Skinner (HM Inspector of Taxes) v Berry Head Lands Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 16 July 1970 |
| Date | 16 July 1970 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D - Profits of trade - Land-dealing company - Sale of stock-in-trade below market value to associated company - Property resold for full value - Whether market value to be substituted for sale price on first sale.
Income tax - Further assessment - Discovery - Further assessment after appeal settled by agreement - Whether competent - Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 510.
The Respondent Company was a land dealing company. On 1st April 1960 the following events took place in the following order: (a) the share capital of the Company was acquired by W Ltd., a finance and share and land dealing company; (b) the Company sold to W Ltd., for £4,175 a parcel of land which it had acquired for £3,575; and (c) that land was resold by W Ltd. for £40,000. On 9th July 1962 the Inspector of Taxes was furnished with the Company's accounts for the period 11th December 1959 to 10th April 1961 and on 22nd October 1962 with the relevant accounts of W Ltd. On 24th October 1962 the Company's auditors informed him, in reply to a query, that the sale to W Ltd. was not at arm's length, and on 19th November 1962 the same firm, acting for W Ltd., informed the same Inspector of the facts of the resale by W Ltd. Appeals against assessments to income tax under Schedule D for the years 1961-62 and 1962-63 in respect of the Company's trading profits were settled by agreement on 8th November and 11th December 1962, respectively, on the basis of the accounts. On the former date the Inspector had not been informed, and on the latter date he did not have in mind, that the land acquired on 1st April 1960 by W Ltd. for £4,175 had been resold on the same day for £40,000.
Additional assessments for the years 1961-62 and 1962-63 were made on the Respondent Company in November 1964 on the basis that in computing its profits the market value of the land sold to W Ltd. should be credited. On appeal, the Company contended (i) that the amount to be credited was the sale price, and (ii) that the additional assessments were incompetent because the first assessments had been settled by agreement when the Inspector was already aware that the sale was not at arm's length. For the Crown it was contended (i) that the sale to W Ltd. was not a trading transaction and in accordance with the decisions in Sharkey v. Wernher 36 T.C. 275; [1956] A.C. 58 and Petrotim Securities Ltd. v. Ayres 41 T.C. 389; [1964] 1 W.L.R. 190 the Company should be treated as having disposed of the land at its market value of £40,000; (ii) that the point in question had not been determined by or as a result of the agreement to settle the appeals against the first assessments. The Special Commissioners found that the sale to W Ltd. was not so outside the ordinary course of business that it was not effected in the course of trade, and expressed no opinion on the agreement point.
Held, (1) that the irresistible inference from the facts was that the sale to W Ltd. was not in course of trade but was an appropriation of profit by a subsidiary to its parent and directly within the principle of Sharkey v. Wernher and Petrotim Securities Ltd. v. Ayres;
(2) that in the agreements settling the appeals against the first assessments there was nothing equivalent to allowing an appeal by the Company against the inclusion of the market value, and accordingly the additional assessments were competent under the rule in Cenlon Finance Co. Ltd. v. Ellwood 40 T.C. 176; [1961] Ch. 634.
Stated under the Income Tax Management Act 1964, s. 12(5) and the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 31st March 1969 Berry Head Lands Ltd. (hereinafter called "Berry Head") appealed against the following additional assessments to income tax made under Schedule D in respect of its profits from property dealing:
Year |
Amount of Assessment |
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1961-62 |
… |
… |
… |
… |
… |
… |
£8,955 |
1962-63 |
… |
… |
… |
… |
… |
… |
£26,870 |
2. Shortly stated, the question for our decision was whether in computing the said profits the amount to be credited for income tax purposes in respect of the sale by Berry Head of certain freehold land at Brixham, Devon (hereinafter referred to as "the said land") should be taken to be the sale price thereof or its market value.
3. Evidence was given before us by Mr. Ivor Casson, senior partner in the firm of Messrs. Casson, Beckman, Rutley & Co., who were the auditors of Berry Head. Mr. Casson was at all material times a director of Wimpole Industrial Finance Co. Ltd. (hereinafter called "Wimpole"), and became a director of Berry Head after the shares of that company had been acquired by Wimpole.
4. The following documents were proved or admitted before us:
(2) Bundle of documents and letters commencing with agreements dated 1st April 1960.
(3) Copy of memorandum and articles of association of Berry Head.
Copies of such of the above as are not annexed hereto as exhibits are available for inspection by the Court if required.
5. At the hearing there was laid before us an agreed statement of facts, in which it was admitted between the parties that:
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(2) On 1st April 1960 the following events took place in the following order:
(i) Wimpole entered into a contract (exhibit (1) hereto(1) to purchase the whole of the issued share capital of Berry Head for £32,277 from Messrs. J. Evans, J.R. Owen, R.H. Passmore and A.J. Boyce.
(ii) Berry Head entered into a contract (exhibit (2) hereto(1)for the sale to Wimpole of the said land for £4,175.
(iii) Wimpole entered into a contract (exhibit (3) hereto(1)with Marina Properties (Torbay) Ltd. (hereinafter called "Marina") for the sale to it of the said land for £40,000.
(3) The two contracts for the sale of the said land were completed on 2nd April 1960 by a conveyance (exhibit (4) hereto(1) ) from Berry Head to Marina at the direction of Wimpole. The market value of the said land at 1st April 1960 was £40,000.
(4) By letter dated 9 July 1962 Messrs. Casson, Beckman, Rutley & Co. (hereinafter called "the auditors") submitted the following documents to H.M. Inspector of Taxes for Cavendish 2nd District (hereinafter called "the Inspector"):
(i) certified copy of the accounts of Berry Head in respect of the period from 11th December 1959 to 10th April 1961 and the year ended 10th April 1962 (exhibit (5) hereto(1) );
(ii) income tax computation for the years 1959-60 to 1963-64 inclusive, together with a computation of the profits tax loss carried forward.
(5) In reply to the Inspector's letter dated 25th July 1962 the Inspector was informed, by letter dated 30th July 1962, that the shares in Berry Head were sold to Wimpole on 1st April 1960 and that on the same date Berry Head sold the land at Brixham to Wimpole. By letter dated 14th August 1962 the Inspector, having pointed out to the auditors the apparent relationship, asked in what circumstances it was claimed that the sale was at arm's length. By letter dated 24th October 1962 the auditors confirmed that the sale in question was not at arm's length, and pointed out that from the tax point of view, as Wimpole was a dealing company, no issue arose.
(6) By letter dated 8th November 1962 the Inspector agreed the income tax computations for Berry Head for the period to 10th April 1962, indicating that the 1962-63 assessment would be £446 less £446 losses and that the appeal against the 1961-62 assessment was determined under s. 510, Income Tax Act 1952, in the sum of £148 less £148 losses. By letter dated 9th November 1962 the auditors confirmed their agreement to the figures set out in the Inspector's letter of 8th November 1962.
(7) By letter dated 22nd October 1962 the auditors, who also acted for Wimpole, sent to the Inspector a copy of that company's accounts in respect of the period 1st January 1959 to 30th April 1960 and income tax computations for the years 1958-59 to 1961-62 inclusive. By letter dated 15th November 1962 the Inspector (the same individual who was in correspondence with the auditors concerning the Berry Head assessments) asked for a statement showing the dates of purchase and sale of securities, land and properties with the purchase and sale prices. This statement was sent to the Inspector by letter dated 19th November 1962, and showed that Wimpole had purchased the land at Brixham for £4,175 on 1st April 1960 and had resold such land on the same date for £40,000 less expenses. The Inspector acknowledged receipt of this information by letter dated 26th November 1962.
(8) On 21st November 1962 the Inspector issued a notice of assessment to income tax on Berry Head for the year 1962-63 in the sum of £500. An appeal against this assessment was made on 28th November 1962 and acknowledged two days later. On 11th December 1962 the Inspector wrote to the auditors with reference to the appeal, and enclosed details of the adjusted assessment amounting to £446 less losses of £446 in accordance with his letter of 8th November.
(9) By letter dated 29th July 1964 the Inspector informed the auditors that, following the decision in Petrotim Securities v. Ayres(2), he proposed to substitute the market value for the price actually paid for the land sold by Berry Head to Wimpole and to reopen the assessments on Berry Head for 1961-62 and 1962-63.
(10) By letter dated 14th September 1964 the auditors drew the attention of the Inspector to the fact that the income tax appeals for 1961-62 and 1962-63 had been determined under s. 510, Income Tax Act 1952. The Inspector replied by letter dated 30th October 1964, maintaining that all the facts had not been known to him at the time...
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