Edwards (HM Inspector of Taxes) v Bairstow & Harrison
| Jurisdiction | England & Wales |
| Judgment Date | 25 July 1955 |
| Date | 25 July 1955 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Purchase and sale of cotton spinning plant - Isolated transaction - Whether adventure in nature of trade.
The Respondents, who were respectively a director of a leather manufacturing company and an employee of a spinning firm, purchased a complete cotton spinning plant in 1946 with the object of selling it as quickly as possible at a profit. They hoped to sell the plant in one lot, but ultimately had to dispose of it in five separate lots over the period from November, 1946, to February, 1948. Assessments to Income Tax in respect of profits arising from this transaction were made under Case I of Schedule D for the years 1946-47 and 1947-48. On appeal, the General Commissioners found that it was an isolated case and not taxable, and discharged the assessments.
The Case was remitted by the Chancery Division to the Commissioners to hear legal argument and answer the question whether the transaction was an adventure in the nature of trade. They decided after further consideration that the transaction was not an adventure in the nature of trade.
Held, that the only reasonable conclusion on the evidence before the Commissioners was that the transaction was an adventure in the nature of trade.
Stated under Section 149 of the Income Tax Act, 1918, by the Commissioners for the General Purposes of the Income Tax for the Division of West Morley in the County of York, for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the General Purposes of the Income Tax for the Division of West Morley in the County of York, held on 14th October, 1949, at 28, Prescott Street, Halifax, Harold Bairstow and Fred Harrison (hereinafter referred to as "the Respondents") appealed
against additional first assessments for Income Tax made upon H. Bairstow in the sums of £10,326 for the year of assessment ended 5th April, 1947, and £5,000 for the year of assessment ended 5th April, 1948, in respect of profits made from sales of machinery.2. Mr. B.R. Lewis, solicitor, appearing for the Respondents, drew the Commissioners' attention to the fact that it was common ground between the parties that the assessments had been made on Mr. Harold Bairstow, who had at the time regarded himself as being solely entitled to the profits of the transaction in question. Mr. Fred Harrison had later successfully claimed a half share of those profits and it was now clear that it was a joint venture; the case was therefore to be argued, by agreement between the parties, as if the assessments had been made in the joint names of H. Bairstow and F. Harrison. Mr. H.L. Edwards, H.M. Inspector of Taxes, said he associated himself with these remarks.
3. The following facts were admitted or proved:-
(2) Mr. Harrison became aware in 1946 that a complete spinning plant was for sale at Messrs. Whitworths at Luddendenfoot and had reason to believe that the plant could be purchased for a reasonable figure. He communicated this information to Mr. Bairstow as he himself was not in a position to finance any purchase. Mr. Bairstow expressed himself to be interested, but both he and Harrison agreed that they had no intention of holding the plant; what they desired was a quick purchase and re-sale. Mr. Bairstow therefore arranged for a valuation to be made by a professional valuer in order that he might be satisfied that the price asked by Whitworths was one on which he could make a quick profit. He also immediately and before purchasing the plant made enquiries as to whether he could arrange to sell the plant even before it had been purchased. Mr. Harrison was in touch with an Indian by name Wattal who was very anxious to purchase some of the plant, namely, the botany spinning section. For this he was prepared to pay £17,000, but both Harrison and Bairstow were quite decided that they had no intention of selling the plant piecemeal; they wanted to sell it as a complete unit. Then Mr. Bairstow began negotiations with the International Export Co. They said they were prepared to buy the whole of the plant. On 14th November the International Export Co. wrote to Mr. Bairstow saying that they were prepared to buy the plant which was on the fourth floor, which was the botany spinning plant, for £15,000, this, of course, being £2,000 less than the price offered for the same section of the plant by the Indian Wattal. The reason why the International Export Co. were prepared to pay £15,000 immediately for that particular section of the plant was because although they were willing to purchase the whole of the plant it was their intention to export it, and whilst they were confident that an import licence into China would be forthcoming for the asking in respect of the botany spinning section they were not willing to complete the purchase of the remainder of the plant until the import licences for such remainder were in fact forthcoming. On 20th November Mr. Bairstow, on behalf of himself and Harrison, having negotiated the purchase of the spinning plant together with two small items of warping plant, completed the purchase by the payment to Whitworths of £12,000. On 27th November, one week later, the International Export Co. paid Mr. Bairstow the sum of £15,000 for the botany spinning plant. Subsequently Messrs. Bairstow and Harrison were informed by the International Export Co. that unfortunately the import licences relating to the remainder of the plant could not be obtained and therefore it was regretted that they could not purchase the remainder of the plant. Thus Mr. Bairstow and Mr. Harrison found themselves with the remainder of the plant on their hands (which they had endeavoured to avoid) and this left them no alternative but to sell that remainder in whatever market they could.
(3) The rest of the plant was sold in two other principal and two smaller lots by February, 1948, though owing to difficulties the last plant was not removed until March, 1949. The two smaller lots consisted of the two items of warping plant.
(4) Mr. Bairstow was a director of a company manufacturing leather. Mr. Harrison was an employee of a spinning firm. Neither of them had had any transactions in machinery or any other commodity before.
(5) The profit shown by the accounts, which form part of this Case and are annexed hereto, marked "A"(1), was £18,225 11s.3d.
(6) The Respondents' sole purpose in the transaction was to sell the plant at a profit.
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(7) With regard to the manner in which the sales were effected:-
(a) Some commissions were paid for assistance received in effecting sales.
(b) There was no advertising. Customers principally learnt of the existence of the plant for sale when they came to inspect the premises which were being advertised by the original owners as becoming vacant.
(c) About 400 spindles out of the 220,000 which the plant represented were replaced because they were missing or damaged.
(d) Insurance risks were covered by the Respondents while the plant was in their hands.
(e) Some costs for renovation were incurred because of damage by floods during their ownership.
(f) When it was seen that the transaction would not be over in a matter of weeks, wages were paid to Mr. Bairstow's secretary, who kept books and did other office jobs in connection with these transactions.
(g) The Respondents incurred expense in travelling and entertainment in meeting both the actual persons who would eventually buy the plant and others who did not in fact become customers. A number of advertisements asking for plant, which appeared in trade papers, were answered by the Respondents in an attempt to sell the plant remaining after the first main sale.
(h) Owing to the delay in removing the plant, rent was paid to the landlords for the last six months during which the plant was housed, and it is thought that a further amount will have to be paid to put the premises in order.
4. It was contended on behalf of the Respondents that this was a transaction which could not be held liable to tax under Case I of Schedule D for the following reasons:-
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(2) In the case of Leeming v. Jones, 15 T.C. 333, four conditions had been approved by the Court, one of which must be present to establish liability:-
(a) the existence of an organisation, or
(b) activities which led to the maturing of the asset to be sold, or
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(c) the existence of special skill, opportunities, in connection with the article dealt with, or
(d) the fact that the nature of the asset itself should lend itself to commercial transactions.
(3) Not one of these conditions was present in this case, for there had been no organisation or numerous sales, no work had been done on the asset, the Respondents' normal activities did not call for any special knowledge of the commodity dealt with, and the purchase and sale of plant lent itself to capital, rather than commercial, transactions.
(4) Mr. Lewis referred to three cases which had been decided in favour of the Revenue and distinguished them from that of his clients as follows:-
(a) In Martin v. Lowry, 11 T.C. 297, though there had been one purchase, there had been many sales and a trading organisation. The whole intention of his clients had been to effect one sale alone and it was incidental that this had been defeated by circumstances.
(b) In Rutledge v. Commissioners of Inland Revenue, 14 T.C. 490, it had been established that Rutledge was a man who embarked on many deals. The Respondents had never had any similar transactions.
(c) In Commissioners of Inland Revenue v. Fraser, 24 T.C. 498, the commodity dealt in-whisky-lent itself to trading transactions, as had also linen and paper, which were the commodities dealt in by Martin and Rutledge. The difference between the sale of a complete spinning plant and those commodities lay in the fact that the former could and was...
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