Absalom v Talbot
| Jurisdiction | England & Wales |
| Judge | The Lord Chancellor,Lord Atkin,Lord Thankerton,Lord Russell of Killowen,Lord Porter |
| Judgment Date | 19 May 1944 |
| Judgment citation (vLex) | [1944] UKHL J0519-1 |
| Date | 19 May 1944 |
| Court | House of Lords |
[1944] UKHL J0519-1
House of Lords
Lord Chancellor
Lord Atkin
Lord Thankerton
Lord Russell of Killowen
Lord Porter
After hearing Counsel, as well on Monday the 14th, as on Tuesday the 15th, Wednesday the 16th, Thursday the 17th, Monday the 21st, Wednesday the 23d, Thursday the 24th and Monday the 28th, days of February last, upon the Petition and Appeal of Frederick Rowland Absalom, of Oxhey Grange, Oxhey, Herts, praying, "That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal of the 20th of April 1943, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of E. G. Talbot (His Majesty's Inspector of Taxes), lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 20th day of April 1943, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Cause be and the same is hereby remitted back to the Commissioners for the Special Purposes of the Income Tax Acts with a Direction to make a valuation and to vary the assessments in accordance with the opinion expressed in this House: And it is further Ordered, That the Respondent do pay, or cause to be paid, to the said Appellant the Costs incurred by him in respect of the Appeal to the Commissioners for the Special Purposes of the Income Tax Acts on remission and in the Courts below, and also the Costs incurred by him in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the King's Bench Division of the High Court of Justice, to do therein as shall be just and consistent with this Judgment.
My Lords,
The question in this case is as to the proper method by which to compute under Schedule D, paragraph I ( a), of the Income Tax Act, 1918, the annual profits or gains arising or accruing to a speculative builder. The nature of the business to be considered is adequately illustrated by two instances annexed to the Case Stated. It is sufficient to take as example the sale by Mr. Absalom in March, 1933, of the fee simple of a house to one James Mayhew on a building estate in Kent which the Appellant was developing. The price of £425 was provided by a cash deposit of £40 made by the purchaser; by £320 paid by a Building Society which took a first mortgage from the purchaser, while the balance of £65 was provided by a loan from the Appellant to the purchaser and was secured by a second mortgage under which the borrower bound himself to pay to the Appellant the sum of £65 with interest at the rate of £5 10s. per cent. per annum by equal monthly payments of 8s. 2d., with the further provision that the mortgagee will accept payment of the principal sum and interest thereon by the said instalments as long as the instalments are punctually paid.
It is not disputed that the Appellant was carrying on a trade of which the transaction just described is an example. The question at issue is whether the profits and gains arising or accruing from such trade have been correctly calculated so far as the £65 covered by the second mortgage is concerned. The Crown contends that the amounts owing to the Appellant, secured by second mortgages or promissory notes, are debts of his trade, the amount of which must be brought into account, except in so far as a deduction is permissible in respect of bad or doubtful debts under the provisions of Rule 3 (i) of the Rules applicable to Cases I and II of Schedule D. The Appellant keeps his accounts on the basis of the calendar year, and consequently his assessment of income tax for the fiscal year ending April 5th, 1935, is based upon the figures of his trade for the calendar year 1933. The argument for the Crown is that since he sold this house in March, 1933, he must bring into his account for income tax purposes for the year 1934-5 the whole purchase price of £425, notwithstanding that £65 of it was not due and payable in 1933 and would only be paid off gradually, so that if the terms of the second mortgage were duly observed some 22 years would elapse before it was finally discharged.
The Appellant, on the other hand, contends that the sums receivable under the second mortgage fall to be valued at the time of the sale of the houses at their actual value at that time and not at their face value. A second contention urged on behalf of the Appellant went further, and urged that such part of the price as was not paid or payable within the year 1933 ought not to be included on the profit side of the account for that year at all, but would fall to be included in the later year or years in which they were paid or became payable. It was, of course, a corollary of this last proposition that there should be included in the calculation of profits and gains for the year 1933 instalments paid or due to be paid in the course of that year in connection with the sales of houses previous to that year.
The Case Stated includes the information that the Appellant retired from his business of a speculative builder on December 31st, 1937. It is easy, therefore, to see the importance to him of securing a decision that what remained to be paid to him after that date does not properly come within the calculation of income tax on his business profits. But there remains to be decided the question as to what is the right mode of estimating the annual profits of his trade.
I have come to the conclusion that neither of the contentions put forward on behalf of the Appellant ought to succeed. When a trader in the course of his trade makes a sale to a purchaser, whether the subject matter of the sale be a house or any other asset in which he deals, his accounts for the year in which the transaction takes place should for income-tax purposes normally include on the one side the cost of providing the asset with which he has parted to the purchaser and, on the other side, the price for the asset which the purchaser has paid or bound himself to pay. The figure to be entered on the credit side is ordinarily the full price and its face value. If at the end of the year the taxpayer can satisfy the Commissioners that such portion of the debt as has not actually been paid is a bad or doubtful debt, an adjustment under Rule 3 (i) of the Rules applicable to Cases I and II may be obtained, though presumably this sort of adjustment is more likely to arise at a later stage. But from the point of view of the trader the relevant time is the time when he parts with his asset to the purchaser, and if the accounts are to set out correctly his profits and gains, the whole consideration must be brought in at that stage, notwithstanding that a portion of it will not be payable until later, while carrying interest in the meantime. If the transaction took the unusual form of a sale in return for a payment, in whole or in part, of a lump sum in the future, with no interest in the meantime, I should be quite prepared to agree that the debt representing the true price required to be arrived at by taking the present value of the lump sum which is payable in futuro. But when the unpaid lump sum (as is usually the case) carries a commercial rate of interest until payment, it is the lump sum itself which enters into the calculation of the price. The decision of this House in Cronk's case [1937] A.C. 185 is distinguishable: in that case there was no question of debt due from the purchaser of the house, and the issue lay between the builder and the building society.
This is, I believe, the recognised practice of accountants in dealing with returns for income tax, and is the method for which the Crown contends. It corresponds to the business sense of the transaction. The Appellant here in the course of selling the house becomes entitled to £65 which will be due to be paid him in the future. In the meantime, he is charging his debtor interest and holds security. The position is, therefore, indistinguishable in a business sense from what it would be if the purchaser had paid him the £65 down and he had then lent the £65 back again to the purchaser on second mortgage at a suitable rate of interest. So analysed the transaction is obviously one in which the £65 should be treated as coming into the profit side of his account at the time of the sale of the house, while the interest paid on it will, of course, be liable to tax on each occasion that it is received.
As this appeal has been very fully and ably argued on both sides, I do not wish to leave it without making an observation on Rule 3, paragraph (i), which provides that, in computing the amount of the profits and gains to be charged, no sum shall be deducted in respect of "any debt except bad debts proved to be such to the satisfaction of the Commissioners and doubtful debts to the extent that they are respectively estimated to be bad." It is clear from the words used in the beginning of the Rule that it is concerned with prohibiting various claims for deduction from profits and has nothing to do directly with declaring what are profits. Yet I cannot help suspecting that it must be sometimes rather hastily read as though it amounted to an assertion that trade debts are profits. The true view is that in cases like the present, profits (or losses) so far as due to the particular transaction,...
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