DEENY VS GOODA WALKER LTD.
1996 P T D 1207
[House of Lord]
Present: Lord Goff of Chieveley, Lord Browne Wilkinson, Lord Mustill, Lord Nicholls of Birkenhead and Lord Hoffmann
DEENY and others
Versus
GOODA WALKER LTD. (in liq) and others (No.2) (Inland Revenue
Commissioners, third party)
Appeal No. Nil, decided on 07/03/1996.
Income-tax---
----Receipt of damages or compensation---Whether receipt taxable---Principles to determine the taxability of such receipt.
Insurance writer recovering damages for losses caused by his agent's failure to exercise reasonable skill and care. The damages are insurance writer's trade receipts and taxable in his hands.
To determine the taxability of the receipt of damages or compensation what is necessary to decide is what the damages or compensation was for? Was it for revenue receipt or expense? Or was it for the partial or total loss of a capital asset employed in the trade? Or was it for something which does not form part of the trade at all? Where compensation or damages are received by a trader two questions arise viz first, was the receipt of compensation a receipt of the recipient's business and, second, was such receipt of an income or capital nature?
The following examples will explain the position.
(i) The company's stocks of rum were compulsorily requisitioned by Admiralty during the war. The compensation paid to the company was sought to be non-taxable on the ground that it was not a receipt of trade but compensation for interference with the trade. Rowlatt, J. said: the payment. was in substance a sale of the company's stock and the fact it was under compulsion was irrelevant. The receipt was taxable. His decision was affirmed by the House of Lords (IRC v. Newcastle Breweries 1927 All ER 287).
(ii) The company received insurance money for the destruction of its timber by fire. The non-taxability of the insurance money was sought on the ground that the company traded in timber and not in fires. Rowlotte, J. said that the insurance policy had been taken out as part of carrying on the business and the result of the transaction was to convert the company's stock into money in the same way as if it had been sold. (see Green Inspector of Taxes) v. J. Glicsten and Son Ltd. (1928) 1 KB 475 by the House of Lords 1929 AC 381-B.
(iii) But, damages for personal injuries are compensated for personal injury and are not taxable even though partly they are calculated by reference to the earning of the injured person. (C. British Transport Commission v. Gourley (1955) 3 All ER 796.
(iv) Similarly, damages awarded to a company for libel are compensation for damage to its reputation and not trade receipts- even though in part they are calculated by reference to the loss of profit which the libel had caused.
Lewis v. Daily Telegraph Ltd. (1963) 2 All ER 151.
Bernard Eder QC, Philip Baker and Simon Bryon (instructed by. Elborne Mithchell) for Defendants.
Geoffrey Vos QC, John Walters and David Lord (instructed by wilde Sapte) for the Names.
Ian Glick QC and Lawncelot Henderson QC (instructed by the Soliciter of Inland avenue) for the Revenue.
Dates of hearing: 15th, 16th, 17th January and 7th March 1996.
JUDGMENT
LORD GOFF OF CHIEVELEY.---My Lords, I have had the opportunity of reading in draft the speech of my noble and learned friend Lord Hoffmann; and, on the first and principal ground relied upon him to his speech, viz. that the receipt of damages by a name constitutes, a receipt of his underwriting business as a member of Lloyd's, I too would dismiss the appeal.
At the conclusion of his speech Lord Hoffmann addressed the question whether a statement by Diplock LJ in London and Thames Haven Oil Wharves Ltd. v Attwooll (Inspector of Taxes) (1967) 2 All ER 124 at 134, (1967) Ch.772 at 815 provides an accurate statement of the law. He concluded that it does. However, having regard to the concern expressed on this point by my noble and learned friend Lord Browne-Wilkinson, a concern shared by the remainder of my noble and learned friends on the Appellate Committee, I am content that the appeal should be dismissed only on the first ground considered by Lord Hoffmann.
LORD BROWNE-WILKINSON.---My Lords, I agree that the appeal should be dismissed on the first ground relied on by my noble and learned friend Lord Hoffmann: the receipt of damages by a name constitutes a receipt of his underwriting business as a member of Lloyd's within the meaning of sections 171 (2) and 184(1) of the Finance Act, 1993, because the name entered into the contracts with the agents in the course of carrying on that business.
My noble and learned friend Lord Hoffmann further concludes that, whether or not the contracts, with the agents formed part of ' his underwriting business', the same result is achieved by applying the statement of law made by Diplock LJ in London and Thames Haven Oil Wharves Ltd. `v Attwooll (Inspector of Taxes) (1967) 2 All ER 124 at 134, (1967) Ch. 772 at 815 which he quotes. Where compensation is received by a trader, two questions arise, viz. first, was the receipt of the compensation a receipt of the recipient's business and, second, was such receipt of an income or capital nature? I have no doubt that the test propounded by Diplock LJ correctly determines the answer to the second of those questions, i.e. whether such compensation falls to be treated as income or capital of the taxpayer's trade. As to the first of those questions, in the ordinary run of cases the receipt of a sum by a trader as compensation for the failure to receive what would have been a receipt of his trade, will normally demonstrate that the compensation is itself a receipt of that business. But there may be unusual cases where the test propounded by Diplock, LJ might not be appropriate to the correct determination of the question whether the compensation is a receipt of the taxpayer's business. For example, in Higgs (Inspector of Taxes) v. Olivier (1952) Ch. 311 the Court of Appeal held, rightly or wrongly, that the receipt by an actor of a sum to compensate him for not carrying on part of his trade for a limited period was not a receipt of the actor's trade. It may be that the test propounded by Diplock LJ would have led to a contrary conclusion. Since it is unnecessary to decide the point in order to determine this appeal,. I prefer to express no view whether the test propounded by Diplock, LJ is in all circumstances determinative of whether or not a receipt of compensation is a receipt of the taxpayer's business.
LORD MUSTILL.---My Lords, I too agree that the appeal should be dismissed, for the reasons given by my noble and learned friend Lord Hoffmann in support of the first ground of his decision.
I would, however, also wish to express my agreement with the observations of my noble and learned friend Lord Browne-Wilkinson concerning London and Thames Haven Oil Wharves Ltd. v. Attwooll, (Inspector of Taxes) (1967) 2 All ER 124, (1967) Ch. 772. In my opinion the question whether a particular receipt is a receipt of the taxpayer's trade must always come first. No doubt in practice it will often be so closely linked to the second question whether if it is a receipt of the trade it is in the nature of interest or capital, that an?? affirmative answer to one will demand an affirmative answer to the other. But this need-not always be so, and too would prefer to decide this appeal on the first ground alone.
LORD NICHOLLS OF BIRKENHEAD.---My Lords, I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Browne-Wilkinson, Lord Mustill and Lord Hoffmann. I agree that this appeal should be dismissed on the first of the two grounds relied on by Lord Hoffmann, As to the second ground, I agree with the observations of Lord Browne Wilkinson and Lord Mustill.
LORD HOFFMANN.---My Lords, this appeal is the latest episode? the storm of litigation which has blown up in the wake of the huge losses suffered by insurance underwriters at Lloyd's a few years ago. It raises a narrow but important point, namely whether damages awarded to a member of Lioyd?s in compensation for loss caused by the negligent conduct of the underwriting his behalf are a taxable receipt of his underwriting business.
(1) UNDERWRITING AT LLOYD'S
Underwriting members of Lloyd's (names) are individuals who each carry on insurance business. The way in which the business is conducted has a number of special features, including the following.
(a) Members' agents
A name who is not himself and underwriting agent must carry on his business through an underwriting agent, known as a 'members' agent'. This is a statutory requirement: see section 8(2) of the Lloyd's Act 1982. The relationship between the name and his members' agent is governed by a standard form of agency agreement prescribed by a Lloyd's 'Byelaw and gives the agent wide discretionary powers.
(b) Syndicates and managing agents
For the purposes if writing insurance policies, names join together in syndicates, which usually specialise in the underwriting of particular form of risk. The managing agent of the syndicate will appoint one or more active underwriters' who will enter into contracts of the insurance on behalf of all the names, including sometimes himself. A syndicate is not a legal entity but an aggregate of the names who have joined the syndicate for a given underwriting year. Nor is a syndicate a partnership: each name undertakes to be liable for his several share of the risk but for the share of any other name.
(c) Sub-agents and combined agents
The name's members' agent may or may not be the same person as the managing agent of one or more of his syndicates. If they are, they will be called combined agents. If not, the name's members' agent will enter into a sub-agency agreement in standard form with the managing agent of the syndicate, which the name wishes to join, delegating his discretionary power to carry on the underwriting business on behalf of the name.
(2) The litigation
In the period 1988 to 1990 there occurred a number of catastrophes (such as the total loss of a North Sea oil rig and a hurricane in the United States), which resulted in very large claims being made against certain syndicates. When the extent of the losses became known on the closure of the three-year Lloyd's accounting period, litigation followed. Large numbers of names sued their members' agents and the managing agents of the loss making syndicates. They alleged that the losses had been caused by the negligence of the managing agents in the conduct of the underwriting and that the members' agents were contractually liable for that negligence. In Henderson v. Merrett. Syndicates Ltd (1994) 3 All ER 506, (1995) 2 AC 145 this House decided two questions of principle. The first was that a managing agent owed duty of care in tort to all members of his syndicate, whether he was acting as combined agent or under a sub-agency agreement. The second was that under the terms of the, standard agency agreement, a members' agent was responsible for the negligent conduct of a managing agent to whom, under a sub-agency agreement, he delegated his discretion in carrying on the business of underwriting on behalf of the name.
The actions with which this appeal is concerned were commenced by names belonging to syndicates managed by Gooda Walker Ltd. and an associated company. I shall for convenience call them both Gooda Walker. The defendants were Gooda Walker and the members' agents of those names for whom Gooda Walker were not combined agents. In a judgment dated, 4th October, 1994 Phillips, J. ((1994) Times, 7th October) held that Gooda Walker had failed to exercise proper care and skill in the conduct of the underwriting. In consequence, he held that Gooda Walker and the members agents were liable for such damages as would place the names' in the same position as if the underwriting carried on their behalf by each syndicate had been competently performed. More specifically, he held that the damages should be assessed by computing what each syndicate would have received from the reinsurance cover which Gooda Walker ought reasonably to have had in place, less what such cover would have cost. An assessment of damages on these lines has since been undertaken. In the course- of that assessment, however, a further question of principle arose. If appropriate reinsurance cover had been in place, the receipt of the syndicate members would have been greater and they would have made profits instead of losses, or at any rate smaller losses. The additional profits would have been liable to income-tax, or if there had still been losses, there would have been less to set off against other profits or carry forward to future years. In either case, the names would have paid more tax. In computing what should be- paid to the names to put them in the same position as if the underwriting had been competently performed, should there be a deduction of the extra tax which would have been payable?
In British Transport Commission v Gourley (1955) 3 All ER 796, (1956) AC 185 this House decided that where a sum of damages which is not liable to tax is calculated by reference to income which would have been liable to tax, the computation should be made by reference to the net amount which the plaintiff would have received. The defendants rely on this principle. It is accepted, however, that the principle does not apply if the award of damages is itself a taxable receipt. In this case the names say that the damages constitute taxable receipts of their underwriting businesses which will have to be brought into account in computing the profits arising to them from those businesses. The defendants say that the damages are not receipts of their underwriting businesses at all.
The Commissioners of Inland Revenue, who have a lively interest in this question, have been found as parties so that they may be bound by the outcome. Not unnaturally, they support the names. Gooda Walker have gone into liquidation and ceased to take an active part in the proceedings. So, the dispute is between the names and their members agents. Potter, J. (1995) STC 439) held in favour of the names and the Inland Revenue. His decision was upheld by a majority of the Court of Appeal (Simon Brown and Peter Gibson LJJ) (1996) STC 39). But Saville LJ, who has probably heard more of the Lloyd's Litigation than any other Judge, dissented.
(3) Taxation of Lloyd's underwriting profits
The profits of an underwriting business are taxed under Case 1 of Schedule D, which is applied to underwriting members of Lloyd's by section 171(2) of the Finance Act, 1993:
"As respects the profits arising to a member from his underwriting business for any year of assessment--(a) the aggregate of those profits shall be chargeable to tax under Case 1 of Schedule D... "
Section 184(1) defines 'underwriting business', in relation to an underwriting member of Lloyd's, as---
his underwriting business as a member of Lloyd's, whether carried on personally or through an underwriting agent, and does not include any other business carried on by him, and in particular, where he is himself an underwriting agent, does not include his business as such as agent... "
We are not concerned in this case with what the expression 'does not include.' The relevant words are 'his underwriting business as a member of Lloyd's ...carried on ...through an underwriting agent'. So, the question is simply whether the damages are a receipt of that business.
My Lords, if it were not for the dissenting judgment of Saville, LJ. I would have thought that the question admitted only one answer. If a trader sells goods, the price of what he sells is a receipt of his trade. If the buyer has to be sued for the price, the money recovered is a receipt of the trade and the irrecoverable costs are an expense. If the buyer does not accept the goods and the trader recovers damages for non-acceptance (being the difference between the price and the value of the goods left on his hands) the damages are a receipt of the trade. What is true of goods is also true of services. If a trader employees someone to perform services for the purposes of his trade, the money which he realises from the performance of those services is a receipt of the trade. If the employee in breach of his legal duty fails to perform the services, or performs them badly so that the trader realises less money than he would have done if they had been performed properly he will be liable in damages and the damages will be a receipt of the trade. In each case the receipt arises out of the trade.
Mr. Eder QC who appeared for the defendants did not dispute that if the employment of the members' agent was part of the name's trade, the damages for which he was liable would be a receipt of that trade. His submission was the name's only trade at Lloyd's was writing contracts of insurance as, part of one or more syndicates. It was not employing member's agents, still less suing them for compensation. Underwriting business is what is done at 'syndicate level' and ,gives rise to receipts and expenses which enter into the syndicate accounts. These would not include damages payable by a members' agent for breach of the agency agreement. A name has to employ a members' agent as a condition of being allowed to trade at Lloyd's but the employment does not form part of that trade.
My Lords, I reject this analysis, which seems to me entirely artificial. Of course the purpose of the name's business is to write insurance. The premiums, the income of the fund in which they are invested and his reinsurance recoveries will ordinarily be his only receipts. Equally it can be said that the business of a shopkeeper is buying and selling goods. But I think that he would be surprised to be told that employing a shop assistant was not part of the trade, so that wages were not a deductible expense. Apart from the fact that the use of an agent is compulsory, which in the present context seems to me neither here nor there, I can see no difference between the employment of agents to conduct one's underwriting business at Lloyd's and their employment in any other kind of business.
(4) Napier's Case
Mr. Eder relied principally upon the decision of Saville J in Lord Napier and Ettrick v Kershaw (14th May, 1992,. unreported)--as indeed did Saville LJ in this case in the Court of Appeal. The issue in that case turned on the construction of words in a Lloyd's Premiums Trust Deed similar to the words of section 171(2) of the 1993 Act with which this appeal is concerned. In Napier's case the words were 'all ...monies whatsoever ...becoming payable to the Name in connection with the underwriting' and 'the underwriting' was defined as "The underwriting business ...of the Name at Lloyd's carried on through the agency of the member's Agent'. In this case the words of section 171(1) are 'profits arising to a member from his underwriting business' and 'underwriting business' is defined to mean 'his underwriting business as a member of Lloyd's ...carried on ...through a [members'] agent.'
On the other hand, the context in which the words are used is not the same. Section 171(1) identifies, receipts of the purpose of computing profits charged to tax. The premiums trust deed identifies receipts for the purpose of requiring them to be held in a trust fund rather than at the free disposal of the name. The purpose of the trust fund is to put a ring fence around the receipts of the name's underwriting business so that they are earmarked to pay the debts of the business. Only the net profits become available to the name, his other creditors or his trustee in bankruptcy. The debts of the business are of course primarily insurance claims but include 'any expenses whatsoever from time to time incurred in connection with or arising out of the underwriting', including the remuneration of the member's agent and any tax he is liable to pay on his underwriting profits.
The issue in Napier's case was whether damages payable to a name by member's were caught by the trust. Saville, J. decided that they were not. His reasoning was as follows:
"' [Underwriting' means] the underwriting business of the name at Lloyd's carried on by or though the member's agent and not just the underwriting in a more general sense. The money in question is clearly not a receipt of the underwriting business, for the business is one of underwriting at Lloyd's and not one of compensating names for the mistakes allegedly made by their agents in conducting the name's business of underwriting at Lloyd's ...It is not a profit of the underwriting business for the same reason, nor would it feature in the accounts of the names' syndicate: and it should be remembered that a name is only allowed to conduct underwriting business at Lloyd's through syndicates ...What, to my mind, the money has to do with is not the names' business of underwriting at all; but the rights and obligations existing between the name and his members and managing agents: and those rights and obligations are not part of the names' business of underwriting at Lloyd's either, but part of the internal arrangements made between these parties as a means of enabling the names' business at Lloyd's to be conducted. That business is business with third parties and not business between the name and his agents. In my judgment, the money is payable in connection with the latter business and not the former business within the meaning of the deed."
Mr. Eder says that this reasoning is of general application, at any rate as demonstrating what was meant by a name's underwriting business at Lloyd's. It applies equally to the computation of his profits for the purposes of income-tax.
I do not think that the Judge's reasoning was intended to be of general application. If it was, I confess that I would not be able to agree with it. I have difficulty with the contrast drawn in the first sentence between the underwriting carried on through the members' agent and 'the underwriting in a more general sense' and in the last sentence between the business with third parties and the 'business between the name and his agents'. Why is it necessary to suppose that the name is carrying on two businesses? William of Ockham would not have approved. He said 'entire nonsunt multiplicanda an explanation should not postulate more entities than are necessary. We have not been asked to examine the premiums trust deed in detail and it may be that its context gives rise to an absolute necessity to postulate the existence of two businesses. But I find no such necessity in the Finance Act, 1993. For most purposes, including income?tax, I think that the name is carrying on a Single business.
The argument that 'the business is one of underwriting at Lloyd's not one of compensating names for mistakes' echoes the rhetoric of counsel in a number of cases down the years, arguing that a payment in compensation for lost trading revenue of additional trading expense was riot a receipt of the trade. In IRC v Newcastle Breweries Ltd. (1,925) 12 TC 927, (1927) All ER Rep. 287 the payment was statutory compensation for the company's stocks of rum which had been requisitioned by the Admiralty during the war. Mr. Latter KC said that it was not a receipt of the trade but compensation for interference with the trade. Rowlatt, J. (12 TC 927 at 937) said that it was in substance a sale of the company's stock and the fact that it was under compulsion was irrelevant. His decision was affirmed by this House (12 TC 927) at 951-955, (1927) All ER Rep. 287 at 291-293). In Green (Inspector of Taxes) v. J. Glikstem & Son Ltd. (1928) 1 KB 475 the payment was insurance money for the company's stock of timber, which had been destroyed in a fire. Sir John Simon KC said the company traded in timber and not in fires. Rowlatt, J. (at 481) said that the insurance policy had been taken out as part of carrying on the business and the result of the transaction was to convert the company's stock into money in the same way as if it had been sold. His decision was affirmed by this House (1929) AC 381, (1929) All ER Rep. 383). I need not multiply the examples. The fallacy in each case is the same. A trader may have a number of rights in respect of his stock in trade. For example, he may have aright to the price or alternatively a right to damages against a purchaser, a right to compensation under an insurance policy if it is accidentally lost, a right to compensation against the Crown if it is requisitioned, a right to damages against a tortfeasor if it is negligently damaged or destroyed. All these rights, because they are rights to compensation for his stock-in-trade, arise out of his trade. The fact that the circumstances giving rise to one or more type of receipt may be of rate occurrence does not make it anytheless a receipt of the trade.
No case on the construction of one document is authority on the construction of another, even if the words are very similar. Any view which I expressed on the application of the reasoning in Napier's case to the construction of the premiums trust deed would necessarily be obitior, I, therefore, say only that I cannot accept it as an authority on the construction of section 171(2) of the Finance Act, 1993.
Mr. Eder says, however, that Napier's case does not stand alone. It was approved by the Court of Appeal in Society of Lloyd's Morris (1993) CA Transcript 636. The question in Society of Lloyd's Morris, however, was a different one. It was whether the proceeds of personal stop-loss insurance taken out by a name were caught by the trust deed. The evidence was that taking out stop-loss insurance was a personal decision of the name which he could, if he wished, arrange outside Lloyd's. It does not fall within the powers and discretions in the conduct of the name's business, which the agency agreement vests in the members' agent. I think that if, as appears to be the case; personal stop-loss is a contract to indemnify the name against a part of the overall losses arising in a given underwriting year from his underwriting business at Lloyd's, then a payment under such a policy cannot itself be a receipt of the business. It is a payment under a contract independent of the business, which depends for its calculation upon the prior computation of all the receipts and expenses of the business. To treat the stop-loss recovery as a receipt of the business would, therefore, involve a circularity. This appears to have been the view of the Revenue, which until 1973 did not allow the premiums for personal stop-loss policies as expenses of the underwriting business and did not tax the proceeds as receipts. The Finance Act, 1973 reversed these rules by special provisions, which are now in section 178 of the 1993 Act.
There is of course no reason why a trader should not, as part of his business, take out an insurance policy to compensate him for the profits he may lose or the losses he may suffer in a given event. In that case there is no circularity. The premium will be a business expense, and the payment a business receipt, calculated by reference to the additional profit he would have made or the losses he would not have made if the event had not occurred (see R v. British Columbia Fir and Cedar Lumber Co. Ltd. (1932) AC 441, (1932) All ER Rep. 147). But payment under a Lloyd's personal stop-loss policy is not calculated by reference to the profits which would have been made if a given contingency had not occurred. It is simply a payment in respect of the losses which have actually been suffered.
I, therefore, think that Morris's case was rightly decided on its own fact but that it does not justify the application of the reasoning in Napier outside the facts of the latter case.
(5) Attwooll's Case
Thus far I have been considering the question of whether the damages arose to the names from their underwriting businesses as if it was equivalent to asking whether they arose from a contract made in the course of that business. This is the way Mr. Eder asked us to approach the matter. I have answered that question in the affirmative because, contrary to his submission, I consider that the agency agreement with the members' agent is a contract made in the course of the name's underwriting business at Lloyd's. Mr. Vos QC submits, however, on behalf of the names that this is applying too narrow a principle. In order that a receipt should arise out of a trade, it need not become payable by virtue of some pre-existing trade relationship. There need have been no previous contractual relationship between the parties at all. In IRC v. Newcastle Breweries Ltd. (1927) 12 TC 927, (1927) AL ER Rep. 287, for example, there had been no previous relationship between the Crown and the company. The Admiralty simply descended on the company and requisitioned its rum, thereby coming under a statutory obligation to pay compensation. The same is true of the compensation payable by a tortfeasor for negligently causing damage, which deprives the trader of a revenue receipt or causes him to incur a revenue expense. Mr. Vos says that these cases show that a legal right to compensation for the loss of a trade receipt gives rise to a payment which by definition arises out of the trade. He relied upon a statement to this effect by Diplock LI in London and Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) (1967) 2 All ER 124, 134, (1967) Ch. 772 at 815:
'Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income-tax purposes in the same way as the sum of money would have been treated if it had been received instead of the compensation.'
Although Diplock, LJ refers to the trader's failure to receive a sum of money which would have been a revenue receipt, his principle must apply equally to compensation for his liability to pay a sum of money which was a revenue expense (see Donald Fisher (Ealing) Ltd. v. Spencer (1989) STC 256). So, Mr. Vos says that we need not concern ourselves with whether the employment of the managing agent was a contract made in the course of the name's trade. The managing agent could have been a stranger to the name's business. The fact that the name is entitled to the damages as compensation for what would have been a revenue expense or receipt of the trade is enough to identify the damages as a trade receipt.
Since I have rejected the arguments of Mr. Eder on his own preferred formulation of the question, I need not decide whether the Attwooll formula (by which I mean the sentence of Diplock, LI which I have quoted) is applicable to this case or not. But the question has been fully argued and it is right that I should express an opinion on it.
Mr. Eder says that it cannot be of general application because there is no special rule in the 1993 Act for compensatory payments. There is only one test for all payments; namely, whether they are receipts arising out of the trade. The rule propounded by Diplock, LJ might be a useful test for deciding whether a payment, which undoubtedly arose out of the trade was capital or income but cannot take the place of the statutory language. The context, says Mr. Eder, was a case in which the only question was whether the payment was capital or income: a tortfeasor had negligently damaged the plaintiff's an asset of their trade, and the compensatory payment in dispute was for their inability to use it while it was being repaired.
I think the Diplock, LJ can safely be credited with having known that the duty of the Court is to apply the language of the statute and not to add its own glosses or addenda. He described his proposition as one of logic rather than law, by which I think he meant that it did no more than express what was logically entailed by the proposition that a trader was entitled to receive a payment in compensation for what would have been a receipt of his trade. It meant, in his view, that the compensatory payment was likewise a receipt of the trade.
I respectfully think that this is right and that it is consistent with the cases. Of course, like all such reformulations, it restates the question rather than providing an answer. It is still necessary to decide what the compensation was for. Was it for a revenue receipt or expense? Or was it for the partial or total loss of capital asset employed in the trade? Or was it for something, which does not form part of the trade at all? These questions sometimes give rise to very fine distinctions. The fact that damages are computed by reference to income which would have been earned does not mean that they are compensation for-the loss of that income. The income which might have been expected to be received may be merely an element in the valuation of a different asset or interest. As Diplock, LJ said in Attwooll's case (1967) 2 All ER 124 at 135, (1967) Ch. 772 at 816:--
?The method by which the compensation has been assessed in the particular case does not identify for what it was paid; it is no more than a factor which may assist in the solution of the problem of identification.'
It is accepted, for example, that damages for personal injury are compensation for the personal injury, though partly calculated by reference to the income which the injured person would have earned (see British Transport Commission v. Courley (1955) 3 All ER 796, (1956) AC 185). In Lewis v. Daily Telegraph Ltd. (1963) 2 All ER 151, (1964) AC 234 it was decided that damages awarded to a company for libel are compensation for damage to its reputation, even though calculated in part by reference to the loss of profits which the libel has caused. In both cases, therefore, the damages were not taxable because they were not compensation for a revenue receipt. What both cases show is that the answer to the question of what the damages were for also provides the answer to the question of whether they arose out of the trade.
Neither of these cases, it will be noticed, was concerned with the distinction between capital and income. An individual's physical health and integrity or a company's reputation are only in the loosest sense capital assets of their respective trades. It is true that in many of the cases, the only plausible alternative to the payment being compensation for a revenue trade item was that it was compensation for a capital asset employed in the trade. But this was not always the case. In J Gliksten & Son Ltd. v. Green (Inspector of Taxes) (1929) AC 381, for example, it was not suggested that the timber was a capital asset. The argument was that having fires was not part of the company's business. It seems to me that the Attwooll proposition is about which compensatory payments can be said to arise from the trade. It identifies them as payments in compensation for what would have been revenue items in the trade. If they are not compensation for such revenue items, the question of what else they are compensation for is irrelevant. So, I do not accept Mr. Eder's submission that one first asks whether a receipt arises out of the trade and then whether it is capital or income. There is nothing special about compensation for a capital asset. It is no more than one kind of compensation which does not for income?tax purposes arise out of the trade. _
I, therefore, think that Mr. Vos's wider argument was right. I do not think it matters whether the damages by way of compensation for lost reinsurance recoveries arose from a contractual right against a member's agent or a right in tort against a managing agent or claim in tort against a broker who negligently failed to act according to instructions or a claim for fraud against a Granger who diverted the money to himself. In each case it arises from a right to be compensated for damage to the trade and the payment, therefore, arises out of the trade.
I would, therefore, dismiss the appeal.
A.A./516/P????????????????????????????????????????? ??????????????????????????????????????????????? Appeal dismissed.