LORD HANWORTH, M.R. - This appeal fails. [His Lordship stated the facts, and continued :] The question before us, which was neatly put by counsel in his argument when he opened this case, is this : Is the decision in what we have known as Rhymney Iron and Coal Co. v. Fowler, decided in 1896, a decision that still stands good ?
It is suggested that as time has gone on there has been a recognition that trading costs must be looked at from a broader point of view than they were thirty-six years ago; that it has been decided, for instance, the Thomas v. Richard Evans and Co., that the expense of insuring for the purpose of meeting the contributions that have to be paid under the Workmens Compensation Act is now a deductible expense. In that case I said the payments which were there made were for the purpose of insurance and for nothing else. When one has come to see that that is so, these sums which are pad for insurance, deductible from the profits and gains because it is part of the system of carrying on the business of the mine.
Let me deal with this form of insurance. This mine, the Thomas Merthyr Colliery Co., of course employs labour, and there is imposed by the Workmens Compensation Act of 1925 an obligation that 'If in any employment personal injury by accident arising out of and in the course of the employment is caused to a workman, his employer shall, subject as hereinafter mentioned, be liable to pay compensation in accordance with the provisions hereinafter contained,' and the premiums paid to an insurance company to enable the employers to meet those liabilities are premiums paid for the purpose of enabling them to meet claims which arise out of and in the course of the employment of the workmen. They are closely associated and connected with the employing of the workmen in the business of the mine. In other cases, of which a number of illustrations have been given, it is pointed out that a sum which is received by a company carrying on its business may still be profits, although they seem to arise out of a temporary paralysis of the business which is carried on. In the case of Ensign Shipping Co. v. Inland Revenue Commissioners, during a coal strike two ships belonging to the appellant company which were ready to proceed to sea with cargoes of coal were detained in port by order of the Government for periods of fifteen and nineteen days, and the money was paid as compensation to the company by the Government for having held back these vessels. It was really a payment in the nature of demurrage. It was a payment made during a time when the actual business in which those ships were engaged, namely, are carrying of coal, was paralysed. Nevertheless, it was a sum which was received in lieu of the money which would have been earned by the transit of those ships on the sea.
We have to consider this question closely. I am not going into the figures. The real question as put and found by the Commissioners is this : 'Upon the evidence given before us we are satisfied that the objects of the Monmouth and South Wales Coalowners Association have altered very considerably since 1896, party owning to changing conditions, under which trade is carried on and partly owning to changing conditions, under which trade is carried on and partly owing to the legislation affecting the coalmining industry since 1912. In so far as the object of the association is still to pay its members an indemnity in the event of deficiency or stoppage of output caused by strikes, etc., we must hold that the Rhymney Case is binding upon us.' The terms under which a payment will be made to the company in respect of the sums paid by the company by subscription to the association are defined in clauses 80 and 81 of the agreement before us. I will not read them again; they have been read already.
I think one may say, broadly, that if the premium has been paid for the purpose of enabling the company to carry on its business better, so that the sum which would be received would be a trading receipt, then the sum that is expended in that insurance is an allowable deduction. In the Gliksten Case the company were carrying on a timber merchants trade. They had a policy of fire insurance. A fire took place, and the wood which they would have sold in the market was burned. The result was they were reimbursed the value of the timber by the insurance company. The timber was turned into money, not by an ordinary sale in the market, but by the action of the fire and the payment of the insurance, and it was held that the money, which was now in the pockets of the timber merchants in lieu of the timber, was money derived from their carrying on their business in ordinary course; it was money derived from the timber, although the channel through which it was received was a fire and not an operation on the market. If, therefore, the money that was to be received under clauses 80 and 81 is money which is to be deemed an ordinary trading receipt, it would seem by parity of reasoning that the money expended in the premium would be a deductible sum in carrying on the ordinary business of the company. We have not to decide that, but I agree with what Romer, L. J., said in the course of the argument, that the is a close connection between a payment for the purpose of being reimbursed in certain events, such as that in the Gliksten Case, and the right to deduct a sum paid for premium in order to insure the receipt of money, which, when received, would be a trading receipt. What we have to decide is whether or not this money is a proper trading receipt.
Let me deal first with the contribution, which, when dissected, is a contribution to the Conciliation Board. That has been determined in the Lochgelly Iron Co.s Case to be a proper deduction. The basis on which it is held to be a proper deduction is put quite shortly. It is thus stated by Lord Dunedin, then Lord President ( S.C., at p. 814; 6 Tax Cas., at p. 278) : 'It the Conciliation Board is a piece of machinary which thee coalowners are entitled to keep up - just as one who was entitled to employ a legal secretary might properly charge the expenses of this employment even in a year in which he was fortunate enough to have no litigation or other legal expenses.' 'It was 'a... machinery by which disputes between the workmen and the employer may be settled, and by that means expenses kept down and more profits earned.' That reasoning seems good and valid to-day, and it governs the allowance of the deduction in respect of the Conciliation Board. But it was in that that case that the contribution to the Mining Association was disallowed. It was definitely disallowed, and one turns, therefore, to consider what is the rule under which a deduction is admissible. That depends upon the construction of Rule 3 of the Rules Applicable to Cases I and II of Schedule D. The Income Tax Act, as was pointed out by Lord Loreburn in Strong and Co. of Romesy v. Woodified, does not state affirmatively what may be deducted. It merely furnishes negative information. But Lord Davey says there, referring to the terms of the rule, that no sum shall be deducted in respect of expenses not being money wholly and exclusively laid out and expended for the purposes of the trade, and Lord Davey says (75 L.J.K.B., at p. 867;  A.C. at p. 453; 5 Tax Cas., at p. 220); 'For the purpose of the trade. These words.. appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits.
Lord Summer in Ushers Case points out (84 L.J.K.B., at pp. 434, 435;  A.C., at pp. 467, 468; 6 Tax Cas., at p. 406) that Rule 3 may be turned round into an affirmative form, but whether it is in the negative or affirmative form the payment to be allowed must fulfill the qualifications, stated by Lord Davey, it must be necessary to enable the company to earn the profits, and it must have been 'wholly and exclusively' laid out for that purpose. This purpose and the narrowing effect of the two adverbs used, 'wholly and exclusively,' must always be kept in mind.
It is quite easy, as Lord Dunedin said in the Gliksten Case, to fall into the quagmires on either side of the path. It is necessary to tread a narrow path in these income-tax cases. It is that stern rule, Rule 3, which must be followed. There are many items of expenditure which a prudent directors might incur, but the dictates of prudence are not the true test. Bearing in mind these limitations, the present outlay on insurance is to make deficiencies good, should a lean time arise, by a stoppage of work; that expenditure illustrates the prudence of the directors, rather than the necessity of the trade, or an outlay to earn profits. It makes provisions for an unfortunate contingency.
I turn for a moment to look at the actual terms of the Rhymney Case. There 'the owners of a colliery were subscribers to a coalowners association which indemnified its subscribers against losses occasioned by strikes.' It was the same association. It was there held that 'the money sought to be deducted was not money wholly and exclusively laid out for the purposes of trade.' Pollock, B., in giving judgment says ( 2 Q. B,, at p. 83; 3 Tax Cas., at p. 479) : 'There are a great many things that a prudent trader might treat as deductions, because he wished to make a fund to provide against future accidents, and things of that kind, which are not dealt with at all by the Income Tax Acts.' He and Bruce, J., founded themselves upon the narrow words which are now found in Rule 3.
It appears to me that these contributions were not paid for the purpose of something arising out of and in the course of the ordinary working of the mine and the seeking of gains. They have not the same characteristics as the premiums paid for the purpose of insurance against the liability under the Workmens Compensation Act. They are expenses incurred by the wisdom of the directors, but they do not, as I understand, enure to secure a profit of the trade as being carried on, but to supply a deficiency at a time when there is no trade being carried on.
Dealing with the first point which was made by counsel for the appellants, and which I think is the really serious point in the case : Has there been an alteration in the decisions of the Courts such as to make the Rhymney Case no longer binding I do not find any laxity creeping in. The Courts have still to go back to those adverbs and the terms of Rule 3. This is illustrated in the case of Strong & Co. of Romsey, Ltd. v. Woodifield, in the case of Thomas v. Richard Evans and Co., and also in the Gliksten Case. At all times the Court has felt called upon to tread the narrow path and to see whether or not it can answer the question that the expense has been laid out or expended for the purposes of the trade wholly and exclusively, and if not it must disallow the outlay.
For these reasons, holding that the Rhymney Case was well decided, it seems that the conclusion reached by the Commissioners and by Finlay, J., was right, and the appeal must be dismissed with costs.
SLESSER, L. J. - I agree. I propose, in the first place, to say a few words with regard to the cases which have dealt with insurances, and contributions in the nature of insurance, which have been held properly to be deductible, and then to ask myself whether the present case does or does not fall within those cases.
The first case to which I would refer for this purpose is the well-known authority of Ushers Wiltshire Brewery Co. v. Bruce, in which a claim was made for a deduction for fire and licence insurance premiums, and that claim was there allowed. As was said by Lord Atkinson (84 L.J.K. B., at p. 426;  A.C., at p. 452; 6 Tax Cas., at pp. 424, 425) : 'As to...item C, the purposes for which the insurances upon the premises are effected are set out. They are found to be usual and proper trade outgoings, and are made as such by the appellants. They are designed to cover the loss of the fabric by fire and the loss sustained if the licences were not renewed. Smith v. Lion Brewery Co. applies, I think to the latter disbursements' - that is the case of the non-renewal of the licence -'and the remarks I have already made apply to the former' - that is, the remaining items. So that we start with this position, that it is a permissible deduction to pay a premium for the purpose of fire insurance. Secondly, it has been held in the case cited to us by the appellants counsel, the case of Thomas v. Richard Evans and Co., that a contribution to an association to cover the case of liability for damages or compensation under the Workmens Compensation Act is a proper deductible expense; and finally, one has to pay consideration, though it is not binding upon us, to the decision in R. v. British Columbia Fir and Cedar Lumber Co., a case decided in the Privy Council, upon a British Columbia Taxation Act, an Act containing language very different from the Income Tax Acts which we have here directly to consider, that it might be, at any rate under the provisions of that Act, that where the fire insurance is in respect of loss of net profits, then that would be included as income taxable and presumably, therefore, the premiums paid therefor would be deductible expenses, though that matter was not there expressly decided.
As against those authorities, we have the case of Rhymney Iron and Coal Co. v. Fowler, where it was held that a subscription by the owners of a colliery company to coalowners association which indemnified its subscribers against losses occasioned by strikes is not 'money wholly and exclusively laid out or expended for the purposes of the trade.' That case, upon the face of it, would appear to govern the present one, if indeed it is still good law. A number of cases have been cited to us to indicate that the principle to decide what covers 'money wholly and exclusively laid out or expended for the purposes of the trade' has suffered a considerable variation and extension in favour of the subject since the decision in the Rhymney Iron Co.s Case. That proposition, that a greater degree of indulgence in the nature of deductions is now allowable than formerly, is based, I think, in part upon what I may conveniently call the brewery cases, where questions of payments with regard to the maintenance and repair of tied houses and the like have had to be considered, and, secondly, upon a number of cases which arose out of the war by which forced sales, requisitions are various interferences with normal trading were brought about by the intervention of the Government under the necessities of the case and questions arose whether compensation or profits accounted for by the Government, and the like, were or were not to be treated as income either for the purposes of the Income Tax Acts or the Acts governing excess profits duty. I am putting compendiously the problems which were raised in a large number of cases.
I do not think it necessary here to consider those cases, because the real principle was considered once and for all in the case of Newcastle Breweries v. Inland Revenue Commissioners; and the other cases I look upon as applications, varying with the particular facts, of the principles there established.
For the purpose of the present case, I find in the short speech of Lord Phillimore all that I need. He says (96 L.J.K.B., at p. 738; 12 Tax Cas., at p. 954) : 'It is quite usual in trade that manufacturers should from time to time for particular reasons dispose of the raw material which in ordinary course they make up for sale. The run was purchased for trade purposes, and the particular sale was none the less a trade sale because the trade was forced upon the appellant company.' And, clearly, where the results of the trade are ultimately ascertainable in terms of money, though the normal course of trading may have been diverted by Government intervention, the principle that it is income can readily be understood. But such cases afford no guidance, in my view, at all to the problem which we have here to consider.
The problem which we have here to consider, in my opinion, is this : Can it be said that an insurance against loss at large in the language of the agreement here entered into, though a prudent thing possibly to do, can be said to be an expenditure, with regard to the premium laid out for that purpose, 'wholly and exclusively laid out or expended for the purposes of the trade' In my view, it cannot. In all the cases which I have mentioned (the fire insurance cases, the case of the timber destroyed, Glikstens Case) there is a direct nexus between the trade as such and the expenditure incurred. In my opinion, this present case is one where in expenditure is not in relation to the trade, but in relation to the absence of the trade, a view I think indicated clearly in the Rhymney Case, to which I referred, and with which I am in agreement, where Pollock, B., says (65 L.J.Q.B., at p. 526;  2 Q. B., at p. 83; 3 Tax Cas., at p. 479) : 'It is an indemnity for what may happen from many causes.. namely, that the colliery is not working, and, while that is so, a loss a occasioned.' Again 'it is money laid out in order to provide for an unfortunate contingency, by reason whereof the trade cannot be worked.' I find the greatest difficulty in taking the view that an expense which is in relation to something which is laid out for the trade can be extended to cover the case of expense wholly and exclusively laid out for the purpose of protecting the trader against the absence of trade; not an absence caused by a specific event such as a fire, which may convert property into money, as in the Gliksten Case, but a complete absence of trade as such.
In the present case, clause 80 of the agreement entered into between these coalowners and the association does not go so far, I think, as in the Rhymney Case. We do not know the exact terms of the rule in the Rhymney Case, and therefore I will say little about it; but in the present agreement it is not every strike, even, for which the coalowner is protected. It is first : 'In case of a strike on the part of the workmen, or any number of them, before or in consequence of the decision of the board or of the association, and if the action of the member in reference to such strike shall be ratified' - it will be observed that the association remain at all times the masters of the event, because if the strike be not in consequence of their decision, or be not ratified by the association, then they are not liable to pay the money which otherwise they might be liable to pay as indemnities under clause 81 and the subsequent clauses. Then, as the Attorney-General has pointed out, it is not limited to strikes. In the case of restriction or a cessation of output at the colliery in consequence of the member acting in compliance with the direction of the association, the indemnity may be paid; there again, whether the output of coal be restricted, or whether a direction of this association result in a cessation of output - either, I suppose, by means of ordering a cessation of labour (what is called a lockout), or by putting an embargo upon the sale of coal - I know not how; but anyhow on cessation of output - there again an indemnity may be paid; but again it is only to be paid if the conditions required by this association are complied with.
In my view, it would be very difficult indeed, on the particular agreement entered into in this case, to maintain that an indemnity so paid at the election of a third party, who was to decide whether the conditions were or were not fulfilled (an indemnity which probably, though I do not base myself upon this, is based upon a contract in restraint of trade and therefore unenforceable), would be a taxable gain or profit arising or accruing from the trade of the coalowners. It points to a separate undertaking of adventure, with special conditions and special requirements of its own. But, however that may be, I am clearly of opinion that an expenditure in respect of the possibility of receiving that indemnity so controlled by a third party would not be one which could be said to be 'wholly and exclusively laid out or expended for the purposes of the trade.'
But I do agree with the contention of counsel, though I do not think it is necessary to-decide it here, that it would be very difficult to argue successfully that, if the gains accruing from this indemnity were taxable profits, the premium which was paid for the purpose of earning those profits was not itself a disbursement or expense to be taken into account in computing the amount of the profit or gain to be charged. But we have not to consider that point finally, and it may be, as the learned Attorney-General has said, that we have not materials to decide it. For my part I am content to say that to appellants have failed to prove that the later decisions have altered the weight or authority of the Rhymney Case and have failed to show any particular facts in this case which would take their case here out of the authority of that decision.
As to the second point, it is sufficient to say, I think that in that respect again the authority of the Scottish case applies fully here. We have not perhaps an exact account of the original rules of the Mining Association. We have the rules of the present Mining Association, to which this company have mediately subscribed through the South Wales Coalowners Association. They go so very far beyond the immediate obligations of this business that they cannot be said mediately or immediately to be 'wholly and exclusively laid out or expended for the purposes of the trade.' The matters to which my Lord has referred, which I do not repeat, indicate, I think, that the objects of the Mining Association of Great Britain are of very varying kinds. Therefore, in my view, the case of Lochgelly Iron and Coal Co. v. Crawford is one which should be followed by this Court, and it cannot be said that those subscriptions are deductible as expenses incurred with a view to earning the profits of the appellants in this case. I agree that this appeal must be dismissed.
ROMER, L. J. - I agree. In my opinion, any sums received by the appellants for the purposes of indemnifying them against loss of profits occasioned by a cessation or restriction of output would not be a trading receipt of the appellants, and for that reason I have come to the conclusion that the part of the subscription paid by the appellants to the association which may be deemed to have been paid for the purpose of securing such a benefit is not a sum of money that has been 'wholly and exclusively laid out or expended for the purposes of their trade.' It is not money that has been expended for the purpose of earning the appellants profits.
So far as the Rhymney Case decided that, I think the case was rightly decided; but there are statements made by Pollock, B., and Bruce, J., in giving their judgments in that case which go further than I am myself prepared to go. They suggested that money paid for the purposes of preventing deterioration of the colliery whilst it is not being worked (to use the words of Pollock, B.), and the maintenance of the machine while the business is not being carried on (to use the words of Bruce J.) would not be payments 'wholly and exclusively laid out or expended for the purposes of the trade.' I am not prepared to say that. Unless that machine, the colliery, is kept in a state in which it can be worked and so profits made, obviously no profits will accrue to the trader and, that being so, any sums expended for those purposes, that is to say, for the purpose of preventing deterioration, for the purpose of maintaining the machine while the business is not being carried on, would appear to be moneys that might properly be allowed as deductions in framing the accounts.
On the other question, the question relating to the subscription to the Mining Association, I have nothing to add to what has been said by the other members of the Court.