The Hindu Business Line : `Everything in life is somewhere else... '

Suffering diminishes, they say, when one sees a greater suffering. Ditto with the tax-troubled too, because you'd start adoring your taxman when you see the plight of assessees in a different country!

So, the case for the week is from the UK, a decision of the Supreme Court of Judicature Court of Appeal (Civil Division) dated March 3 in Commissioners of Customs & Excise vs Elm Milk Ltd.

Elm was a private company that carried on business in three areas, viz. "as a landlord of farm premises, as a consultant to the dairy trade and as a consultant to the leisure industry". Phillips was the company's only director, and the members of his family owned Elm.

Phillips drove `considerable distances in the course of the company's business'. Acting on his advice, Elm passed a board resolution to purchase a Mercedes in 2003. In one year, the car logged `some 50,000 miles on company business'.

When Elm claimed to recover input tax incurred on the purchase of the car, there was a roadblock. The Customs & Excise Department refused the benefit, saying that the car had not been used exclusively for business purposes, as required by the statutory provisions.

The company showed the board minutes, where it had been stated that the car was to be bought with the intention that it should be used for business purposes only by Phillips, and that the company did not intend to make the car available for private use, and that any private use would be a breach of an employee's terms of employment.

The dispute went to the Value Added Tax and Duties Tribunal, where the decision went in favour of Elm.

Aggrieved, the taxman took the issue before the next level of appeal, the High Court of Justice — Chancery Division, where too it met with disappointment. Undaunted, the Department pursued the case before the Court of Appeal, where Lord Justice Ward, Lady Justice Arden and Lord Justice Moore-Bick heard the arguments.

"A person is not deemed to intend to use a car exclusively for business use if he intends to make it available for private use," reads the text of the verdict by Lady Justice Arden. "The question is how such intention is shown where the owner of the car is a small company with a sole director." A precedent on the topic was the Upton case (2001).

Upton story

It seems Upton carried on business as a cigarette vending machine operator. "His vending machines were installed in nightclubs in London. In 1998, for the purpose of impressing his customers and staying ahead of his competitors, he bought a Lamborghini motorcar... He conducted his business seven days a week from 8 a.m. until midnight or later. When the car was not in use it was parked in a car park."

Upton owned no other car for private use, nor did he need one. He did not use the Lamborghini for shopping or for social occasions. When he claimed the recovery of VAT paid on the purchase of the car, the taxman disallowed the claim.

Upton appealed to the tribunal, which held that there was no evidence in the specialised circumstances of Upton's business and personal life that he intended to make the car available for his own private use.

The Customs & Excise appealed to the High Court; there it was held that the car might be made available, if it was available in fact, and the owner did nothing to prevent its use by himself. At the Court of Appeal, Upton's appeal was dismissed. A strong support, this case was, for taxman to nail in Elm.

Thus, the Department submitted before the court that the car, when not in use, "was kept locked in a car park near the company's office and within fifty yards of Phillips' home". And that the keys to the car, though kept in the company's office, would have been accessible to the sole director Phillips at all times.

At the High Court, however, it had been held that the physical circumstances of where the car was kept did not mean that as a matter of law the company intended to make it available for private use. Elm had contended that Mrs Phillips had a Rover 75 car and that Phillips did all private motoring in his wife's car.

The Department tried to draw support from the insurance cover note for the Mercedes. The note had specified four drivers, viz. Phillips, his wife, his son and his son's fiancée. Wasn't this an indication that Elm intended to make the car available for private use of the director's family, wondered the Department. "The fact that the insurance cover permits private use is beside the point," the tribunal had ruled. "If Phillips were to use the car for a non-business purpose, he would be acting in defiance of the Board resolution, which contained the relevant terms of his employment."

Lady Justice Arden concurred with the reasoning and dismissed the taxman's appeal. Lord Justice Moore-Bick said, "I agree" and Lord Justice Ward said, "I also agree." To wrap, here's a quote of E. B. White: "Everything in life is somewhere else, and you get there in a car."

Tailpiece

Taxi-driver: "I used to be a taxman earlier!"

Passenger: "Which means you were a hangman before that!"

Detaxification@TheHindu.co.in

D. Murali

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