LORD HANWORTH, M.R. - This seems, to my mind, a very plain case. It is necessary just to state the facts, because the propositions of law are not in dispute. It seems that one of these partners, the senior partner, acquired some premises in March, 1926, for Pounds 10,000, premises which were leasehold, with a ground rent of Pounds 460. On September 19, 1928, a deed of partnership was entered into to regulate the business relations between the partners in respect of a business which had been carried on before but in respect of which there had been no actual partnership deed. Under the terms of the partnership deed, these premises, of which the senior partner was the owner, were to be the place where the partners were to carry on their business, and it was provided by the partnership deed that, entirely at the will and sole discretion of the senior partner and so long as he should deem fit, the partnership should use the premises and pay to the senior partner in respect of the use of the premises Pounds 1,250 per annum for rent.
That is how the matter stood with regard to these premises. Now, there was a provision in the partnership deed that the capital of the partnership should be brought in exclusively by the senior partner and the amount of his capital should be the sum shown to the credit of the senior partner in the balance sheet, dated March 31, 1928, which the balance sheet was made out; and also such further sums as the senior partner from time to time is his sole discretion should deem necessary to bring in. Of course, it is not conclusive matter, because one has always to go to the substance of the matter and not merely to accounts but so far as the balance sheet we have before us is an indication it would seem that the capital of the senior partner was Pounds 2,700 at March, 1931, and no more, but it does appear from that that he still was entitled to receive the rent for that year of Pounds 1,250 which would seem to indicate that the premises were still held by him as they had been before the partnership deed, and that nothing had intervened to make the sum of Pounds 1,250 per annum otherwise than payable out of the partnership assets.
There is no doubt about it - and the Attorney-General does not contend otherwise - that if these premises had belonged to some entirely independent owner, the partnership would have been entitled to pay that owner Pounds 1,250 and that sum would have been deductible as a proper outgoing in ascertaining the profit and gains, in accordance with the indication that is given in rule 3 (c) of the rules applicable to Cases I and II of schedule D. There is no doubt about that. On the other side, there is no doubt about this, that if and so far as capital is borrowed by the firm, borrowed from whomever you please, any annual interest and paid out of the profits and gains is a deduction which definitely is forbidden in computing the annual profits and gains under the same Rule 3 (l). What is said here is that although in form it is a payment for rent and a proper payment for rent, as it would be to a wholly outside person, this sum paid to the partner was really a payment made to him in respect of capital which was really a payment for rent and a proper payment for rent, as it would be a to a wholly outside person, this sum paid to the partner was really a payment made to him in respect of capital which he brought in; that he brought in a sum in the form of premises, but none the less it was a sum which may be treated as being converted into capital of Pounds 10,000, and so far as he was paid Pounds 1,250 that was a deduction which was forbidden under rule 3 (l). We have, therefore, really to come to the conclusion on which side of the line does this fall : was it a payment for rent, or was it a payment for capital? The Commissioners said it was proved before them - and they are the right persons for estimating the facts - that 'the rent of Pounds 1,250 was a fair and proper rent for 9, Coleman Street. It was in fact the rent which the senior partner was asked to pay by the previous owners in 1926 if he decided to tent the premises instead of purchasing the They have come to the conclusion definitely that they accept the view that this story told in the partnership deed was a true story. I quite agree that the matter is not concluded as a question of fact, but it is open to review as a question of law, because it is a mixed question of fact and law, and we have to construe and determine what is the result of Clause 4 of the partnership deed. But I an prepared to give very considerable weight to the conclusion reached by the Commissioners, who are quite within their province in telling us that the Pounds 1,250 was a fair and proper rent for these premises. Under those circumstances, I cannot see any evidence whereby one can turn this habitation of the partnership into money and treat it simply as money - treat it as borrowed capital. It appears to me that it stands, as the commissioners have found, as being the habitation charged at a proper rent to the partnership. Therefore, the decision of the commissioners have found, as being the habitation charged at a proper rent to the partnership. Therefore, the decision of the commissioners must be restored and the appeal allowed, with costs here and below.
SLESSER, L.J., - I agree. The learned Judge has refused to allow this rent to be deducted under Rule 3 of the Rules applicable to Cases I and II, because he says it is simply a payment made by the two partners to one of them. I think that is an over-simplification of the relation between these people, as found before us. As I view this thing -and it is the view taken by the Commissioners (though, of course, it is a matter which, once it is held that is a bona fide transaction, is one of law rather than of fact, as to what the deed means) - it seems to me it is an ordinary landlord and tenant agreement in which one of the partners happens to be the landlord and the partnership are the tenants. There is an obligation to pay rent, and a right on the part of the landlord to determine the transaction at his discretion, and there is an obligation on the partnership to pay such things as repairs and the like. Such a transaction appears to me properly to be described as 'rent' within the meaning of rule 3 (c). If that conclusion is properly arrived at, that these money were paid as rent, then I think that concluded the matter. I would only add that the Attorney-General has argued difficult cases about complication which may arise with regard to the payment of salaries and the introduction of capital into the firm. With regard to salaries, those are the cases, as I understand, whether it is held that the partner cannot be treated as receiving a salary where money is paid to him in respect of the partnership business in one form or another. I am far from saying that, if a payment were made to a partner for something altogether disconnected with the partnership business as such, he might not be entitled strictly to remuneration on an independent contract. We have not to consider that case. As regards interest upon capital, that is expressly provided for, as my Lord has said, in Rule 3 (l). It therefore follows that this satisfies all the requirements of the section, and the deduction is therefore proper.
ROMER, L.J. - I think that the answer to the argument advanced on behalf of the Crown, based on an analogy, or suggested analogy, between this case and that of services rendered by the partner to his firm, is that the services so rendered are rendered as a partner. Where two persons agree together to carry on a business or a profession in partnership, it is no more possible, in ascertaining the profits of that business or partnership for the purpose of Schedule D, to deduct the salary paid to one or both of them for the work they have done in carrying on that business than it would be for a professional man to carry on a business on his own account and by himself to deduct something which he thought was equivalent to the value of his services rendered to himself.
But it is not the that you can never, in ascertaining the profits of a partnership, deduct something paid to one of the partners. An illustration I ventured to give during the argument is this : suppose two people are carrying on business in partnership as hotel proprietors, and it is necessary for the purpose of carrying on that hotel, that business, that they should be supplied from time to time with wine, and suppose one of the partners is carrying on a wholly independent business on his own account in the wine business and supplies wine to the partnership, it would be ideal to suggest, would it not, that for the purpose of ascertaining the profits of the hotel you could not deduct the sums paid to the partner who was the wine merchant. The fact that such a deduction would be permissible is, I think, made clear by Rule 10 of the Rules applicable to Cases I and II, which says that for the purposes of taxation under Schedule D a partnership is treated as a separate entity from individual partners composing the firm. In the present case it appears to me that the premises were supplied for the use of the partnership by the partner who owned them, not in his capacity of partner at all, but in his capacity of landlord of the premises. Now if it were the fact that interest on capital brought in by the partners could not be deducted for the purpose of ascertaining the profits of the partnership business under Schedule D, because capital was brought in by an outside-advanced to the partnership by an outside - the interest on the capital could be deducted, I should agree with the contention on the part of the Crown. As I understand it, the reason why interest is not deductible in such a case - that is to say, interest on capital brought in by a partner for the purpose of ascertaining the partnership profits - is because Rule 3 (l) prevents the deduction of interest in any case.
For these reasons, it appears to me that this appeal should be allowed.