McMillan v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 10 March 1942 |
| Date | 10 March 1942 |
| Court | Court of Session (Inner House - First Division) |
NO. 1218-COURT OF SESSION (FIRST DIVISION)-
Income Tax, Schedule D - Profits of trade - Erection and sale of houses subject to feu duties retained by builder - Basis of assessment of profits.
The Appellant, a builder and dealer in land, bought land and developed it, erecting thereon houses which he subsequently sold for a cash payment, subject to a feu duty payable to himself as immediate superior. He retained unsold the feu duties so created. The General Commissioners, on appeal, accepted the Crown's contention that the Appellant was chargeable to Income Tax in respect of the profits on such houses, on the difference between the cost and selling prices, and that (following the method adopted by the Special Commissioners in John Emery & Sons v. Commissioners of Inland Revenue, 20 T.C. 213) the cost price of a house burdened with a feu duty was the proportion of the total cost of acquiring and developing the land and building the house thereon, which the price realised by the house when erected (and burdened with the feu duty) bore to the sum of the estimated selling value of the feu duty reserved and the price realised by the sale of the house.
Held, that the Commissioners' decision was correct.
At a meeting of the Commissioners for the General Purposes of the Income Tax held at 18 Bonaccord Square, Aberdeen, on 12th January, 1939, Mr. John Ross McMillan, F.R.I.B.A., of 105 Crown Street, Aberdeen (hereinafter called "the Appellant") appealed against estimated assessments to Income Tax made upon him under Schedule D of the Income Tax Act, 1918, as follows:-
Assessment for the year to 5th April, 1937, as builder on the sum of £1,000.
Assessment for the year to 5th April, 1938, as builder on the sum of £1,000.
Assessment for the year to 5th April, 1939, as builder on the sum of £1,000.
It was agreed between the parties to the appeal that only the question of principle should be dealt with by the Commissioners at this time, viz., whether the capitalised value of feu duties created by the Appellant should be regarded as trading receipts, and taken into account in computing his profits as a builder.
I. The following facts were admitted or proved:-
(2) For many years and particularly during the years to which the above-mentioned assessments relate, the Appellant on his own account and sometimes in conjunction with his brother, Mr. D.S. McMillan, carried on the business of builder. He also carried on contemporaneously the business of architect.
(3) It has been the Appellant's practice generally to purchase ground or take it on feu, develop and build upon it, and dispose of the houses when built, subject to a portion of the original feu duty (if any) or to a feu duty constituted by and payable to him.
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(4) In the last 40 years, during which he has built many houses and created many feu duties, the Appellant has never sold any feu duties constituted by and payable to him.
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(5) The following are specific instances of the Appellant's transactions:-
(a) Abergeldie Terrace Subjects.-By a feu charter dated 11th and recorded in the Division of the General Register of Sasines applicable to the County of Aberdeen on 13th both days of March, 1935, there was disponed to the Appellant and his said brother certain ground at a yearly feu duty of £19 12s. 6d. The ground was divided by the Appellant and his brother into six stances, and upon each stance they built a house. By arrangement with the superior, the whole of the feu duty of £19 12s. 6d. was allocated upon four of these stances. These four stances together with the houses thereon were then sold outright to purchasers for £600 each. When the remaining two houses were disposed of, the Appellant and his brother granted feu dispositions in favour of the purchasers, one for £600 and a feu duty of £5 15s. 0d. reserved to the Appellant and his said brother and the other for £600 and a feu duty of £5 5s. 0d. also reserved to them.
(b) Cairnfield Place Subjects.-By a feu charter dated 16th April, 1936, and recorded in the Division of the General Register of Sasines applicable to the County of Aberdeen, on 18th May, 1936, there was disponed to the Appellant and his said brother certain ground at an annual feu duty of £38 13s. 6d. The ground was divided into twelve stances and upon each stance a house was built by the Appellant and his brother. By arrangement with the superior, the whole of the feu duty of £38 13s. 6d. was allocated upon seven of these stances. These seven stances together with the houses thereon were then sold outright to purchasers. When the remaining five stances were disposed of, the Appellant and his brother executed feu dispositions in favour of the purchasers in consideration in each case of £795 and an annual feu duty of £5 10s. 6d. payable to the Appellant and his brother.
(c) Bonnymuir Place Subjects.-By a feu charter dated 19th October, and recorded in the Division of the General Register of Sasines applicable to the County of Aberdeen on 25th November, 1936, there was disponed to the Appellant and his said brother certain ground at an annual feu duty of £66 9s. 4d. By arrangement with the superior, the ground was divided into 15 building stances and the feu duty of £66 9s. 4d. allocated over eleven of them leaving four free of feu duty. On these four stances the Appellant and his said brother built houses and in respect of each house and land they have granted feu dispositions in favour of the purchasers in consideration of £795 and an annual feu duty reserved to the Appellant and his brother of £5 19s. 0d. in respect of three of the houses and £6 5s. 0d. in respect of the fourth.
(d) Cotton Lodge Estate.-By a disposition dated 8th and recorded in the Division of the General Register of Sasines applicable to the County of Aberdeen on 18th both days of November, 1933, the Appellant acquired for £5,000 from Patrick McGranaghan certain ground together with a residence known as Cotton Lodge, Aberdeen. The ground was burdened with a feu duty of £2.
(e) By a disposition dated 13th and recorded 21st November, 1933, the Appellant acquired for £530 from Robert Goodlad certain adjoining ground subject to a feu duty of £5 9s. 0d. in order to get access to the Cotton Lodge Estate from Great Northern Road.
By a feu charter granted by the University Court of the University of Aberdeen dated 3rd and recorded 23rd April, 1934, there was disponed to the Appellant certain further ground adjoining the Cotton Lodge Estate to give him access from Leslie Road, at a feu duty of £40 which was to be allocated on some of the houses to be built thereon.
The Appellant made a road through the property acquired by him as before-mentioned and contemplated making another. By a disposition dated 6th, 12th and 19th September, and 6th October and recorded on 12th November, 1934, he acquired from the trustees of the deceased Alexander Scott Mearns further ground for a feu duty of £20. This purchase enabled the Appellant to straighten out a lane, in which lane he has erected 37 lock-up garages which are to be let.
The Appellant is also under agreement to acquire from Seaton Estates (the property of Major Hay) further ground and cottages at a feu duty of £10 per annum to enable him to complete a road through the estate.
There is annexed to and forms part of this Case(1) a plan showing the ground acquired by the Appellant in connection with the Cotton Lodge Estate scheme. Having acquired such an area of land, the Appellant submitted to the appropriate local authority a lay-out scheme. This involved parcelling the land out into building stances. After receiving the sanction of the local authority, the Appellant built houses on said stances as required. The Cotton Lodge Estate has not yet been fully developed or disposed of and building operations still continue. Some of the houses built on the estate have been sold. In certain cases feu duties have been created and reserved by the Appellant, in which case a feu disposition is given by the Appellant to the purchaser of the house in consideration of a lump sum and an annual feu duty. In other cases, portions of the over feu duty have been allocated to houses and land sold by him, in which case, the Appellant gives the purchaser of the house a disposition of the land in consideration of a lump sum of money only.
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[The contentions of the parties and other matter not relevant to the second Case are omitted from this print. The Commissioners' decision and the questions of law for the opinion of the Court were stated as follows.]
We, the undersigned Commissioners, decided by a majority that the "capitalised values of the feu duties should be considered as part of the "Appellant's trading receipts.
The questions of law for the opinion of the Court are:-
(2) "Whether the capitalised value of the feu duties created by the "Appellant alone or jointly with his brother ought to be added to his "trading receipts from the sale of houses and lands for the purpose of "ascertaining the amount of his trading profits chargeable to Income Tax.
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(3) "If so, should such value be taken into account for the year in "which the feu duty was created and the houses sold, or should such value "only be taken into account when all the Appellant's operations in respect "of a particular building scheme have been completed?
(4) "If not, (a) whether the Appellant was entitled to charge the whole "of the expenses incurred in buying the ground or taking it on feu, developing "it, and building houses thereon against the cash prices realised by the sale "of the houses, or whether a deduction should be made from such expenses "in respect of the cost of creating the feu duties reserved, or (b) how should "the Appellant's profits from his transactions in land and houses be "computed?
The first case came before the First Division of the Court of Session (the Lord President and Lords...
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