LORD DENNING M. R. The facts appear from the case stated in this case and in the previous case of Bolam v. Regent Oil Co. Ltd., and I will only state sufficient to show the problem. There are three large suppliers of petrol in this country - Shell, Esso and Regent. Since the war there has been intense competition between them. Each of these three great companies has sought to get the owners of garages of others. Each seeks to get the retailer to sell its brand of petrol exclusively. The competition is so intense that they call it an 'exclusively war'. The retailers have not been show to take advantage of this war between the giants. They have bid the one against the other. They ask each of the big companies : 'What will you pay me if I tie myself to your products ?' In the early stages the inducement held out by each company was a simple rebate. The company would offer the retailer a rebate of a farthing or thereabouts on every gallon of petrol if he would promise to sell its brand to the exclusion of all others. The retailer would tie himself to the company offering the most rebate. Competition forced the rebates up. The next stage was that instead of rebate, the company paid a sum in advance to the retailer each year according to the estimated gallonage for the coming year. So the retailer received cash in hand at the beginning of the year, and then at the end of the year the figure was adjusted up or down according to the gallonage actually supplied. The retailer would tie himself to the company offering the best advance payment. The third stage was, that instead of an advance for one year, the company paid a lump sum in advance for five or six years ahead; and this was adjusted up or down afterwards according to the gallonage sold. That was the stage reached in Bolams case, where Danckwerts J. held that these advance payments made by a company were payments of a revenue nature. They were not capital expenditure. They could be deducted by the company in calculating its profits for tax purposes.
We have now reached a further stage. Some of the retailers have taken even greater advantage of their bargaining position. They have extracted from the oil companies a sum in advance which is not to be returned in any circumstances, and furthermore, in such a form that the retailers hope will not be taxable in their hands. This form is known as 'lease-sublease'.
I will describe it by reference to one of the cases. First, the lease. Green Ace Motors Ltd. owned a garage and filling station in the Norwich Road, Ipswhich. On June 11, 1956, Regent paid Green Ace Motors the sum of pounds 5,000 which was described as 'paid by way of premium'. In return, Green Ace Motors demised to Regent the garage and filling station for 10 years from May 13, 1955, at a rent of pounds 1 a year. The pounds 5,000 was calculated in this way : It was estimated that Green Ace Motors would, during the 10 years, sell 1,200,000 gallons of petrol, and that the rebate on that gallonage would be at about 1. d a gallon. That comes to pounds 5,000 over the 10 years. Secondly, the sublease. On the same day, June 11, 1956, Regent sublet the property back again to Green Ace Motors. They subdemised it for 10 years less three days from May 13, 1955, at a rent of pounds 1 a year. This sublease contained a specific covenant which tied Green Ace Motors to Regent. They covenanted that during the term of the sublease they would buy all their requirements of motor fuels from Regent and they would not sell any fuel except that supplied by Regent. They covenanted also to keep the premises open for the supply of fuel and not discontinue business or reduce the number of pumps. They could not assign the premises if they got a responsible person who would covenant to observe the tie. Thirdly, additional payment. On the same day, June 11, 1956, Regent agreed that if during the 10 years Green Ace Motors bought from them more than 1,20,000 gallons, they would pay or allow by way of rebate a penny a gallon on every gallon over 1,20,000. In other words, if Green Ace Motors sold more than the estimated gallonage they were to receive extra payment. But there was no provision for any adjustment for a repayment of any part of the pounds 5,000. Regent made similar agreements with the other owners of garages, but usually for longer terms of years and bigger payments. In some cases the sum paid was not described as a 'premium' but just as a 'sum.'
The question is whether the pounds 5,000 and similar sums which Regent thus paid were sums employed by Regent as capital in its trading; for if they were, regent was not entitled to deduct them in computing its profits (see section 137(f) of the Income-tax Act, 1952). But if they were of a revenue nature, of course, they could be deducted. The commissioners held that the payments were properly to be deducted as of a revenue and not of a capital nature. Pennycuick J. held that the commissioners could not reasonably come to that conclusion. He held that they were payments of a capital nature.
We were referred to several authorities on this subject, particularly the well-known words of Viscount Cave L.C. in British Insulated and Helsby Cables v. Atherton and of Lord Macmillan in Van den Berghs Ltd. v. Clark, and the recent application of those principles in the opencast mining cases of Knight v. Calder Grove Estates and H. J. Rorke Ltd. v. Inland Revenue Commissioners. If one looks at the transaction according to its legal form, the payment of the lump sum was to my mind clearly expenditure of a capital nature. It was paid by Regent so as to acquire a lease for a term of years at a nominal rent. Whether described by the parties as a 'premium' or as a 'sum' it was nothing more nor less than a premium paid for a lease. If Regent had paid an annual rent for the term of years, the payments of rent, of course, would be of a revenue nature, but a premium paid at the beginning is clearly capital expenditure. It is a sum paid once for all so as to acquire a permanent asset. If Regent had put this permanent assets to profitable use by subletting it at a rack-rent, the premium would clearly be capital used to produce revenue. So also when it puts the asset to profitable use by subletting it to a retailer in return for a tie. Even if one looks at the transaction in a business sense one gets the same result. The payment was made so as to acquire an exclusive output for Regents oil for a term of years. This was an asset of a permanent nature which would bring in revenue throughout the term. Suppose Regent were to say to the owner of the piece of land : 'We will pay you pounds 5,000 if you will give us the exclusive right to sell petrol at this point for five years' or 10 years or 21 years, as the case may be; and were themselves to sell direct to the public at that point. Such a payment would clearly be a capital payment. I see no difference between that case and the present. True it is that regent to not sell direct to the public but only sell through retailers. But the effect is the same. Regent say to the retailer : 'We will pay you pounds 5,000 if you will sell our products exclusively at this point for five years' or 10 or 21, as the case may be. Regent make a payment once and for all. In return they get an advantage which is of enduring benefit to them. It brings in revenue to regent week after week, and month after month, from the petrol they supply to the retailer. I have no doubt this advantage is a capital asset and the payment for it is capital expenditure.
The burden of Mr. Bornemans argument before us was this. He said that these lump sum payments were really only rebates. They were allowed in advance here just as they were in Bolams case; and that these companies were merely the vehicle by which the allowance was made. I cannot accept this view at all. These lump sums were not rebates. True it is they were calculated on the estimated gallonage, but the measure of a thing is not to be confused with the thing itself. The Yardstick is different from the cloth which it measures. We must look at these lump sums as they really were, payments for a permanent assets in the shape of an exclusive output of Regents product, and as such they were capital payments.
I would like to pay tribute to the care and consideration which the commissioners gave to this case, but after reflection I have come to the conclusion that their decisions was one to which they could not reasonably come. I think these payments were of a capital nature and I agree with Pennycuick J., and I would dismiss the appeal.
DANCKWERTS L. J. In Bolam v. Regent Oil Co. Ltd. sums paid by regent to retailers of petrol by reference to 'rebates' of so much per gallon of petrol sold, were held not to be capital payments but deductible payments out of revenue for income tax purposes, albeit in some cases considerable sums were paid by Regent to retailers in advance of actual sales. The correctness of that decision is not contested by the Inland Revenue.
The present case is concerned with some transactions (of a type of which it is said that there are only 12 examples) in which a different arrangements has been adopted. I am afraid that Regent has been pushed by the cupidity of the retailers, given strength by the competition of the oil companies, into a position which is disadvantages to Regent, because the payments have become capital payments, and cannot be deducted from profits for purposes of income tax.
The transactions are carried out by means of a lease at a nominal rent by Regent of the retailers garages with the further considerations of a lump suns payment by the regent followed by a sublease at a nominal rent to the retailer, who enters into covenants which include a covenant restricting the retailers sales of petrol to the products of regent. In two cases the lump sums is described as a 'premium' but in the other cases it is simply referred to as a sum of money.
It has been argued on behalf of the regent that as the lump sum has been calculated by reference to the rebate of Id. per gallon on the estimated amount of petrol likely to be sold by the retailer during the period of the transaction, these transactions are essentially of the same character as those considered by the court in Bolam v. Regent Oil Co. Ltd. and the device of a lease and sublease is merely a vehicle for carrying out the same purpose of providing the retailers with their rebates and giving regent security for the retailers obligations. I am afraid that these arguments, in my opinion, cannot succeed. The real purpose of the transactions, is, of course, to secure a tie, in the sense that the retailer and his petrol station are restricted to sale of Regents products. This is an asset of commercial value in the fierce competition between the rival oil Companies. In my opinion, it is impossible to ignore the form, which the transactions have taken. Very often the convincing forms adopted to decide the result of the operation which is carried out, not only for the legal purpose but also for the substance. It may well be that a form could have been devised by a skillful draftsman in which the purpose could have been achieved while present case I am satisfied that the payments have been made capital payments, and one can see that the retailers may well have reasons for desiring that the payments to them should be capital payments.
In my opinion, therefore, the conclusion reached by the judge was correct, and the appeal should be dismissed.
DIPLOCK L.J.I, too, agree. Counsel for the taxpayer has attacked a judgment of Pennycuick J. on the grounds that he was mesmerised by the fact that this transaction involved the acquisition by the taxpayer of an interest in land. It is urged that we should look at it not with the clouded gaze of conveyancer, but with the penetrating observations of a businessman, we should look not to the form but to the substance. But this is a case in which the substance follows from the form. The purpose of acquiring the interest in land, the head lease, was that there might be attached to it by means of the sublease to the dealer covenants by the dealer under which he would be compelled for the duration of the lease (which varied on the cases under considerations from five to 20 years) to buy his petrol exclusively from the taxpayer, regent. Not only was he obliged under those covenants to buy all his petrol from regent but he was compelled to continue to carry on the business during the duration of the lease, and not to reduce the number of his pumps. Furthermore, the covenants were so designed that if he himself on which the business or if the sought to assign the business, the premises on which the business was carried on would still be tied and continue to be used as an outlet, and an exclusive outlet, for regents oil. This was what regent acquired by the premium paid for the head lease. It seems to me plain that it was a capital sum expended to secure an advantage of enduring benefit during the period of the head lease.
Pennycuick J. held that the commissioners could not, on those facts, reasonably come to the conclusion that the payments were of a revenue nature. I should hesitate always to say that the commissioners had come to a conclusion which no reasonable person their decision as a result of me that in this case the commissioners reached their decision as a result of misdirecting themselves on a matter of law. In the case stated they refer to the well-known dictum of Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton where he refers to assets or advantages for the enduring benefit of the taxpayers trade. I think it is fairly plain from what follows in the course of the case stated that the commissioners interpreted 'enduring' benefit not in relation to time but in relation to seize. They also refer to Lord Macmillans observations in Van den Berghs Ltd. v. Clark and put the question which they considered they had to determine thus '.... were the several transactions with retailers ordinary commercial contracts made in the course on [Regents] trade... contracts for the disposal of their products ?; or did such contracts, on the contrary, relate to the whole structure of Profit-making apparatus ?' That it is true was the antithesis on the facts of Van den Berghs case but on the facts of this case it is a false antithesis, for it matters not whether the contract relates to the whole structure of Regents profit-making apparatus. What matters is whether or not they were moneys which were expended to obtain an enduring benefit for the trade, even though the benefit related only to a small part of the trade.
The reason I think that the commissioners have misunderstood or misapplied those citations is because in the next sentences they go on to say this : 'In our opinion these questions' - that is to say, the questions they had extracted from Athertons and Van den Berghs cases - 'had to be answered having regard to the whole nature, extent and scope of regent trade, including the fact that the payments in question were not expected to secure an increase in regent share of the oil trade but only to maintain it.' With the greatest respect that was an irrelevant consideration. If a trader acquires a capital asset in order to carry on trade to produce his stock-in-trade or to enable him to sell it, it matters not whether he does it in the hope of extending his business or of maintaining that business. To instal a new machine is to acquire a capital asset whether it is to replace an obsolete machine and retain trade against competition or whether it is to extend the trade.
The next point to which they refer in their case is this. They go on to say : 'What might be an enduring advantage in the case of a company with a small and limited turnover would probably be an insignificant matter in the case of a company with a 'word-wide or nation-wide trade.' That, again, with great respect, seems to me to be an irrelevant considerations whether it is a capital asset or not depends not upon its size in relation to the size of the total business done by the company. The commissioners then go on to say : 'It was therefore a question of degree....' I think they are here misdirecting themselves. The question was not a question if degree. It was a question of principle : what was the nature of the asset acquired This did not depend upon the seize nor upon whether it was acquired in order to increase or maintain trade. I agree that the payments made were payments of a capital nature and the appeal should be dismissed.
Appeal dismissed with costs.
Leave to appeal to House of Lords refused.
Solicitors : J. G. Senior; Solicitor of Inland Revenue.