Withers (HM Inspector of Taxes) v Nethersole
| Jurisdiction | England & Wales |
| Judgment Date | 27 February 1948 |
| Date | 27 February 1948 |
| Court | House of Lords |
NO. 1393-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Vocation - Income or capital - Sums received by dramatist of a single novel as consideration for assignment of film rights - Whether annual profits or gains or capital payments - Income Tax Act, 1918 (8 & 9 Geo. V, c. 40), Schedule D, Case II or Case VI.
N, while carrying on the vocation of an actress and a producer of plays, dramatised a novel by virtue of an agreement with the author in 1897. Under the terms of an agreement entered into in 1914 the author agreed to pay N one-third of the sums received by him in respect of the film rights of the novel or play. From 1916 onwards the film rights were granted by the author, and by his legal personal representative, to various motion picture companies, and in accordance with the 1914 agreement one-third of the sums received from time to time from the grantees by the author and his legal personal representative was handed over to N. Under a grant of film rights for ten years, so made in 1939, an American company acquired rights of a comprehensive character in both the story and the play including, inter alia, the right to adapt and change the play and combine it with other works.
On appeal against assessments to Income Tax under Case II of Schedule D, or alternatively under Case VI of that Schedule, for the years 1937-38, 1938-39 and 1939-40, the Special Commissioners decided (1) that N was not carrying on a profession or vocation at the material times covered by the assessments made upon her in respect of dramatic and film rights of the novel in question, and (2) that the sums received by her in respect of these rights under the terms of the 1914 agreement were in the nature of revenue payments on account of royalties and liable to assessment under Case VI. The Crown accepted the Special Commissioners' decision on the first point.
Held, that N ceased to be the owner of the portion of the copyright she assigned under the 1939 agreement and that the proceeds of the sale were not annual profits or gains within the meaning of Schedule D, Case VI
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 13th June, 1944, Miss Olga Nethersole (hereinafter called "the Appellant") appealed against Income Tax assessments for the six years 1934-35 to 1939-40, inclusive, made in estimated amounts under Schedule D of the Income Tax Acts. The subject-matters of the said assessments were described as follows:-
1934-35: "Royalties on Proceeds from Sale of Film Rights."
1935-36 and 1936-37: "Profit from "The Light that Failed"."
1937-38 to 1939-40: "Royalties or Proceeds from Sale of Film Rights."
2. By an agreement made in 1897 between the Appellant and Mr. Rudyard Kipling she obtained the exclusive right to dramatise Mr. Kipling's book, "The Light that Failed."
In 1914 the question of a film version of the book or play arose and it was agreed between the Appellant and Mr. Kipling that it should be left to him to arrange for the film rights and he should pay to her one-third of his receipts.
Film rights were duly granted by Mr. Kipling to film producing companies, and between 1914 and 1939 various sums were received by the Appellant in respect of the one-third which he had agreed to pay her. These sums are set out in the statement of receipts referred to in paragraph 6 (D) of this case. The payments of £66 13s.4d. and £33 6s. 8d. received by the Appellant on 31st December, 1937, and 3rd January, 1939, respectively, were the Appellant's share of sums of £200 and £100 paid to the estate of Mr. Kipling by Paramount Films Services, Ltd., in respect of an option to take a further grant of film rights in "The Light that Failed."
3. In 1939, Mr. Kipling having died, his widow, Mrs. Caroline Kipling, made an agreement with Paramount Pictures for the sound and film rights of the book and play. By that agreement she assigned to Paramount Pictures the sole rights for ten years for a lump sum of £8,000, and pursuant to the 1914 agreement the Appellant received one-third, i.e., £2,666, of that sum.
4. The Appellant, who is now an elderly lady, was for many years a celebrated actress and producer of various plays. Early in 1914 she gave up the stage and since that time has done no dramatic work. She has written or been concerned in the writing of no play except "The Light that Failed." In 1916 she joined the British Red Cross, and since the last war has devoted herself to the education of the public in matters of health, in which connection she has held and still holds many important positions without remuneration.
5. In a certified copy from copyright records in the Public Record Office, which is attached to this Case, marked "A", and forms part thereof(1), the author of "The Light that Failed", a play in three acts, is given as Constance Fletcher ("George Fleming"), and Olga Nethersole is described as the proprietor of the sole liberty of representation or performance. The Appellant's state of health did not make it possible for her to appear before us to give evidence and we were therefore unable to ascertain the part played by Miss Fletcher, but in the result this matter is not, in our view, material.
A further disadvantage in presenting the case is that Mrs.
Caroline Kipling and the Executors of the late Mr. Rudyard Kipling are not parties thereto, and it is impossible therefore to attach copies of agreements made by Mr. Kipling with any persons other than the Appellant herself.6. There are attached to this Case, and form part thereof, copies of:-
(A) The agreement of 15th June, 1897, between Mr. Kipling and the Appellant.
(B) The agreement of 27th June, 1939, between Mrs. Caroline Kipling and Paramount Pictures.
(C) Three letters of 2nd June, 1914, 10th June, 1914, and 29th August, 1914, which passed between the Appellant and Mr. A.S. Watt of A.P. Watt & Son of Hastings House, 10 Norfolk Street, in which the one-third offer is made on behalf of Mr. Kipling and the Appellant and accepted by her.
(D) A statement of receipts by the Appellant covering the period January, 1916, to July, 1939, which is described as "Amounts received in respect of Film rights of "The 'Light that Failed"."
(E) Three letters dated 31st December, 1937, 3rd January and 7th July, 1939, from Messrs. A.P. Watt & Son to the Appellant relating to the payments made on 31st December, 1937, and 3rd January and 12th July, 1939.
(F) A letter dated 20th June, 1944, which was not before us at the hearing but which was addressed by A.P. Watt & Son to the Appellant's solicitors and which with the consent of both parties is admitted as part of this Case(1).
In this letter Messrs. Watt, who were in 1914 acting as agents for Mr. Kipling, state that he agreed that the Appellant should dramatise his book, and that at a later date, when the question of film rights arose, she should have one-third of any amount for which he might be able to sell the film rights of the book and her dramatisation in conjunction. The letter continues:-
The film rights were originally sold to Messrs. Pathé Frère "under an agreement which provided for a payment in advance and "on account of royalties. The sums referred to under Pathé Productions "in the list of amounts received, which you enclosed in your "letter and which I now return, were Miss Nethersole's share of "amounts received under the above agreement from Messrs. Pathé. "(The list referred to is the statement mentioned in sub-paragraph (D) "above.)
"In due course the Pathé agreement expired or was about to "expire, and in 1923 the rights were sold to Famous Players for "£7,500 for a period of seven years. They were sold again in 1930 "to Paramount Famous Lasky Corporation for £8,000 for a period "of 10 years, and when that agreement expired or was about to "expire, in 1939 to Paramount Pictures Inc. for £8,000 for a period "of 10 years, and that agreement is still running. The last three "amounts were all paid on the dates the agreements were made, and "in each case Miss Nethersole's share was duly paid over to her at "the time.
7. On behalf of the Appellant it was contended:-
(2) that the receipts in question were earnings of the Appellant's former profession or vocation of dramatic authorship;
(3) that such profession or vocation was not being carried on by the Appellant during the years to which the said assessments related;
(4) that the Appellant was accordingly not assessable to Income Tax under Case II of Schedule D, and
(5) that the sums in question were not royalties nor were they otherwise "income" within the meaning of the Income Tax Acts so as to be assessable to tax under Case VI of Schedule D or at all.
Reference was made to the judgment of Rowlatt, J., inConstantinesco v. The King, 11 T.C. 730, and to the decision in Desoutter Bros., Ltd. v. J.E. Hanger & Co., Ltd., [1936] 1 All E.R. 535.
8. On behalf of the Respondent it was contended:-
(2) that the Appellant was carrying on the profession of a dramatist assessable under Case II of Schedule D, and alternatively
(3) that the payments in question were of an income nature assessable under Case VI.
9. Having reserved judgment we, the Commissioners who heard the appeal, issued our decision in writing to both sides as follows:-
On the evidence before us which, with the consent of the Crown's representative, includes a letter of 20th June, 1944, from Messrs. A. P. Watt & Son addressed to Messrs. Laytons, the Appellant's solicitors, we hold:
(2) That the Appellant was not carrying on a profession or vocation at the material times covered by the assessments made upon her in respect of dramatic and film rights of...
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