| 10/2/2012 |
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| Board of Special Commissioners - Cases |
| Case No. 20/59 |
Decided: 01 July, 1961 |
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Capital as against income expenditure; Expenses incurred before the relative source commences to produce income; Depreciation of a particular asset may only be deducted from income generated by that source; Expenses incurred on improvements to a site or building are of a capital nature even if they are taken over in full ownership by the lessor at the lapse of the lease - articles 10 and 11, now 14 and 26, Income Tax Act
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Appellant company purchased a second-hand ship which had not as yet undergone the four yearly survey required by international maritime regulations. The vessel was allowed to travel to Malta via England by special permission because even the year of grace for the carrying out of the survey that is conceded only once during a ship's lifetime, had also lapsed. During the voyage the vessel sustained damages partly due to the crew's incompetence. The carrying out of the survey and cost of repairs amounted to thousands of liri. Appellant company claimed the deduction of the whole amount as income expenditure.
The Board agreed with Revenue's decision to base its assessment on the case The Law Shipping Co Ltd vs Commissioner of Inland Revenue (1924) and deduct only one quarter of the amount spent as income expenditure. The vessel was purchased tale quale and it is reasonable to assume that the price negotiated took into consideration the expenses that would be incurred in rendering it sea worthy, carrying out the survey and procuring maritime certification. The expense, therefore, was not incurred in the production of income but formed an integral part of the capital outlay. Indeed until such time as it was duly registered following the survey, the vessel could not even have been legally used by appellant company to produce such income.
By the time the vessel was sold years later the asset had accumulated a capital allowance far in excess of the profits it had generated. The law provides that "where full effect cannot be given to any such allowance in any year owing to there being no profits or gains chargeable for that year from the source of income in respect of which depreciation is claimed owing to the profits or gains chargeable from that source...." The Board agreed with Revenue's interpretation that this proviso makes it amply clear that a deduction in respect of depreciation, even accrued, may only be made against income produced by that particular asset and not from any other source of income.
Appellant company leased a site on which to erect a place of entertainment and, in terms of the contract, any improvements they would make would become the property of the lessor at the end of the sixteen year lease without any compensation being paid. They therefore claimed that the expenses ought to be considered as income expenditure apportioned over the period of lease.
In the case Atherton vs British Insulated and Helsby Cables Ltd it was retained that any expenditure incurred not only "once and for all" but "with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade" was of a capital nature. Moreover Hannan and Farnsworth authoritatively contend that "if a tenant makes improvements to premises leased by him for the purpose of his business the benefit he derives is not only tangible but probably measurable money's worth. Nevertheless, he cannot successfully claim a deduction of the cost thereby incurred even if he has no tenant rights in the improvements ... and the fact that the asset does not belong to him is immaterial." Both Revenue and the Board decided accordingly.
An appeal was entered before the Court from this decision (see case no. 44).
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