Pennine Raceway Ltd v Kirklees Metropolitan Borough Council

Town and Country Planning Act 1971, section 164(1) — Compensation for withdrawal by direction of deemed planning permission — Tax problem — Withdrawal of permission to use airfield for drag racing (a race between two motor vehicles over a furlong from a standing start) — Appellants had a licence from the owner of the airfield to use it for this purpose on the 14 days allowed by the Town and Country Planning General Development Order 1973, art 3 and Schedule 1, class IV — Question as to whether compensation for loss of profits should be paid by the planning authority subject to deduction of the corporation tax which would have been paid on the profits if they had been earned — Whether compensation taxable in the hands of the recipients — Appeal from decision of Lands Tribunal (Mr V G Wellings QC) holding that the deduction should be made — The tribunal had at first ruled that the appellants were not ‘a person interested in the land’ within section 164(1) of the 1971 Act but, after a contrary decision on appeal to the Court of Appeal ([1983] QB 382), considered the compensation issue — The tribunal member applied the principle of the decisions in British Transport Commission v Gourley and West Suffolk County Council v W Rought Ltd to the present case on the ground that he was not satisfied that the compensation for loss of profits would be assessed to tax in the hands of the appellants — He made no provision for grossing up the net income for the purposes of capital gains tax — The Inland Revenue, after some initial hesitation as to what kind of tax was payable, eventually made it clear that they were claiming that the compensation would be liable to capital gains tax In the Court of Appeal the decisions in the Gourley and Rought cases were distinguished from the present on the ground that in both these cases it was plain that no tax would be chargeable on the damages or compensation received; it was thus necessary in these cases to ensure that the recipients did not obtain a windfall in the compensation — Attention was drawn to the case of Stoke-on-Trent City Council v Wood Mitchell & Co Ltd, which decided that compensation should be paid in full without deduction unless it was absolutely clear that the sum would not be taxable in the hands of the recipients — The member of the Lands Tribunal had misdirected himself on this point It was argued on behalf of the respondent planning authority that in the present case the compensation was not taxable in the hands of the appellants — The argument was that the compensation, although in the opinion of the Inland31 Revenue a capital sum, was not ‘derived from’ the asset, namely, the licence, within the meaning of section 20(1) of the Capital Gains Tax Act 1979 — It was derived, on this view, simply from the statutory right to compensation conferred by section 164(1) of the Town and Country Planning Act 1971 — The cases of Davis v Powell and Drummond v Austin Brown were cited in support of this submission — The argument was, however, rejected by the Court of Appeal — They held that it was not supported by the authorities and that the mere fact that the right to compensation was statutory did not prevent the capital sum from being derived from the asset, the licence, the depreciation in the value of which was due to the withdrawal of the planning permission — It followed that the submission that no capital gains tax would be payable failed — It was not, however, necessary for the court to decide whether the compensation was properly taxable as capital or income — The proper course was for the respondents to pay the gross sum of compensation, leaving it to the appellants and the Revenue to solve the problem together — Appeal allowed and questions raised by the tribunal in the case stated answered accordingly The following cases are referred to in this report. British Transport Commission v Gourley [1956] AC 185; [1956] 2 WLR 41; [1955] 3 All ER 796, HL Davenport v Chilver [1983] Ch 293; [1983] 3 WLR 481; (1983) 57 TC 661; [1983] STC 426 Davis v Powell [1977] 1 WLR 258; [1977] 1 All ER 471; (1976) 51 TC 492; 242 EG 380, [1977] 1 EGLR 105 Drummond v Austin Brown [1985] Ch 52; [1984] 3 WLR 381; [1984] 2 All ER 699; (1984) 58 TC 67, CA Glenborg Union Fireclay Co Ltd v CIR [1922] SC (HL) 112; (1921) 12 TC 427, HL Lang v Rice (1983) 57 TC 80, CA (NI) London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772; [1967] 2 WLR 743; [1967] 2 All ER 124; [1967] 1 Lloyd’s Rep 204; (1966) 43 TC 491; [1966] TR 411, CA Marren v Ingles [1980] 1 WLR 983; [1980] 3 All ER 95; [1980] STC 500, HL Pennine Raceway Ltd v Kirklees Metropolitan Borough Council [1983] QB 382; [1982] 3 WLR 987; [1982] 3 All ER 628; (1982) 81 LGR 89; 45 P&CR 313; [1982] EGD 1243; 263 EG 712; [1982] JPL 780, CA Raja’s Commercial College v Gian Singh & Co Ltd [1977] AC 312; [1976] 3 WLR 58; [1976] 2 All ER 801, PC Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1980] 1 WLR 254; [1979] 2 All ER 65; [1978] EGD 549; (1978) 248 EG 870, [1978] 2 EGLR 21; [1979] JPL 230, CA West Stuffolk County Council v Rought (W) Ltd [1957] AC 403; [1956] 3 WLR 589; [1956] 3 All ER 216; (1956) 54 LGR 473; 6 P&CR 362, [1956] EGD 114; 168 EG 124, HL Zim Properties Ltd v Proctor (1984) 58 TC 371; [1985] STC 90 This was an appeal by way of case stated by Pennine Raceway Ltd from the decision of the Lands Tribunal in regard to the treatment of tax on compensation payable by the respondents, Kirklees Metropolitan Borough Council, in respect of the withdrawal of planning permission given by the Town and Country Planning General Development Order 1973. The permission had previously enabled the appellants to operate drag motor racing at an airfield at Crosland Moor, Huddersfield, under a licence granted by the owner of the land. William Massey (instructed by Penningtons Ward Bowie, agents for Booth & Co, of Leeds) appeared on behalf of the appellants; Robin Mathew (instructed by Sharpe Pritchard, agents for the chief legal officer of Kirklees Metropolitan Borough Council) represented the respondents. Giving judgment, CROOM-JOHNSON LJ said: This is an appeal by way of case stated by Pennine Raceway Ltd from the decision of the Lands Tribunal given on March 22 1984. There is an airfield at Crosland Moor, Huddersfield, owned by Mr Whitham. In September 1974 Pennine were incorporated, but before that Mr Whitham had granted to its promoters an oral licence to use the airfield for the purpose of drag motor racing. Drag racing is a race between two motor vehicles over a furlong from a standing start. A speed up to 165 miles an hour may be reached. The cars have parachute brakes. It is a sport recognised by the governing bodies of motor sports and is supervised by the Royal Automobile Club. Two-day meetings covering 14 days a year were covered by the permission contained in article 3 of the Town and Country Planning General Development Order 1973, and class IV, para 2 of Schedule 1 thereto. Meetings were held on this airfield in July and August 1974. After Pennine was incorporated the licence was put into the form of a deed between Mr Whitham and the company. There were mutual covenants in the deed, which need not be recited. The company was to pay Mr Whitham £500 per meeting except for the first full year. On November 8 1974 the Kirklees Metropolitan Borough Council made a direction under the Town and Country Planning General Development Order 1973, article 4, that the previous permission should not apply to the use of the airfield for the purpose of motor car or motorcycle racing. The direction was confirmed by the Secretary of State for the Environment on December 13 1974. The company made an application for appropriate planning permission, which was refused. An appeal to the Secretary of State was dismissed on June 9 1976. The company made a claim for compensation, under the Town and Country Planning Act 1971, section 164(1), which reads: . . . where planning permission is revoked or modified by an order under section 45 of this Act . . . then if, on a claim made to the local planning authority . . . it is shown that a person interested in the land . . . — (a)   has incurred expenditure in carrying out work which is rendered abortive by the revocation or modification; or (b)   has otherwise sustained loss or damage which is directly attributable to the revocation or modification, the local planning authority shall pay to that person compensation in respect of that expenditure, loss or damage. The council took the view that the company was not ‘a person interested in the land’ within the meaning of the section. The company made a reference to the Lands Tribunal. The tribunal, on a preliminary point of law, upheld the council. The Court of Appeal ([1983] QB 382) reversed the tribunal. Accordingly, the claim for compensation was heard by the tribunal in November and December 1983. The claim covered expenditure in preparing the airfield for racing, loss of advertising revenue, expenditure on printing advertising leaflets, a loss made on an unsuccessful attempt at mitigation, and the estimated cost of reinstatement if racing were discontinued (which was an obligation of the company under the deed of licence). But the principal item of claim was for loss of income. There were a large number of agreed facts going to the loss of profits claim. The company limited its claim for loss of profits for the individual years up to 1979, because since 1980 drag racing had been hit by the general recession and because of rising petrol and motoring costs and unemployment. An alternative method which was proposed was the award of a capital sum based on the loss for 1979 and applying a generous multiplier. The method adopted by the tribunal was to take each of the years up to 1979 and add them together. Apart from factual evidence about the prospects for drag racing and for the company, the financial evidence for the company was given by its auditor, Mr Marshall. He calculated the expected profits for each of the relevant years. He said he made no allowance for corporation income tax against the profits for each year, because he assumed the Inland Revenue would tax the profits as trading receipts when the compensation was paid. The evidence for the council was given by Mr Townend, one of its officials. In the course of his evidence he said that tax should be deducted from the alleged loss of profits although he provided no calculation as to the manner in which this should be done or as to the rates of tax which ought to be applied. We asked counsel if those accounts of the evidence of Mr Marshall and Mr Townend, which we have taken from the award of the member of the tribunal, fully represented all the evidence given on the subject of tax. We were told, on instructions, that they did. After making various deductions, the member concluded that the year 1975 resulted in a small actual loss. He therefore concluded that it would be unfair to award the compensation in the form of a capital sum reached by applying a multiplier to the year 1974 or 1975, owing to the difficulty of assessing notional profits for those years, which had shown actual losses. He was influenced in that decision by the failure of the council to provide any figures to which the multiplier might be applied. He accordingly assessed the actual lost profits for the succeeding years and aggregated them. The result was as follows: 1975 (£413) loss 1976 11,505 1977 39,821 1978 61,346 1979 90,485 £202,744 32 Without having heard argument on the subject, he then made a further adjustment ‘to reflect the corporation income tax which would have been payable by the company if those profits had in fact been earned in the relevant years. I am not satisfied that the compensation for loss of profits will be assessed to corporation income tax in the hands of the recipients’. He accordingly deducted figures from the above sums and awarded these figures: 1975 Nil 1976 £11,505 — the 1975 loss £413 less 42% tax £6,433 1977 £39,821 — 42% tax 23,096 1978 £61,346 — 52% tax 29,446 1978 £90,485 — 52% tax 43,432 £102,407 Those deductions were expressly made on the principle of British Transport Commission v Gourley [1956] AC 185, which had been followed in West Suffolk County Council v W Rought Ltd [1957] AC 403. In Gourley’s case the tax was deducted from the damages awarded because the damages would not be taxable in the recipient’s hands. To that sum was added £692 representing the loss incurred in the unsuccessful attempt at mitigation. The total awarded was thus £103,100, and that sum was paid by the council. After dealing with Gourley’s case, the member added: I have received no argument on the question whether the profits, after deduction for corporation income tax, ought to be grossed up for corporation capital gains tax. . . . The compensation is intended to be not a capital sum but the aggregation of five payments for loss of income. Further, if technically the compensation constitutes a capital payment, it is not derived from an asset, nor paid as compensation for any damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of any asset within the meaning of section 20(1) of the Capital Gains Tax Act 1979. Accordingly I make no provision for grossing up. We were told that there was no argument from either side on whether Gourley’s case was applicable. In view of the form of the award, Pennine did not appeal. It was assumed, since tax had been deducted in arriving at the figure for compensation, that there would be no further liability to tax. On April 19 1984 the time for appealing expired. Unfortunately, the Inland Revenue took a different view. They asked about the Lands Tribunal’s award and on October 9 1986 they wrote to Pennine stating that they considered the sum was liable to taxation, although they were not sure of what kind. They said that in determining the sum awarded, the Lands Tribunal had considered tax as: no more than a process to arrive at the final figure to be paid. There was for example no corresponding provision for Kirklees Council to account for this Corporation Tax on behalf of the Company nor could the Revenue go to the Council seeking payment of it. The letter continued that the Revenue must consider whether the compensation was chargeable as a trading profit or under Schedule A as a receipt from the exploitation of the company’s interest in land. Alternatively it may be that the compensation is chargeable to Capital Gains Tax as a capital sum derived from the company’s assets (the interest in land). Pennine obtained legal advice from tax counsel and warned Kirklees of the attitude being taken by the Revenue. Faced thus with double taxation, the company obtained an extension of time for requiring a case to be stated by the Lands Tribunal. On July 27 1987, extension of time was granted. To complete this part of the history, on August 28 1987 the Revenue wrote again. They said they had concluded that the compensation would be taxable as a capital gain and tax would fall to be charged accordingly. The letter ended: If as a result of your appeal against the Lands Tribunal Decision a further sum is awarded to the company, then this too will be chargeable to Capital Gains Tax. On December 3 1987 the Lands Tribunal member stated the case. It asked for four questions to be decided by the Court of Appeal: whether: (i)  I erred in holding . . . that the adjusted net profits must be further adjusted to reflect the Corporation income tax which would have been payable by the company . . . if those profits had in fact been earned in the relevant years; (ii)  I erred in law in stating . . . that I was not satisfied that the compensation for loss of profits would be assessed to corporation income tax in the hands of the recipients; (iii)  notwithstanding that I received no argument or other assistance on the question whether the profits, after deduction for corporation income tax, ought to be grossed up for corporation capital gains tax, I erred in law in making no provision for such grossing up; (iv)  notwithstanding that I received no argument or other assistance on the question whether marginal relief should be taken into account, I erred in law in failing to take it into account. Gourley’s case was an action for personal injuries, in which a large part of the damages was referable to the plaintiff’s loss of earnings. The damages would be free of tax when received by him. The House of Lords held that since the liability to pay income tax on his earnings was a liability established by law, the plaintiff could only claim as his loss such sum as he would have received after deduction of tax. Otherwise, he would be receiving a windfall. It was followed in West Suffolk County Council v W Rought Ltd [1957] AC 403. There, W Rought Ltd claimed compensation from the county council, which had compulsorily acquired leasehold factory premises occupied by them. They claimed for loss of profits. An important point was that the Inland Revenue had made it plain that in their view no income tax was chargeable on the compensation in question. The House of Lords proceeded on that basis, and in order to ensure that Rought should not recover greater compensation than represented their real loss, they applied Gourley’s case and held that the Lands Tribunal, in assessing that compensation, should have estimated to the best of their ability the amount of additional taxation which Rought would have had to bear if they had actually earned the amount which they had been prevented from earning. In 1965 capital gains tax was introduced, and thereafter the present statutory provisions for the taxation of corporations. It is unnecessary for the purpose of this judgment to go into them in any detail in view of the way in which the argument before us has developed. But the changes did affect the third case to which the member of the tribunal referred in the award and to which our attention has been called. This is Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1980] 1 WLR 254. Wood Mitchell & Co Ltd were subject to compulsory purchase of part of their land. They agreed to sell. The problem was the amount of compensation for disturbance, which was referred to the Lands Tribunal. Apart from a small sum which was agreed to be payment of capital, the only dispute was whether £12,228 in respect of temporary losses suffered should be adjusted to take into account corporation tax. The tribunal held that it was income and to be treated as a trading receipt in the hands of the claimants and since they were liable to pay corporation tax on it, they were entitled to compensation without deduction of tax. The Court of Appeal upheld the tribunal. Gourley’s case and Rought’s case were distinguished. The significant distinction between Stoke-on-Trent and Rought’s case was that in Rought’s case the Inland Revenue had made it plain that no income tax was chargeable upon the compensation in question, whereas in Stoke-on-Trent no such assurance had been forthcoming. The Inland Revenue, for understandable reasons, declined an invitation by the Court of Appeal to give help on whether that would be the case, and it was left to the court to consider whether the statutory changes had resulted in Wood Mitchell & Co becoming liable to pay capital gains tax on compensation for compulsory acquisition upon the footing that such compensation is a capital sum received upon the disposal of an asset, and for other reasons. Before analysing the statutory position, Roskill LJ (who delivered the judgment of the court) in a passage [at p 259] relied on by Pennine in the present case, said that the position of the Inland Revenue was important. If they later levied tax after it had already been deducted from the award by the Lands Tribunal, then Wood Mitchell & Co would suffer double taxation and that would be an injustice. He emphasised that Gourley’s case and Rought’s case were intended to secure that a successful claimant did not recover more than his actual loss. But — . . . in the absence of any assurance from the Inland Revenue that no attempt would be made to levy tax upon this sum, [the claimants] stood in peril of receiving considerably less than that which they would have received had their capacity to earn continued unaffected by compulsory acquisition. In such circumstances the more natural course, which would avoid any risk of injustice, would be for the claimants to receive the full sum, leaving the question of liability to tax, if any, to be adjusted thereafter between the claimants and the Inland Revenue. We take the view that the principles laid down in West Suffolk County Council v W Rought Ltd can only be applied if after examination of the relevant statutory provisions it is clear beyond peradventure that the sum in question would not be taxable in the hands of the claimants. If that is clear, then it would be wrong to require the acquiring authority to compensate the claimants beyond the amount of the loss which the claimants would in truth suffer. But if it is not, then it seems to us unjust that in a doubtful situation the acquiring authority can get the benefit of a reduced payment while leaving the claimants exposed to the risks we have mentioned. Considerations of abstract justice might be thought to suggest that the claimants should receive the full sum and then in due course account to the Inland Revenue for any tax properly chargeable upon that amount. Pennine submit, in view of the uncertain attitude of the Inland Revenue to their compensation, that the same approach should be adopted in this case; in other words, their original submission to the tribunal should have been accepted. But they say that prima facie the sum is liable to be taxed as income, because the annual sums would have been credited in each year to the profit and loss account, in accordance with the approach of the Court of Appeal in London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772, a principle which was approved in Raja’s Commercial College v Gian Singh & Co Ltd [1977] AC 312. The other way of looking at it is as a capital sum, in which case it will be liable to corporation tax on chargeable gains under the Capital Gains Tax Act 1979, section 20(1). Kirklees’ stance in this appeal has been that, in Roskill LJ’s words, it is ‘clear beyond peradventure’ that the award will not be taxable, because although it is a capital sum, it is one which will not be liable to be taxed. They submit that even if the tax deducted in the award were on the basis that the sum represented tax on profits lost over the five-year period, they are content to leave the award as they have paid it, and that the deduction of income tax (albeit at an inappropriate rate) was truly an attempt by the tribunal to ensure that Pennine did not have the benefit of a windfall and that Gourley’s case was properly applied. There is no argument about the £692. Kirklees also concede that if the £202,744 was a sum which over four years would have been paid into the company’s profit and loss account, it would be taxable by the Inland Revenue, and therefore it would be wrong to have applied Gourley, although they reserve the right to argue the contrary, if need be, in the House of Lords. They rely on Glenboig Union Fireclay Co Ltd v CIR (1921) 12 TC 427. In that case the Fireclay Co was lessee of Fireclay deposits, some of which lay under the line of the Caledonian Railway. The railway, under its statutory powers, prohibited the company from working part of the fireclay, and paid compensation. The compensation was calculated on the basis that if the ‘sterilised’ fireclay had been worked it would have been exhausted, within three years, at a total profit to the company of £15,316. A question arose between the company and the Inland Revenue whether that compensation was to be treated as capital or income for the purpose of assessing excess profits tax. The House of Lords held that it was capital. Lord Buckmaster, at p 463, said: In truth the sum of money is the sum paid to prevent the Fireclay Company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of £15,316 was paid. It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. At p 465 Lord Wrenbury said: . . . the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. On the other hand, in Lang v Rice (1983) 57 TC 80, two bars in Belfast were bombed and destroyed. Neither business was restarted. The owner claimed in respect of ‘loss of profit, ie goodwill, 1 1/2 years’ purchase of net profit’ by way of compensation under the Criminal Injuries to Property (Compensation) Act (Northern Ireland) 1971. The Crown maintained the payment was to be assessed to capital gains tax. The Court of Appeal (Northern Ireland) held that the nature of the claim meant the compensation was not capital but receipts of revenue, distinguishing Glenboig. Kirklees submit that the licence to Pennine was an asset in the same way as the case of fireclay was in Glenboig. It was a vital ingredient of its trading process and has not been disposed of. As a licence it still exists, and has not been revoked or sold. But is it taxable?  For capital gains to be incurred, the asset must be a ‘chargeable asset’ within the Capital Gains Tax Act 1979, and must be ‘disposed’ under sections 19 and 20. Section 20 states: 20. — (1) Subject to sections 21 and 23(1) below, and to any other exceptions in this Act, there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to — (a)   capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset, (b)   capital sums received under a policy of insurance of the risk of any kind or damage or injury to, or the loss or depreciation of, assets, (c)    capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights, and (d)   capital sums received as consideration for use or exploitation of assets. (2)  In the case of a disposal within paragraph (a), (b), (c) or (d) of subsection (1)  above the time of the disposal shall be the time when the capital sum is received as described in that subsection. (3)  In this section ‘capital sum’ means any money or money’s worth which is not excluded from the consideration taken into account in the computation under Chapter II below. First, under section 20(1)(a) this would be a capital sum received by way of compensation for (i) any kind of damage or injury to the asset, or (ii) . . . any depreciation of the asset. Even if there has been no damage or injury to the licence which (as a licence) is still in existence although useless, it seems to me that it cannot be said that there has not been a depreciation of the licence, which granted to Pennine ‘sole rights to promote motor and motor-cycle events on the Airfield at Crosland Moor’. The question arises, has the capital sum been ‘derived’ from the asset?  Mr Mathew’s submission for the respondent council is that it has not; it has been simply compensation payable by Kirklees under the statutory requirement laid down by the Town and Country Planning Act 1971, section 164(1), and is ‘derived’ from the statutory obligation, not from any section 20(1)(a) event. In Davis v Powell (1976) 51 TC 492 a tenant farmer surrendered part of his land to his landlord in consideration of a sum of money, part of which (£591) was treated as compensation for disturbance after a notice to quit. The Revenue contended that that compensation was a capital sum derived from an asset, ie the tenancy, and was chargeable to capital gains tax. Templeman J held it was not chargeable because the compensation was not derived from the asset, which had been the lease. The lease had gone, giving the ex-tenant a limited right to compensation for the loss or expense directly attributable to the quitting of the holding which is unavoidably incurred by the tenant upon or in connection with the sale or removal of his [belongings]: section 34 of the Agricultural Holdings Act 1948. As Templeman J (as he then was) said: It does not seem to me that the compensation paid under section 3-is derived from the asset: namely, the lease. It is not derived from an asset at all: it is simply a sum which Parliament says shall be paid for expense and loss which are unavoidably incurred after the lease has gone. In Drummond v Austin Brown (1984) 58 TC 67 a solicitor’s tenancy was terminated by notice under the Landlord and Tenant Act 1954, section 25. He had to get out. On quitting the premises the taxpayer was paid a compensation by the landlord of £31,384 under section 37 of the Act. It was held by Walton J that the compensation had been given by statute, not to compensate him for the loss of an asset, but because he had lost his tenancy and for the purpose of enabling him to start up all over again. Accordingly, it was not chargeable to capital gains tax. The Court of Appeal agreed. Fox LJ said, at p 85: In our opinion the £31,384 was not derived from the lease. The word ‘derive’ suggests a source. The right to payment was, in our view, from one source only, namely the statute of 1954. The lease itself gives no right to such a payment. It was the statute, and the statute alone, which created the right to the payment. The statute simply created an entitlement where none would otherwise have existed. Davis v Powell was distinguished in Davenport v Chilver (1983) 57 TC 661. In that case the compensation was paid under the Foreign Compensation (Union of Soviet Socialist Republics) Order 1969 in respect of property in Latvia owned by the Chilver family which had been expropriated in 1940 by the Soviet Government. Nourse J held that the relevant payment had not been merely under statutory authority (as in Davis v Powell) but because Miss Chilver had an independent proprietary right in the compensation fund which was itself an ‘asset’ within the meaning of the section which was then the33 equivalent of that which we are now considering. In my view, the authorities cited by Mr Mathew do not support a general proposition that compensation awarded by statute is outside the Capital Gains Tax Act 1979, section 20. One must look in each case to see whether the capital sum is ‘derived’ from the asset or from something else, and in this connection one should properly approach that question in the way adopted by Warner J in Zim Properties Ltd v Procter (1984) 58 TC 371 where at p 391, after saying that it would be a mistake to say that the asset from which a capital sum is derived must always be the asset that constitutes its immediate source (emphasis added), he went on to say: The true view was hinted at by Fox J in O’Brien v Benson’s Hosiery (Holdings) Ltd (1979) 53 TC 241 when he referred . . . to ‘the reality of the matter’. One has to look in each case for the real (rather than the immediate) source of the capital sum. In the present case Pennine had an asset, which was the licence, and that licence depreciated in value when the planning permission was revoked. For that depreciation they are entitled to a capital sum by way of compensation, and their right to the compensation is given by the Town and Country Planning Act 1971, section 164(1), because their asset (which made them ‘a person interested in the land’) has sustained loss or damage which is directly attributable to the revocation of the permission. It is clear that the capital sum is ‘derived’ from the asset. That is the view of Pennine themselves, and also of the Inland Revenue, and they are right. It follows that the submission of Kirklees that no capital gains tax will be payable fails. I am not at present convinced that the sum is a capital sum as laid down in the Glenboig case. The reasoning in that case is a strong pointer, but we have not had the benefit of any argument from the Inland Revenue, or any comparison of the different positions under the Capital Gains Tax Act 1979 and its immediate predecessors with the Finance (No 2) Act 1915, which was concerned with the liability of businesses to pay excess profits duty on profits made by them during world war one when compared with their pre-war profits, and I would reserve that point for further consideration if it should ever arise. It is convenient at this point to deal with a reference in the award on p 32. The member of the tribunal said: I have received no argument on the question whether the profits, after deduction for corporation income tax, ought to be grossed up for corporation capital gains tax. We have received no argument on that, either. What, then, is the position?  Pennine accept that they are liable to pay tax on their compensation, one way or another. There is no certainty that the Inland Revenue will not change its mind again about which is the correct approach or what Pennine’s attitude will be if they do. In my view, the proper course is that Kirklees should pay the sum of compensation gross, leaving it to the Revenue and Pennine to solve the problem together, as Roskill LJ suggested in the Stoke-on-Trent case. Accordingly, the answer to the first question in the stated case is ‘Yes’. As to the second question, Pennine submit that the member of the tribunal asked himself the wrong question and that he should have asked himself, ‘Am I satisfied that the compensation will be free of tax?’. Be that as it may, he had received no submissions at all on the subject, and what he said was not so much an error of law as a procedural error. I should prefer not to answer the second question in the form in which it is asked, but order that the award be remitted to the tribunal with a direction that the award should be for the gross sum of £203,436. The answer to the third question is ‘No’, and the answer to the fourth question is ‘No’, neither the tribunal nor the Court of Appeal having received any argument or assistance on the subject. I would allow the appeal accordingly. Agreeing that the appeal must be allowed, RALPH GIBSON LJ said: In personal injury cases the defendant tortfeasor pays only the net amount of any notional lost earnings to the injured plaintiff, after deduction of the tax which would have been payable, because the damages payable by the defendant will not be taxable in the plaintiff’s hands: see British Transport Commission v Gourley [1956] AC 185. Since compensation money for lost income, payable by a local planning authority when a planning permission is withdrawn in pursuance of its planning policy, is taxable in the hands of the recipient, the local authority must pay any notional lost earnings in full, on the basis that the amount of the tax will be paid to central government: see Stoke-on-Trent v Wood Mitchell & Co [1980] 1 WLR 254. In short, the cost to the local planning authority of implementing their planning policy is increased by the amount of the tax payable. In this case that amount is £100,337. No doubt there are good reasons for the law so providing. It was conceded by Mr Mathew for the council that, in so far as the compensation payable is to be regarded as the replacement of lost income, the decision of the tribunal was wrong and the award should have been for the gross amount of £202,744 plus £692, namely £203,436. In so far as the compensation payable is to be regarded as a capital receipt by the claimants, I agree, for the reasons given by Croom-Johnson LJ, that as such the receipt will be taxable as a ‘capital sum received by way of compensation’ within section 20(1)(a) of the Capital Gains Tax Act 1979 as applied to corporation tax. Since, thus, the amount of the compensation, as assessed by the tribunal, will be taxable whether it is regarded as income or as a capital receipt, it is not necessary for this court to decide in these proceedings which it is, but I wish to make some comments upon the submissions made. Mr Mathew submitted that the compensation as assessed is a capital receipt and that this court should so hold. That submission was the first step in the contention that the sum awarded is not taxable. For my part, I would have difficulty in accepting that submission. It is clear that what was claimed was compensation for lost profit income, ie the income lost in the five years of 1975 to 1979. The reason why the claim was limited to the five years to 1979 was not because the claimants accepted that five years’ purchase represented a fair calculation of the capital value to them of the lost permission to use the land for drag racing. The claim was so limited because, remarkably, the projected amount of profits reached an alleged peak of £163,773 in 1979 and then disappeared to nothing because ‘after 1980 . . . [and] . . . because of the effects of the recession the company had confined its claims for loss of profits to the years up to 1979’: see p 14 of the decision. The claimants did put forward an alternative claim to a capital sum for loss of profits and suggested that it should be calculated by taking the alleged loss for 1975 (£11,075) and applying a generous multiplier. To achieve a capital sum in the region of that contended for in the claim for lost profits, namely £401,178, or in the region of that awarded for lost profits, namely £202,744 based on an assessed loss for 1975 of £413, would have required a very generous multiplier indeed. The tribunal, after considering the possibility of making ‘a robust assessment of a capital sum as though . . . assessing general damages at common law’, decided not to take that course. The compensating authority had proffered a multiplier but had provided no figures to which it might be applied. On the other hand, it was said, the claimants had a certain amount of choice in the formulation of their claim. If they had claimed for loss of opportunity to make profits over an infinite number of years an award in the shape of a capital sum would have been appropriate. But they had claimed losses over a finite number of years. For those reasons the tribunal did not assess a capital sum but adjusted the revenues and expenditure alleged by the claimants to have been lost. Mr Mathew submitted that, notwithstanding that approach by the tribunal in calculating and awarding the compensation, this court must regard the net award as a capital sum in the hands of the appellants. It was said that the case is covered by the decision in the Glenboig case 1922 SC (HL) 112; (1921) 12 TC 427. The sum paid to the Glenboig Fireclay Co, as compensation for being prevented from mining a particular quantity of fireclay under the railway, could not, in the view of the House of Lords, be regarded as profits, or as a sum in the nature of profits, but was a sum paid in respect of the destruction or sterilisation of a capital asset of the company. The column of fireclay beneath the railway could not be mined. The sum paid was not converted to lost profits because the sum paid was calculated by reference to the fact that the lost fireclay could be worked only for some two and a half years before it would be exhausted. It was, said Lord Buckmaster (12 TC at p 463), unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned. It is not clear to me that in this case it is shown that the assessment of the amount of what the profit would have been in the particular years was merely the measure of the value of a lost capital asset. The planning permission had been permanently withdrawn, but the34 claimants did not own the land and had only the limited interest of a licence, terminable on reasonable notice such as six months: see Pennine Raceway Ltd v Kirklees Metropolitan Borough Council [1983] QB 382 per Eveleigh LJ at p 389A. The owner of the land, who could terminate the licence, was unlikely to do so while satisfied with the performance of the claimant company in which he was interested. The supervening recession of 1980, to which I have referred, and the limited nature of the claimants’ interest in the land can be regarded as providing support and explanation for the claim being limited to loss of income in specific years. Since, as proposed by Croom-Johnson LJ, the right course in this case is for the compensation to be assessed in the gross sum, calculated by reference to loss of profits, and since the claimants will be left to deal directly with the Revenue as to their tax liability upon the sum awarded, it is better that this court express no final view as to whether that sum is a capital or revenue receipt. We have been told that the Revenue have asserted in 1987 that the compensation received by the claimants, namely a sum reduced by corporation income tax, should be treated as a capital receipt. I do not know whether the willingness of the Revenue to regard as a capital receipt the sum then received by the claimants was influenced by the fact that corporation income tax had been deducted. It is common ground between the parties before this court that the Revenue will be free to claim tax upon the gross amount, which the claimants will receive pursuant to the judgment of this court, on whatever basis is seen by the Revenue to be right. As to the second part of Mr Mathew’s contention, namely that, if received as a capital sum, the compensation would not be taxable, I agree, as I have said, that the contention fails. As a capital receipt it would, in my judgment, fall within section 20(1)(a) as a ‘capital sum received by way of compensation for . . . damage to assets’ or for ‘depreciation of . . . an asset’, namely the licence under which the claimants used the land for drag racing, and which constituted the right by which the claimants could satisfy the requirement under section 164 of the 1971 Act of being ‘interested in the land’. It was submitted by Mr Mathew that the compensation is not within the deemed disposal provision of section 20 because it was not ‘derived from assets’ within the meaning of that phrase in the general words of section 20. In my judgment, the compensation paid to these claimants for ‘loss or damage . . . directly attributable to the revocation’ of the planning permission for drag racing was ‘derived from’ the asset, that is to say the licence to use the land for drag racing. If the words ‘derived from assets’ govern the words in the following subparagraphs of subsection (1), in the sense that a case cannot come within any of the lettered paragraphs unless the case is also within the introductory or general words, then I would agree with the approach of Warner J in Zim Properties Ltd v Procter [1985] STC 90 at p 107, where he said that the court must look for the real source from which the capital sum was derived rather than the immediate source. It seems to me that, in reality, the source of the capital sum payable to the claimants for compensation was the asset, namely the licence, because it was that through which the claimants were injured by the withdrawal of the planning permission and were entitled to be paid compensation in respect of that injury. A question was raised in argument as to whether Warner J was right in holding that a case could not fall within the particular provisions of any of the lettered paragraphs of section 20(1) unless the case was shown to be covered by the introductory words of the subsection, namely a ‘capital sum . . . derived from assets’. Nourse J (as he then was) in Davenport v Chilver [1983] STC 426 at p 439 held that, as a matter of construction, the particular examples contained in the lettered paragraphs stand on their own feet and, if necessary, prevail over the general words. Warner J took the view, and the contrary view was not argued before him, that that opinion of Nourse J must be regarded as mistaken in the light of the speeches of Lord Wilberforce and Lord Fraser in Marren v Ingles [1980] STC 500; [1980] 1 WLR 983. It is suggested in Sumption’s Capital Gains Tax, 1988, para A1.09 that that view of Warner J was based upon a misreading of passages in Marren v Ingles. We have not heard full submissions upon the point, and it is not necessary for us to decide it, but my inclination is to agree with the conclusion of Nourse J in Davenport v Chilver. The enactment in section 20(1) is contained first in the words: there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum. The words ‘notwithstanding that no asset is acquired’ are words of extension and not of limitation: see Marren v Ingles. The subsection then continues: and this subsection applies in particular to (a) capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset. In my judgment, the cases covered by the words in para (a) are intended to be within the deemed disposal provision without proof of any further requirement. I do not, however, think that it greatly matters whether the words are regarded as creating a provision which ‘stands on its own feet’ or as an example which must be shown to be within the general words, because, so far as concerns (a), if a capital sum is shown to have been received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset, it seems to me that it will be shown to have been ‘derived from’ the asset in question within the meaning of the general words; and the same would, I think, be true of subparas (b), (c) and (d). I agree that this appeal should be allowed and that an order be made as proposed by Croom-Johnson LJ. Also agreeing that the appeal should be allowed, STUART-SMITH LJ said: The principal question in this appeal is whether Mr Wellings QC, the member of the Lands Tribunal, was correct to deduct the sum of £102,407 from the gross sum of compensation that he awarded the appellants under section 164 of the Town and Country Planning Act 1971. This sum represented the aggregate of corporation income tax which the appellants would have had to pay on profits which Mr Wellings held they would have earned over a five-year period from 1975 to 1979, if they had been able to engage in their business of running drag racing at Crosland Moor. He made the deduction because he considered he was bound to do so on the authority of British Transport Commission v Gourley [1956] AC 185 and West Suffolk County Council v W Rought Ltd [1957] AC 403. He directed himself on this issue as follows: In my judgment, the adjusted profits must be further adjusted to reflect the corporation income tax which would have been payable by the company if those profits had in fact been earned in the relevant years. I am not satisfied that the compensation for loss of profits will be assessed to corporation income tax in the hands of the recipients. This was a misdirection. In Stoke-on-Trent City Council v Wood Mitchell & Co [1980] 1 WLR 254 at p 259G Roskill LJ, in giving the judgment of the court, said: We take the view that the principles laid down in West Suffolk County Council v W Rought Ltd can only be applied if after examination of the relevant statutory provisions it is clear beyond peradventure that the sum in question would not be taxable in the hands of the claimants. If that is clear, then it would be wrong to require the acquiring authority to compensate the claimants beyond the amount of the loss which the claimants would in truth suffer. But if it is not, then it seems to us unjust that in a doubtful situation the acquiring authority can get the benefit of a reduced payment while leaving the claimants exposed to the risks we have mentioned. But Mr Mathew, on behalf of the respondents, has submitted that it is clear beyond doubt that in fact the compensation awarded in the sum of £103,100 will not be taxed either as income or as capital in the hands of the appellants, and that accordingly the member was correct to apply the Gourley principle, though there may be some minor adjustment in the actual figures. The first limb of the argument is that no matter how the compensation was calculated by the Lands Tribunal, it must be treated as capital in the hands of the appellant by the Revenue. This proposition is based on the decision of the House of Lords in Glenboig Union Fireclay Co Ltd v Commissioners of Inland Revenue (1921) 12 TC 427. For the purpose of my decisions in this appeal, I am content to assume, without deciding, that this is correct. It is certainly the current view of the Inland Revenue: see their letter of August 28 1987. It is the second limb of Mr Mathew’s argument that is the crucial one. He submits that the compensation, being a capital receipt, is not a chargeable gain under the relevant provisions of the Capital Gains Tax Act 1979. The relevant section of that Act is section 20(1), which provides: 20.–(1) Subject to sections 21 and 23(1) below, and to any other exceptions in this Act, there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to — 35 (a)   capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset. It is common ground that the appellants’ asset was the licence. Mr Mathew’s submission is that the compensation was not a capital sum derived from the licence within the general words of section 20(1) and that since these words govern the particular words in section 20(1)(a) it was not compensation for the loss or depreciation of an asset. It was, he submitted, derived from the statutory right to compensation given by section 164 of the Town and Country Planning Act 1971. There has been a divergence of judicial view as to whether the general words of section 20(1) govern the particular words of paras (a) to (d). Nourse J in Davenport v Chilver (1983) 57 TC 661 at p 677 held that the particular examples in paras (a) to (d) stood on their own feet and were to be construed independently of the opening and general words of section 20(1). Warner J in Zim Properties Ltd v Procter (1984) 58 TC 371 at p 390G took a different view and held that paras (a) to (d) were particular instances of the application of the principle enacted by the general words; and consequently that a case cannot come within any of the lettered paragraphs if it cannot come within the general words. For the purpose of deciding this appeal it is not necessary to resolve this divergence. I am content to assume that the narrower construction favoured by Warner J is correct. This means that the words ‘capital sum is derived from assets’ govern both the general words of section 20(1) and also the particular words of para (a). Mr Mathew relied upon two authorities to support his proposition that the sum of compensation did not derive from the appellant’s asset, the licence, but from the statute. The first is Davis v Powell (1976) 51 TC 492, in which Templeman J held that compensation paid to a tenant farmer under section 34 of the Agricultural Holdings Act 1948 was not chargeable to capital gains tax on the grounds inter alia that it was not a capital sum derived from an asset within the meaning of section 22(3) of the Finance Act 1965 (the equivalent to section 20(1) of the 1979 Act). It was argued that the compensation derived from the taxpayer’s asset, namely the lease. The learned judge put the matter succinctly at p 495 when he said: It [the compensation] is not derived from an asset at all; it is simply a sum which Parliament says shall be paid for expense and loss which are unavoidably incurred after the lease has gone. That case is clearly distinguishable from the present. In that case the lease had gone; in this the licence continued. The lease gave no right to compensation either expressly or by operation of the common law. The right was conferred by statute for loss and expense incurred. The second case is Drummond v Austin Brown (1984) 58 TC 67. The Court of Appeal held that compensation payable to a business tenant under section 37 of the Landlord and Tenant Act 1954 where the business tenancy came to an end because the landlord intended to occupy the premises pursuant to section 30(1)(g) of that Act was not derived from the asset, namely the lease, but the statute. At p 85 Fox LJ, giving the judgment of the court, said: In our opinion the £31,384 was not derived from the lease. The word ‘derive’ suggests a source. The right to the payment was, in our view, from one source only, namely the statute of 1954. The lease itself gives no right to such a payment . . . The statute simply created an entitlement where none would otherwise have existed. And in creating that entitlement it did not require that any provisions were to be written into the lease. Thus, there is no deeming provision which would in any way require one to treat the lease as being the source of the entitlement. We do not think the sum can be said to be derived from any asset. It was, as Templeman J said in Davis v Powell [1977] 1 WLR 258,260 — a case in which he rejected the Crown’s claim to capital gains tax on the compensation payable to an outgoing tenant under the Agricultural Holdings Act 1948 — simply a sum which Parliament said should be paid. Further, Parliament has not said that the tenant is to be entitled to the payment just by proving the lease. He must also prove that the premises were occupied by him and were so occupied for the purposes of a business carried on by him or for those and other purposes; and the right to the double compensation payable in the present case depended also upon the fact that the tenant and his predecessors in the business run between them occupied the premises for business purposes for the previous 14 years. Thus, compensation is not the inevitable result of the lease. No doubt the right to compensation impinges upon the landlord and the tenant. And no doubt the provisions of Part II of the Act of 1954 apply to all tenancies within s23(1). But the right to compensation is still only a right given by Parliament. If Parliament chose to take it away, the lease by itself would not have conferred it. We do not think that it is accurately described as an ‘incident’ of the lease. It does not attach to the estate as such. It is a right given by statute to certain tenants in certain circumstances and the lease by itself did not confer a right to it. It was as Brightman J said In Re 14 Grafton Street, London W1 [1971] Ch 935 at p 942, ‘a debt created by statute, upon which the tenant may sue in other proceedings if necessary’. So in this case Mr Mathew submitted that the compensation was derived not from the licence, which was the appellants’ asset, but from the statutory right granted to a person who had an interest in land and who could prove that he had sustained loss or damage directly attributable to the revocation of the relevant planning permission: section 164 of the Town and Country Planning Act 1971. It is clear, in my judgment, that the mere fact that right to compensation is statutory as opposed to one arising at common law does not of itself prevent the capital sum being derived from the asset. The provisions as to compulsory purchase in section 110 of the Capital Gains Tax Act 1979 makes this plain. I would also adopt the test used by Warner J in the Zim Properties case at p 391B that the court ‘has to look in each case for the real (rather than the immediate) source of the capital sum’. In my judgment, the capital sum was derived from the licence, more specifically from depreciation of the licence. The licence coupled with planning permission for drag racing was a valuable asset; without planning permission it was worthless. The revocation of the planning permission turned the licence into a totally emasculated creature compared with what it was before; indeed, although the licence continued alive it could be likened to someone in a permanent coma. Two further points should perhaps be considered. In the course of argument I suggested that section 20(1)(a) might be concerned only with physical loss, damage or injury to a corporeal asset; and Mr Mathew, perhaps without mature reflection, adopted the suggestion. I am satisfied that it is not so limited, but may extend to loss or damage to incorporeal assets, such as, for example, loss of goodwill. And this was the view of Nourse J in Davenport v Chilvers at p 677, with which I respectfully agree. Second, Mr Mathew submitted that the capital sum had to be consideration for a bargain. He referred to section 20(3), which provides: In this section ‘capital sum’ means any money or money’s worth which is not excluded from the consideration taken into account in the computation under Chapter II below. But it is perfectly clear that both paras (a) and (b) envisage capital sums that do not result from any bargain. Compensation is normally awarded by a court or other tribunal. Sums received under a policy of insurance are not paid in consideration of the loss or damage to the asset in the sense that there is any bargain for the disposal in that way. In my judgment, the compensation was a capital sum within section 20(1). In the result, far from being satisfied beyond doubt that the compensation will not be taxable in the hands of the appellants, I am satisfied it will, though I do not find it necessary to decide whether it is properly taxable as income or capital. In these circumstances I would allow the appeal and answer the first two questions in the case in the affirmative. Like the member of the tribunal, we have heard no argument on questions 3 and 4 and I would answer these questions in the negative. The appeal was allowed with costs. An application for leave to appeal to the House of Lords was refused. The decision of the Lands Tribunal given on March 22 1984 has been reissued with the addition of the following paragraph signed by the Member (Mr V G Wellings QC) and dated December 19 1988: By the direction of the Court of Appeal dated December 2 1988, I award to the Claimants in substitution for the award herein before contained the gross sum of £203,436.