Their Lordships took time for consideration.
May 13 :- LORD GREENE, M.R., stated the facts and continued : The General Commissioners decided in favour of the appellants, but their decision was reversed by Lawrence, J., and this appeal results.
A new justice on-licence granted under the Licensing (Consolidation) Act, 1910, Section 14, takes one of two forms. It may be an annual licence, or it may under sub-section (2) be a licence for a term not exceeding seven years. Paradoxically, the annual licence gives in practice a more secure tenure to the licence-holder. Where the licence is granted for a term, an application for a re-grant at the expiration of the term is treated as an application for the grant of a new licence, with all the difficulties which that involves. An annual licence, on the other hand, is in ordinary circumstances renewed every year as a matter of course. On the grant of a new on licence the justices are bound to attach conditions 'for securing to the public any monopoly value which is represented by the difference between the value which the premises will bear in the opinion of justices, when licenced, and the value of the same premises if they were not licenced.' These conditions must be imposed which ever of the two forms above mentioned the licence may take but in practice there is a difference in application, since in the case of the licence for a term it is only payment of the part or 'slice' of the monopoly value which is referable to the term of the licence that is exacted. The advantage of this method of procedure is that the payments which the licensee is compelled to make for one period can be adjusted in a subsequent period so as to reflect what experience shows to be the real monopoly value. It will be seen, therefore, that in the present case the sums fixed by the Justices in the case of each of the three grants was intended to represent that part or 'slice' of the monopoly value which was referable to the period covered by the licence. These sums were made payable by annual installments but this circumstance clearly cannot affect the character which for present purposes must be described to the payments. If the sum payable is not in the nature of revenue expenditure, it cannot be made so by permitting it to be paid by annual instalments. These payments by installments in respect of monopoly value have not the annual quality of the payments for the grant of the annual excise licence, but are of a different character altogether.
It was not seriously argued that the payments now in dispute fall within the list of prohibited deduction set out in Rule 3 of the Rules to Case I and I of Schedule D. The question therefore is, to quote the language of Lord Summer in Ushers Wiltshire Brewery Co. v. Bruce, is the deduction claimed 'on the facts of the case a proper debit item to the charged against incoming of the trade when computing the balance of profits of it' (8 4 L.J.K.B., at p. 435;  A.C., at p. 468). This, of course, is to state the problem, not to solve it, since it remains to discover whether the item is proper one to be charged. For this purpose the first thing to do is to examine the nature of the payment, that is to say, the nature of the subject in respect of which the payment is made. In this connection the manner of payment may be relevant as throwing light appoints nature. In many cases-and in my opinion this is one of them-the question will be found to answer itself once the true nature of the payment is ascertained. Here the appellants were minded to acquire an asset in the shape of a licence for a term of years. As a condition of obtaining it, payment had to be made of a sum sufficient to secure to the public the apart or slice of the monopoly value which was referable to the period of the licence. The effect of the licensing law is, of course, to grant to a licensee what for practical purposes and in respect of a particular area is in truth a monopoly. What the grantee of a licence is under Section 14 compelled to do is, so to speak, to purchase the monopoly rights for a sum equal to their value. The public confreres the monopoly upon him, he must pay the public its value, although in the case of a licence granted for a period under sub-section (2) he pays not for the whole monopoly value but only for a part of it.
The nature of the payment which justices are to fix in respect of monopoly has been considered in a number of cases. It is true that these cases were not concerned with questions arising under the Income-tax Acts. They do, however, show what the nature of the payment is as between the licensee and the public and as between the hypothetical tenant and his landlord. In other words they show what it is that the licensee is paying for. Thus, in Inland Revenue Commissioners v. Truman, Hanbury, Buxton & Co., Lord Haldance, L.C., observed (82 L.J.K.B., at p. 1047;  A.C., at p. 659) that the corresponding section which he was there considering dealt 'not with the annual value of the licence but with its capital value.' In R. v. Sunderland Customs and Excise Commissioners, justices had omitted to estimate the monopoly value at a definite capital sum and had instead exacted payment of an annual sum representing a percentage of gross takings. This it was held they were not entitled to do. Lord Cozens Hardy, M.R., said (83 L.J.K.B., at p. 577;  2 K.B., at p. 397) : 'This is a lump sum, to be ascertained once for all, though when so ascertained it is competent to the justices in their discretion to say how that monopoly value is to be secured to the public and whether it is to be paid in one sum or by instalments.' Joyce, J., said (83 L.J.K.B., at p. 560  2 K.B., at p. 403) : 'I have not succeeded in finding anything in the Act to countenance the view that there is any such things as annual monopoly value.' The last of these cases is a rating case in this Court-Appenrodt v. Central Middlesex Assessment Committee. There did was decided that in fixing the estimated rent which the hypothetical tenant would be expected to pay, the liability for installments payable in respect of monopoly value coughs not to be taken into account. It is not necessary to consider this decision in any detail. Lord Weight, M.R., (106 L.J.K.B., at p. 693  2 K.B., at p. 54) approved the statement of Lush, J., in the Division Court in R. v. Sunderland Customs and Excise Commissioner (83 L.J.K.B., at p. 57;  3 K.B., at p. 497) that the sum fixed for monopoly value is 'the capital sum which represents the monopoly value' which he said, is only repeating the clear words of cessation 14(1) 'that the capital payment is based on the value of the premises and has directly nothing to do with annual value or with rent.' He then went on to point out that in a case falling under sub-section 92 (as did the case before this Court) the payment 'though it concerns the market value of the hereditament it is limited to the number of years (not exceeding seven) for which the new on-licence is granted; a further similar charge for a further period of monopoly value may be imposed, it seems, at the expiration of the term.' Later he said (106 L.J.K.B., at p. 693;  2 K.B., at p. 56) : 'The justices licence is essential to give the premises the status necessary to enable a licensed victuallers business to be carried on.' Romer, L.J., said (106 L.J.K.B., at p. 693;  2 K.B., at p. 61) : 'The instalments are an expense necessary for the accrual to the hoted of the incorporeal condition of being licensed premises.' It is true that Scott, L.J., thought (106 L.J.K.B., at p. 699;  2 K.B., at p. 69) that a payment under sub Section (2) is not necessarily a true capital payment, and he referred to the possibility of a fixation of the annual value of the monopoly. With respect I doubt whether it is open to justices to do this. But in any case, Scott, L.J., clearly regarded payment in respect of a five and a quarter years period (which was the case before him) as a capital nature since later in his judgment he treats the acquisition of the monopoly as being on the same footing as any capital improvement of the property effected before the licensed house was open for business, such as a swimming pool. It is to be noted that the provisions as to fixing monopoly value appear in sub-section (1), and there is nothing in the section to suggest that any change in the character of the payment or the method of fixing to takes place were a licence for a term is granted under sub-section (2). It is true that in the two earlier cases the observations which I have quoted were not directed to the case of a licence granted for a term, and it is argued that for Income-tax purposes at any rate the payments in such a case fall into a different category. This argument cannot, in my opinion, be sustained. The fact that under sub-section (2) the licence is granted for a term and the payments are made in respect of term gives a false appearance of periodicity to the payments. In the normal case the grantee of a new on-licence under sub-section (2) no doubt looks forward to a renewal of his licence and not unnaturally regards the payments which he makes as periodically payments. Indeed, he may well decided in his accounts to debit them to revenue account. This, however, is by no means conclusive as to their nature. Traders frequently prefer to debit to revenue account payments which are in their nature proper to be carried to capital account. If they do so, it means nothing more than that they have a conservative taste in the matter of accountancy.
It appears to me that there can be difference in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of a monopoly for that term. When a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term, and so on. The payments are recurrent if the licence is renewed; they are not periodical, so as to give them the quality of payments whip bought to be debited to revenue account. The thing that is paid for is of a permanent quality, although its permanence, being conditioned by the length of the term, is short-lived. A payment of this character pears to me to fall into the same class as the payment of a premium on the grant of a lease which is admittedly not deductible. In the case of such a premium it is nothing to the point to say that the parties, if they had chosen, might have suppressed the premium and made a corresponding increase in the rent. No doubt, they might have done so, but they did not, in fact, do so. The lessee purchases the term for the premium. There is no revenue quality in a payment made to acquire such an asset as a term of years. Another class of expenditure which is comparable to the payments now in question is expenditure on improvements to the property which justices may require to be made as a condition of granting licence. Such expenditure would clearly not be deductible in so far at any rate as the work required went beyond mere repairs. If my view of the nature of this expenditure is correct, it is unnecessary to discuss the authorities in which questions relating to deductions have been considered, or to refer to the various attempts which have benumbed to find a formula for describing what is a proper item to be charged when computing profits in case which do not fall within the list of prohibited deductions. I need only say that I have considered carefully the authorities to which we have been referred. They have been quoted again and again in the books and I do not propose again to quote them. But the conclusion to which I have come in the present case that the sums claimed are not deductible is, I think, entirely consonant with those authorities.
One other argument must be mentioned. It was said that whatever the position might be in the case where, for example, a freeholder obtains a licence and makes the necessary payments, there is a difference where the payments are made by a lessee under a covenant in that behalf contained in his lease. I do not follow this. If a payment is of such a nature as to preclude its deduction when made spontaneously, I cannot see that its nature is affected by reason of the fact that it is made nude a convenient with a third party. Capital improvements are often made under a covenant in a lease. I have never heard it suggested that the cost of making them can be deducted bathe lessee in computing his profits for Income-tax purposes. An attempt was made to rescue this argument from shipwreck by saying that if the lessor had undertaken to bear these payments and had consequently exacted a higher rent, the full rent could have been deducted as an expense. This argument has a familiar ring. The answer to it is that this was not the contract which the parties chose to make. It frequently happens in Income-tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for saying that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not, or vice versa. The appeal fails and must be dismissed with costs.
DU PARCQ, L.J. - I agree that this appeal be dismissed.
[His Lordship set out the facts given above and continued :] The person liable to pay these sums of Pound 570 under the justices orders were, I think, clearly the licensees, though probably no one expected that the money would come out of their pockets. When it is desirable from the point of view of lessor and lease alike that the dismissed premises should be licensed, it is necessary that they should agree how the cost is to be borne. The landlord may pay the cost and recoup himself by charging a higher rent. In the case of a short tenancy, for instance, that of the hypothetical tenant whose position had to be considered in Appenrodt v. Central Middlesex Assessment Committee, the land lord is very like to pay such a charge 'just as much as that of any other element of value in the her editment which he lets' : (per Lord Wright, M.R., (106 L.J.K.B., at p. 694;  2 K.B., at p. 57). In the present case the lessees (the appellants) bound themselves to pay 'all charges..........imposed' in respect of the licences. They accordingly came under an obligation to pay two charges, each of Pound 570, in respect of the second and third licences. In 1934, and again in 1937, they were left, until a new licence was obtained, without the protection which would enable them to carry on their trade. The payment of the Pound 570 was an expense which secured for them the right to open the Grafton Hotel as a licensed house : without that right they must either have ceased to trade there altogether, or carried on some different trade, but they could not have continued in business as licensed victuallers in those premises. In other words, When the licence dies, the trade dies, unless the grant of a new licence enables it to be carried on for a further period.
Thus the question which we have to consider comes to be whether a payment of a lump sum made to stain permission to trade for a term of years is of such a character that it 'is proper and necessary' to deduct it 'in order to ascertain the balance of profits and gains' : (see the speech of Lord Parker in Ushers Wiltshire Brewery Co. v. Bruce (84 L.J.K.B., at p. 429;  A.C., at p. 458). It is conceded that if the payment was in the nature of a capital payment, it is not deductible. Unfortunately the expression 'capital payment' does not appear to be capable of precise definition. At any rate I will not attempt to define it, but will confine myself to dealing with the facts of the present case. Here each sum in question was part of a total amount paid to acquire the right to trade for a period of years. At the date when that period began, the possession of that right was essential before trading could be begun. In these circumstances, I am of opinion that each sum paid must be considered part of a capital outlay. This view is, I think, in accordance with the principle laid down by Viscount Cave, L.C., in British Insulated and Helsby Cables Ltd. v. Atherton, when he said (95 L.J.K.B., at p. 340;  A.C., at p. 213) : 'But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority.'
In two Scottish cases, Lord Clyde (Lord President) formulated the question for decision as follows : 'Are the sums in question part of the traders working expenses, are they expenditure laid out as part of the process-of-profit earning; or, on the other hand, are they capital outlays, are they expenditure necessary for the acquisition of property or rights of a permanent character the possession of which is a condition of carrying on the trade at all ?' (see Addie & Sons Collieries, Ltd. v. Inland Revenue Commissioners  S.C., at p. 235), and Inland Revenue Commissioners v. Adam  S.C., at p. 742). It is true that the period for which the right was acquired in this case was three years and no more, and a doubt may be raised whether such a right is of 'enduring benefit' or 'of permanent character.' These phrases, in my opinion, were introduced only for the purpose of making it clear that the 'asset' or 'right' acquired must have enough durability to justify its being treated as a capital asset. This is born out, so far as Lord Clydes judgments are concerned, by the fact that in Adams Case the duration of the right acquired was eight years, and that this Lordship there spoke of its 'relatively permanent character.' 'Permanent' is indeed a relative term, and is not synonymous with 'everlasting.' In my opinion the right to trade for three years as a licensed victualler must be regarded as attaining to the dignity of a capital asset, whereas the payment made for an excise licence is no doubt properly regarded as part of the working expenses for the year. For these reasons I have come to the conclusion that the Commissioners were wrong; not in their findings of fact, which are not disputed, but in the inference which they appear to have drawn from the facts, and that the decision of Lawrence J., was right, and sold be affirmed.
SINGLETON, J., after stating the facts, continued : It is to be remembered that under the Licensing (Consolidation) Act, 1910, Section 14(4), a new justices on-licence granted for a term under the section may be forfeited if any condition imposed under the section is not complied with, by order of a Court of summary jurisdiction. Thus, failure to make any one of the payments might have resulted in loss of the licence, without which the business could not have been carried on. It becomes necessary, therefore, to consider what is the nature of the payment made as one of the conditions of the grant of a new justices on-licence under Section 14(1)(a) of the Act of 1910. The sub-section speaks of it as 'any monopoly value which is represented by the difference between the value which the premises will bear, in the opinion of the justices, when licensed, and the value of the same premises if they were not licensed.' This clearly indicates a capital value, an increased value attached to the premises. This was the view taken in R. v. Sunderland Customs and Excise Commissioners Lord Cozens Hardy, M.R. said (83 L.J.K.B., at p. 557;  2 K.B., at p. 397) : This is a lump sum, to be ascertained once for all, though when so ascertained it is competent to the justices in their discern on to say how that monopoly value is to be secured to the public, and whether it is to be paid in one sum or by installments.' Sir Samuel Evans, P., said (83 L.J.K.B. at p. 558;  2 K.B., at p. 399) : 'I think it is abundantly clear from the section that the monopoly value must be a definite sum fixed once for all when the licence is applied for and before it is granted. When it has been fixed the justices must take measures by the conditions attached to the grant to secure it to the public, and they can include in the conditions provisions for payment by installments but by sub-clause (b) of sub-section (1) the amount of any payments imposed under the conditions shall not exceed the amount thus required to secure the monopoly valued. It follows that the monopoly value cannot be left to be ascertained or fixed either by the justices, or by anybody else, annually, or periodically.' Juice, J., said (83 L.J.K.B., at p. 560;  2 K.B., at p. 403. I have not succeeded in finding anything in the Act to countenance the view that there is any such thing as annual monopoly value. I think there is not.' The same view was taken by Lawrence J., in Kneeshaw v. Abertolli. It is unnecessary to express a view as to whether what he said as to the mode of assessing monopoly value in the case of a licence granted for a period of years is right or not, but it is clear that he was of opinion that the amount fixed by way of monopoly value was a capital sum.
In Appenrodi v. Central Middlesex Assessment Committee the Court was dealing with a question under the Rating and Valuation Act, 1925 and the point which arose was whether installment payments made by the owner occupier of licensed premises in respect of monopoly value of a licence granted for a period of five and a quarter years could be taken into consideration by way of diminishing the estimated rent which a hypothetical tenant would pay for the premises. The Divisional Court had held that the payments ought not to be taken into consideration and from two of the judgments at least it is clear that the payments were to be regarded as payments of capital nature. The Court of Appeal affirmed the decision of the Divisional Court on somewhat different grounds. Reliance was placed by counsel for the appellant on the Judgment of Scott, L.J., in this case : on there other hand, the Attorney-General submitted that if it were carefully examined it was really support for the case of the Crown. Scott, L.J., said (166 L.J.K.B., at p. 698 :  2 K.B., at p. 66) : 'The Divisional Court have however decided that the amount of rent which the hypothetical tenant would be willing to pay is not in law affected by the payments of monopoly value. The main reason for the decision, as explained by the Lord Chief Justice, was that a payment to be made for monopoly value is, according to the decision of the Divisional Court, affirmed by this Court in R. v. Sunderland Customs and Excise Commissioners 390, and followed by Lord Reading in R. v. Taylor, R. V. Amendt ( No. 2) a capital payment whether payable in one sum or in several installments. The learned Chief Justice concluded his judgment thus (105 L.J.K.B., at p. 496.  2 K.B., at p. 455) But the one thing that is clear about it is that it is a part of capital value and in those circumstances it seems to me that it is impossible to hold that the sum should be taken into account by way of deduction when the question is asked : What would the hypothetical tenant be prepared to pay by way or rent ?' And I draw attention to another passage in the judgment of Scott L.J., commencing at the words (106 L.J.K.B., at p. 699;  2 K.B., at p. 67) : 'I agree that installments etc.', and ending with the words : 'As they have an unfettered discretion as to how they secure payment of the monopoly value during the period, in can see nothing to prevent their providing in each year for payment of an amount which they estimate will be the equivalent of the annual value of the monopoly in that year, if they so choose, but whether they make it a lump sum for the period at the beginning of each year seems to me immaterial. It show, at any rate that a payment under sub-section (2a) is not necessarily a true capital payment.'
I confess that I find it difficult to reconcile some expressions of Scott. L. J., with the views of the Court of Appeal as expressed in R. v. Sunderland Customs and Excise Commissioners. If as the Lord Justice said the words 'capital sum' were not used in the judgments in the 1914 case there were reference to a 'lump sum payment to be ascertained once and for all', and Joyce. J in his judgment made it clear that he could find nothing which pointed to an annual payment made for a licence granted under sub-section (1) of Section 14, while in Appenrodits Case it was a payment for a licence granted under sub-section (2) Scott L.J., obviously thought that there might be a difference between the two and that is something which has to be considered, in this connection it must not be overlooked that sub-section (1) alone deals with the payment which may have to be made and it is not easy to see that a payment required under that sub-section may sometimes be a capital payment and at other times something quite different. Moreover, the monopoly value for which the payment is required attaches in a sense to the premises. The amount of it is determined in a normal case very much in the same way as compensation was determined in the case of a redundant old on-licence. That was always regarded as a capital sum and so I venture to think has monopoly value been. I cannot help feeling that there has been some misunderstanding as to Section 14 of the Licensing (Consolidation) Act, 1910 which was in the same terms generally as Section 4 of the 1904 Act. I have always understood that the reason for sub-section (2) enabling a licence to be granted for a period was because of the difficulty of arriving at the amount to be paid by way of monopoly value. If the licensing justices granted the ordinary licence AAHC (spoken of as an annual licence) and fixed a sum to be paid for monopoly value, they could not afterwards after that sum, however unfair it might turn out to be to the one side or to the other. And the difficulty in arriving at a figure in respect of a new house in a growing neighbourhood before trade has commenced is obvious. To avoid this difficulty, or to meet it to some extent, it was provided that a licence could be granted for a period, and when that course was adopted a more or less nominal payment was required in the first instance for monopoly value and when the subsequent application was made the justice, with the help of the Commissioners of Customs and Excise and with knowledge of the trade of the house and of development of the neighbourhood, were in a much better position to form a view as to what amount should be required by way of monopoly value. The first payment (already made) was regarded as in the nature of a payment on account and a sum was fixed which was much more likely to be fair to both sides than one determined on the initial application could reasonably have been excepted to be, (See note in Patersons Licensing Acts 51st ed., at p. 493) If this be the correct view a payment required on the grant of a licence under sub-Section (2) is just as much a capital payment as it is in the case of a grant under sub-section (1) and that I think was the view of Lord Chief Justice in Appenrodts Case.
We were told by the Attorney-General that there was a practice in London of granting period licences again and again, as was done in the present case. Now it may be that that is strictly within the terms of sub-section (2) of Section 14. But I cannot think that it was the intention of the Legislature, if the just case adopt such a course, and if they time and again fix a sum for what is described as monopoly value for a period, they are in my view departing from the general understanding of monopoly value. The period may be short one, and it can be argued that what they are then requiring from the applicant is a periodical payment to allow him to carry on his trade in that house. If that be the true position they do not alter it by calling it a lump sum payable by installments, in the case which we have to consider on each of the last two applications the justices fixed the sum Pound 570 payable by installments of Pound 190 a year. It is at least akin to saying : 'Pay Pound 190 a year for the privilege of carrying on your trade on those premises.' No doubt the justices had the help of the Customs and Excise (as representing the public) in arriving at the proper sum and if they can be said to be parties to the fixing of a sum to be paid annually for these so-called period licences the position is indeed confused. The case stated does not give the reasons for the decision of the Commissioners, if they had found as a fact that the justice had on either of the last two applications decided that the Pound 190 a year was the amount to be paid for the licence to trade during that year, it seems to me that it would have been difficult for any Court to interfere with their decision. In the absence of any such finding we must come to the conclusion that the justices did that which was their duty and fixed a capital sum as the value of the monopoly. If that be so, the company is not entitled to have the amount of an installment of a capital sum allowed as a deduction in calculating its yearly profit, any more than it would be if it had entered into a contract with the owners to rebuild or to make structural alterations (as distinct from repairs) which the licensing justice might require during the currency of the lease.
I have dealt with the Licensing Act, 1910, Section 14, at some length, because of what we were told as to the practice of granting period licence, but on subsequent applications. If this is done and if a sum is required to be paid by way of monopoly value for a short period, it is arguable that the sum 'is not necessarily a true capital payment,' as Scott. L. J., said in Appenrodts Case but that it is rather an amount required for the privilege of carrying on the trade for the period. It may be that this was the view of the Commissioners but they have not so found. In the course of the argument it was suggested that it might be necessary to send the case back for endings of fact, but counsel for the company said he could not ask that Commissioners to find that the justices had done something illegal id set, that they hab fixed a yearly sum instead of a capital sum, if the absence of any such finding by the Commissioners I do not see that it is open to this Court to say that the sum fixed is other than a capital sum and consequently I agree that the appeal fails.
Leave to appeal to the House of Lords.