Sharkey (Inspector of Taxes) v Wernher
| Jurisdiction | England & Wales |
| Judge | Lord Oaksey,Lord Tucker,Lord Radcliffe |
| Judgment Date | 07 November 1955 |
| Judgment citation (vLex) | [1955] UKHL J1107-2 |
| Date | 07 November 1955 |
| Court | House of Lords |
[1955] UKHL J1107-2
House of Lords
Viscount Simonds
Lord Porter
Lord Oaksey
Lord Radcliffe
Lord Tucker
Upon Report from the Appellate Committee, to whom was referred the Cause Sharkey (Inspector of Taxes) against Wernher, that the Committee had heard Counsel, as well on Tuesday the 19th, as on Wednesday the 20th and Thursday the 21st, days of July last, upon the Petition and Appeal of Oswald Thomas Bernard Sharkey (Her Majesty's Inspector of Taxes), of Head Office, London (Enquiry Branch), 4th Floor, Minford House, Rockley Road, W.14, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 7th of July 1954, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the printed Case of Sir Harold Wernher, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 7th day of July 1954, complained of in the said Appeal, be, and the same is hereby, Reversed, and that the Judgment of the Honourable Mr. Justice Vaisey of the 24th day of July 1953 thereby Reversed, be, and the same is hereby, Restored: And it is further Ordered, That the Respondent do pay, or cause to be paid, to the said Appellant the Costs incurred by him in the Courts below, and also the Costs incurred by him in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments: And it is also further Ordered, That the Cause be, and the same is hereby, remitted back to the Chancery Division of the High Court of Justice, to do therein as shall be just and consistent with this Judgment.
My Lords,
This appeal arises upon an assessment to income tax for the year 1949-50 made upon the Respondent, Sir Harold Wernher, in respect of profits made by his wife, Lady Zia Wernher, from a stud farm owned and carried on by her. The question in dispute is what amount should be entered on the credit side of the trading account of the stud farm in respect of animals bred there and transferred to a racing establishment also carried on by her.
It is common ground between the parties that some amount must be credited in respect of these animals upon their transfer (a matter upon which I shall say something later) and the issue has been whether this amount should be the cost of production of the animals so transferred or their market value at the date of transfer.
The course of proceedings before the matter reached your Lordships' House has been as follows: An estimated assessment in an amount of £5,000 was made upon the Respondent for the year 1949-50 in respect of the profits arising from the stud farm. He appealed from this assessment to the Special Commissioners, the only material ground of appeal being that which I have already indicated, that in principle the assessment was based on crediting the trading account of the stud farm with the market value of the transferred animals, instead of with the cost of their production. The Special Commissioners allowed his appeal, and at the request of the present Appellant stated a case for the opinion of the High Court. The case duly came before Mr. Justice Vaisey, and on the 24th July, 1953, that learned Judge gave judgment allowing the appeal. In his opinion the case was indistinguishable in principle from Watson Bros. v. Hornby, 24 T.C. 506, and he was bound by it. I shall have to consider this case in some detail presently. The Respondent appealed to the Court of Appeal, which unanimously reversed the judgment of Mr. Justice Vaisey, being, I think, largely influenced to that course by a previous decision of the Court of Appeal in Briton Ferry Steel Co. Ltd. v. Barry, 23 T.C. 414. The question at issue has therefore so far been resolved by saying that in principle the stud farm trading account must be credited only with the cost of production of the transferred animals. The question of figures is still at large. The Crown now appeals and contends that it is the market value of the transferred animals, not the cost of their production, with which the account must be credited.
Before I examine the rival contentions and the authorities by which they are supported, I must make certain further observations which are not, I think, controversial.
It is not in dispute that the enterprise of a stud farm carried on by Lady Zia Wernher is what has been called a taxable activity, which is another way of saying that the Respondent is chargeable in respect of any profits arising therefrom in accordance with the Rules of Case I of Schedule D of the Income Tax Act, 1918, relating to trades. Nor is it in dispute that the racing establishment carried on by Lady Zia is not a taxable activity: her profits, if any, of that activity are not subject to taxation: her losses, if any, cannot be set off against any other taxable income. This has been called a recreational activity.
Further, it is common ground that the stud farm enterprise is a farming enterprise which is by virtue of section 10 of the Finance Act, 1941, and section 31 (1) ( a) of the Finance Act, 1948, to be treated as the carrying on of a trade, and, accordingly, that its profits are chargeable in the way that I have mentioned.
Again, it is not disputed that (to take the year ending the 31st December, 1948, as an example) Lady Zia transferred five horses from her stud farm to her racing establishment and that their then market value exceeded their cost of production. Nor, I think, is it in doubt that a main purpose, if not the main purpose, of the stud farm was to supply the racing establishment.
These, my Lords, are the simple facts of the case, and it is perhaps surprising that in the year 1955 there should be any room for doubt about a position which cannot in its essentials differ from a great many other cases. I wish at the outset to say that I attach no importance to the fact that of Lady Zia's two activities to which I have referred the one is taxable and the other is not. I do not understand how her taxable profits in respect of the stud farm can in principle be the greater or the less because the profits of the racing establishment are or are not taxable. The problem, therefore, in all its simplicity is whether a person, carrying on the trade of farming or, I suppose, any other trade, who disposes of part of his stock-in-trade not by way of sale in the course of trade but for his own use, enjoyment, or recreation, must bring into his trading account for income tax purposes the market value of that stock-in-trade at the time of such disposition. But for the fact that this case has throughout proceeded upon the footing as stated in the Special Case that some figure in respect of the transferred horses fell to be brought into the stud farm accounts as a receipt", I should have stated the problem differently. I say this because, since it is the Respondent's case that Lady Zia did not dispose of the transferred horses in the way of trade, I do not understand why it is admitted that she should be credited as a receipt with the cost of production. In fact as a trader she received no more the cost of production than the market value: I do not understand, therefore, why the argument did not proceed that, as she received nothing, her trading account should be credited with nothing; that she suffered, so far as her trade was concerned, a dead loss in respect of these animals, and that the accounts of the stud farm should be made up so as to show this like any other dead loss. I do not understand how the adjustment could take the form of the fictitious entry of a receipt which had not been received.
My Lords, I am the more puzzled by the basis on which this case has proceeded, because learned Counsel for the Respondent has throughout insisted on what is an elementary principle of income tax law that a man cannot be taxed on profits that he might have, but has not, made: see, e.g., Dublin Corporation v. M'Adam, 2 T.C. 387, Gresham Life Assurance Society v. Styles, 3 T.C. 185. But this is only saying in another way that a trader is not to be charged with the receipt of sums that he might have, but has not, received, and this is equally true whether the sum with which it is sought to charge him is market value or production cost, whether it will result in a notional profit or a notional balancing of receipts with expenditure and whether the reason for his not in fact receiving such a sum is that the goods which are his stock-in-trade have perished in the course of nature or that he has chosen to use them for his own pleasure or otherwise dispose of them. The true proposition is not that a man cannot make a profit out of himself but that he cannot trade with himself. The question is whether and how far this general proposition must be qualified for the purposes of income tax law.
An attempt has been made to justify the notional receipt of a sum equal to the cost of production by treating such a receipt as the equivalent of an expenditure which in the event proved not to have been for the purpose of trade, since the article was not disposed of in the way of trade. But this is pure fiction. Up to the very moment of disposition (in this case the transfer of a horse from stud farm to racing stable) the article was part of the trader's stock-in-trade and the cost of its production was properly treated as part of his...
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