Their Lordships took time for consideration.
May 7. LORD EVERSHED M.R. read the following judgment : Two appeals by the Racecourse Betting Control Board (which I shall hereafter refer to as 'the board'), and corresponding cross-appeals on the part of the Crown have been heard together. One appeal and the corresponding cross-appeal are concerned with the boards liability to income tax; the second appeal and cross-appeal relate to profits tax. It has been agreed before us that identical principles apply, so far as is relevant to these appeals, to both income tax and profits tax, so that the answer as regards the one necessarily involves the answer also as regards the other. In the circumstances I shall confine myself in this judgment to income tax.
The board has been assessed to income tax under Schedule D of the Income Tax Act, 1952, for the income tax years 1953-54 and 1954-55, in reference to its trade as a totalisator operator. Although Mr. Heyworth Talbot was not prepared unreservedly so to admit, it is, in my judgment, clear that the board is in fact carrying on such a 'trade.' In respect of these tax years, the board has claimed that certain payments made by it ought to be deducted from it taxable profits or gains as having been, within the terms of section 137(a) of the Act, 'wholly and exclusively laid out or expended for the purposes of' its 'trade.' The facts as regards these payments have been fully recited in the case stated. They were summarized also in the judgment appealed from of Upjohn J. So far as necessary, I shall treat the case stated as incorporated in this judgment. It is a sufficient recapitulation for me to state that the sums in question have fallen under six heads, namely : (1) Runners allowances, that is, sums paid to racehorse owners who run horses in any race at racecourses with which the board is concerned, at the rate of pound 1 for every runner. (2) Sums paid to 'racecourse executives,' that is, sums paid to racecourse owners for use by them in improvements upon the structures and amenities, etc., on racecourses (being racecourses used for horse races, and approved as such by the board). It is to be noted that the expenditure is in fact subject to a substantial measure of control or supervision by the board in each case. (3) Sums paid to owners and trainers towards their expenses in bringing racehorses to the racecourses, and therefore an encouragement to them so to do. It was clearly proved that the business done by the board varies in direct proportion to the number of runners on the races with which they are concerned, and that, without assistance, the owners and trainers in modern times have found the burden of these travelling expenses a serious financial strain. (4) Sums paid to assist in meeting the administrative expenses of the Jockey Club, the National Hunt Committee and the like, which need no further exposition. (5) Sums paid to assist those responsible in discharging the expenses of point-to-point meetings. And (6) sums paid to assist and encourage racing under the rules of the Pony Turf Club.
The sums involved are large, amounting in each year to something over half a million pounds, but that figure is, in truth, only about 2 per cent. of the total receipts of the board.
On the six heads which I have above mentioned, there is a distinction for the purposes of the appeal between the first of them and the other five. The first, the runners allowances, was made by the board as being a working expense, that is, part of the financial obligations to be discharged by the board under the relevant Act regulating their activities, before arriving at what is called in the Act the surplus totalisator fund. The remaining five heads are applications of that surplus totalisator fund. There is evidence before us of correspondence between the board and the Home Secretary as regards this first head of payment, but, in my judgment, the correspondence is not relevant to the problem before us, and I do not further refer to it.
I must now make some reference to the Racecourse Betting Act, 1928, under which the board was constituted, but as the terms of the Act are conveniently and sufficiently summarized in the judgment from the case in 1935 of Attorney-General v. Racecourse Betting Control Board, it will be sufficient for me now to make a somewhat fuller reference to section 3 than is found in the summaries mentioned. Section 3 is the section setting out the powers and duties of the board. (His Lordship read the relevant portions of section 3 and continued :) The problem presented in the appeal is : were the payments in question board within the section of the Act The authorities relating to the meaning of that phrase were considered by Upjohn J., and I need not add to what the judge said, because there was before us no doubt that the phrase means what the words indeed imply, that the payments in question, to qualify as proper deductions, must in truth as to all of them have been laid out exclusively for the purposes of the boards business.
As I have indicated, there are two categories of payment, namely, first, the runners allowances under the first head above stated, which the board have said were part of their working expenses within section 3(6) of the Act; and secondly, the remaining items, which were applications of the surplus of the totalisator fund, pursuant to the same subsection, after the discharge of rates, taxes, working expenses, etc.
The case of the board has been that all these six heads of payment were found in paragraph 7, and again in paragraph 12(4) of the case stated, to have been wholly and exclusively laid out for the purposes of the boards business, and that that finding being a finding of fact is now conclusive.
Paragraph 7 of the case stated is in the following terms : 'We were satisfied on the evidence that all the payments set out in' the exhibits mentioned 'were made by the board with the object of increasing the receipts of its totalisators, although such payments might and in all cases did (in the words of section 3(6) of the Act of 1928) improve the breed of horses or the sport of horse-racing, and although the increase in such receipts was not in all cases expected to be exactly proportionate to the expenditure.' The other reference, in paragraph 12(4) reads : 'We consider that in this as in other cases we have to determine whether the disputed payments were made wholly and exclusively for the purposes of the boards trade upon the evidence of the witnesses called before us, and an examination of the documents placed before us. Upon a full consideration of such evidence and documents we find that all the (aforesaid payments) were paid wholly and exclusively for the purposes of such trade.'
It will be noticed that in the second paragraph the commissioners adhere to the language of the section, whereas in the first paragraph they do not. This is a point to which I shall later again allude.
The board, however, have also said that if they were regarded as an ordinary trader, then all these payments would necessarily have been or be so allowable in the light of the findings which I have mentioned. In my judgment, however, this submission really carries the matter no further; for the fact is, that the boards trade and the boards powers are defined by, or are to be derived from the terms of the Act, upon which, in the end, the answer to the question must depend. In any event, the boards case, as will be seen, hangs upon the sanctity of the findings of the Special Commissioners.
The case of the Crown, on the other hand, is that, as regards the items other than the runners allowances, the finding is, upon the face of it, not sacrosanct. The question whether payments were wholly and exclusively laid out for the purposes of the business of the board is not a mere question of fact. The Crown say that the purposes of the payments cannot be judged in disregard of the purposes imposed by section 3(6), which are real and independent objectives. In any case, says the Crown, the terms of paragraph 7 of the case, which ought, in the light of the whole document, to be read as expository of paragraph 12(4), do not come up to the standard of the phrase 'wholly and exclusively laid out,' etc. That matter was put in the form of a dilemma by Mr. Orr : either, looking at paragraph 7, the language used by the commissioners means what it says, in which case it is not a finding of fact of sufficient precision; or, if paragraph 7 has to be expounded and explained, it is necessarily open in some degree to review.
As regards the first head of payment, the runners allowances, the Crown have supported Upjohn J.s view, and have said that the payment was ultra vires : but even if the payment were intra vires, the Crown says, still in essential quality the purposes of that payment are the same as the purposes of other payments, particularly the payment of travelling allowances. So much, indeed, was admitted by the board, and therefore, if the finding of the commissioners cannot stand as to the five heads relating to the surplus, it cannot stand either, the Crown say, as the first head, the runners allowances.
It will be seen, therefore, that the two questions for the court may be formulated as follows : first, what is, in truth, the scope of the boards business, and what are its powers Put more precisely, what is the scope of the phrase 'working expenses' in subsection (6), and what otherwise is the effect of that subsection Secondly, and in the light of the answer to the first question, is the finding of the Special Commissioners conclusive, and, if it is not conclusive, is it right ?
As to the first question, that of the scope and powers of the board, they are to be found in the first three sections of the Act. They are conveniently summarized in Attorney-General v. Racecourse Betting Control Board. In that case the question was whether certain payments were intra vires the board, and I would therefore like to begin my citation (because it has a bearing upon the like question relating) to runners expenses) with a passage in the judgment of Romer L.J. : 'It is sufficient,' said the Lord Justice, 'to say that the test to be applied is whether the acts in question of the board, which are nowhere expressly prohibited, can fairly be regarded as incidental to or consequential upon the exercise of the powers that the legislature has in express terms conferred upon the board. In these circumstances the first thing to be ascertained is what those powers are. Here, again, there is no room for dispute. They are to be found expressed in unambiguous terms in the Racecourse Betting Act, 1928. By section 1(2), the board is given power (amongst other things) to set up and keep a totalisator on any approved racecourse (as defined in subsection (3)), and there to operate the totalisator for the purpose of effecting betting transactions on horse races only on days when horse races, but no other races, take place on such racecourses. By section 3(3) it is provided that the board shall distribute or cause to be distributed the whole of the moneys staked by means of a totalisator on any race among the persons winning bets made by means of the totalisator on that race after deducting a percentage, as therein mentioned, which we are told is in fact 10 per cent. Such percentage, as well as any other moneys received by the board, are to be paid into a totalisator fund. This fund is to be applied by the board in payment of all taxes, rates,' etc. Then the Lord Justice summarizes the other subsections of section 3.
Upon the question of vires, I make this reference to the judgment of Maugham L.J. in the same case : 'It follows therefore,' says he, 'from the decisions of the House of Lords in Baroness Wenlock v. River Dee Co., and Attorney-General v. Great Eastern Railway Co., that, on the one hand, the powers of the corporation must either be expressly conferred by or be derived by reasonable implication from provisions of the Act of Parliament while, on the other hand, the doctrine ought to be reasonably understood and applied and that whatever may fairly be regarded as incidental to or consequential upon the things which the legislature has authorized ought not in the absence of express prohibition to be held to be ultra vires.' The Lord Justice then himself summarizes the effect of the provisions of the Act.
It will be observed that, whereas the trading purposes of the board are, as stated in those judgments, the operation of the totalisator, the purposes as stated in subsection (6) comprise (inter alia) the improvement of breeds of horses; and it is, no doubt, true that the two things are closely linked. If it is indeed permissible to make a reference from a living historian, Professor Brogan, I cite this passage from 'An Introducing to American Politics' (p. 153) : 'For although it is well-known that the object of horse-racing is to improve the breeds of racehorses so that they may run faster in other horse-races, this activity has historically been associated with wagers upon the success of the endeavours.' But if the purposes are closely linked, it does not follow that they are the same.
I note that the Court of Appeal in the case that I have cited held that the payment of commissions to Tote Investors Ltd., was reasonably incidental to the powers of the board, as being directed to increasing the number of bets, and therefore, to promoting the business success of the board. The members of this court did not say that the commissions, which were held to be intra vires, must therefore be com-prehended by the formula 'working expenses' in section 3(6) of the Act. Still less did they indicate a view - and the point not being before them it was unnecessary that they should - whether the commissions were payments wholly and exclusively laid out for the purpose of the boards business. In my view, however, it is inevitable that such commissions and any other expenditure properly incurred by the board in the conduct of the business (as distinct from applications of the surplus of the totalisator fund, pursuant to the latter part of section 3(6) must be classed as 'working expenses' : for the directions contained in subsections (3), (4), (5) and (6) of section 3 appear to leave no scope for expenditure by the board (other than by way of payment to winning backers and of application of the surplus of the fund) save under one or other of the heads in the parenthesis in subsection (6); and of these heads 'working expenses' is the only one relevant. It was, therefore, said that the phrase 'working expenses' must be narrowly construed. But I am not, for my part, quite clear what precisely is thereby meant. Having regard to the presence of sub-section of section 3 and to the language which I have quoted from the judgments of Romer and Maugham L.JJ., the term 'working expenses' must, at any rate, cover expenditure reasonably and properly incurred in the conduct of the business committed to the board by Parliament. I therefore prefer to attempt no further definition than to say that 'working expenses' means what those two English words naturally signify, and that they cover the expenses incurred, reasonably and properly, in the 'working' (that is, the setting up, keeping and operating) of totalisator upon approved racecourses; but that they are not limited to such expenditure only as is wholly and exclusively laid out for the purposes of the boards business.
Subject to what I have said, I for my part accept the Crowns argument, which I have above indicated. The business of the board is as I have said, that of operating totalisator, and is not the promoting as such, of the improvement of breeds of horses, and the like. More particularly, I accept the view of the Crown that the purposes to which the surplus can alone be applied are 'independent objectives,' and I, as did Upjohn J., reject the view that it is legitimate to disregard these purposes as regards any of the applications of the surplus, and that is nonetheless so, even though the procedure which was indicated in subsection (6) appears to have been somewhat departed from. By the express terms of subsection (6), the board is bound to apply the surplus moneys 'in accordance with a scheme prepared by the board and approved by the Secretary of State for purposes conducive,' etc. The phrasing seems, at first sight at any rate to me, to contemplate that there will be drawn up at some stage, though no doubt subject to later variation, a 'scheme,' in the sense in which that word is used familiarly, e.g., for administration of charity. In truth, what appears to have happened is that no such formal scheme operative over a period has been drawn up. The board, at end of the year, put before the Secretary of State proposals for the application of the surplus, and those proposals are considered and approved, and then constitute the 'scheme' for that year.
Nevertheless, in truth it seems to me that the matter cannot be put higher than this : out of the purposes which Parliament designated those for which alone the surplus can be applied, and which, in my view, are essentially distinct from the business purposes of the board, the board has selected those most calculated to promote the boards own business interests. The result therefore, in my judgment, is that Upjohn J. was right in saying that the findings in this case were, upon their face, open to question, and ought not to be regarded as sacrosanct.
The judge said this : 'The appropriations are made and are made only for the reason that they have to be so made pursuant to section 3(6) of the Act. They are made, not for the purposes of trade but for public purposes conducive to the improvement of breeding of horses and the sport of horseracing and the advancement of veterinary science.' And then, omitting a few lines, 'True enough, the appropriations made coincide with the trading desires of the board. My comment upon that is how very fortunate it is for the board. But it cannot turn what is, in essence, a statutory distribution in accordance with an Act of Parliament of a surplus of fund into a trading activity.' The only qualification to what I have earlier said that I would venture to make is this, that it does not seem to me (though it is not strictly necessary for my judgment) that no application under section 3(6) could, in any case, be one wholly and exclusively laid out for the purposes of the boards trade. But on the material before us it has not, in my judgment, been established that any such payments were of such a very special character that they should be rightly so described.
As regards the first head of expenses, the runners allowances, I am not prepared, with all respect to him, to hold with Upjohn J. that these payments were ultra vires the board. In my judgment, it is not necessary to decide whether such payments were or were not ultra vires, because, assuming they were intra vires and must, therefore, be treated as working expenses, it does not follow, as I have earlier stated, that the payments were wholly and exclusively laid out for the purposes of boards business. And, in my judgment, the sums paid for runners allowances were not so wholly and exclusively laid out, notwithstanding the findings of the Special Commissioners. It is true that these sums, not having been applications of the surplus and fund pursuant to the final part of the subsection, are not therefore of necessity impressed with the quality of being applied for one or other of the purposes for which alone such surplus is applicable. But it is, in my judgment, impossible to sever the Commissioners findings. The Commissioners treated all the expenses with which we are concerned as having been incurred with like intent and for like purposes; and rightly so, for it has conceded before us that the runners allowances cannot in these respects be distinguishable from, for example, the travelling allowances. In my judgment, it follows that, if the Commissioners findings are open to challenge as to all the other expenses (as I think they are), they must inevitably be open to challenge as regards the runners allowances, to which they directed no separate attention or conclusion. And if the findings are so open to challenge, then, in my judgment, the runners allowances fail equally with the other expenses to qualify as deductions for income tax purposes, since they, like certain of the other expenses and particularly the travelling allowances, were laid out for purposes not exclusive to the boards business, but to some real extent at least, for the purposes of assisting and promoting the interests of racehorse owners. For these reasons I would therefore prefer to leave entirely open the question of the vires of the payment of runner allowances, and all he more so since I have no wish to add to the difficulties of the board in the discharge of their responsible statutory tasks, and since the point does not appear to have been taken before the Commissioners, so that the materials before us, like the form of the proceedings itself, are not properly or sufficiently directed to the determination of the question.
In the course of presenting the case, Mr. Heyworth Talbot propounded six propositions. They are : (1) Whatever the scope of the expression 'working expenses' in section 3(6), the expression does not, as a matter of law, constitute an exclusive definition of disbursements or expenses which are deductible in computing the profits of trade. (2) There is no reason in law why a disbursement made pursuant to a scheme prepared by the board and approved by the Home Secretary should not be a disbursement wholly and exclusively laid out for the purposes of the boards trade. (3) If the disbursement is of such a nature that it can, as a matter of law, have been made wholly or exclusively for the purposes of the trade, the question whether or not it was so made is one of fact. (4) Where it is found that the disbursement has been made by the trader 'wholly and exclusively,' etc., the fact that the expense insure also for the benefit of a third party is nihil ad rem as a matter of law. (5) The payment of the runners allowances were not ultra vires, and (6) if these propositions were well founded, there is no ground on which the decision of the Special Commissioners on the main part of the case can be disturbed.
In the result, I am prepared to accept numbers 1, 2 (with qualifications), 4 and 5, but not number 3. Number 6 does not arise. Accepting proposition number 2, I do so as constituting a general negative, as above indicated, but not in fact as governing this case.
In the circumstances, the cross-appeal does not now arise, but in case there is an appeal in this matter to the House of Lords, I am prepared to say that, as at present advised, I agree with Upjohn J. that none of the payments can be distinguished as creating some enduring asset in the business of the board within the meaning of the issue. In the circumstances, I would dismiss the appeal.
MORRIS L.J. I find myself in entire agreement with the reasoning and conclusion in the judgment that my Lord has delivered, and there is nothing that I desire to add.
ORMEROD L.J. I agree also.
Leave to appeal to the House of Lords.