Their Lordships took time for consideration.
LORD GREENE, M.R. - It is conceded in this appeal that if the sum in question was not of a nature to attract income-tax in the hands of the company it cannot be taxed in the hands of the shareholder, whose executors are the appellants, either for income-tax or for surtax. The sole question, therefore, which we have to consider is whether or not this sum was in the hands of the company a receipt on capital account, or a receipt on revenue account. The fact that the company has agreed to have it treated as between itself and the Inland Revenue as a receipt on revenue account cannot bind the present appellants, who are not affected by the view which the company may have taken.
The difficulty lies, as it does so often, in the application of principles to the facts of an individual case; and in this class of case, different minds may well take different views. I have come to the conclusion that the decision of Macnaghten, J., was right. The first thing to do is to examine the nature of the payment which company received. It was a sum of Sterling Pound 15,000, received under a policy taken out for the benefit of the company covering injury or death by accident of Mr. Crawford, one of the directors of the company. It was a very small company. There were three principle shareholders and directors. Mr. Crawford was a gentleman who had very special experience and knowledge of bloodstock, with the sale and purchase of which the companys business was mainly concerned. The nature of his special value to the company is set out in the case stated, and I need not read the passages which refer to it. The company adopted the policy of effecting insurances of a similar character in respect of Mr. Crawford and also in respect of the other two directors, who, in different ways, appeal to have had qualifications and experience of special value to the company. But Mr. Crawford obviously stood in a category by himself. The object of the insurance was not to cover any temporary loss. That is stated in the case, although when one comes to look at the policy it is not quite clear how that conclusion was reached by the Special Commissioners. But the suggestion out of which the insurance materialized was that, in the event of Mr. Crawfords death, the companys business would suffer and his family would not get much for his shares. The latter part of that sentence which was quite clearly to give the company some money to make up for the loss which it would super if it were deprived of the very volleyball services of Mr. Crawford.
It is clear from the case that Mr. Crawford was not bound to the company by any contract. He could have served his connection with it, or he could have ceased to perform the very useful services which he was performing. But that, to my mind, does not affect the matter. From the business point of view Mr. Crawfords connection with the company was one which obviously was likely to endure, and the absence of any contract of service binding him to the company does not alter the business position, which was that, so long as he remained there, he would naturally continue to do what he had done in the past and give the company the benefit of his greats experience. The case, therefore, may be treated, it seems to me, in exactly the same way as a case in which a valuable servant is bound by a contract, long or short, and the benefit of his services is protected, so to speak, by a policy of insurance taken out by the employer. The policy contained what is called a compensation schedule, and it is, on the face of it, perhaps more appropriate to a policy designed to compensate an individual in respect of injury by accident; but that was not the object of this policy. It was not a policy such as that dealt with in the case of Murphy v. Gray & Co. The object of the policy in that case was to put the company in funds in respect of payments to employees which, either through a legal obligation or through a moral obligation, it might be called upon to make. In that respect it differs from the purposes of the present policy, which was not to enable the company to make payments to Mr. Crawford, but to give the company something to make up for the loss which the company would sustain if it were tone deprived of Mr. Crawford services. Under the policy a sum of Sterling Pound 15,000 was payable in the case of death or disabling injuries of a specified character, the occurrence of which would obviously have interfered with his services, or deprived the company of them altogether; then their is a provision of Sterling Pound 50 a week in respect of temperate partial disablement from engaging in or giving attention to profession or occupation. Bearing in mind the object of this policy, if Mr. Crawford had, for instance, suffered a temporary disablement over a period of six months, and the company had thereby been deprived of his services during that period, the company would, nude this policy, have been receiving Sterling Pound 50 a week, and that Sterling Pound 50 a week would have been received by it not for the porpoise of handling it over to Mr. Crawford but for the purpose of putting it into its own coffers in order to make up in whole or in part for the loss which it would suffer by being deprived of his services during that period. The provisions of the policy therefore fall into line with the general purpose which the company had in taking it out. In point of fact, what happened was that Mr. Crawford unfortunately was killed in an accident. The company therefor was deprived for ever of his services in the future, and its assets were increased by the sum of Sterling Pound 15,000 received undo the policy. That sum was distributed among the shareholders. What we have to consider is whether that sum of money received in the circumstances whip I have stated and being of the nature which I have stated, is to be treated for income-tax purposes as capital or income.
It is useful to consider whether there is any broad class into which payments of this character can be said to fall. I think it just to observe as a purely general proposition that in the case of a trading company both goods and services fall into the same class. The expenditure incurred in procuring the goods or producing the goods in which a person trades and the benefits derived from disposing of those goods are obviously of a revenue character. Similarly the expenditure incurred by a person in securing the services of his employees and the benefits derived from those services, reflected as they are in the output and profits of the employer, are again, generally speaking, of a revenue character. The matter can be carried a little further in the case of goods. Not merely are the profits derived from the sale of goods in which a person trades of a revenue character, but insurance moneys received in respect of the loss of trade goods are proper receipts to appear in a revenue account. If a company insures its stock of goods against fire and that the stock is destroyed by fire, however, great and valuable it may be, the receipts must be treated in exactly the same manner as receipts from the sale of the goods would have been treated. The trader, it is true, as has been said, does not trade in fires but in goods, but if he dispose of the whole of his stock by sale, or if the whole of his stock is destroyed by fire and the insurance money is received, there can be no ground for differentiating for tax purposes between the purchase money and the insurance money.
It seems to me that the benefits derived from a service contract fall into the same broad class. Suppose a company has a particularly valuable servant engaged under a contract of service. So long as that contract remains in force the salary which the company pays is expenditure on revenue account. The benefits which the company receives are reflected in its output and the profits that it makes. They are equally matters for revenue account. If during the course of that employment the servant is temporarily incapacitated, the companys revenue account is affected by reason of the fact that during the incapacity it produces less goods or earns less profits. It may say to itself : 'The services of this employee are so important for our business that it is worth our while by way of insurance to protect ourselves against the loss which we shall suffer in our trade if he is temporarily incapacited.' That loss is, of course, of two kinds : (1) the payment of salary during the incapacity, and (2) the actual loss of the profits which the company would otherwise have made. If the company takes out a policy for a sum which the directors estimate will fairly represent the los or part of the loss - it matters not which - that they will suffer if they are deprived of those services, can it be said the the Sterling Pound 50 a week or whether the figure may be, that the company receives under such a policy is anything but a revenue receipt It seems to me that the insurance moneys received to cover the company against the revenue loss which it suffers by being deprived of those services are receipts on revenue account and nothing else. But supposing the company carries the matter a step further rang says' 'We shall suffer loss not merely by the temporary incapacity of our servant, but if he dies during the period of service we shall suffer a very much greater loss', and, with that in mind, it decides to extend the insurance to cover the death of this valuable servant and insures his life accordingly for a lump sum. Whether or not the directors estimate of the loss which they will suffer by the death of that servant is accurately reflected in the sum which they fix for his insurance is neither here nor there. The important matter is the object of the insurance, which may or may to be entirely achieved according to the accuracy of the estimate made. What would be the position if after taking out that policy the employee happened to die, with the result that the company was deprived of those benefits on revenue amount which it would have received if it had continued to enjoy his services ?
There is no magic here in the distinction between a lump sum and a periodical sum. The question is : What is the nature of the sum - and although the fact there is a lump sum paid once and for all rather tends to colour the question and to make one inclined to regard it as of a capital nature, that, in my opinion, is apt to be misleading. To go back to the example I took a moment ago of temporary incapacity, I myself cannot see what difference there can be between a case where the insurance takes the form of a weekly payment and a case where it takes the form of a lump-sum payment to cover some defined period. Similarly in the case of death, the fact that a lump sum is paid cannot in my view, differentiate the case from one where a periodical payment is made year by year under a policy during the unexpired part of the contract of service. Suppose that the policy, instead of providing that the company should receive a lump sum on death, provided that during the remainder of the period of service between the death and the end of the term the company should receive a yearly sum, the object being to compensate it for the estimated loss it would sustain, I cannot see that there can be any difference between the two cases. My view that insurance moneys received in circumstances such as those which I have described are really receipts on revenue account can be tested in the case, for instance, of a particularly valuable commission agent. A company might be in a position to estimate with very considerable accuracy the amount of business which it was likely to get from a particular commission agent, and it might be in a position to fix very closely the appropriate sum for insurance against his incapacity or death. It seems to me that whether the amount of the insurance is fixed on an estimate which in the circumstances can be made with substantial accuracy or whether it is fixed on the basis of a broad estimate by the employer, as to the sum for which it will be worth his while to insure the employee makes no difference. Therefore, it seems to me that in this case the receipt must be treated as a receipt on revenue account.
The matter can be looked at from rather a different pointed of view. I do not wish to lay down any general proposition which would lead to the result that the test in the case of payment is necessarily the same as the test in the case of receipts. In the case of payments the question whether they are to be treated as deductible expenses is complicated by the special provisions of the Income-tax Acts which lay down certain categories of expenditure which are not deductible. But looking at the matter from the broader point of view, on the question whether a particular item of expenditure or a particular item of receipt falls into the category of revenue expenditure or a receipt, or capital expenditure or receipt, I think assistance is to be obtained from examination of cases which have dealt with the question of expenditure. I do not propose to go into the various cases whip have bed cited to us, but the case of Mitcheil v. Noble Ltd., is perhaps the best example. That was a case, putting it shortly, in which the company found it advisable to pay money in order to get rid of a servant whose services they no longer required and who in point of fact was embarrassing to the company. It was held that the sums paid in order to get rid of that servant were admissible deductions. When an employer or a company finds it desirable to expend money in getting rid of an onerous contract of service. The expenses incurred are revenue expenses, but it does not seem to me to follow that the money received in respect of the loss of a beneficial contract of service falls into the same category; and, apart from the fact that no actual contract existed, that appears to me to be the present case. There is one more case to which I may refer, the case in the Privy Council to which our attention was called that the Income-tax Act which was being dealt with there was different in language from our own Income-tax Acts, but it does afford an illustration of what happens in the matter of insurances of a particular character. I think the result of that case is of general application in this sense; the particular matter of insurance that was being dealt with there was an insurance against loss of profits. A manufacturer can, of course, insure his factory against fire. The receipts from that insurance will obviously be capital receipts. But supposing he goes further, as the manufacturer did in that case, and insures himself against the loss of profits which he will suffer while his factory is out of action. It seems to me it is beyond question that sums received in respect of that insurance against loss of profits must be of a revenue nature. Similarly the moneys received under a policy of insurance against the loss of profits through the loss of a valuable servant must be essence be receipts of a revenue nature. As I have already said, I can draw no distinction between the case where the receipts under such an insurance take the form of periodical payments and the case when they take the form of a lump sum paid down.
The cases which were relied upon by counsel for the appellants do not, in my opinion, support his proposition. The two main ones were Chibbett v. Robison & Sons and Du Cros v. Ryall. The former was a case in which a firm of ship managers, whose sole business consisted in managing the ships of a particular company, received in the liquidation of that company a sum of Sterling Pound 50,000. The question was whether that sum ought to be treated as part of the profits of their business. When the employing company went into liquidation the business of the firm of ship managers came to an end, and the receipt was held to be to a receipt from business activities, but in the nature of a voluntary payment, made as compensation for the loss of the profits of their employment under the company which had terminated. It seems to me that that stands in quite a different category from the present case. The other case, Du Cros v. Ryall, was a case in which the general manager of a company working on a fixed salary and a commission on profits had a contract for a fixed term whip has repudiated by the employing company. He brought an action which was compromised, and the question was whether the large sum paid as agreed damages under that compromise was assessable nude Schedule E. The contract of service was at an end. The source of income had disappeared, and the sum paid by way of damages could not be regarded as a sum derived from the employment. It was something which arose outside the employment. It was something to which Mr. Du Cros became entitled by reason of the disappearance of the employment. It was therefor again of quite a different character from insurance moneys received by a going concern in order to recoup it for the loss suffered through the death or disablement of a valuable servant, or, as in this case, of a person associated with the company without a contract of service whose services, from a business point of view, the company might reasonably anticipate would continue.
In my opinion, as I have said, the learned Judge came to the right conclusion in this case, and the appeal must be dismissed with costs.
SCOTT, L.J. - I agree.
MACKINNON. L.J. - I agree.
Leave to appeal to the House of Lords.