James v Pope (HM Inspector of Taxes)

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date29 March 1972
Date29 March 1972

HIGH COURT OF JUSTICE (CHANCERY DIVISION)-

James
and
Pope (H.M. Inspector of Taxes)

Income tax, Schedules D and E - Back duty - Fraud or wilful default - Unexplained increases of capital - Whether prima facie case of wilful default - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 47(1) proviso.

The Appellant carried on an ironmongery business for many years until 31st October 1956, when it was transferred to a family company of which he was a director until 1961. In 1965 on his instructions his then accountant informed the Inspector of Taxes that the profits of the business might have been understated. Capital statements prepared with the co-operation of another accountant appointed by the Appellant in 1966 showed that in the years 1946-47 to 1960-61 he had received a total of some £14,000 the source of which had not been explained. The Appellant had had a minor stroke in 1964, and his physical and mental condition rendered him unfit to attend an appeal meeting. Both accountants stated that they had found him most co-operative but that owing to ill-health he had difficulty in recollecting past events.

On appeal against assessments made out of time under Schedule D for the years 1946-47 to 1956-57 in respect of his ironmongery profits and under Schedule E for the years 1956-57 to 1960-61 in respect of his remuneration from the company, the Appellant contended, inter alia, that the onus of establishing fraud or wilful default for each year of assessment was on the Revenue and had not been discharged, and that there was no evidence that the amounts in question represented taxable income or, so far as assessed under Schedule E, had been voted to him by the company as remuneration. The General Commissioners found that there had been wilful default on the part of the Appellant for each of the years in question.

Held, (1) that in the circumstances no inference could be drawn from the failure of the taxpayer's recollection after 1964, but subject to that the case had to be decided on the evidence as it stood at the time of the decision;

(2) that the Commissioners' decision was justified.

CASE

Stated under the Taxes Management Act 1970, s. 56, by the Commissioners for the General Purposes of the Income Tax for the Division of Kemes in the County of Pembroke for the opinion of the High Court of Justice.

1. At a meeting of the Commissioners for the General Purposes of the Income Tax acting in and for the Division of Kemes in the County of Pembroke held at the Guildhall, Cardigan, on 6th, 7th and 8th May 1970, William Herbert James (hereinafter called "the Appellant"), of Highbury, 41 Mags Barrow, West Parley, Ferndown, Dorset, appealed against the following additional assessments to income tax made upon him under Schedule D of the Income Tax Acts:

Year of

Profit as

assessment

ironmonger

£

1946-47

5000

1947-48

5000

1948-49

5000

1949-50

5000

1950-51

5000

1951-52

5000

1952-53

5000

1953-54

5000

1954-55

5000

1955-56

5000

1956-57

5000

And against the following assessments to income tax made upon him under Schedule E of the Income Tax Acts:

Year of

assessment

Remuneration

1956-57

£500

1957-58

£1,000

1958-59

£1,000

1959-60

£1,000

1960-61

£1,000

2. The questions for our determination were as follows:

  1. (i) Whether certain moneys amounting to £14,869 or any part thereof were (so far as the Schedule D assessments were concerned) profits or gains of the Appellant's trade of ironmonger or (so far as the Schedule E assessments were concerned) remuneration arising to the Appellant as director of a company known as W.H. James & Son Ltd.;

  2. (ii) whether any form of fraud or wilful default had been committed by or on behalf of the Appellant within the meaning of the proviso to s. 47 (1) of the Income Tax Act 1952 or alternatively (in relation to the assessments under Schedule E) whether he had been guilty of neglect within the meaning of s. 51 of the Finance Act 1960.

3. The Appellant did not attend the hearing but was represented by Mr. Graham Aaronson of Counsel. Evidence was put before us (which we accepted) that the Appellant's physical and mental condition rendered him unfit to attend.

  1. (i) Apart from the medical evidence the following persons gave evidence before us: Mr. T.S. Wilson F.C.A. ("Mr. Wilson"), a partner in Peat, Marwick, Mitchell & Co., chartered accountants; Mr. M.J. Burridge A.C.A. ("Mr. Burridge"), of Wheatley, Pearce & Co., chartered accountants; Mr. V. K. Robinson, a Senior Inspector of Taxes in the Inland Revenue Enquiry Branch.

  2. (ii) Seven bundles of documents marked A-F and H were also exhibited before us as follows:

A -General correspondence;

B -Accounts and related correspondence;

C -Returns of income and correspondence;

D -Messrs. Wheatley, Pearce & Co.'s report of 1st October 1968 and associated documents;

E -Capital statements;

F -Bank documents;

H -Loan account between the Appellant and W.H. James & Son Ltd.

Such of the documents as are not attached to this Case are available for inspection by the Court.

5. We accepted as proved the following evidence given by Mr. V.K. Robinson:

  1. (i) The Appellant had for many years carried on his own ironmongery business at Crymmych, Pembrokeshire, until 31st October 1956, when a family company called W.H. James & Son Ltd. ("the company") was formed, in which the Appellant was a director and the holder of 6000 out of 15,000 shares issued by the company, the other shareholders being his wife, son and daughter.

  2. (ii) At all material times until March 1966 the accounts, first of the business and later of the company, were prepared by Mr. Wilson. Mr. Wilson had acted first on his own account and then as a partner in a firm which was subsequently amalgamated with his present firm. After March 1966 Mr. Burridge dealt with the Appellant's tax affairs.

  3. (iii) In 1951 and 1953, at the request of the Revenue, the Appellant certified to the Revenue that no part of his business receipts for the three years to 31st August 1949 had been diverted to any private bank accounts, either of himself, his wife or his children, which had not been disclosed to Mr. Wilson, his accountant.

  4. (iv) In June 1953, at the request of the Revenue, the Appellant certified to the Revenue that he had provided the Revenue with a list of all banking accounts in the name of himself, his wife or his nominees (exhibit B40). That list did not appear to include a private current account at Lloyds Bank Ltd., Cardigan.

  5. (v) In September 1965 (exhibit A15) Mr. Wilson, on the instructions of the Appellant, disclosed that certain moneys received by the Appellant in 1950 may have included business takings which may not have been included in the accounts submitted to the Revenue for taxation purposes.

  6. (vi) In November 1965 (exhibit A17) Mr. Wilson sent to the Revenue a copy of a private current account of the Appellant at Lloyds Bank Ltd., Cardigan, showing cash lodgments totalling £4,500 in 1950 and cheques totalling £1,900 in 1956. No explanation as to the source of these sums had been given to the Revenue then or at any other time.

  7. (vii) With the co-operation of Mr. Burridge the Revenue prepared capital statements for the period 1946 to 1961 (exhibit E). From these statements it can be inferred that the Appellant had received during that period a total sum of £14,869 the source of which had not been explained. Certain adjustments had, however, subsequently been made without prejudice, reducing the total to £12,299.

6. We accepted as proved the following evidence of Mr. Wilson:

  1. (i) The Appellant adopted a single-entry bookkeeping system. This system was normal for the area, double-entry bookkeeping being exceptional. The single-entry system, although quite accurate, was by its nature prone to some degree of error. An error of 0.3 per cent. on a turnover of £100,000 (i.e. £300) was reasonable and might be unnoticed. An error of 1 per cent., however, should show up. Although one might expect the error to go both ways and cancel itself out, it was quite possible that the error might go predominantly one way. It depends on precisely how the error came about.

  2. (ii) The accuracy and completeness of accounts depended upon the records kept. The Appellant's records would be classed as incomplete. This, however, was quite normal in that type of business in that area of the country. In view of the searching enquiries made by the Revenue in the early period covered by the assessments he had made through tests of the records and had found them correct, and he was satisfied in submitting each set of accounts to the Revenue that they were accurate.

  3. (iii) In submitting the Appellant's accounts he was unaware of the existence of the private current account at Lloyds Bank Ltd., Cardigan, and he would not have submitted the accounts if he had been so aware without investigating the origin of the sums therein. Had he been aware of that bank account, he would have assumed the business accounts to be incomplete, but not reckless or fraudulent.

  4. (iv) The list of the Appellant's bank accounts submitted to the Revenue in June 1963 had been drawn up by Mr. Wilson and written by him in his own hand. While he himself was not aware of the Lloyds Bank personal current account at Cardigan, and did not intend to include such an account in the list, he agreed that the first entry relating to Lloyds Bank...

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    ...can, and usually do, discharge the s. 36 burden: see Hudson v Humbles (HMIT) TAX(1965) 42 TC 380 at p. 386, James v Pope (HMIT) TAX(1972) 48 TC 142 at p. 150. (ii) If the taxpayer advances an explanation but the commissioners reject it (that is, they positively disbelieve it) the capital st......
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