| 22/8/2008 |
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| Court of Appeal - Decisions in Income Tax Cases |
| Case No: 50 |
Decided on 25 September 1963 |
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Capital Allowances On Conversion Of A Partnership Into A Limited Liability Company
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A long established partnership en nom collectif was converted into a limited liability company. The new company revalued the assets taken over from the partnership, and requested capital allowances on the adjusted values. It also claimed initial allowances in their respect on the grounds that the assets were being "first used" by it on conversion. The Board of Special Commissioners agreed.
On appeal by the Revenue, the Court first ruled out an objection put forward by the Revenue to the effect that, in the circumstances, the company could not be said to have made capital expenditure. The issue by the new company of shares to the old shareholders in return for the assets received was clearly its capital expenditure.
The Court however agreed that the words "first used and employed" in relation to initial allowances referred objectively to the assets themselves. These had to be brand new to qualify for the allowance. The term could not refer to the time when the taxpayer was first using the assets in question. This point had also been made clear when the law was being debated in Parliament.
U.K. law to which reference was made by the taxpayer was different in its details from Maltese law on the subject.
As regards the value on which the annual allowances were to be worked out in the hands of the new company, the Court was clearly not happy with the fact that full legislative arrangements had not been made by the issue of appropriate deduction rules. The Court however pointed out that allowances have always to be worked out on the original cost price of the assets. Moreover, the aggregate of the allowances granted in an asset could not exceed this price. These provisions again objectively referred to the assets and not to their owners. "Original" meant original for everybody. There clearly had to be continuity between the several owners. The Court appreciated that in this way there could be major differences between the economic value of the assets as appearing in taxpayer's books, and the value taken into account for tax purposes, but the law was clear enough.
Note: The position regarding capital allowances had been substantially changed since the decision was delivered: eg: the introduction of balancing charges and allowances, the removal of initial allowances and the issue of Legal Notices regarding annual allowances. The decision, however, remains a classic in its line.
BSC Case: 19/61
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