Page1

Status: Positive or Neutral Judicial Treatment

*949 Commissioner of Taxes Appellant; v Nchanga Consolidated Copper

Mines Ltd. Respondent.
Privy Council
15 January 1964

[1964] 2 W.L.R. 339

[1964] A.C. 948

Viscount Radcliffe , Lord Morris of Borth-Y-Gest and Lord Upjohn.
1964 Jan. 15
On Appeal from the Federal Supreme Court of the Federation of Rhodesia and Nyasaland.
Revenue—Income tax—Capital or income expenditure—Company—Group of copper mining
companies—Fall in price of copper—Voluntary cut in production—Payment by one company of group
to another to cease production for one year—An operating caught of payor company—Allowable
deduction for tax purposes— Federation of Rhodesia and Nyasaland Income Tax Act, 1954 s. 13 (1)
(2) (a) .
Southern Rhodesia—Income tax—Capital or income expenditure—Group of copper mining
companies—Voluntary cut in production—payment by one company of group to another to cease
production for one year—Operating cost of payor company—Deductible for tax purposes—
Federation of Rhodesia and Nyasaland Income Tax Act, 1954, s. 13 (1) (2) (a) .
By section 13 of the Income Tax Act, 1954, of the Federation of Rhodesia and Nyasaland : "(1)
For the purpose of determining the taxable income of any person, there shall be deducted from
the income of such person ... (2) ... (a) Expenditure ... (not being expenditure ... of a capital
nature) wholly and exclusively incurred by the taxpayer for the purpose of his trade or in the
production of the income."
Company N., the respondent, together with companies R. and B., formed a group carrying on the
business of copper mining, each company being independent of the others, but with overlapping
directorates and each with the same deputy chairman. There was a common sales department
for handling the disposal of their output; the copper itself not being failed as the specific product
of any one of the three mines. Following a steep fall in the price of copper in the world market the
group, in common with other producers, decided voluntarily to cut their production, and did so
early in 1958 by 10 per cent., which for the three companies meant a cut of 27,000 tons, and
reducing the group's estimated aggregate production for the year of 270,000 tons to 243,000
tons. In effecting this cut it was agreed that company B. should cease production for one year,
that the respondent company and company R. should undertake between them the whole group
program me for the year reduced by the overall cut of 10 per cent., and should pay a sum to
company B. to compensate it for the abandonment of its production for the year.
The appellant commissioner of taxes contended that the proportion of the compensation which
the respondent company had paid to company B., £1,384,569, was expenditure of a capital
natures the cost of acquiring a source of income and, therefore, a capital astound disallowed it as
an admissible item in the computation of the taxable profit of the respondent company for the
year ended March 31, 1959:-
Held, that the compensation paid was an allowable deduction in determining the respondent
company's taxable income. The expenditure bought only the right to have B. out of production for
12 months and had no true analogy with expenditure for the purpose of acquiring a business or
the benefit of a long-term or enduring contract. It bore a fair comparison with a monetary levy on
the production of a given year. What the respondent company did was to charge its 1958-1959
production with the payment of this money in order to settle its share of the group's production
programme in the way that suited it best. It was a cost incidental to the production and sale of the
output of their mine; as such its true analogy was with an operating cost. It resembled an outlay
of a business "in order to carry it on and to earn a profit out of this expense as an expense of
 Page2

carrying it on": per Lord Sumner in John Smith & Son v. Moore [1921] 2 A.C. 13, 39; 37 T.L.R.
613; 12 T.C. 266 , H.L.(Sc.) (post, pp. 961, 962, 964). *950
Atherton v. British Insulated and Helsby Cables Ltd. [1926] A.C. 205; 42 T.L.R. 187; 10 T.C. 155 ,
188, H.L.(E.) and John Smith & Son v. Moore (supra) distinguished.
Judgment of the Federal Supreme Court of the Federation of Rhodesia and Nyasaland affirmed.
APPEAL (No. 32 of 1962), by special leave, from a judgment of the Federal Supreme Court of the
Federation of Rhodesia and Nyasaland (Clay den C.J., Briggs and Quenet F.JJ.) (November 7, 1961)
allowing an appeal by the present respondent from a judgment of the High Court of Southern
Rhodesia (Young J.) (May 9, 1961) whereby an appeal by the respondent against the disallowance of
its objection to an income tax assessment made upon it for the year ending March 31, 1959, was
dismissed.
The following facts are taken from the judgment of the judicial Committee: The respondent's business
was that of copper mining. Together with two other companies, Rhokana Corporation Ltd. and
Bancroft Mines Ltd., it formed what was known as the Anglo-American group of copper mines in
Northern Rhodesia. Each of the three operated a separate mine and was independent of the others,
but there were overlapping directorates, and one Acutt, the joint deputy-chairman of the
Anglo-American Corporation of South Africa Ltd., was deputy-chairman of each company.
Anglo-American acted as secretary and technical adviser to the group. There was also a common
sales department for handling the disposal of their output, which was marketed through the British
Metal Corporation. It was, apparently, the practice that the corporation should sell the copper forward
on the basis of production estimates supplied by each of the members of the group. The sales were
not at prices fixed in advance: they were commitments to supply, but only at the market price current
when the copper was actually made available. Each company was expected to meet the corporation's
commitments to the extent of its production estimates, but the copper itself was not sold as the
specific product of any one of the three mines.
In the year 1957 the price of copper on the world market was falling steeply. Supply whew in excess
of demand, and during the year a number of the large producers in different parts of the world
imposed upon themselves voluntary outs in production. There was no binding agreement between
them to effect this, but the individual decisions must have become known to all those actively
interested in the copper mining business.
*951
Down to the close of 1957 the Anglo-American group had not adopted any policy of reducing output.
For 1958 the planned production of the three mines was an aggregate figure of 270,000 tons,
140,000 for the respondent, 90,000 for Rhokana, and 40,000 for Bancroft. By the beginning of 1958 it
was accepted by those responsible for these companies that the Anglo-American group could not
continue to make no contribution in the way of a cut in production, and a figure of 10 per cent. was
taken as the appropriate measure of the cut. That would reduce the estimated aggregate of 270,000
to 243,000 tons. The question was, if the group was to sacrifice 27,000 tons, how was the sacrifice to
be distributed among the three members of the group?
Accordingly, a meeting between their representatives took place at Salisbury, Southern Rhodesia, in
the month of January, 1958. Three alternative courses of action were reviewed in turn at that meeting.
First, each mine could cut its program me by 10 per cent. But to Bancroft, which was the most recent
to come into production and was, comparatively, a high-cost producer, such a cut was altogether
unacceptable, owing to the adverse influence on its costs of production. A second alternative was that
Bancroft should be left with an unreduced programme, Nchanga and Rhokana adding to their own
cuts the 4,000 tons of reduction that would have been due from Bancroft. But again this proposal had
to be rejected, as it was felt that it could not be defended from the point of view of the separate
interests of those two companies. There then emerged, and was accepted, the idea that Bancroft
should go out of production altogether for 12 months, beginning as early in 1958 as was practicable,
and Nchanga and Rhokana should be left to undertake between them the whole group program me
for the year, reduced by the overall cut of 10 per cent. Relatively, this would suit them, since their
combined output of 230,000 tons, as planned, would rise to 243,000 tons, Nchanga adding 9,000 tons
and Rhokana 4,000 tons. At any price for copper that could reasonably be expected, even at the
current low level of price, the additional production would be profitable to them; and they would pay a
sum to Bancroft to compensate it for the abandonment of its production for the year.
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Nchanga's share of this compensation sum, £2,165,000 in all, was the £1,384,569 which was in
dispute in the appeal, the balance being found by Rhokana. The basis upon which the compensation
was calculated was that Bancroft should receive enough to cover (a) the interest charges on its
outstanding loans and notes, *952 (b) the cost of the development work necessary to bring the mine
into a position to produce at its full rated capacity, and (c) the cost of pumping operations at its No. 1
shaft. At the end of the 12 months Bancroft was to be free to resume full production, with, it was
hoped, the benefit of the lower cost per ton resulting from the further development work.
The terms of the arrangement set out above were recorded in a letter dated January 27, 1958, from
Nchanga to Bancroft. It was not in dispute that that letter did accurately record what the arrangement
was and state the consideration for which the £1,384,569 was paid.
The question in this appeal was whether that sum was properly chargeable to income or to capital for
the purposes of determining the respondent company's taxable income. The Federal Supreme Court,
reversing the decision of the High Court of Southern Rhodesia, held that it was an allowable
deduction. The Commissioner of Taxes appealed.
1963. Nov. 28; Dec. 2, 3. Roy Borneman Q.C., Alan S. Orr Q.C. and B. Goldin Q.C. (Southern
Rhodesian Bar) for the appellant. There is a long series of cases showing that whether the
£1,384,569 is a capital or income payment is solely a question of law, being the proper conclusion to
be drawn from a consideration of the facts (see Jeffrey v. Rolls-Royce Ltd. 1 decided since the
Federal Supreme Court gave the judgment in the present case), and it is submitted that the
conclusion of the trial judge is right. The Chief Justice in the Federal Supreme Court clearly adopted
one of the proper tests in this matter, but misapplied it to the facts of this case. Money paid in
consideration of the acquisition of a source of profit or income is capital expenditure both on principle
and authority. The dispute between capital and revenue expenditure has gone on for a long time, and
there are authorities on either side on the distinction between capital and income, whether as regards
expenditure or receipt. Viscount Cave certainly gave a very strong lead in Atherton v. British Insulated
and Helsby Cables Ltd. 2 when he said: "But where an expenditure is made, not only once for all, but
with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I
think that there is very good reason (in the absence of special circumstances leading to an *953
opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to
capital." That dictum, however, cannot be regarded as an authority to be pressed into service on
every occasion.
The relevant authorities, in chronological order, start with Vallambrosa Rubber Co. Ltd. v. Farmer 3
where it was said that it is not a bad criterion of what is capital expenditure as against income
expenditure to say that "capital expenditure is a thing that is going to be spent once and for all, and
income expenditure is a thing that is going to recur every year." That phrase "once and for all"
appears in many of the cases. In John Smith & Son v. Moore 4 Lord Guthrie was using words which
could be applied almost precisely to the present case; Nchanga had the right to stand in the position
of Bancroft; and see also the observations of Lord Haldane in the same case. 5 It is important to
appreciate that the contract in the present case had no more durability than those before the courts in
that case. In Atherton's case 6 the Vallambrosa case 7 is described as a valuable guide, but was not
intended to be decisive in every case. It does not mean that the asset must necessarily be durable; it
certainly can endure for a very short time on certain occasions. Though the actual decision in
Commissioner for Inland Revenue v. George Forest Timber Co. Ltd. 8 is immaterial here, the Chief
Justice's observations there support the submissions for this appellant. In United Steel Companies
Ltd. v. Cullington 9 the payments were held to be of a capital nature. Sun Newspapers Ltd. and
Associated Newspapers Ltd. v. Federal Commissioner of Taxation 10 appears to show that where a
payment was not for a recurrent expenditure it should be added to fixed assets. In that case Dixon J.
said 11 that "the real test is between expenditure which is made to meet a continuous demand as
opposed to an expenditure which is made once and for all." [ Mann, Crossman & Paulin Ltd. v.
Compton 12 was also referred to.] There appears to be nothing in New State Areas Ltd. v.
Commissioner for Inland Revenue 13 to assist the Board either way. Stow Bardolph Gravel Co. Ltd. v.
Poole 14 is a very important case; see the opinion of Jenkins L.J. 15 Lastly, there is antler South
African case, Commissioner for Inland Revenue v. African Oxygen Ltd. 16
The real ratio decidendi of the trial judge in the present case is that "on the evidence, it is a possible
and a proper inference that, to borrow the words of Dixon J. in the Sun Newspapers case 17 : 'In
principle the transaction must be regarded as strengthening and preserving the business organisation
or entity, the profit yielding subject, and affecting the capital structure' of Nchanga." The Chief Justice
in the Federal Supreme Court did adopt a correct test - if not the best one - but applied it wrongly, and
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was in error in saying that the expenditure was made as part of the cost of the income earning
structure. In short, the submission is that the £1,384,569 was paid by Nchanga to Bancroft in
consideration of the acquisition of a source of profit or income and is capital expenditure both on
principle and authority. Bancroft did not offer copper; Nchanga did not buy copper; it bought a right to
produce. The appeal should be allowed.
Alan Orr Q.C. following. The words used by Viscount Cave in Atherton's case, 18 "for the enduring
benefit," have been described in the authorities as being a useful guide, but they are no more than a
guide. In H. J. Rorke Ltd. v. Commissioners of Inland Revenue 19 it was not said that Viscount Cave's
test was satisfied, but that it was not applicable. It is in fact not more than a guide. The expenditure
here was to obtain a source of profit and was capital expenditure.
Heyworth Talbot Q.C., R. S. Welsh Q.C. (Southern Rhodesian Bar) and J. Holroyd Pearce for the
respondent. An exhaustive definition of expenditure of a capital nature - a definition infallibly capable
of providing an answer to the question in all circumstances - is an unattainable ideal. Whether
expenditure is of a capital nature is to be answered by what the law holds to be in accordance with
sound principles of commercial accounting. An examination of the authorities shows that various tests
have been formulated as to what is expenditure of a capital nature, each of them apt enough to the
particular circumstances of the case before the court, but none of them establishing a universally
*955 applicable criterion. In John Smith & Son v. Moore 20 the payment in question was consideration
for the acquisition of a business; and an examination of the speeches of Lord Haldane and Lord
Sumner (Viscount Finlay having dissented and Lord Cave having based his conclusion on the
character of the excess profits duty) shows that this fact constituted the ground of the decision.
Coming to the facts of the present case, which are of critical importance, in accordance with the
principles of sound commercial accounting approved by the law the payment by Nchanga to Bancroft
was one of the incidents of a commercial arrangement of short duration designed to benefit all three
companies; they wanted to arrange matters in a way least detrimental to the three of them by taking
measures considered necessary to reverse the downward trend of copper prices. It was a short term
arrangement. There was no acquisition of a business of a competitor, for it was intended that Bancroft
should be invigorated. Nchanga acquired an opportunity of increasing its own production for one year
only by 6.4 per cent. The trial judge's finding that the payment of £1,384,569 was expenditure of a
capital nature was wrong in law and contrary to the evidence; the only true and reasonable conclusion
which could be drawn from the evidence was that the payment was not expenditure of a capital
nature. The Federal Supreme Court were right in holding that the payment was made by Nchanga as
part of the cost of performing its income earning operations.
Welsh Q.C. following. There was no evidence to support the trial judge's finding. The forward sales
contracts of the copper differed fundamentally from those considered in John Smith & Son v. Moore 21
- Nchanga was not acquiring by its payment the benefit of any contract with a fixed price, and that
entirely distinguishes this case from Smith's. 22 The Chief Justice in the supreme Court said "I have
not discussed ... the many cases which were cited as indicating from their facts that the result should
be one way or another in this case. This case is in my view not similar to any one of those cases and
the analogy is always strained." Stow Bardolph Gravel Co. Ltd. v. Poole 23 and H. J. Rorke Ltd. v.
Commissioners of Inland Revenue 24 are not of great assistance in this case because Nchanga did
not *956 purchase from Bancroft any right to work Bancroft's copper during the period.
Borneman Q.C. in reply. The respondents must distinguish the John Smith case 25 ; it is still a
sufficient authority on which to solve the present problem; Mr. Heyworth Talbot has sought to
distinguish that case as a specialty, but it has always been regarded as a decision on the general law;
it is conclusive in all cases where the facts are sufficiently comparable, and the present is such a
case. Mr. Welsh's submission seeking to distinguish the contracts in John Smith's case 26 has no
substance. [Reference was made to the Sun Newspapers case. 27 ] With regard to the facts, Nchanga
was entitled to produce 9,000 tons more than they would otherwise have done, and this impugned
payment was a sum paid to Bancroft by Nchanga for the right to produce that amount. Nchanga said
that it was worth while to pay that sum to get that opportunity. It was adding to their profit-making
structure. Admittedly the problem was a commercial one, but the Board are concerned with an
income tax problem.

1964. Jan. 15. The judgment of their Lordships was delivered by

VISCOUNT RADCLIFFE.
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This is an appeal from a judgment of the Federal Supreme Court of the Federation of Rhodesia and
Nyasaland concerning the income tax assessment of the respondent for the year ending March 31,
1959. The respondent in computing its profit had claimed to charge against its trading receipts a sum
of £1,384,569 paid away during the year in circumstances that will later be mentioned: the appellant
disallowed this claim, and on the respondent's appeal to the High Court of Southern Rhodesia the
appellant had been upheld by the judgment of Young J. given on May 9, 1961. This judgment was, in
its turn, reversed by the unanimous judgment of the Supreme Court, who held the respondent to be
entitled to the deduction claimed, and it is from that judgment, which was delivered on November 7,
1961, that the appellant has appealed to this Board.
The argument before the Board was confined to the single issue whether the sum of £1,384,569 was
properly chargeable to income or to capital for the purpose of determining the company's assessable
profit. That, indeed, appears to have been the only issue of substance that could divide the parties,
*957 once the facts of the case had been sufficiently ascertained. Before coming to those facts it is
necessary to state only that, so far as statutory provisions go, section 13 of the Income Tax Act, 1954
, of the Federation is the governing enactment, for the combined effect of subsection (1) and
subsection (2) (a) of that section is to lay down that in determining the taxable income of any person,
expenditure of a capital nature is not to be allowed as a deduction, even though wholly and
exclusively incurred for the purposes of the taxpayer's trade or in the production of his income. So far
as general principles go, on the other hand, it can be taken that the Federal income tax system would
recognise and seek to apply the same basic conceptions as have been adopted by other systems,
including that of the United Kingdom, which have been faced with the task of separating income
receipts from capital receipts, income expenditure from capital expenditure, in computing the profits of
manufacturing or commercial ventures.
The relevant facts, then, are these. [His Lordship stated the facts as set out above and continued:] No
doubt there is more than one way of describing the effect of the agreement. Their Lordships think,
however, that its essential features are plain. What Nchanga actually acquired by its payment was the
right to have Bancroft out of production for 12 months. It would not be accurate to say that it bought
Bancroft's production, much less that it bought the right to produce Bancroft's copper or any right to
produce more of its own copper. It did not need such a right. But in a commercial sense it might fairly
be said that it and Rhokana bought Bancroft's production program me for the year and, having bought
it, they felt themselves at liberty, as a matter of policy, to increase their planned output to the extent
that was necessary to fill the 243,000 tons that would be looked for from the Anglo-American group
on the basis of all overall cut of 10 per cent.
The forward sales contracts effected for the group do not appear to their Lordships to have been
regarded by the parties to the arrangement as presenting any problem of their own. Some 240,000
tons had been committed, but, as the sales were not made ex any specified mine, the purchasers
would not be concerned so long as the required amounts came forward; and, so long as they did
come forward, Bancroft would not be left in any difficulty through not having raised its own planned
quota. The sales, as has been said, were not at fixed prices. There was no question therefore of
Nchanga and Rhokana taking over or *958 paying to take over the benefit of advantageous price
arrangements. No element of such a consideration seems to have contributed to the terms ultimately
agreed upon.
In its operating account for the year ended March 31, 1959, the balance on which was carried to the
profit and loss account, Nchanga entered the £1,384,569 as a deduction from the figure of
£26,290,987 representing "sales of metals and concentrates" and thus attributed £24,906,418 to that
item for the year. The appellant, on the other hand, disallowed the £1,384,569 as an admissible item
in the computation of taxable profit for the same period. He objected to it on two separate grounds.
One was that the expenditure was not wholly and exclusively incurred by Nchanga for the purpose of
its trade or in the production of its income, since it was made in the interests of Bancroft's trade. This
contention was rejected by Young J. after investigating the evidence produced at the hearing in the
High Court, and it has disappeared from the case. The alternative ground was that the expenditure
was of a capital nature.
The second contention was accepted by Young J., but his acceptance was based on an interpretation
of the facts that appeared to the Federal Court and appears to their Lordships to be unsupported by
the evidence. In his view the chief object of Nchanga in accepting the arrangements of January, 1958,
was "to preserve from impairment and dislocation Nchanga's organisation. The probabilities are that
the advantage of this to Nchanga's business was lasting, or at any rate sufficiently lasting to qualify as
an 'enduring advantage' within the meaning of Viscount Cave's dictum" [ British Insulated & Helsby
 Page6

Cables Ltd. v. Atherton 28 ]. Leaving aside the undesirability of determining the nature of a payment by
the motive or object of the payer, their Lordships cannot find in the evidence any support for the idea
that the preservation of Nchanga's business was in fact the purpose of the arrangement or that the
benefit obtained by its payment was to endure in any other sense than that it was to condition the
year's production. It should be added, in passing, that preservation expenditure, which in one form
appears as maintenance, does not suggest itself to their Lordships as being in itself a satisfactory
category of expenditure for capital purposes.
The arguments advanced by the appellant before their Lordships were not rested on the trial judge's
reading of the facts. *959 What was said was that Nchanga's payment had been made in order to
acquire a right or a "quasi-right" to carry on its trade more extensively, that this secured for it an
"enduring benefit" comparable with that described in British Insulated & Helsby Cables Ltd. v.
Atherton, 29 that it was expenditure forming "part of the cost of the income-earning machine or
structure," as opposed to part of "the cost of performing the income earning operations." 30 These
various descriptions were summed up in the submission that, properly understood, Nchanga's
payment was the cost of acquiring a "source of income" and, therefore, a capital asset.
These phrases are, of course, used with intended reference to earlier judicial decisions that
distinguish between capital and income for the purpose of assessing profit. Since a question of capital
or income is always capable of giving rise to a question of law, such a form of argument is
unavoidable in any legal system that governs itself by appeal to precedent. Nevertheless, it has to be
remembered that all these phrases, as, for instance, "enduring benefit" or "capital structure" are
essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is
sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is
to inquire how far a description that was both relevant and significant in one set of circumstances is
either significant or relevant in those which are presently before it. For example, while it is certainly
important that in Atherton's case 31 expenditure that did secure an enduring benefit for a company's
business was spoken of as being for that reason a capital expenditure, it would be a misuse of that
authority to suppose that it gives any warrant for the idea that securing a benefit for the business is
prima facie capital expenditure, so long as the benefit is not so transitory as to have no endurance at
all. The present case is one in which the advantage obtained was conditioned to last for not more
than 12 months, the very period adopted for the ascertainment of each successive profit balance, and
in their Lordships' opinion its essential facts are so unlike those of the Atherton case 32 that no useful
analogy can be constructed between them.
Judicial decisions have from time to time applied various tests *960 in seeking to distinguish income
from capital. There is the distinction between fixed and circulating capital resorted to by Lord Haldane
in John Smith & Son v. Moore, 33 to which reference will be made later; and, so long as the
expenditure in question can be clearly referred to the acquisition of an asset which satisfies one or
other of the accepted categories, as in the ordinary framework of a manufacturing or merchanting
business such a test must be a critical one. But at the same time, even putting aside the special
circumstances of the extraction industries which regularly convert part of their fixed capital for which
they have paid into part of their stock-in-trade which they sell, there are many forms of expenditure
which, though not falling easily within these categories, have nevertheless to be allocated to capital or
revenue account respectively in the ascertainment of profit, and with regard to all these some other
and rather different distinction has to be looked for.
Again, courts have stressed the importance of observing a demarcation between the cost of creating,
acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income
is to be the produce or fruit and the cost of earning that income itself or performing the
income-earning operations. Probably this is as illuminating a line of distinction as the law by itself is
likely to achieve, but the reality of the distinction, it must be admitted, does not become the easier to
maintain as tea systems in different countries allow more and more kinds of capital expenditure to be
charged against profits by way of allowances for depreciation, and by so doing recognise that at any
rate the exhaustion of fixed capital is an operating cost. Even so, the functions of business are
capable of great complexity and the line of demarcation is sometimes difficult indeed to draw an a
leads to distinctions of some subtlety between profit that is made "out of" assets and profit that is
made "upon" assets or "with" assets. It does not settle the question, for instance, to say merely that
an expenditure has been made to acquire a "source of income," as the appellant says here, unless
one is clear that some forms of circulating capital itself, e.g., labour, raw material, stock-in-trade, are
not themselves to be regarded as such a source.
With these considerations in mind their Lordships must address themselves to Nchanga's challenged
 Page7

expenditure. It bought one right only, the right to have Bancroft out of production for 12 months.
While, no doubt, money paid to acquire a *961 business or to shut a business down for good or to
acquire some contractual right to last for years may well be capital expenditure, it seems a
contradiction in terms to speak of what Nchanga thus acquired, which exhausted itself and was
created to exhaust itself within the 12 months' period within which profits are ascertained, as
constituting an enduring benefit or as an accretion to the capital or income-earning structure of the
business. If the expenditure is to be treated as capital expenditure at all, it cannot be for any reason
such as that.
It is not the fact, as their Lordships understand the evidence, that the expenditure bought for Nchanga
a right to produce any part of whatever its annual production for March, 1958/March, 1959 may have
been. As has been remarked, it needed no such right. What happened was that, having settled as
between Rhokana, Bancroft and itself what the production policies and programs were to be for the
group, it implemented its own production program me accordingly. It is not in evidence how the mine's
working was adapted to the small increase of the planned total that was involved. There is nothing to
suggest that there was required any structural enlargement of the mine. In any event, it was not for
that that the £1,384,569 was paid.
In considering allocations of expenditure between the capital and income accounts, it is almost
unavoidable to argue from analogy. An instance is taken which seems to fall beyond dispute on one
or other side of the line and it is argued that the case under review is in substance more akin to that
than to any comparable instance which falls beyond argument on the opposite side. Applying this
method, their Lordships think that Nchanga's expenditure has no true analogy with expenditure for the
purposes of acquiring a business or the benefit of a long-term or "enduring" contract. On the other
hand, it does bear a fair comparison with a monetary levy on the production of a given year. What
Nchanga did was to charge its 1958/59 production with the payment of this money in order to settle its
share of the group's production program me in the way that suited it best. The payment was wholly
related to and an incident of its output of the year, and it is of no moment for this purpose that the
factors of the calculation that produced the sum were certain financial requirements of Bancroft itself.
Nor does it matter whether the sum is treated as a charge on the gross proceeds of the copper sales
of the year, as it was in Nchanga's accounts, or as an extra charge on the additional production, as
the Chief Justice described it in the Federal Supreme *962 Court. Some of the year's production, he
said, was produced "at very high cost." The point in either case is the same. Nchanga's arrangement
with Rhokana and Bancroft, out of which the expenditure arose, made it a cost incidental to the
production and sale of the output of the mine. As such its true analogy is with an operating cost.
The appellant's argument relied largely, as was natural, upon the decision of the House of Lords in
John Smith & Son v. Mayor. 34 It would perhaps be more accurate to say that it relied on the speeches
of Lord Haldane and Lord Sumner in that case, for of the four Lords who took part in the decision
Viscount Finlay dissented and Lord Cave took a line of approach which is not relevant to the present
dispute. In their Lordships' opinion the John Smith case 35 determines nothing that could govern
Nchanga's case.
The facts were that the taxpayer, a coal merchant, had taken over his deceased father's business
under powers given by the father's trust disposition and settlement. By the terms of that disposition he
succeeded to the business under the obligation of paying for its net value, excluding goodwill from the
assets for the purpose of valuation. The business assets included contracts giving a call on the output
of certain collieries at what had become very favorable prices, none of the contracts having longer
than nine months to run at the date of the father's death. A value of £30,000 was put upon the benefit
of these contracts as an item of a coal-merchant's business, although in fact the total sum that had to
be paid for the business came out at less than £28,000. The taxpayer had sought to deduct £30,000
from his assessable profits for the accounting period that followed his father's death. The claim was
disallowed by the Court of Session in Scotland and the majority of the House of Lords on the ground
that the sum was capital expenditure in relation to the son's business.
It appears clearly from a close study of the speeches of Lord Haldane and Lord Sumner that two
elements in the case, or rather the combination of those two elements, determined their decision.
First, no sum of £30,000 had ever been paid. What was acquired was a business consisting of a
variety of assets, among which was the benefit of the contracts, and involving a number of liabilities;
the only money that the son had paid was the sum representing the net value of that business. "He
bought *963 a business and its assets," said Lord Sumner, 36 "at a valuation ... He bought no coals;
the business had none, nor any stock in trade; nor did he acquire any stock in trade in any business
sense of the term ... He did not pay this sum as the consideration for an assignment of the benefit of
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these contracts to himself; he took no assignment." It is evident that both the learned Lords felt it to be
impossible to say that a sum paid to acquire a business as representing the net value of that
business, but not specifically allocated to individual assets of the business, was anything but a capital
expenditure upon a fixed asset. Lord Sumner regarded the case as being in effect governed by the
earlier decisions of City of London Contract Corporation v. Styles 37 and Alianza Co. Ltd. v. Bell. 38
and so it was according to the terms in which he dealt with it.
The second feature that was treated as of importance was the fact, alluded to by Lord Sumner, that in
paying something in respect of the benefit of the contracts the son had not acquired stock-in-trade or
anything like such stock. It is not difficult to suppose that in a different context a sum paid by a
running concern to a trader for the right to take over his supply contracts at fixed prices, if limited to
the year of profit ascertainment, might fairly be regarded as part of the cost of acquiring the
commodity to be supplied and, as such, chargeable against the gross proceeds of its sale. Lord
Sumner indeed seems to have visualised this, when he said 39 in explanation of the Styles's decision
40 "this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits
were made in the business; the sum was not paid as an outlay in a business already acquired, in
order to carry it on and to earn a profit out of this expense as an expense of carrying it on."
The John Smith decision 41 therefore turned upon the combination of two elements as the facts of the
case: an aggregate price paid as the net value of a business taken over, and the inclusion in the
assets of that business of the benefit of short-term supply contracts which were not in a form allowing
them to be treated as analogous to stock-in-trade. But for the combination of those elements it is not
to be assumed that the decision would have been the same, for it is difficult to accept as a sound
*964 general proposition that if a man acquires and pays for stock-in-trade for his own business on
the taking over of another he is not entitled to set off against the gross proceeds of realising the stock
the identifiable cost of acquiring it. However that may be, neither of the determining elements in the
John Smith case 42 is present here. Nchanga did not pay for Bancroft's business nor did it pay for the
benefit of its contracts. Bancroft remained a potential producer and in fact, as was intended, resumed
production with enlarged capacity at the end of the year. The compensation paid to Bancroft
resembled much more closely, to use Lord Sumner's words, an outlay of a business, "in order to carry
it on and to earn a profit out of this expense as an expense of carrying it on."
For these reasons, which are substantially the same as those given by Chief Justice Sir John
Clayden, and agreed in by his colleagues in the Supreme Court, their Lordships are of opinion that
the appeal must fail, and they will humbly advise Her Majesty to this effect. The appellant must pay
the respondent's costs of the appeal.

Representation
Solicitors: Coward, Chance & Co. ; Linklaters & Paines .
(C. C. )

1. [1962] 1 W.L.R. 425; [1962] 1 All E.R. 801; 40 T.C. 443 , H.L.(E.).
2. [1926] A.C. 205, 213; 42 T.L.R. 187; 10 T.C. 155 , H.L.(E.).
3. (1910) 5 T.C. 529 , 536, Ct.Sess.
4. [1921] 2 A.C. 13; 37 T.L.R. 613; 12 T.C. 266 , 279, H.L.(Sc.).
5. [1921] 2 A.C. 13 .
6. [1926] A.C. 205 .
7. 5 T.C. 529 .
8. (1924) S.A., S.C.R.(A.D.) 516 , 524.
9. (1939) 23 T.C. 71 , 84.
10. (1938) 61 C.L.R. 357 .
11. Ibid. 362.
12. [1947] 1 All E.R. 742; 28 T.C. 410 , 420.
13. (1946) S.A., S.C.R.(A.D.) 610 , 620, 627.
14. [1954] 1 W.L.R. 1503; [1954] 3 All E.R. 637; 35 T.C. 458 , C.A.
15. [1954] 1 W.L.R. 1503 , 1513.
16. (1963) 1 S.A.L.R. 681, 685, 688-690.
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17. 61 C.L.R. 357 , 364.

18. [1926] A.C. 205 , 213.
19. [1960] 1 W.L.R. 1132; 39 T.C. 194 , 204.
20. [1921] 2 A.C. 13 .
21. Ibid.
22. Ibid.
23. [1954] 1 W.L.R. 1503 .
24. [1960] 1 W.L.R. 1132 .
25. [1921] 2 A.C. 13 .
26. [1921] 2 A.C. 13 .
27. 61 C.L.R. 357 .
28. [1926] A.C. 205, 213; 42 T.L.R. 187; 10 T.C. 155 , 188, H.L.(E.)
29. [1926] A.C. 205 .
30. Per Watermeyer C.J. in New State Areas Ltd. v. Comr. for Inland Revenue, S.A.L.R. [1946] A.D. 610 , 620, 621.
31. [1926] A.C. 205 , 213.
32. [1926] A.C. 205 , 213.
33. [1921] 2 A.C. 13; 37 T.L.R. 613; 12 T.C. 266 , H.L.(Sc.).
34. [1921] 2 A.C. 13 .
35. [1921] 2 A.C. 13 .
36. [1921] 2 A.C. 13 , 37-38.
37. (1887) 2 T.C. 239 .
38. (1904) 5 T.C. 60, 172; 21 T.L.R. 134 , C.A.
39. [1921] 2 A.C. 13, 39.
40. 2 T.C. 239 .
41. [1921] 2 A.C. 13 .
42. [1921] 2 A.C. 13
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