Bath and West Counties Property Trust Ltd v Thomas (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 28 July 1977 |
| Date | 28 July 1977 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income Tax, Schedule D - Land - Right of pre-emption - Purchase and sale at a profit - Adventure in the nature of trade - Assessment under Case VII - Whether assessment to be confirmed by reference to Case I - Whether value of right of pre-emption allowable deduction in computing profits of adventure - Finance Act 1962, s 10(1) -Income Tax Act 1952, ss 64(6) and 514 - Taxes Management Act 1970, ss 56(6) and 114.
The taxpayer Company sold certain land in 1939 and 1940 to the War Department for use as an ordnance depot, subject to a right to repurchase at its then market price if and when it ceased to be required for the purposes of that or any other Government Department. In December 1961 the War Department informed the Company that the land was no longer required by any Government Department, and the Company thereupon exercised its rights of pre-emption. After negotiations a price of £42,000 was agreed, and completion took place in October 1962. Meanwhile the Company had solicited and accepted an offer from a brewery to purchase the land for £115,000 and completion of this sale took place in November 1962. The directors of the Company had at all times considered that the rights of pre-emption under the 1939 and 1940 conveyances were valuable assets.
In February 1969, in the absence of the Company's accounts for the year in question, the Inspector made an assessment under Case VII of Schedule D (described as "short term gains") in the estimated sum of £80,000 and the Company appealed. Shortly before the appeal was heard by the Special Commissioners in May 1975 the Company disclosed further evidence following which it was agreed by the Crown that the purchase and sale of the land in 1962 amounted to an adventure in the nature of trade, so that the profits of the adventure were excluded from the charge to short term gains tax under Case VII of Schedule D by virtue of the proviso to s 10(1), Finance Act 1962.
Accordingly the questions for the Special Commissioners were: (i) whether the assessment could be upheld by reference to Case I of Schedule D, and if so, (ii) whether any deduction in computing the profits of the trade fell to be allowed in respect of the value of the rights of pre-emption. The Commissioners decided both questions against the Company.
On the Company's appeal to the High Court it was contended by the Crown, first, that an assessment containing a mistake was to be regarded as corrected under s 514(2) and (3), Income Tax Act 1952, where the assessment was "in substance and effect in conformity with or according to the intent and meaning of" that Act and "the person or property intended to be charged… thereby is designated therein according to common intent and understanding"; and that such a mistake had occurred in the present case. Further, the Crown contended that in any event the Commissioners were empowered to uphold the assessment by reference to Case I of Schedule D. Secondly, it was contended by the Crown that the trading adventure had begun with the purchase of the land by the Company in 1962, so that the value of the rights of preemption were to be left out of account in computing the profits of the adventure.
Held, (1) that there had been no mistake in the assessment, as the Inspector had made the assessment he had intended to make, and further that the words "common intent and understanding" in s 514(2), Income Tax Act 1952, refer to an objective understanding of persons skilled in tax law and not the subjective understanding of the two parties, so that s 514 did not assist the Crown; nevertheless, that where the Crown has selected the wrong Case of a Schedule in making an assessment the Court has a discretion to deal with it on the basis of the Case under which it should have been made, and that in the present case such a discretion should be exercised in the Crown's favour since, no doubt unwittingly, the Company had seriously misled the Inspector in not supplying all the relevant facts;
(2) that the trading adventure did not start with the purchase of the land by the Company, since at that time it had valuable rights, the rights of pre-emption, while at the end of the transaction it had lost them without being credited for them by the Crown for tax purposes; hence, that for the purpose of computing the profits of the adventure the cost of acquiring the land was the actual price paid to the War Department (£42,000), plus the value of the rights of pre-emption. Accordingly the case would be remitted to the Special Commissioners for the purpose of establishing the value of the rights of pre-emption.
Stated under the Taxes Management Act 1970, s 56, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 15 and 16 May 1975 and on 21 January 1976 Bath and West Counties Property Trust Ltd. (hereinafter called "the Appellant") appealed against an assessment made upon it to income tax, Schedule D, for 1962-63, in an amount of £80,000.
2. The questions for our decision are set out in para 5(7) hereof.
3. The following witnesses gave evidence before us: Mr. J.S. Nixon, a partner in Messrs. Gilbert Robertson & Co., solicitors; Mr. C.W. Hutchinson, senior partner in Messrs. Gerald Eve and Co., chartered surveyors, and Mr. D.N. Wade, also a partner in Messrs. Gerald Eve and Co.
4. The following documents were proved or admitted before us:
(i) A conveyance by the Appellant to H.M. Secretary of State for War of certain lands at Marshfield dated 30 August 1939 (exhibit 1).
(ii) A conveyance by the Appellant to H.M. Secretary of State for War of further lands at Marshfield dated 20 August 1940.
(iii) Three conveyances of parcels of land at Marshfield to H.M. Secretary of State for War dated 31 August 1939, 13 March 1940 and 2 May 1940 by a Mrs. Williams, a Lt. Col. Davies and the Commissioners for Church Temporalities in Wales respectively.
(iv) Letters passing between the Appellant or its agents and the War Office dated 20 June, 13 July, 17 July, 24 July and 25 July 1962 (exhibit 2).
(v) Two letters passing between Messrs. Gerald Eve & Co. and Lloyds (Newport) Ltd. dated 26 and 27 July 1962 (exhibit 3).
(vi) An agreement dated 4 August 1962 between the Appellant and Lloyds (Newport) Ltd.
(vii) A letter dated 2 October 1962 from the solicitors for Lloyds (Newport) Ltd. to the Appellant's solicitors (exhibit 4).
(viii) A conveyance dated 4 October 1962 of land by the War Department to the Appellant.
(ix) A conveyance dated 30 November 1962 by the Appellant to Lloyds (Newport) Ltd.
(x) A bundle of correspondence between the Inspector of Taxes and the Appellant's accountants and solicitors.
(xi) Copy of a note of a meeting in October 1962 between the Appellant's accountant and the Inspector of Taxes.
(xii) Accounts of the Appellant for the year ended 31 March 1963, dated 12 September 1969.
(xiii) A copy of the notice of the assessment under appeal, dated 17 February 1969 (exhibit 5).
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. As a result of the evidence both oral and documentary adduced before us we find the following facts proved or admitted:
(2) In August 1939 the Appellant sold certain parcels of land at Marshfield in Monmouthshire to the War Department. The deed of conveyance (exhibit 1) contained, in clause 2 thereof, provisions to the effect that if the land ceased to be required for the purposes of the War Department or any other Government Department, the Appellant should have the option of repurchasing it on certain specified terms and conditions, and it provided that the decision of the War Department as to whether the land was required for such purposes should be final and conclusive. On the land ceasing to be required as aforesaid the War Department was to make an offer to the Appellant in writing to sell, in its then existing state, at its then market price; if the Appellant failed to accept within three months the War Department might dispose of the land as it wished. In August 1940 the Appellant sold further land adjoining to the War Department by a conveyance incorporating an identical option. In the course of 1939 and 1940 the War Department purchased from three separate vendors three further parcels of land adjoining; the deeds of conveyance did not provide any option to repurchase in any of these three cases. All the land so acquired by the War Department comprised one solid area, and the War Department constructed on the major part thereof buildings and bunkers for the storage of ammunition. It comprised in all 511/2 acres, of which just under 43 acres had been bought from the Appellant subject to the option to repurchase.
(3) At the times relevant to the transactions hereafter mentioned the majority shareholder and managing director of the Appellant was Mr. Gwyn Davies, who was advised in relation to landed property matters by Messrs. Gerald Eve and Co., chartered surveyors, in the person of Mr. Hutchinson. Early in 1960 Mr. Gwyn Davies and Mr. Hutchinson had discussions concerning the land in question and the Appellant's rights of pre-emption. Mr. Hutchinson, having become aware that the staff of the ammunition depot was being run down, wrote, at the Appellant's request, to the War Department in September 1960 asking whether the Appellant could repurchase. He received a non-committal reply but the Appellant considered it had a valuable right in the shape of the option and hoped to repurchase the land and sell it on at a profit. In December 1961 the War Department informed Mr. Hutchinson that it was ready to proceed with a sale of the land and appointed a Mr. Silkstone-a very experienced land...
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