BIM62070 - Measuring the profits (particular trades): Mineral extraction: Bullcroft Main Collieries Ltd v O'Grady [1932]17TC93
The issues in this case were whether payments in respect of certain indemnities, and the cost of replacing a furnace chimney, were allowable deductions for tax purposes (see BIM62030).
The company had been granted coal-mining leases, under the terms of which it was liable to compensate the owners of surface lands for any damage caused by subsidence from working the mine. It was not in dispute that such compensation payments were an allowable deduction.
However, under two of the leases the company agreed to make yearly payments to the landlords for each acre under which coal had been worked. In return the landlords agreed that they would indemnify the company against all claims for surface damage.
In the same year the company replaced a furnace chimney that had become dangerous. An improved chimney was erected on a site close to old chimney.
It was held that the sums paid to the lessors in respect of the indemnities against claims for surface damage were allowable revenue deductions, but the cost of replacing the chimney was capital expenditure and not an allowable deduction for tax purposes.
Rowlatt J said in respect of the chimney:
‘I do not think it is possible to regard that as repairing a subsidiary part of the factory. I think it is simply having a new one… I think the chimney is the entirety here and they simply renewed it.’
Concerning the indemnity payments, he noted:
‘The other point seems to me to be a point of some little difficulty and some little nicety. It is conceded on the one hand and, in fact, it appears from the Addie’s case [see BIM62065], that if you buy outright the right to let down the surface from the surface owners, however you may describe that right in legal language - if you buy that so that you can let down the surface without paying anything more, at the beginning of your operations, that is capital expenditure; you pay that to enable you to start, really. That is clear. On the other hand, if you do not make any arrangements of this kind at all and, as the damage happens, you go to arbitration and you pay the persons whose property is damaged on the surface each time that you cause the damage, that, it is admitted, is a deduction and a revenue expense.’
He also said:
‘You buy a seam of coal for whatever is in it at a certain price - capital expenditure. You go on and you get the coal and pay by the ton - income expenditure, although it is really the coal itself that is given you by a lease from the beginning… In this case, they do not make this payment except where they go under a new acre. The payments are progressively distributed as they work… Have you provided by a capital payment for getting a right or are you really, however it is arranged, conducting your mine upon the principle of having to make incidental payments as you go along to enable you to conduct the mine? Not without some diffidence I think that the Commissioners way of looking at it cannot be disturbed.’