Knight v Parry
| Jurisdiction | England & Wales |
| Date | 1969 |
| Year | 1969 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income Tax, Schedule D - Deduction - Expenses - Solicitor - Costs of defending action in which professional misconduct and breach of former contract of employment alleged - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 137(a) and (b).
From March to October 1964 the Respondent was employed as an assistant solicitor by one S. In or about August 1964 one of S's clients suggested that he should set up in practice on his own account, in which event the client would instruct him to act for him. The Respondent agreed, and set up in practice as a solicitor in October 1964. Shortly afterwards S complained to the Law Society that he had solicited the client's business. The Law Society agreed that a prima facie case of professional misconduct had been established but invited S to take proceedings in the Courts before they considered the matter further. In the ensuing action it was held that S had failed to prove professional misconduct but damages were awarded against the Respondent on the ground that agreeing to undertake the business in question was a breach of his contract of employment. On appeal against an assessment to income tax under Schedule D, the General Commissioners held that the costs of defending the action were a deductible expense for the reason that the Respondent was defending his right to practise as a solicitor.
Held, that the deduction claimed was inadmissible because both
(1) the Respondent's purpose of protecting himself professionally was not wholly and exclusively referable to the carrying on of his practice but was for seeing that he was not precluded from doing so; and
(2) he had two purposes in defending the action, the other being to contest the claim for damages for breach of the contract of employment.
Stated under s. 56 of the Taxes Management Act 1970 by the Commissioners for the General Purposes of the Income Tax Acts for the Division of Barstable and Chafford for the opinion of the High Court of Justice.
1. At a meeting of Commissioners for the General Purposes of the Income Tax Acts for the said Division of Barstable and Chafford held at Grays, Essex, on 19th November 1970, David J. Parry, of 41A Orsett Road, Grays, in the County of Essex, solicitor (hereinafter called "the Respondent"), appealed against an assessment to income tax under Case II of Schedule D in the sum of £10,000 for the year 1968-69 arising out of his practice as a solicitor.
2. The question for our decision was whether certain expenses incurred in relation to proceedings in the High Court should be allowed as an expense in computing the Respondent's assessable profit.
3. The Respondent and his accountant, Mr. A.E. Deason, gave evidence before us, and the following documents were proved or admitted before us and are attached to and form part of this Case.(1)
A. Certified copy accounts for the year ended October 1967, forming the basis of the assessment.
B. Summary of agreed facts.
C. Full verbatim report of the judgment of Havers J. in the case of Sanders v. Parry(2).
D. Copy letter dated 13th April 1967 from Messrs. Sanders & Co. to the secretary of the Law Society.
E. Copy letter dated 2nd August 1967 from the Law Society to the Respondent.
F. Copy statement of claim in the action Sanders v.Parry.
G. Copy certificate of taxation of the plaintiff's costs in the action Sanders v. Parry and copy Respondent's solicitors' costs in the same action.
H. Copy letter dated 15th May 1967 from the Law Society to the Respondent.
4. The following is the summary of agreed facts referred to in 3B above:
In March 1964 I commenced employment with F.O. Sanders as assistant solicitor. In or about August 1964 one Tully, a client of the firm, suggested that I should set up in practice on my own account and he would then instruct me to act for him. In September 1964 I agreed to do so. In October 1964 I ceased to work for Sanders and set up my own practice.
In October or November 1964 Sanders wrote to the Law Society alleging that I had decided to start my own practice and had solicited Mr. Tully's business for that practice. This would have been professional misconduct, and he asked that disciplinary proceedings should be taken against me. The Law Society agreed that a prima facie case of professional misconduct had been established, but invited...
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