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Business Income Manual

Measuring the profits (particular trades): Mineral extraction: Coltness Iron Company v Black [1881] 1TC287

The original point in this case was whether the cost of sinking new pits was an allowable revenue deduction (see BIM62010).

The company carried on the trade of coal and iron masters. It had opened up several mineral fields and sank new pits as the old pits became exhausted. The company claimed that the cost of sinking the pits was a revenue cost of winning the minerals and not an investment of capital.

The General Commissioners (predecessors of the First-Tier Tribunal) and the Court of Appeal held that the expenditure of sinking the pits was capital expenditure and not allowable.

The House of Lords remitted the case to the General Commissioners for further facts to be found. The General Commissioners found that the sum claimed as a deduction was not the actual cost of sinking the pits, but an estimate of the capital expended on pits during the accounting period. This was calculated by reference to the amount of coal sold in the year.

The company then accepted that the cost of sinking the pits was capital and argued that a deduction was allowable for capital expended and exhausted in the course of the company’s trade.

Held, that the deduction was capital and, accordingly, not allowable for tax purposes.

Earl Cairns noted that:

‘… as now explained, can a mine owner write off and deduct from the gross earnings of his mine in a particular year a sum to represent that year’s depreciation of all the pits in the mine whenever sunk. I am clearly of the opinion that this cannot be done.’