## Facts

- Glenboig Union Fireclay Co Ltd owned mineral rights that were effectively sterilised when a railway company acquired land to prevent subsidence, making extraction impossible.
- The company received compensation for being unable to use these minerals, while legal ownership remained unchanged.
- The compensation related to the permanent inability to use the minerals, thereby reducing the capital value of the company.
- The issue before the court was the tax treatment of this compensation.

## Issues

1. Whether compensation received for the permanent sterilisation of a capital asset should be treated as a capital receipt or as income for tax purposes.
2. How to distinguish between compensation for the loss of profits (income) and compensation for loss or sterilisation of a capital asset (capital).
3. Whether the compensation substituted one capital asset for another, affecting the capital structure of the business.

## Decision

- The court held that compensation for the permanent loss or sterilisation of a capital asset, such as mineral rights, is a capital receipt and not taxable as income.
- It was determined that the compensation replaced one capital asset (the minerals) with another (money).
- The court clarified that if the compensation had instead been for lost profits, it would be classified as an income receipt and taxable.
- The judgment established a clear standard for separating capital from income receipts, influencing subsequent tax law decisions.

## Legal Principles

- Compensation for the permanent sterilisation or loss of a capital asset constitutes a capital receipt, not taxable as income.
- The distinction between capital and income receipts depends on whether the receipt is a substitute for a capital asset or for trading profits.
- The principle applies not only to tangible assets but, as later cases show, to intangible assets forming part of a company’s capital structure.
- Subsequent cases, such as Burmah Steam Ship Co Ltd v IRC and Van den Berghs Ltd v Clark, confirmed and extended this differentiation, particularly emphasising the need to separate permanent loss of assets from loss of profits or temporary business interruptions.

## Conclusion

The decision in Glenboig Union Fireclay Co Ltd v IRC established that compensation for permanent asset sterilisation is treated as a capital receipt, not taxable as income, providing an important distinction in tax law for handling compensation related to asset loss or compulsory purchase.

Glenboig Union Fireclay Co Ltd v IRC (1922) 12 TC 427