THE SUPREME COURT

Denham J.
Murray J.
Geoghegan J.
313/99

REVENUE

BETWEEN

SEÁN MacAONGHUSA

Appellant

and

RINGMAHON COMPANY

Respondent

Judgment of Mr. Justice Geoghegan delivered the 29th day of May 2001 (nem. Diss.)

	The appellant is an inspector of taxes, and he has brought an appeal to this court from a decision of the High Court (Budd J.) on a case stated from the Circuit Court (Judge Lynch) in which the learned Circuit Court judge sought the opinion of the High Court as to whether he was correct in holding that the respondent was entitled to a deduction of £435,764 in computing the amount of its profits under Case 1 of Schedule D.    The High Court answered the question in the affirmative.    The basic facts proved or admitted are well summarised in paragraph 4 of the case stated and they read as follows:-

	“(a)	Ringmahon, an unlimited company, is a wholly owned subsidiary of Ringmahon Holdings Limited, the ordinary shares of which are held by members of the Dunne family.
	(b)	In 1987 Ringmahon acquired some of the former H. Williams supermarkets and began to trade from these stores under the Dunnes Stores brand name.
	(c)	Ringmahon is engaged in the trade of “Retailing of food, clothing and other Household Goods”.
	(d)	The purchase of the H. Williams shops was initially financed by way of loan from Dunnes Stores Ireland Company (hereinafter called “DSIC”), but this finance was replaced by the issue by Ringmahon of 11,500,000 redeemable preference shares of 5p at a premium of 95p per share to DSIC on the 4/1/1988.    (DSIC is ultimately controlled by the Dunne Family Trust, the beneficiaries of which are members of the Dunne family).
	(e)	 In 1991 the Ringmahon Board decided to redeem 6 million of the redeemable preference shares held by DSIC.    The company negotiated a loan of £6 m. with Allied Irish Banks for this stated purpose.    The loan was drawn down by Ringmahon on the 30/4/1991, and on the 2/5/1991 Ringmahon issued a cheque for  £6 m. to DSIC.    The journal entries reflect a redemption of 6,000,000 redeemable preference shares in the accounts of Ringmahon for the period ended 28/12/1991.   
	(f)	The proposal to redeem part of the preference share capital was in pursuance of the stated objective at the time that Ringmahon was set up that the company would be financed independently of the Dunne Family Trust (including the group companies owned by the Trust) and would stand alone as a separate operation.
	(g)	There was no obligation on Ringmahon to redeem the preference share capital.    The Articles of Association provide that the company has sole discretion in the decision to redeem all or part of its redeemable preference shares.
	(h)	The issued ordinary share capital of Ringmahon at the date of the aforementioned redemption was two ordinary £1 shares fully paid up.”

	Following on the loan from Allied Irish Banks being applied for the redemption of the preference shares, there was a continuing ongoing liability on the part of the respondent to the bank for interest on the loan.    Normally, where a trading company has to pay interest to a bank, that interest is deductible for tax purposes because it will have been “wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation” of the taxpayer.    In the case of non-capital expenditure that is the statutory test of whether it is deductible for tax purposes or not and that form of wording has been repeated from its original enactment to subsequent re-enactments in various Acts culminating in the Taxes Consolidation Act, 1997.    However, the relevant enactment in this case, which applied at the relevant time, was section 61 of the Income Tax Act, 1967.    The part of that section relevant to this case reads as follows:-

“Subject to the provisions of this Act, in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of - 

		(a)	any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession;

			...”

	The arguments of both sides can be summarised very shortly.    The appellant argues that since the purpose of the loan was to redeem the preference shares and, therefore, was related to the capital structuring of the company and not the ordinary trading, ongoing interest liability in respect of that loan must be treated as stamped with the same character and, therefore, cannot be deducted against profits for tax purposes.    The respondent, on the other hand, argues that although the loan was undoubtedly for the redemption of the shares and that there could be no question of the capital sum spent on the redemption being deductible, the ongoing annual interest is in quite a different position as it becomes merged in the ordinary ongoing liabilities of the company in its trading.    Counsel for the respondent, at p. 3 of his written submissions, puts it this way:

“From the point of view of the respondents this in effect means that the interest must have been ‘wholly and exclusively’ laid out for the purposes of the trade carried on by them.    In the submission of the respondents it was so laid out - the basis of this submission is that the only way in which the trade could be carried on after the redeemable preference shares had been redeemed was by new share capital or by borrowings and the interest on those borrowings is then wholly and exclusively laid out for the purposes of the trade.    If the interest was not laid out for the purposes of the trade the question arises as to what it was laid out for? - nothing in the case stated suggests that it was laid out for anything other than to enable the company to carry on the trade and while the principal was laid out to redeem the preference shares the interest in each year was laid out to retain the benefits of the borrowing so as to enable the company to carry on its trade.”

	Later on in the same written submission it is pointed out that 
“the essence of interest is that it must be looked at in each year and is not, it is submitted, necessarily coloured by the fact that the principal was used for a capital purpose - indeed it is not so coloured at all because if one builds a factory on borrowings, which is clearly a capital expenditure and the borrowings would not be an allowable deduction, nonetheless the interest is an allowable deduction as has been agreed with the Revenue.    In the present case no new asset was acquired by the respondent - it extinguished share capital and continued its business by substituting bank borrowings on which it pays interest.”

	Without the assistance of any decided cases and simply upon the basis of interpreting the statutory provisions, I find the respondent’s argument much more convincing.    Indeed, if the respondent is not correct, there would be somewhat of an anomaly in the tax regime because as counsel for the respondent, Mr. Thomas S. McCann, S.C. points out in the written submissions at p. 6 and as he further orally argued in court, if the respondent had, at all times, financed its business by bank borrowings the interest payable would clearly have been allowable as a trading expense and this could not have been disputed by the Revenue Commissioners.    Yet if that is the case, it would seem strange if the position should be different, merely, because there were no borrowings prior to the 1991 accounting period, the company having financed its business by redeemable share capital.    The respondent submits that there is no distinction in principle between interest payable on the bank borrowings for the purposes of the redemption of the share capital and interest payable upon bank borrowings incurred in substitution for earlier borrowings from another bank.    But even if this is no better than a debating point, I think that the respondent successfully demonstrates that the interest on an ongoing basis must be regarded as being laid out wholly or exclusively in earning of the profits of the particular accounting year.

	I have already indicated that I arrive at that view as a matter of principle on the arguments put before the court and without recourse to case law.    A large number of cases have in fact been cited in this court and in the court below.    These have been accurately and exhaustively reviewed in the written judgment of Budd J.    The general principles applicable have been considered in Irish, English, Scottish and Canadian cases.    While in a very broad way each of them may be helpful, nevertheless with one single exception, I do not find any of them directly in point in relation to the particular application of the principles to the facts of this case.     That single exception is the Canadian case of Trans-Prairie Pipelines Limited v. Minister of National Revenue 70 DTC 6351.    The facts of that case are extraordinarily similar to the facts of this case, and although the wording of the relevant statutory provision is different, I do not think that that difference is material to the points at issue in this case.     I , therefore, find very considerable support for the view which I have taken in the Trans-Prairie case.    I think it useful to treat of that case at some length.   

	The Trans-Prairie case was an appeal from the Canadian Tax Appeal Board to the Exchequer Court of Canada.    The appellant company had been incorporated to construct and operate a pipeline and its original issued capital had consisted of a number of “common shares” (presumably the equivalent of  ordinary shares” in our terminology) and 140,000 redeemable preferred shares (“preference shares” in our terminology), these preferred shares having a total par value of $700,000.    Two years after incorporation the company issued $700,000 First Mortgage Bonds and used $400,000 of the amount thus borrowed (with $300,000 obtained by issuing additional common shares) to redeem the preferred shares.    For the purposes of arriving at taxable income the company, in each of the subsequent years, deducted the interest paid on the bonds, but the Minister of National Revenue, who was the relevant authority for this purpose, allowed the company to deduct only three sevenths of the expenses claimed on the grounds that four sevenths or $400,000 of the money borrowed through the issue of the bonds was used by the company to redeem the preferred shares and was not used “for the purpose of earning income from its business” which was the relevant requirement under the Canadian legislation.    An appeal was taken from the Minister’s decision to the Tax Appeal Board and the Minister’s interpretation was upheld.    A further appeal was then taken to the Exchequer Court of Canada.    The appeal was heard by a single judge, Jackett P., and he delivered a written judgment allowing the appeal.    In the course of that judgment he cited the relevant Canadian statutory provision in the following manner:-
    
	“11. (1)  	Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

			....

		(c)	An amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income) pursuant to a legal obligation to pay interest on

			    (i)  borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt) or

			         ...

		or a reasonable amount in respect thereof, whichever is the lesser;”

	The learned judge then went on to observe as follows on the third page of his judgment:
“The respondent has disallowed the deduction of four- sevenths of the amount of such interest for each of the years in question on the ground that $400,000 out of the $700,000 borrowed by the bond issue was used to redeem the preferred shares and was not, therefore, used ‘for the purpose of earning income’ from the business.    In this conclusion, the respondent has been upheld by the Tax Appeal Board.

The alternative view is that, prior to the transactions in question, the capital being used for the purpose of earning income from the appellant’s business was the $700,000 subscribed by the preferred shareholders and the $140,006 subscribed by the common shareholders, and that, after those transactions, the money subscribed by the preferred shareholders had been withdrawn and what the appellant was using in its business to earn income was the $440,006 subscribed by common shareholders and the $700,000 of borrowed money.    This, in my view, is a correct appreciation of the matter.

It follows that, in my view, the whole of the $700,000 of borrowed money was being used by the appellant in its business for the purpose of earning income from the business; and that is my view even though, from another point of view, and in a different sense, some $400,000 of the $700,000 was in fact paid on the redemption of the preferred shares.”

	I cannot see any difference in principle between that case and this case, though of course, this court would be perfectly entitled to take a different view from the view taken by the Exchequer Court of Canada.    But as is clear from the earlier part of this judgment, I am in complete agreement with the reasoning adopted in that case.    Budd J., in the High Court, also found it persuasive. nt.    The Canadian legislation, as cited above, contains the expression “money used for the purpose of earning income from a business or property”, whereas the wording in s. 61 of the Irish Income Tax Act, 1967 is “wholly and exclusively laid out or expended for the purposes of the trade”.    But although it may well be that there could be cases in which that distinction would be relevant, it would not appear to be at all relevant in this case.     Jackett P., in his analysis of what happened to the borrowings, was clearly expressing the view that they were wholly and exclusively laid out or expended for the purposes of the business.    In view of the understandably strong reliance being placed on this case by counsel for the respondent, it is interesting how little analysis there is of it in the written submissions of the appellant.    Counsel for the appellant has effectively confined themselves to drawing attention to the acknowledgment by the learned trial judge that the wordings of the relevant legislation differed, and while admitting that the facts were similar they submitted “that for those and other reasons it is of little assistance”.    There is really no indication as to what those “other reasons” were and nothing convincing emerged from the oral argument of the appeal.    Furthermore, the reference to Budd J.’s acknowledgment of the differences in the legislative wording is somewhat misleading in that after a quite detailed résumé of the Canadian case the learned trial judge expressed the view that assistance can be gleaned from that case “even though the Canadian section is narrower in scope”.    Budd J. points out that under the Canadian statutory provision the loan could be drawn down and used for the purchase of a luxury yacht, a use of the money which would, obviously, not be for the purpose of earning income from the business, but if the yacht was then sold and the proceeds of the sale were used for the purposes of earning income from the business then the interest paid on the loan would become deductible.     He then cites the argument of counsel for the respondent (I think with some implicit approval) that 

“under the Canadian section the interest on the loan should be deductible for the years in which the borrowed capital was employed in the business and he says that the same principle applies in the very similar situation in Ringmahon.”

	Returning to the judgment of Jackett P., I think it useful to cite a further sentence towards the end of his judgment where he said:-

“Surely, what must have been intended by section 11(1)(c) was that the interest should be deductible for the years in which the borrowed capital was employed in the business rather than that it should be deductible for the life of the loan as long as its first use was in the business.”

	By the same token it makes no sense, in my view, to hold that on a true interpretation of the relevant Irish legislation that because the loan was originally raised for the purposes of paying off the preference shareholders, the interest thereon cannot ever thereafter be treated as “wholly and exclusively laid out or expended for the purposes of a trade”.    The final paragraph of the judgment of Jackett P. in the Trans-Prairie case neatly illustrates the weakness of any alternative interpretation, and for the reasons which I have indicated would appear to be equally applicable to this case.    It reads as follows:

“The facts of the present appeal provide an even more striking illustration of the inappropriateness of the meaning of the words ‘money used for the purpose of earning income from a business’ that is relied on by the respondent.    Prior to the 1956 transactions, the appellant’s capital used in its business consisted in part of $700,000 subscribed by preferred shareholders.    As a result of those transactions the $700,000 had been repaid to those shareholders and the appellant had borrowed $700,000 which as a practical matter of business common sense, went to fill the hole left by redemption of the $700,000 preferred.  Yet, according to the view relied on by the respondent, for the purpose of this provision concerning interest on borrowed capital, $400,000 of the borrowed money cannot be regarded as being used to earn income from the business.”

	For the reasons given I would, therefore, dismiss the appeal.    I have also explained why I am reluctant to delve into the many other authorities, which were cited because in the first place they are of little assistance in the application of the correct principles to this particular case, and secondly, they have been very fully reviewed by the learned trial judge in his judgment.    I would, however, make clear in this connection that I have read and considered, in addition to the Trans-Prairie case, the cases listed in the appendix to this judgment.    I will just briefly refer to a few of them.     Archbold Thomson, Black and Company v. Batty     7 TC 158 was a Scottish case relied on by the appellant.    But the facts were wholly different.    £300 had been spent in reducing the capital of the company and it was then claimed as an allowable deduction from the profits for income tax purposes.    But there had been a finding of fact that the reduction of the share capital and, therefore, the expenditure of the money was for the purpose of giving a better dividend to the remaining shareholders and not for any purposes of the trade.    The Second Division of the Inner House of the Court of Session being bound by that finding of fact held that as a matter of law it was not deductible.    Who could argue with that result?    But it is of no avail to the appellant in this case.    In Strong and Company of Romsey Limited v. Woodifield 5 TC 215, a brewing company which also owned licensed houses in which they carried on the business of innkeepers incurred damages and costs to the amount of £1,490 on account of injuries caused to a visitor staying at one of their houses by the falling in of a chimney.    The House of Lords held that these once off payments were not deductible, that because although there may have been a connection with the trade they were not made for the purpose of enabling the carrying on and earning profits in the trade.     That case is also clearly distinguishable.    The remaining cases, in so far as they are really relevant at all, were decided on their own facts and by that I mean, there was a finding of fact as to the purpose of the payment and in the light of that finding of fact it was reasonably clear whether as a matter of law the payment was deductible or not.    If, for instance, the purpose of the payment was the financing of the business rather than the earning of profits, the payment could not be deductible (see Montreal Coke and Manufacturing Co. v. Minister of National Revenue [1944] 1 All ER 743, a decision of the Privy Council.    I have no doubt that, in this case, the learned Circuit Court judge took the view that the ongoing interest payments were necessarily part and parcel of the trading of the company and were clearly deductible.    In my opinion the learned High Court judge was correct in upholding that view.

APPENDIX
1.	Strong and Company of Romsey Limited v. Woodifield 5 TC 215.
2.	Montreal Coke and Manufacturing Co. v. Minister of National Revenue
	[1944] 1 All ER 743.
3.	Commissioners of Inland Revenue v. Carron Company 45 TC 18.
4.	Craddock v. Zevo Finance Company Limited 27 TC 267.
5.	Morgan v. Tate and Lyle Limited 35 TC 367.
6.	Atherton v. British Insulated and Helsby Cables Limited 10 TC 155.
7.	W.S. McGarry v. The Limerick Gas Committee 1 ITR 375.
8.	Mara v. Hummingbird 1982 ILRM 421.
9.	Commissioners of Inland Revenue v. Coleman Car Company Limited 
	35 TC 221.
10.	Trans-Prairie Pipelines Limited v. Minister of National Revenue    
	70 DTC  6351.
11.	McGrath v. McDermott 111 ITR 683.
12.	Archbold Thomson, Black and Company v. Batty 7 TC 158.
13.	Vodafone Cellular Limited v. Shaw 1997 [STC 734].
14.	MacNiven v. Westmoreland Investments Limited [1998] STC 1131.
15.	Boyle Brothers Drilling Company Limited v. Minister of National 
	Revenue 51 DTC 70.