The points at issue were whether payments in respect of certain
indemnities, and the cost of replacing a furnace chimney, were
allowable deductions for tax purposes (see
BIM62030).
The company had been granted coal-mining leases, under the
terms of which it was liable to compensate the owners of surface
lands for any damage caused by subsidence from working the mine. It
was not in dispute that such compensation payments were an
allowable deduction.
However, under two of the leases the company agreed to make
yearly payments to the landlords for each acre under which coal had
been worked. In return the landlords agreed that they would
indemnify the company against all claims for surface damage.
In the same year the company replaced a furnace chimney that
had become dangerous. An improved chimney was erected on a site
close to old chimney.
Held that the sums paid to the lessors in respect of the
indemnities against claims for surface damage were allowable
revenue deductions, but the cost of replacing the chimney was
capital expenditure and not an allowable deduction for tax
purposes.
Justice Rowlatt noted in respect of the chimney:
"
I do not think it is possible to regard that
as repairing a subsidiary part of the factory. I think it is simply
having a new one… I think the chimney is the entirety here
and they simply renewed it."
Concerning the indemnity payments, he noted:
"
The other point seems to me to be a point of
some little difficulty and some little nicety. It is conceded on
the one hand and, in fact, it appears from the Addie's case
(see
BIM62065),
that if you buy outright the right to let down
the surface from the surface owners, however you may describe that
right in legal language - if you buy that so that you can let down
the surface without paying anything more, at the beginning of your
operations, that is capital expenditure; you pay that to enable you
to start, really. That is clear. On the other hand, if you do not
make any arrangements of this kind at all and, as the damage
happens, you go to arbitration and you pay the persons whose
property is damaged on the surface each time that you cause the
damage, that, it is admitted, is a deduction and a revenue
expense."
He also noted:
"
You buy a seam of coal for whatever is in it
at a certain price - capital expenditure. You go on and you get the
coal and pay by the ton - income expenditure, although it is really
the coal itself that is given you by a lease from the
beginning… In this case, they do not make this payment except
where they go under a new acre. The payments are progressively
distributed as they work… Have you provided by a capital
payment for getting a right or are you really, however it is
arranged, conducting your mine upon the principle of having to make
incidental payments as you go along to enable you to conduct the
mine? Not without some diffidence I think that the Commissioners
way of looking at it cannot be disturbed."
