EVERSHED, M.R. - The question raised in this appeal is whether the Stow Bardolph Gravel Co. Ltd., to whom I will hereafter refer as the taxpayers, were entitled to bring into their trading and profit and loss accounts for the two years ended March 31, 1949 and 1950, by way of expenses and in reduction of the profits or gains in respect of which they were being assessed, an item representing the purchase of gravel made during the year in question, less any stock of gravel so purchased at the end of that year. It is necessary to make it clear that the taxpayers are admittedly being charged for tax in respect of the gainful occupation or business of sand and gravel merchants. Therefore, prima facie it seems reasonable enough that in arriving at the taxable gains at the end of any given year the taxpayers should be entitled to deduct and to bring into account as an expense any sums laid out by them during the year in buying the stock-in-trade in which they dealt, namely, sand or gravel; but in fact when the matter is examined it is not quite so simple, for the alleged purchase of gravel represents what the taxpayers obtained under an agreement, made in October, 1947, not with them, but with a predecessor in title.
The Commissioners for the General Purposes of the Income Tax were of opinion that these claims to make deductions were not admissible, but Harman, J., was of opinion that the deductions were admissible. I have myself reached a different conclusion from that reached by Harman, J., and I have reached it, I confess, with some slight feelings of regret and misgiving on two grounds : first, I think the result bears a little hardly on the taxpayers for reasons which will, I think, emerge without any necessity for emphasis as I recite the facts; second, I am not for my own part satisfied that if close investigation were made of the method whereby the taxpayers and others in the same line of business carry on their business, it might not emerge - I say no more than than - that the commissioners would find as a fact that, notwithstanding the apparent legal consequences of the agreement to which I have referred, there was here in truth such a taking possession of the deposit of gravel in question that it could sensibly for tax purposes and rightly and fairly be said that once the consideration money had been paid under the agreement the deposit was in truth the stock-in-trade of the taxpayer. However, I have felt compelled to say that there is no finding of fact to support such a conclusion, nor indeed is there before us any evidence sufficient to warrant it. It is in that respect, I apprehend, that I find myself at variance with Harman, J.
Having regard to the dates which I have mentioned, the Act which is relevant is that of 1918. The taxpayers having been assessed under Schedule D, their case, admittedly as I follow it, falls within the first two cases. [His Lordship read rule 3 of the rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918, and continued :] If the question were asked, as a matter of what might be called business common sense, whether the sums which were paid under this agreement of October, 1947, were sums wholly and exclusively laid out or expended for the purposes of the trade as sand and gravel merchants. I think the answer would be that they were. But when their true nature is more closely examined in the light of the authorities which have been cited to the Court, and bearing in mind also the prohibition in sub-paragraph (f) of rule 3, I think that one comes in this case to a conclusion contrary to that which commended itself to Harman, J.
The agreement is expressed to be made between a company called Luddington Estates Ltd., who may be taken as owners of all the land which is relevant, and two persons then carrying on a partnership business, the interest of the second party to the agreement being admittedly now vested in the taxpayers. [His Lordship read the agreement of October, 1947, as set out above and continued :]
Certain matters may be mentioned, although they are perhaps obvious and elementary. The first is that this deposit which is 'purchased' according to the terms of clause I is, of course, part of the land itself. The gravel in situ is the land. There is, therefore, a real, if narrow, distinction between what is expressed to be a purchase of gravel on the one hand and a purchase of something which may be growing on the land or be lying on the land, such as potatoes, truffles, a crop of apples, or the leaves of a tree, on the other hand. It is also to be noted that once the purchaser has paid the Pounds 2,000, he is under no particular obligation to work this gravel. Allowing for the period covered by the option, the term of this agreement might extend for about ten years; but, on the face of the document, there is no doubt that it purports to be a sale of the gravel and sand as such, and the terms of the final clause, clause 8, can be said to emphasise the fact that no other interests are created than those which are essential for the main purpose of the sale of gravel and sand.
Before I comment further upon the agreement, I must make one or two references to the case in which the facts are stated. I have already said that the practice of business of this kind is not really discussed. As a matter of fact, the only finding seems to be in paragraph 3(e), where the commissioners state : 'On acquiring the benefit of the said agreement in writing, the appellant company proceeded to excavate the deposit of sand and gravel hereinbefore referred to, and sold the same in the course of trade.' In view of what follows, I emphasize the word 'excavate'. The contentions of the taxpayers and of the Crown were then set out; and the commissioners stated their conclusion : 'We...... after hearing and considering the evidence were of opinion that the above payments were not admissible deductions for Income Tax purposes.'
Harman, J., apparently rested his conclusion on his acceptance of the literal fact of the first clause of the agreement, which has indeed underlaid the substance of the argument forcefully put before us by Mr. Magnus. In the report in the Weekly Law Reports the reasoning of the judge is introduced by the simple formula, 'Having stated the facts.' That formula, however, does less than justice to what the judge stated at the beginning of his judgment, and I think it is necessary to refer to a line or two in the early part of his judgment. He said : 'No estate or interest in the land was expressed to be given to the so-called purchaser, nor is there any limit to the time in which he must remove the sand and gravel; the only time limit is the 5 year period within which he must exercise the options. He is not the owner of the land obviously, because he only has access to it by one road and the freehold must remain, I take it, in the vendor. What he gets is, apparently, a right of access not limited in time, coupled with a profit a prendre, and for that he pays down his Pounds 2,000.'
I respectfully agree with that summary of the rights granted by the document of 1947, and in the light of the authorities to which we have been referred I should have thought that that statement of the position led to a conclusion in favour of the Crown. But the judge avoided that conclusion by the emphasis he put, not on the legal effect of the document, but on the language used, particularly in the first clause. Thus he said : 'It is argued on behalf of the appellants' - that is the taxpayers - 'that this is a mere purchase of stock-in-trade-their stock-in-trade being sand and gravel and that all they do is to go on the land, shovel the sand and gravel into a lorry, and sell it to their customers, so that it is as much their stock-in-trade as any other article in sand and gravel is not a chattel detached from the soil, but something which has to be worked as if it were in a mine or a quarry; and that all that was bought under this contract was a capital asset, namely, the right to go on the land and win the gravel and the sand and to carry it away.' I venture to think that in his recital of the argument of the Crown he might be said to be restating his own conclusion of the rights given by the agreement of 1947.
The judge, however, next referred to a case to which I must also presently allude, Golden Horse Shoe (New) Ltd. v. Thurgood, which admittedly on the facts is the closest authority to the present case. He then came back to the present case, and stated his conclusions thus : 'It is said here that the opposite conclusion' - that is, opposite to the Golden Horse Shoe case - 'should be reached, and the reason in substance is because this gravel had never been raked off the soil on which it was lying. This is not a case where the gravel is in any true sense won from the soil; nor is any process applied to it. It is not even suggested that a riddle or sieve is used; it is merely shovelled up where it lies, put on a lorry and sold wherever it can be sold.'
I do not know whether those are, or are not, the facts; but there is no finding to that effect. If the facts were as the judge intimated, the General Commissioners might find, and might justifiably find, that a case such as this is not really distinguishable as a matter of law and common sense from a sale of loose objects lying on the surface of the ground, such as windfalls from apple trees, or even from cases like those I have mentioned, which are concerned with crops or leaves growing on trees. But my difficulty is that I can find no justification for that conclusion in the material before us. I venture to think, with all respect to Harman, J., that it neglects the introduction to his judgment which is, in my opinion, a correct appreciation of the real rights given to the taxpayers under the agreement of 1947.
I come back to the question which is inherent in the judges summary of the argument, and which seems to be fundamental to the decision of the present case. Can it be said on the facts which are proved, that from the moment when the purchaser paid his Pounds 2,000 this deposit which is identified by reference to a field on the map became the stock-in-trade of the gravel merchant I have found it impossible to answer that question affirmatively.
I do not think it is necessary to go at length all through the many cases which have been brought to the attention of the court. If I do not do so, I hope that I shall not be thought to have failed in appreciation of their significance, or have failed to do justice to the arguments put before us. The earlier cases, I think, are sufficiently exemplified by Coltness Iron Co. v. Black and Alianza Co. v. Bell which may be said to be the foundation for what is said in the Golder Horse Shoe case. The Coltness Iron Co. case, as its name implies, was a mining case strictly so-called; that is to say, it concerned an iron mine, the getting of iron by mining operations. As Mr. Magnus observed, the business of mining has been the subject of special treatment in the Income Tax Acts, as may be seen on reference to Schedule A and the exceptions thereto. In the Alianza case also the business operation was that of turning to account a caliche mine in South America. But in that case, since the mine was out of the jurisdiction, the business, which was managed and controlled in the United Kingdom, could not be treated for tax purposes on the same footing as that of the owner of a mine situated in England. None the less the court held that the same principles applied.
Those cases laid down the principle that in all cases truly analogous thereto the costs of acquiring a mine, or the depreciation of a mine once acquired (which for accounting purposes is another way of saying the same thing), were not legitimate deductions as being expenses wholly and exclusively incurred for the purposes of the trade and not being sums employed as capital in the business.
The subject-matter of the Golden Horse Shoe case was not a mine or underground minerals but dumps formed of tailings; that is, the refuse of the mine from which the best gold ore had already been extracted, analogous to the tips which are a familiar sight bear coal mines in this country. The business operation of the company was extracting the gold ore, the gold metal, which admittedly still existed in some quantities in the tailings. The Golden Horse Shoe Co. had bought tailings (one of those dumps, it is stated, was about 250 feet high) and they were undoubtedly raw material from which, by appropriate manufacturing processes, the Golden Horse Shoe Co. extracted gold. The question was whether the costs of acquiring these tailings, which were severed from the earth, were legitimate deductions. This court came to the conclusion that they were, distinguishing the tailings lying heaped on the ground from, for example, the minerals which were still ungotten, and which had been the subject of Coltness Iron Co. v. Black and earlier cases.
Romer, L.J., said in the Golden Horse Shoe case : 'Unfortunately... it is not always easy to determine whether a particular asset belongs to the one category or the other.' That is, whether it is in fact a capital asset or part of the stock-in-trade or raw material. 'It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed.' He then illustrated the point he was making, and took by way of illustration the example of a man whose trade is that of a manufacturer and seller of gas, which is to be extracted, of course, from coal. 'But now suppose' he continued, 'that the gas manufacturer, instead of buying his coal from outside sources, purchases a coal mine and produces the coal that he requires by mining. The cost of extracting from the mine the coal treated will, of course, be a permissible deduction in ascertaining the profits of his business in the year. But he may not debit his profit and loss account with the sum by which the value of his mine has depreciated in consequence of the extraction of that coal. For the mine is regarded as being fixed capital :' There follows a reference to Coltness Iron Co. v. Black and Alianza Co. v. Bell. 'If, on the other hand, instead of buying the mine, the gas manufacturer had bought a quantity of coal already extracted from the mine and stacked on the surface, the price of the coal would have been regarded as part of the circulating capital. The reason for this distinction is not at first sight very easy to discover. It must, as it seems to me, be found in this : that in the former case the purchase of the mine is not a purchase of coal but a purchase of land with the right of extracting coal from it. The land is regarded merely as one of the means provided by the manufacturer for causing coal to be brought in his gasworks, and therefore as much part of his fixed capital as would be any railway trucks or lorries provided by him for the same purpose.' Then, after a citation, Romer, L. J., said : 'It seems to follow from these considerations that the question to be decided in the present case resolves itself into this : Are the dumps the raw material of the appellants business or do they merely provided the means of obtaining that raw material In my opinion they are the raw material itself.'
Harman, J., applying that case to the present one, asked the question whether the sand and gravel here was subject to extraction. Since there was no processing, the raw material in this case was, he found, the stock-in-trade of the taxpayers business, and he thought that there was in principle no distinction between the Golden Horse Shoe case and the case before him. I have already quoted from his judgment : 'This is not a case where the gravel is in any true-sense won from the soil... it is merely shovelled up where it lies.' It is on that matter, as I have said, that I find myself at variance with the judge. I find it impossible to resist the conclusion on the facts before us that, the rights under the agreement of 1947 being as the judge and I have stated them, the deposit where it lay under the top soil, under part of a field like any other part of the surrounding country, was not the stock-in-trade of this business and could not become such until it had been excavated. It has been the burden of Mr. Magnuss case that that is not right, and it is at that point that the ways part.
Mr. Mangus further contended that, even if it could not be said that the gravel was merely sold as a chattel or chattels and became, accordingly, the taxpayers stock-in-trade, the nature of this agreement is such that the cost of acquiring the gravel, the contractual rights which the sum of Pounds 2,000 and the option price gave, were none the less matters which were properly to be brought into the income accounts for income tax purposes. I cannot accept that. I think that once it has to be conceded that there was no sale of the gravel in the way the judge said there was, then it must follow that what the company acquired was, to use Romer, L. J.s language, 'the means of getting the gravel by excavating and making it part of the stock-in-trade.'
Other examples were quoted, and Mr. Magnus drew attention, among others, to cases of growing timber. On one side of the line was a Scottish case recently decided, Murray v. Commissioners of Inland Revenue, where a Mr. Murray, having bought certain standing timber for about Pound 1,000, was fortunately able to sell it later, still standing, for Pound 14,000. The Inner House of the Court of Session decided the case, as I read their judgment, on this simple ground : that there was evidence justifying the commissioners finding that the purchase and sale of that growing timber were transactions within the scope of the business activities of Mr. Murray as a timber merchant, and, therefore, that the difference between the two figures was taxable profit in his hands.
On the other side of the line was Kauri Timber Co. Ltd. v. New Zealand Commissioner of Taxes, which came to the Judicial Committee of the Privy Council from New Zealand. The appellant company had, like Mr. Murray in Murray v. Commissioners of Inland Revenue, entered into a number of contracts or similar documents for acquiring rights over standing timber. The nature of the transactions which the Kauri Company entered into may be said to have been far more comprehensive in scope than Mr. Murrays transactions, but still I think that the principle was not very different. In that case, however, the Board came to the conclusion that the deduction of the sums paid by the Kauri Timber Company was not admissible. Reference was made to the other cases to which I have also referred. But Lord Shaw said : 'It appears to the Board that the present case involves no refinement of distinction; for the transaction under which these timber rights were acquired was not one under which a mere possession of goods by a contract of sale was given to the appellant company, but was one under which they obtained an interest in, and possession of, land.' If that test is applied to the present case, it seems to me that it produces the result which I have already indicated.
Finally, I refer to a case to which Jenkins, L. J., drew our attention, which also came before the Privy Council : Mohanlal Hargovind of Jubbulpore v. Commissioner of Income-tax, Central Provinces and Berar, Nagpur. In that case the taxpayer had entered into a series of contracts which entitled him to pick off and take away the leaves of trees known as tendu leaves, which were required for making into cigarettes. The question again was whether the sums spent in acquiring the leaves were properly deducted as being expenses which were exclusively incurred in the business, or whether they were in truth in pari materia with the Kauri Timber case, and, therefore capital outlay. On the facts of that case the Board came to the conclusion that the sums were deductible, and the judgment of the Board, delivered by Lord Greene, undoubtedly reflects, and reflects closely, the argument which Mr. Magnus has put forward in the present case for the sand and gravel company; so that if sand and gravel are substituted for tendu leaves one would be hearing an echo of the argument for the taxpayers in the present case. As Romer, L. J., said in the Golden Horse Shoe case, the distinctions are not always easy to discern or to expound, but I think that in the case of the tendu leaves Lord Greene undoubtedly emphasised the short-term nature of the contract and the fact that it gave thing whatever to the tax payer except the right to take the leaves off the tress, just as a man might acquire a crop of apples on the tress, with only the necessary rights to go and take them away. 'In their Lordships opinion' said Lord Greene, 'the High Court' [from which the appeal came] 'has adopted an approach to the question which has diverted its view from the real point and has attached too much importance to cases decided on quite different facts. Cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber, etc., referred to in the judgment and relied on in the argument before the Board do not appear to their Lordships to be of assistance.' It is obvious from the contrasted examples that the decision rested upon the particular circumstances of the case and upon the fact that the Board was able to say that from the moment the contract was entered into and before the leaves had actually been picked and tendu leaves were part of the raw material of the appellant. But I cannot say the same of the sand and gravel, part of the earth itself, which was the subject of the contract in the present case and which I think could only become part of the stock-in-trade of this gravel merchants business when it had, in the true sense, been won, been excavated and been taken into their possession.
For these reasons, which I have stated at some length out of respect for Harman, J.s judgment, I would allow the appeal.
JENKINS, L.J. I agree. Whether the decision in this case should be in favour of the Crown or the taxpayers, in my opinion the grounds which led the judge to decide in favour of the taxpayers cannot be supported. He treated the case as if the transaction evidenced by the agreement of October 29, 1947, was a sale of a chattel in the shape of gravel lying loose on the surface of the land. There is no finding of fact in the case stated to support the view that the gravel was lying loose. On the other hand, there are passages in the case stated and in the agreement which make it reasonably apparent that the subject-matter of the agreement consisted of a deposit of gravel of the usual kind lying some feet beneath the surface of the land and requiring to be won from the land by a process of excavation.
My Lord has referred to the passages in the judgment describing the gravel in effect as lying loose on the land. Harman, J., said : 'It is said here that the opposite conclusion should be reached, and the reason in substance is because this gravel had never been raked off the soil on which it was lying. This is not a case where the gravel is in any true sense won :' Then two lines further on : '... it is merely shovelled up where it lies, put on a lorry and sold wherever it can be sold... I think that it is a distinction without difference to suggest that, because nobody had ever before applied a rake to this gravel, it should be treated as capital, whereas if somebody had raked it into little heaps before the contract was made, then its purchase would constitute a different form of adventure. It is the same situation; it is no more and no less attached to the land... it would be to introduce only another artificiality if I were to hold that the fact that this gravel had not been moved made the expenditure upon it a capital outlay, when the expenditure on it would have been a trading cost had it been touched by a rake.'
It is, to my mind, clear that the case should be considered on the footing that this was a deposit of gravel beneath the surface of the land which required winning from the land by operations in the nature of quarrying or excavation. On that footing, how does the matter stand One starts with the wellknown provisions of Schedule D and the rules applicable to Cases I and II. [His Lordship read rule 3 and continued :]
The two sums paid by the taxpayers under the agreement of October 29, 1947, that is to say, the initial sum of Pounds 2,000 which was paid by them to the original parties to the agreement from whom they took an assignment, and the further sum of Pounds 2,250 paid by them on the partial exercise of the first of the two options, were clearly sums laid out wholly and exclusively for the purposes of their trade. It remains to consider whether these two sums were in the nature of capital outlay or were expenditure on revenue account; for in order to be expenses properly deductible they must be of the latter description. To arrive at an answer, it is necessary to consider the nature of the rights taken by the taxpayers under the agreement of October 29, 1947. The agreement by clause I purports to effects a sale upon the deposit of gravel under the defined 8 acres of land. The agreement then provides by clause 2 for the necessary access to the land by the taxpayers, their servants and agents, for the purpose of removing the gravel, with certain limitations as to the way by which access is to be had. In clause 4 rights are given to take upon the land portable machinery, haulage equipment and so forth; but there is a prohibition against structures or dwelling-houses of a permanent nature, and a prohibition against depositing on the land any refuse, rubbish or spoil other than the excavated top soil. The two options to which reference has already been made are given by clause 6; the first is given for a period of five years from the date of the agreement, and the further option is given by a proviso to the same paragraph and is to be exercisable within a further five years from the date of the exercise of the first option, in the event of the first option being exercised. Finally, by clause 8 : 'No legal estate in the lands hereinbefore referred to shall be created or conveyed by virtue of this agreement and no interests easements licences or rights of way sporting or otherwise whatsoever except as herein expressly agreed and declared shall be created or conferred or deemed to be created or conferred hereby.'
What is the effect of that agreement, and in particular of clause I, which contains the purported sale of the deposit of gravel contained in and upon the land coloured pink, in conjunction with clause 8, which states that no legal estate in the land is to be created or conveyed by virtue of the agreement In my view, the effect of the agreement is to given the taxpayers, as assignees of the original parties, an exclusive right to win and carry away the deposit which is referred to. In view of clause 8, I do not think that the agreement should be regarded as conferring on the taxpayers any proprietary right in the stratum of the land containing the sand or gravel. In my view the taxpayers had an exclusive right to win the gravel, and when it had been excavated and won, it became their property; but in my view the taxpayers cannot be described as having had any proprietary right in that particular stratum of the soil or in the gravel while it lay in that stratum except in so far as they had an exclusive right to win it. The effect of the agreement, therefore, in my view, was to give the taxpayers an interest in the land in the nature of a profit a prendre, so that if they availed themselves of the right granted, they would become the owners of any gravel excavated by them from this area of land.
Certain features of the agreement require special notice. First of all, it is unlimited in time, so that the taxpayers are allowed the right to excavate the gravel over an indefinite period. The taxpayers are under no obligation to work the gravel at all, and if any work is done it is for the taxpayers to decide at what rate excavation shall proceed. Secondly, the price in no way depends on the amount of gravel excavated or available. Thirdly, the taxpayers are given options of securing further reserves of gravel to be exercised during a period which may extend for as long as ten years from the date of the agreement. Those reserves, in the event of the option being fully exercised, would have comprised, I think, another 10 acres in addition to the 8 acres to which the right originally extended.
Such being the nature of the rights, it remains to consider whether the money laid out by the taxpayers in purchasing those rights, in purchasing the rights originally granted and in purchasing part of the further rights comprised in the first option, was laid out by way of capital expenditure or by way of income expenditure in the course of the taxpayers trade. Mr. Magnus for the taxpayers contended that the business of the taxpayers was the business of dealers in sand and gravel, and not the business of quarry owners. He said that the taxpayers business was to buy and sell gravel, so that any expenditure necessary to the purchase of gravel must be a proper expense of the taxpayers trade. In my view, that states the position too narrowly. I would say that the taxpayers carry on the business of dealers in sand and gravel, but I would say that the part of the business consists no merely in purchasing gravel but in obtaining gravel, and there may be expenditure necessary or desirable with a view to obtaining gravel which is, nevertheless, not the purchase price of gravel as stock-in-trade of the business.
Sir Lynn Ungoed-Thomas, on the other hand, contended for the Crown that it could not be said here that the taxpayers had purchased a quantity of gravel as part of the taxpayers stock-in-trade. He said that the true view was, when the terms and effect of the agreement were examined, that the taxpayers had provided themselves with a means of supplying themselves with gravel which when procured would form part of their stock-in-trade. On that view of the agreement, Sir Lynn submitted that the expenditure of the taxpayers in obtaining the rights granted by the agreement was expenditure of a capital nature on the principles stated by this court, and particularly in the judgment of Romer, L. J., in the Golden Horse Shoe case.
The question is not free from difficulty. In this a case of a purchase of the raw material of the trade, that is, the stock-in-trade in which a particular trade deals, or is it a case of purchase of a capital asset from which the taxpayers will be able to derive raw material or stock-in-trade as and when the requirements of the taxpayers business make it expedient to do so In my view, the latter conclusion is the correct one, and I think that conclusion accords with the Alianza case and the Coltness case, and also with the observations of Lord Shaw in the Kauri case. The distinctions drawn by the case are not altogether satisfying to some minds. It may seem strange that a purchase of a heap of tailings, as in the Golden Horse Shoe case, should be regarded as a purchase of raw material or stock-in-trade, whereas the sums expended in acquiring a quantity of caliche or nitrates embedded in a quarry, as in the Alianza case, should be a capital expense; or again, which I think is the result in the present case, that the right to obtain or win gravel lying in the soil should be a capital expense. But these matters of taxation must depend on the rules laid down by the relevant legislation by reference to which income for tax purposes is to be measured and under which capital expenditure is not deductible. In my view, when all the authorities are looked at, it is reasonably plain that an asset such as that acquired by the taxpayers in the present case must be regarded as a capital asset and not as so much stock-in-trade purchased by the taxpayers for the purposes of their trade.
Mr. Magnus invited us to distinguish the Alianza case and the Coltness case and other case of that kind on the ground that these were either cases where there was a question of assessing the owner of a mine under No. III of Schedule A, or else cases in which, as in the Alianza case, the appropriate Schedule was Schedule D but the question concerned the profit derived from mining or quarrying operations; and he said that those cases could not govern the present one, because here it was not sought to tax the appellants under Schedule A in respect of their operations in relation to these deposits of gravel. I cannot accept that argument. It seems to me to be reasonably plain from the cases which have been referred to, and in particular from the Alianza case and the criticisms of Knowles v. Mc Adam in the House of Lords in the Coltness case, that there is here involved a general principle which is equally applicable whether the question concerns the ascertainment of the profits derived from a mine, or concerns the ascertainment of the profits of a trader or manufacturer under Schedule D. The question is the same in all these cases, and it is in effect whether a given expense, granted that it is wholly and exclusively for the purposes of the trade, is a capital expense or an income expense; and in deciding that question I think that the same principle must be applied whether the gainful activity concerned is the operation of a mine or a quarry or dealing in such a commodity as gravel.
For these reasons, I agree with the Master of the Rolls that this appeal should be allowed.
BIRKETT, L. J. I am of the same opinion and I will, therefore, confine myself to a few words in stating why I feel that the judgment of Harman, J., cannot be supported.
Many analogies have been discussed - potatoes, truffles, strawberries, apples and all sorts of other commodities -in order to ascertain what is the true test to be applied to the particular facts of this case. For my own part, as the decision has continued it has become clearer and clearer that the all-important matter is the true view of the facts. It is plain that Harman, J., came to his decision on his particular view of the facts after hearing the authorities which have been cited to this court. Jenkins, L. J., has cited several extracts from the judgment of Harman, J., which, considered in the light of the evidence, such as it is, are very striking. I could have wished that when this case was before the commissioners the facts had been opened more elaborately, because the true position now has to be extracted from certain documents. For example, in the case stated, in paragraph 3(e), it is said : 'On acquiring the benefit of the said agreement in writing, the appellant company proceeded to excavate the deposit of sand and gravel,' but the agreement itself, by clause 4, states : 'The purchaser shall have the right to take upon the said land any portable machinery and haulage equipment which may be required for the purpose of excavating and carrying away the said gravel and sand ballast.' In clause 6, which is of some importance, it is provided : 'For the period of 5 years from the date hereof the purchaser shall have the option to purchase the additional deposit of gravel and sand ballast in and upon the adjoining 5 acres of land coloured blue on the plan annexed hereto at the price of Pounds 1,000 per acre where the deposit shall be of a depth of 9 feet or more, provided that where the deposit shall be found to be of a lesser depth than 9 feet the purchase price' shall be adjusted.
Those matters are in striking contrast with some of the expressions which are to be found in the judgment of Harman, J., to which Jenkins, L. J., drew attention : '...... this gravel had never been raked off the soil on which it was lying,' which would make it a surface matter. It is argued that what was bought was a mere right to go on the land and win the gravel... because nobody had ever before applied a rake to this gravel, it should be treated as capital, whereas if somebody had raked it into little heaps before the contract was made, then its purchase would constitute a different form of adventure..... They did not work it up or treat it as raw material or do anything with it, so far as I am told, except to load it on a cart and take it away, and it would be to introduce only another artificiality if I were to hold that the fact that this gravel had not been moved made the expenditure upon it a capital outlay, when the expenditure on it would have been a trading cost had it been touched by a rake.'
Sir Lynn Ungoed-Thomas, when opening this appeal, referred to the fact that he though the judge had decided this case wrongly, not upon any mistaken view of the law but on a mistaken view of the facts; and it appears to be the fact that the judge was not treating this matter as apparently the facts really warranted, as a deposit of gravel on this particular piece of land which had to be excavated and won.
For that reason, I think that the judgment cannot be supported because the cases which have been cited, and the judgments of Lord Hanworth and Romer, L. J., which have been read, were, I gather, read to Harman, J., and he considered the Golden Horse Shoe case indicating his view of the facts that coloured the whole situation. He said : '... in effect, in the Golden Horse Shoe case what was bought was the licence to go on the land and take away the tailings, and I think that it is a distinction without difference to suggest that, because nobody had ever before applied a rake to this gravel,' and so on. For my own part, I think that the passage which was cited to us by Sir Lynn Ungoed-Thomas at the outset of this appeal is really a governing consideration to be taken into account with the true facts. Said Romer, L. J. : 'It seems to follow from these considerations that the question to be decided in the present case resolves itself into this : Are the dumps the raw material of the appellants business or do they merely provide the means of obtaining that raw material ?' His answer to that question was that they were the raw material itself. That was a decision on the facts of that case.
After listening carefully to the arguments that have been addressed to this court and applying the test which Romer, L. J., laid down as the test which is to be applied, I think that although the first clause of the agreement states that the taxpayers purchased the deposit of sand the gravel, the true view is that they purchased the means of obtaining that raw material for the trade which they carried on, namely, the sale of gravel.
Finally, I observe that Harman, J., said in his judgment that the appellants 'were buying their stock-in-trade when they bought the gravel.' If this company unfortunately had gone into liquidation, and if the contract had not been performed, it might have been difficult to say that one asset, the stock-in-trade, lay below the surface of the ground on that particular plot of land. I should have thought that to describe that property as stock-in-trade would be quite inappropriate.
For these reasons, I feel that it is impossible to support the judgment of Harman, J., and I agree with the judgments which have already been delivered.
Solicitors : Solicitor of Inland Revenue; Metcalfe, Copeman & Pettefar.