Inland Revenue v Cardonald Feuing Company, Ltd
| Jurisdiction | Scotland |
| Judgment Date | 06 November 1906 |
| Docket Number | No. 8. |
| Date | 06 November 1906 |
| Court | Court of Session |
Lord Kinnear, Lord Pearson, Lord M'Laren.
RevenueIncome-TaxProfitsMethod of Estimating ProfitsFeuing CompanySale by Company of Feu-duties on land bought and built onProperty and Income-Tax Act, 1842 (5 and 6 Vict. cap. 35), sec. 100, Schedule D, First Case.
A company whose business consisted in buying and selling land and rights in land, bought a piece of vacant ground for 898, and after erecting houses upon it burdened each house with a feu-duty, the feu-duties in all amounting to 114 per annum. The company then sold the feu-duties for 3135, but retained the land and houses.
The Inland Revenue claimed income-tax on the difference between 898 and 3135 as profit earned by the company.
Held that the claim could not be sustained, in respect that the price of 3135 could not have been obtained if the ground had remained vacant, but was partly due to the erection of houses by the company.
In 1897 the Cardonald Feuing Company, Limited, was formed for the purpose of buying and selling land and rights over land and similar purposes.*
Prior to October 1903 they were proprietors of a vacant piece of ground, 7181 square yards in extent, on which they erected twenty-four houses, and afterwards disponed the houses to a nominee of their own, burdening each house with a separate feu-duty. These feu-duties together amounted to 114 per annum. The Company then sold the mid-superiority with the right to the feu-duties for 3135.
The Company applied this sum in reduction of a debt of 14,500 under a bond granted by the Company on which they had to pay 4 per cent of interest.
Immediately after the feu-duties were disposed of the houses were reconveyed to the Company.
The Company having been assessed for income-tax on the difference between the 3135 received for the mid-superiority and the cost of the vacant land before the houses were built, appealed to the Commissioners of Income-Tax. The Commissioners relieved the Company of the assessment.
M. C. Furtado, Surveyor of Taxes, Glasgow, obtained a case for the opinion of the Court of Session as the Court of Exchequer.
| The case, inter alia, set forthThe assessment for the year ending the 5th April 1905 fell to be made on the average profits of the Company for the three years ending the 31st October 1903. The assessment of 746 made for the year ending the 5th April 1905 consists of the price of the feu-duties, amounting to.. | 3135 | 0 | 0 |
| Less the estimated original cost to the Company of the ground on which the houses are built, as set forth in the Company's report and accounts for the year ended 31st October 1903,.... | 898 | 0 | 0 |
| 2237 | 0 | 0 | |
| One-third whereof is.. | 746 | 0 | 0 |
Argued for the Surveyor;The sum in question was ordinary commercial profit earned by the Company, or, in other words, income derived from trade transactions of the nature contemplated in the memorandum of association of the Company, and therefore was assessable for income-tax under Schedule D. Moreover, the profit was correctly ascertained for income-tax purposes by taking the difference between the price paid for the land (being the subject which the company was formed to deal in) and the price got for the land.1 The 86th article of association expressly provided that feu-duties, &c., payable from land belonging to or sold by the Company shall be dealt with as profits arising from the business of the Company, and should be divisible among the shareholders by way of dividend. The Company was formed to buy and sell land, and the price got for the feu-duties, though the existence of the buildings may have enhanced the price got, was a price got for the land. The houses still remained the property of the Company. The Company, accordingly, was not entitled to deduct from the price got for the land not only what they had paid for the land (which had been deducted), but also what they had spent in building houses or improving the land. The business of erecting and selling houses was a separate profit-earning business, and separately taxable from the profits made by buying and selling land. The only question was whether profit had been earned. If profit was earned, the Court had nothing to do with its destination, and, accordingly, it was irrelevant under the Income-Tax Acts that the price of the feu-duties had been applied to pay off a debt due under a bond and disposition in security over the land.2 The land having been bought to sell, and that being in the line of
the Company's business, the gain made by the Company by selling the land at a higher price than that paid for it was profits in the sense of the Income-Tax Acts,1 and the fact that in a continuing undertaking there might be an ultimate loss did not prevent the yearly profits made in the realisation from being subject to tax as ordinary income actually earned.2
Argued for the Company;The sum received for the sale of the feu-duties was not profits. The scheme of the Income-Tax Acts was to tax not receipts but profits properly so called. What had to be ascertained was the amount of the balance of profits or gains, and the word profits was to be construed in its ordinary commercial sense, i.e., there must be set against what was earned the expenditure necessary to earn it.3 The price...
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