The decision of the Court of Appeal, in Harroda (Buenos Aires) Ltd. v. Taylor-Gooby('), fully exposed the fallacy involved .in applying, without close examinatioR, the test of capacity, for the possession of which a tax may be imposed, to eve!) levy of a tax, by extending ti)e alluringly simple formula . of the Lord Chancellor, in Strong's case, to cases for which lt eould not have been meant. In Harrods' case, deduction was claimed, in computing annual profits ~f a Company, of a 'Substitute Tax' which had to be paid on the Com:)any's capital in Argentina, irres,ective of the profits made on it (ii st like the Wealth Tax before us). The Court of Appeal quoted 1assages from the opinions of the Law Lords, in Rushden Heel :o:s case (supra) and Smith's Potato Estates' case (supra), to 'how that the ratio decidendi of these two decisions confined 'he principle applied there to cases where taxes, like the Income ' 'ax and the Excess Profits Tax, had to be paid upon and after a · :alculation of profits and did not extend to other cases. In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed. the di,bursements to meet such taxes cannot be deducted. But. where the tax was levied, as it was in Harrods' case, on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.
