B. G. Utting & Company, Ltd v Hughes (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 12 March 1940 |
| Date | 12 March 1940 |
| Court | King's Bench Division |
No. 1133-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Profits of trade - Builders - Houses disposed of by way of lease, subject to payment of premium and yearly ground rent - Whether premiums and ground rents to be included in trading receipts and, in the case of the ground rents, whether at cost or realizable value.
The Appellant Company carried on the business of speculative builders. In a number of cases it disposed of houses by granting, in consideration of a premium, a lease for 99 years subject to the payment of a yearly ground rent. Since its formation the Company had not sold any ground rent so created.
On appeal against assessments to Income Tax under Case I of Schedule D the Company contended that in computing its trading profits for Income Tax purposes nothing fell to be included in respect of the premiums or the right to the ground rents, and, alternatively as regards the ground rents, that no profit arose in respect of the value of its reversionary interest in the lands or of the ground rents until the sale thereof. The Special Commissioners decided that both the amount of the premiums and the realizable value of the ground rents at the date of sale of the houses must be brought in as receipts of the Company's trade.
Held, that the Special Commissioners' decision was correct in regard to the treatment of the premiums, but that the unrealized freehold reversions (the "ground rents") must be brought into the trading account at cost or market value, whichever was the less.
John Emery & Sons v. Commissioners of Inland Revenue, 20 T.C. 213, distinguished.
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 6th January, 1938, B. G. Utting & Co., Ltd. (hereinafter called "the Company"), appealed against assessments to Income Tax for the years ending 5th April, 1936 and 1937, made under Case I of Schedule D of the Income Tax Act, 1918.
2. The Company, which was incorporated under the Companies Act, 1929, on 11th March, 1935, carries on the business of builders, contractors and developers of building estates.
A copy of the Memorandum and Articles of Association of the Company is attached hereto (marked "A") and forms part of this Case(1).
3. The Company owns two estates, one at Norbury and one at Hither Green. In the course of its trade the Company has developed these estates by making roads and laying down sewers and drains, and on the said lands has erected houses.
4. In a number of cases the Company sells land with the houses thereon freehold for cash, and in these cases the purchase price received by the Company is brought into the Company's accounts as a trading receipt, while the cost of the land and buildings is set against it as a trading expense.
In other cases the Company disposes of houses by way of 99 years' leases in consideration of a cash payment and subject to a yearly ground rent of either £9 15s. 0d. or £10 10s.0d. In these cases the said cash payment is brought into the Company's accounts as a trading receipt and the ground rent is brought into those accounts at a figure assumed to represent the cost thereof as stated in paragraph 6 hereof, and the cost of the land and buildings is debited as a trading expense.
Whichever method is adopted the transaction is a transaction in the ordinary course of the Company's trading.
During the period 1st July, 1935, to 31st December, 1936, the Company disposed of properties by way of freehold sales in about twenty cases and granted leases for 99 years, subject to ground rents, in respect of nine houses.
The Company has not since its formation sold any ground rents, but has always retained its reversionary estate in those houses in respect of which the ground rents are payable.
5. The method adopted by the Company for the disposal of houses by way of 99 years' leases subject to ground rents is as follows:-
An agreement is entered into by the Company with the purchaser whereby the Company agrees to sell and the purchaser agrees to purchase by way of lease, for a named sum, a specified plot of land with the house erected or to be erected thereon. On payment of the purchase money a lease for 99 years, subject to a ground rent of £-, is granted by the Company to the purchaser.
Specimen copies of the agreement for sale and the lease for 99 years are attached hereto (marked "B", and "C") and form part of this Case(1).
The lease, though actually executed by B. G. Utting personally, was executed by him as nominee of the Company, who were throughout the beneficial owners of the two estates and the rents arising under the leases thereof(2).
The said agreements and leases are in similar form for both the Hither Green and Norbury estates.
6. A copy of the Company's Balance Sheet as at 31st December, 1936, and Trading and Profit and Loss Account for the period 1st July, 1935, to 31st December, 1936, is attached hereto (marked "D") and forms part of this Case(1).
Among the assets in the Balance Sheet appears an entry:-
Materials on site, premises in course of |
|||
erection, completed and unsold, un- |
|||
developed land and ground rents created |
|||
and unsold |
£46,882 |
2s. |
8d. |
The said sum of £46,882 2s. 8d. is made up as follows:-
£ |
s. |
d. |
|
Ground rents created and in hand at cost |
1374 |
0 |
0 |
Undeveloped land |
36,035 |
2 |
8 |
Materials on site |
9,473 |
0 |
0 |
£46,882 |
2 |
8 |
The said sum of £1,374 was arrived at by taking a proportionate part of the cost of the land and of the expenditure on roads and sewers. No part of the expenditure upon the building was taken into consideration.
In the Trading and Profit and Loss Account the entry, sales of premises £25,005 11s. 8d. includes sums received for sales of freeholds and the cash payments made prior to the grant of the leases for 99 years.
7. Mr. Ernest William Watts, a member of the firm of Messrs. Bourner, Bullock, Andrew & Co., Chartered Accountants and Auditors to the Company, gave evidence before us and stated (inter alia) as follows:-
(a) During the period 1st July, 1935, to 31st December, 1936, the Company had sold about twenty houses freehold and granted 99 years' leases, subject to ground rents, in respect of nine.
(b) The sums received by the Company from the freehold sales and the premiums received on the grant of 99 years' leases were included in the Company's trading account as receipts from sales of premises.
(c) He regarded ground rents as stock in hand, and as such they were correctly entered in the accounts at cost price.
(d) The Company had not sold any ground rents and he was of opinion that until they did sell the ground rent no profit was realized in respect thereof, and it would not be correct to bring the value into account at a sum in excess of the cost.
(e) The Company had not sold any land without a house erected upon it.
(f) Ground rents were readily saleable and their realizable value could be readily ascertained.
8. Mr. Francis Laurence Cooke, a member of the firm of Messrs. Slater Chapman & Co., Incorporated Accountants, consulting Accountants to the House Builders' Association of Great Britain, also gave evidence. He said that in his opinion it would not be correct to take credit in the Company's accounts for any profit in respect of the creation of the ground rents until the sale of the reversionary estate, when the transaction initiated by the original purchase of the land would be completed.
9. In computing the profits of the Company under Case I of Schedule D a sum of £2,139 has been included by the Revenue as a trading receipt in respect of the realizable value of the said ground rents.
The sum of £2,139 was computed as follows:-
Ground rents £93 at 23 years' purchase-£2,139.
The Company did not agree that this valuation was correct and no evidence on the matter was called before us, it being agreed that, if necessary, the case should be brought before us at a later date to take evidence on the question.
10. It was contended on behalf of the Company:-
(a) That both the premiums received on the granting of the leases and the ground rents reserved are profits arising to the Company from the ownership of the land in respect of which the Company was taxable only under Schedule A. In support of this contention the cases ofSalisbury House Estate, Ltd. v. Fry, [1930] A.C. 432, 15 T.C. 266, and Birch v. Delaney, [1936] I.R. 517, were referred to.
(b) That the case of John Emery & Sons v. Commissioners of Inland Revenue, [1937] A.C. 91, 20 T.C. 213, is distinguishable on the ground that in that case the builders had disposed of their entire interest in the land for money's worth.
(c) That the right to the ground rents is inseparable from the Company's reversionary estate in the lands subject to the leases, and in computing the Company's profits for assessment to Income Tax under Schedule D no addition falls to be made in respect of such right.
(d) Alternatively, that if the value of the reversionary estate retained by the Company or of the right to receive the ground rents falls to be included in the computation of the profits of the Company's trade for the purposes of Schedule D no profit arises to the Company in respect of the value of such reversion or ground rents until the sale thereof, and that until the reversion is realized such value falls to be brought into account only at cost or at market value if that is less than cost.
11. It was contended on behalf of the Inspector of Taxes (inter alia) that:-
(a) The Company in the course of its trading had sold houses and land on 99 years' leases in each case for a cash payment and money's worth,i.e., the right to receive a ground rent.
(b) The said cash payments...
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