Absalom v Talbot (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 19 May 1944 |
| Date | 19 May 1944 |
| Court | King's Bench Division |
No. 1297-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Profits of trade - Sales of houses by builder - Part purchase price advanced by building society - Whether balance, secured by second mortgage granted by builder, to be brought in as trading receipt in year of sale.
The Appellant carried on the business of a speculative builder erecting workmen's houses for sale. In most cases the purchasers, being unable to find the whole purchase price, paid a small deposit only. The bulk of the remainder of the purchase money was advanced on first mortgage by a building society and the Appellant advanced the balance on the security of a second mortgage with the addition in some cases of a promissory note.
On appeal against assessments to Income Tax under Case I of Schedule D, the Appellant contended that the sums receivable under the second mortgages and promissory notes should be valued at their actual value at the time of the sale of the houses, and that if a valuation were impracticable the amounts assessable in any year were only the advances repaid in that year. The Special Commissioners decided that, on the granting of a second mortgage or promissory note, a trade debt due from the purchaser to the Appellant was created, the amount of which must be included as a receipt in the computation of his liability to Income Tax for the year in which the sale took place.
Held, (the Lord Chancellor and Lord Porter dissenting), that the sums receivable under the second mortgages and promissory notes should be taken into account at the time of the sale of the houses at their estimated value at that time, and not at their face value.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 5th February, 1941, F.R. Absalom (hereinafter called "the Appellant") appealed against four assessments to Income Tax in the sums of £87,000, £48,000, £24,000 and £30,000 for the years ending 5th April, 1935, to 5th April, 1938, inclusive, made upon him under the provisions of Case I of Schedule D of the Income Tax Act, 1918.
2. The Appellant carried on the business of a speculative builder during all times material to this appeal. He retired on 31st December, 1937. His business mainly consisted of erecting workmen's houses at Erith and Bexley Heath, after purchasing the land and making the necessary roads and sewers. The purchase price of the houses ranged from £395 to £750.
3. In most cases, the purchasers being unable to find for themselves the purchase price of the houses, paid a small sum down (varying between £20 and £35) and the balance was advanced on mortgage by a building society under guarantee by the Appellant of a proportion of the amount so advanced. The Appellant became dissatisfied with this method because of his liability under the guarantee to the building society. He adopted a system of granting second mortgages and in some cases accepting promissory notes in respect of the difference between the sale price of the house and an amount made up of the cash deposit and the amount advanced on first mortgage by the building society.
4. This latter method was adopted by the Appellant at all times material to this appeal and consisted of a cash deposit being paid by the purchaser of the house at the time of reservation, and a second mortgage (with or without a promissory note) being usually executed at the same time as the conveyance to the purchaser and the first mortgage to the building society.
A copy of a completion statement in the case of J. Mayhew, a conveyance and second mortgage to the same, marked "A", "B" and "C", respectively, are annexed hereto and form part of this Case, as examples(1).
A copy of a completion statement in the case of W. Hearnden, a second mortgage and promissory note, marked "D", "E" and "F", respectively, are annexed hereto and form part of this Case, as examples(1).
A summary of second mortgages and promissory notes, shewing the balance outstanding at the end of 1936, is annexed hereto, marked "G", and forms part of this Case(1).
5. The Appellant gave evidence at the hearing before us which we accepted, as follows:-
He never wrote off debts as bad until it was known that the building society had sold the house in question under its powers. Up to 1935 he had occasionally sued on the covenant in the second mortgage granted by him, but he had then given it up as useless. He had also tried debt collectors but the purchasers were not worth pursuing.
6. Copies of the Appellant's accounts for the years ending 31st December, 1933 and 1937, are annexed hereto, marked "H" and "I", respectively, and form part of this Case(1).
7. Mr. H.C. Hopkin, incorporated accountant, gave evidence at the hearing before us which we accepted, as follows:-
He had prepared the Appellant's accounts for some years past. All the accounts from 1933 up to 1936 had been prepared on identical lines. The certificate of his firm on the balance sheet for 1933 was an unqualified one. In this, second mortgages were included on the assets side of the account in sundry debtors. The figure of sales in the profit and loss account included the nominal amount of second mortgages and promissory notes. The Respondent had in every year allowed a deduction for debts (secured by second mortgages or promissory notes) proved to be bad, and the amounts of these deductions are agreed subject to the question of principle at issue. After the decision in John Cronk & Sons, Ltd. v. Harrison, 20 T.C. 612, he wished to reopen the accounts.
8. It was contended on behalf of the Appellant:-
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(a) That the sums receivable under the second mortgages or the promissory notes fell 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.
(b) That, if a valuation be found to be impracticable, then the sums received under the second mortgages or the promissory notes are assessable as trading receipts in the trading years in which they are received.
(c) That Rule 3 (i) of the Rules applicable to Cases I and II of Schedule D is a Rule applicable to normal commercial or trading transactions for cash. It never was part of the arrangement between the Appellant and a purchaser (in the type of case in question) that the Appellant was entitled to payment of the whole price at the time of sale.
(d) That the acknowledgement of receipt of the whole price in the deed of conveyance was conclusive in favour of a purchaser for value without notice, and was necessary to give a good title, but did not prevent the true facts being regarded in such a question as the present one (cf. Lord Thankerton in John Cronk & Sons, Ltd. v.Harrison, 20 T.C., at page 641).
(e) That in receiving a second mortgage the Appellant received a thing which may be of money's worth, but he did not thereby receive payment of the purchase price. Further, in respect of the promissory notes, the general principle applies that "a debtor who "gives his creditor a promissory note for the sum he owes can in no "sense be said to pay his creditor: he merely gives him a document "or voucher of debt possessing certain legal attributes"-vide Commissioner of Income Tax v.Maharajadhiraja of Darbhanga, 60 I.A. 146, at page 161, andCross v. London and Provincial Trust, Ltd., 21 T.C. 705, at pages 716/8.
(f) That the present case is concluded in principle by the decision of the House of Lords in John Cronk & Sons, Ltd. v.Harrison, and the fact that in that case the primary question lay between the builder and the building society does not differentiate it from the present case since "it is clear that as regards the balance of the "price the building society acted as the agent of the purchaser"- vide Lord Thankerton, 20 T.C., at page 641.
9. It was contended on behalf of the Respondent, the Inspector of Taxes:-
(2) That the Appellant in the course of his trade made sales on credit.
(3) That the amounts owing to the Appellant secured by second mortgages or promissory notes were trade debts, the amount of which must be brought into account except in so far as a deduction was 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.
(4) That the Appellant was claiming, in effect, an allowance for anticipated future losses to which he was not entitled.
(5) That the case of John Cronk & Sons, Ltd. v.Harrison, 20 T.C. 612, was distinguishable.
(6) That the assessments were correct in principle and should be confirmed.
10. We, the Commissioners, held that on the granting of a second mortgage or promissory note to the purchaser of the Appellant's houses a trade debt, due from the purchaser to the Appellant, was created and that in computing his liability to Income Tax it must be included. These debts, if and when proved to be bad, would be allowable as deductions in the normal manner. Reliance was placed by the Appellant on the case ofJohn Cronk & Sons, Ltd. v. Harrison, 20 T.C. 612. In our opinion in that case no debt was due from the purchaser of the houses, the question lay between the builder and the building society. In our view the present case is one of sale of houses on credit, and trade debts were created in respect of the purchase price by way of second mortgages and promissory notes.
We held that the appeal failed and we confirmed the assessments in the following figures agreed between the parties, namely:-
1934-35 |
… |
£82,896, less £176 for wear and tear. |
1935-36 |
… |
£44,521, less £230 for wear and tear. |
1936-37 |
… |
£15,490, less £167 for wear and tear. |
1937-38 |
… |
Nil. |
11. The Appellant immediately after the determination of the...
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