Pearlberg v Varty (HM Inspector of Taxes)

The facts are stated in Lord Denning M.R.'s judgment.

The case came before Pennycuick J. in the Chancery Division on 10th February 1970, when the Plaintiff conceded that the issue was concluded against him in that Court by the decision of the Court of Appeal in Day v. Williams (1969) 46 T.C. 59. Judgment was given accordingly in favour of the Crown, with costs.

Lord Denning M.R.-This case raises a point of procedure in tax matters. It concerns "out-of-time" assessments, that is, assessments made more than six years after the end of the year to which the assessment relates. The statutory provisions are very hard to understand, but they are best shown by taking three periods of six years each.

Suppose that in March 1957 the Revenue authorities believe that the Crown has lost tax for many years past, and that the loss is attributable to the neglect of the taxpayer to make proper returns of his income. The Revenue authorities determine to take steps to make good the loss. They can assess him for the six years before 1957, which I will call the "first six years". They can make the assessment for those first six years of their own motion, without the leave of anyone: see s. 46(1) of the Income Tax Act 1952. They can, for instance, make an assessment on him for the year 1951-52 so as to make good the loss of tax in that year due to his neglect. If they make such an assessment it becomes what is called "the normal year": see s. 51(1) of the Finance Act 1960.

Now suppose the taxpayer accepts that assessment for the "normal year" as correct, so that it is finally determined in 1957: or suppose that the taxpayer appeals against that assessment for the "normal year". It may be many years before his appeal is finally determined. Let us assume that it is not finally determined for the ten years from 1957 until 1967. During the whole of the time, until it is finally determined, the Revenue authorities can go back for the six earlier years before the end of the "normal year" 1951-52. I will call those earlier six years the "second six years" back: see s. 51(1), (2) and (3) of the Finance Act 1960. The Revenue can, for instance, make assessments on him for the earlier years 1945-46 onwards down to 1950-51, provided that they do it for the purpose of making good a loss of tax due to his neglect. But in the case of those "second six years" the assessment may only be made "with the leave of a General or Special Commissioner": see s. 6(1)(c) of the Income Tax Management Act 1964. One Commissioner is enough, but they must get his leave. If there is an appeal against the assessment the Commissioner who gave the leave must not be present at the appeal: see s. 6(2) of the Income Tax Management Act 1964.

Now suppose that the Revenue authorities in 1957 made such an assessment for the year 1945-46. That year 1945-46 then becomes what is called the "earlier year": see s. 51(5) of the Finance Act 1960. The taxpayer appeals,

In this particular case the Revenue authorities claim to go back for the "second six years" but not for the "third six years". The facts are as follows.

In March 1957 the Revenue authorities made an assessment on Mr. Pearlberg for the year 1951-52 for untaxed interest. It was within the "first six years" back. So 1951-52 was the "normal year". He appealed against that assessment. The appeal was not determined for many years. The Crown told us that it has not been finally determined even now. In December 1967 the Revenue authorities decided to charge Mr. Pearlberg, if they could, for "the second six years" back. To do this they had to obtain leave from one Commissioner. This requirement of leave is contained in s. 6(1) of the Income Tax Management Act 1964, which says that an assessment for the second six years back:

…may only be made with the leave of a General or Special Commissioner given on being satisfied by an inspector or other officer of the Board that there are reasonable grounds for believing that tax has or may have been lost to the Crown owing to the fraud or wilful default or neglect of any person.

In pursuance of that request the Inspector of Taxes on 19th December 1967 made an application for leave to make assessments on Mr. Pearlberg, on a printed form no. 64D-2. The form, so far as material, was as follows:

LEAVE TO MAKE INCOME TAX OR SURTAX ASSESSMENTS OUT OF TIME

Person assessable and address

H.H. Pearlberg, 18 Wilton Crescent, S.W.1.

Description of income

Profits on sale of property and chief rents.

Income Tax Schedule D

Section 51, Finance Act 1960.

Normal year (Section 51(1), Finance Act 1960) 1951-52.

Years and amounts

	1946-47	1947-48	1948-49	1949-50	1950-51
	£	£	£	£	£
Assessment proposed:	7743	11,825	314,634	1224	313
Inspector's signature: L. A. Varty			Date: 19th December 1967
Leave to assess given
Commissioner's signature:			Date: 25th January 1968"

The Inspector on 19th December 1967 sent with the form a letter to the Clerk to the Commissioners, saying:

…I attach the forms for consideration by one of the General Commissioners and for his signature if he approves these assessments. The application is made under Section 51(1) (3), Finance Act 1960, on the grounds of neglect or wilful default…The facts are as follows: (a) No Income Tax Returns were made by Mr. Pearlberg for the years 1936-37 to 1950-51. (b) Statutory notices to Mr. Pearlberg to render returns of income were given as follows: 1945-46, 26th April 1945; 1946-47, 12th April 1946; 1947-48, 6th May 1947; 1948-49 to 1950-51 inclusive, 6th December 1950. (c) No returns of income were completed by Mr. Pearlberg for the years 1945-46 to 1949-50 inclusive. For 1950-51 a further return was issued by this District on 3rd July 1956, and completed by Mr. Pearlberg on 17th November 1957.

In addition, the Inspector sent to Mr. Pearlberg's solicitors on 12th December 1967 a letter setting out the facts on which he relied in precisely the same words. On 2nd January 1968 Mr. Pearlberg's solicitors wrote to the Inspector denying that there was any neglect, let alone fraud or wilful default. They added two significant sentences:

…It appears to us to follow that your proposed assessments are out of time, and that your intended application to the Commissioners is wholly misconceived. If, notwithstanding the above, you propose to continue with your application for leave, we shall be obliged if you will please arrange for us to be notified of the Hearing because our clients wish to appear and be heard.

On 5th January 1968 the Inspector of Taxes replied saying that Mr. and Mrs. Pearlberg had consistently neglected all requests to make income tax returns. He impliedly turned down the request to be heard, because he said that if the Commissioner agreed to the making of the assessments the taxpayer would receive notice in the usual way and have the right to appeal against them.

The result was that on 24th January 1968 the form of application...