Jacgilden (Weston Hall) Ltd v Castle (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 14 July 1969 |
| Date | 14 July 1969 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Profits tax - Profits of trade - Property acquired commercially at under-value - Conveyed by vendors to company owned by purchaser - Price paid by company - Property resold - Whether purchase price or market value deductible in arriving at profit on resale.
The Appellant Company was formed in May 1959 by R with the objects of a property investment company and went into voluntary liquidation in June 1960. The share capital belonged to R and his wife. The Company engaged in no business activity other than the purchase and sale of the property hereinafter mentioned, which were found by the Special Commissioners to be trading transactions. In March 1959, with a view to erecting flats on the site, R had agreed to purchase an hotel, together with an adjoining property, for £88,000, completion to take place on 29th September. He paid a deposit of £8,800, of which £7,000 was agreed between R and the Company to be attributable to the hotel. On 29th September 1959 he authorised the vendors to convey the hotel to the Company for £72,000, and the Company paid the balance of the purchase price, £65,000, by means of an overdraft from its bankers. Before the completion date R had decided that the market for new flats was likely to become glutted and was trying to resell the property. The site, which had been cleared in the meantime, was eventually sold by the Company in February 1960 for £155,000.
On appeal against assessments to income tax under Case I of Schedule D for the year 1959-60 and profits tax for the chargeable accounting periods of ten months to 31st March 1960 and two months to 30th May 1960 in respect of the profit on the sale, the Company contended (inter alia) that the market value of the property when acquired by the Company was £150,000, and that having received as a gift from R the contract, with a market value of £78,000, to buy the property, it had appropriated that £78,000 to a trading purpose and was entitled to debit it in an account for the purpose of arriving at the profit to be assessed. The Special Commissioners found that on 29th September 1959 the Company acquired the right to obtain for £72,000 a conveyance of property then worth £150,000, and that it was a commercial acquisition from the outset. They held that the Company was entitled to deduct the cost to it of the freehold (£72,000) and no more.
Held, that the Commissioners' conclusion was justified.
(1) Jacgilden (Weston Hall) Ltd. v. Castle (H.M. Inspector of Taxes)
CASE
Stated under the Income Tax Act 1952, s. 64, 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 15th and 16th November 1967 Jacgilden (Weston Hall) Ltd. (hereinafter called "the Company") appealed against an assessment to income tax under Case I of Schedule D for 1959-60 in the sum of £70,000.
2. The questions for our determination were (1) whether the Company engaged in trade in the acquisition and sale of a property in Bournemouth, and (2) if so, how the profits therefrom should be computed.
(2) The following gave evidence at the hearing of the appeal: Mr. F. G. Rowe J.P., a director of and principal shareholder in the Company; Mr. D. C. Herring, partner in Messrs. Rumsey & Rumsey, estate agents, of Bournemouth; Mr. H. Payne, chartered accountant, the liquidator of the Company.
(3) The following documents were admitted or proved; such of them as are not annexed hereto and marked as exhibits(1) are available for inspection by the Court if required.
Contract dated 31st March 1959 for the purchase of Weston Hall and Durley Gardens.
Outline planning permission dated 3rd March 1959 for erection of flats on Weston Hall site.
Bundle of correspondence (exhibit 1).
Memorandum and articles of association of the Company.
Letter dated 29th September 1959 from Mr. Rowe to the vendors of Weston Hall (exhibit 2).
Conveyance and assignment of Weston Hall to the Company dated 30th September 1959.
Contract for sale of Weston Hall by the Company dated 11th February 1960 (exhibit 3).
Account of the purchase and sale of Weston Hall and Durley Gardens.
Account of the purchase and sale of Weston Hall.
A copy of the Company's account with the National Provincial Bank Ltd.
Correspondence with the Inspector of Taxes.
Statement of account by the Company's liquidator (exhibit 4).
3. From the evidence, oral and documentary, we found the facts set out in paras. 4 to 11 below.
4. Mr. Rowe is a man with a wide knowledge of buildings and properties in Bournemouth and Poole. He has interests in Cooper & Rowe (Contractors) Ltd. (hereinafter called "Cooper & Rowe"), and also has interests in other building and property investment companies; he is a Justice of the Peace and at the time the appeal was heard was Mayor of Poole. Cooper & Rowe undertook large building contracts in Bournemouth and Poole, and in consequence Mr. Rowe was on familiar terms with estate agents in those towns.
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(2) In the summer of 1958 Messrs. Rumsey & Rumsey, estate agents in Bournemouth, made enquiries from the owners of Weston Hall Hotel, a large hotel on a prominent site in Bournemouth, and ascertained that they were
willing to sell. On 4th November 1958 Mr. Crockford (a partner in Rumsey & Rumsey) wrote to Mr. Rowe drawing his attention to the Weston Hall site as suitable for development for 150 to 200 flats, and asking whether he was interested (folio 4 of exhibit 1). (3) Mr. Rowe was interested in the site of the hotel; the owners wished to sell it together with an adjoining property (Durley Gardens) in which he was not interested, but which he considered he could sell off easily if he should purchase the whole. His plan at that time was to erect on the site about 150 medium-priced flats; Cooper & Rowe would contract for the building; temporary finance could be obtained from the bank, and when the flats were built 99-year leases would be granted at premiums, and the ground rents retained. He contemplated forming a property investment company, which would acquire the site and eventually hold the ground rents as a long term investment. In the event, it never became necessary to decide what arrangement should be made for the development of the site and what part the company to be formed should play in them. He estimated the cost of building at about £500,000. Accordingly he instituted negotiations for purchase, and on 31st March 1959 he entered a contract to buy Weston Hall and Durley Gardens for £88,000, completion to be on 29th September 1959 (as the vendors were committed to keeping the hotel open through the summer). Mr. Rowe paid the deposit of £8,800.
(4) Prior to the date of the contract of sale the vendors had obtained outline planning permission (granted on 3rd March 1959) for the erection of 144 flats. Mr. Rowe did not like these plans, and early in April 1959 he instructed architects to prepare other plans for submission to the planning authority; he wanted at least 150 flats, but, owing to the authority's requirements concerning car parking, it seemed likely that it would not be practicable to erect more than 140. There were many discussions with the planning officers over this, but Mr. Rowe did not get so far as presenting final plans for approval.
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(5) Mr. Rowe caused the Company to be incorporated on 28th May 1959, with the objects of a property investment company and a capital of £100, in 100 £1 shares, of which 55 were held by Mr. Rowe and 45 by his wife. As Mr. Rowe intended to resell Durley Gardens and the hotel fixtures and fittings immediately after completion (which he did), it was contemplated that the Company would take a conveyance only of Weston Hall. On 29th September Mr. Rowe formally authorised the vendors to convey to the Company, and Weston Hall was duly conveyed to the Company on completion, at a price of £72,000 (being £22,000 for the freehold and £50,000 for the residue of a leasehold interest), and in the account finally struck between Mr. Rowe and the Company Mr. Rowe was regarded as having paid £7,000 (out of the £8,800 deposit) as a deposit on Weston Hall. There was no evidence that the Company acquired any interest in the contract of sale prior to 29th September 1959.
(2) At some time after contracting to buy Weston Hall Mr. Rowe began to feel doubtful about his project of developing the site, as he began to form the view that there would be a slump in the demand for flats in Bournemouth, and to entertain the idea of selling the site to another developer. We do not know exactly when his mind began to fluctuate, or when his decision to sell crystallised.
(3) Although Mr. Rowe formed the view that the market for new flats was, or was likely to become, glutted, the market for flat sites was high throughout 1959.
(4) He knew that planning permissions for flats were being granted more readily, and saw that nearly completed flats were not being snapped up. Although his change of mind was not caused by any financial squeeze, he had come to realise that he had an asset worth more than he had thought, and saw the advantage of getting out while he was still liquid.
(5) By the end of September, when the Company acquired the property, there was very little, if any, likelihood of the Company retaining the land and building on it, and Mr. Rowe and (from that time onwards) the Company were trying to sell it. We find from the bundle of correspondence (exhibit 1(1) ) that by 8th July 1959 Rumsey & Rumsey on Mr. Rowe's instructions were trying to interest Messrs Basil Gordon Ltd. in the property; Mr. Rowe had previously asked Rumsey & Rumsey to find out what people were prepared to pay, and they had made tentative enquiries from...
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