for the decision of the case or not, that the question here is not really a question under (e), because there was not here any loss. There was a sum of money expended and I do not think that is a loss. There was a sum of money expended because the taxpayer conceived, and I dare say very wisely conceived, that it was a wise and judicious thing for him to expend the money. That, I think, is not a loss; on the other hand, it is a disbursement or expense.

…the question, of course, comes to be whether this, is a disbursement or expense which is ‘money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation.’ If I were wrong in the view I take, and if (e) is either alone applicable or applicable as alternative to (a), that would not really matter, for, in my opinion, the question, the test to be applied, would be just the came if one were considering whether there was a ‘loss not connected with or arising out of the trade, profession, employment or vocation.’

That brings me to the real point in this case. A large number of authorities, not the least too many, but still a substantial number of authorities, were cited to me. It is of course quite clear - there is ample authority for it and there is no doubt about it - that not every expenditure which a prudent trader makes can be deducted. There are prohibitions and they have got to be observed. The thing has been put in a very large number of cases. I shall refer - and it is as good a case as any other - to the case of Strong & Co of Romsey v Woodifield [see BIM37300]. In that case, the speeches both of the Lord Chancellor (Lord Loreburn) and Lord Davey make it perfectly clear that there may be, indeed there are, disbursements which cannot be deducted, disbursements which a prudent trader might very well think proper to make, which cannot be deducted. What Lord Davey says (I take a sentence from him; it will do as well as any other; several others might be cited) is this [5TC at page 220]: ‘It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. it must be made for the purpose of earning the profits.’ If I may say so with the utmost respect for the learned judge who uttered those words, it is probably easier to lay down a principle of that sort than to apply it directly in the numerous cases which arise, but applying as well as we can the principle which Lord Davey laid down, what one has to consider is this: It not being enough that it should arise out of, or be connected with, the trade, was it an expenditure made for the purpose of earning the profits of the trade? That, I understand, to be a slight expansion by Lord Davey of the words in the Statute which are: ‘not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation’.

Now the difficulty arises - it nearly always does arise in these sorts of cases - in drawing the line. I do not doubt that there are expenditures connected, for example, with the accounts, which are habitually allowed and rightly allowed; I do not doubt that the expenditure of keeping an accountant or, it may be, in the case of some of the very great businesses with which we are familiar keeping a whole accountants' department, is a proper deduction to be made. I do not doubt, further, that the accountants' department will deal with matters of Income Tax in the sense that they will prepare the accounts for Income Tax and, as I suppose, sometimes discuss questions with the Inspector of Taxes or representatives from Somerset House which arise, and I do not suppose it would be sought to say that, by reason of that, the expenses of the accountants' department were not proper to be allowed. I have got to decide the case, in spite of the invitation which has to some extent been given to me from both sides of the Bar, on the facts as they are found in the case, and in this case it seems to me that it is impossible to say that this was an expenditure for the purpose of earning the profits. The answer seems to me to be simple, that it was not an expenditure for the purpose of earning the profits and could not be. I cannot see that the profits were in the slightest degree altered, either decreased or diminished, as the result of this expenditure. I feel compelled, on these facts as they are set out in this Case, to hold that this was an application - I should think, as far as I can judge, an exceedingly proper application - of profits after they have been earned and was not an expenditure necessary to earn the profits. I do not think that the distinction which at one stage was a good deal pressed upon me by the learned Attorney, the distinction between a partnership and a company, or an individual, matters. As I conceive the thing, the question would be exactly the same if this, instead of being, as it was, a partnership firm, had been a company or had been an individual.