H.L.]

12th Jan. 1920 :

In the course of his remarks the managing director informed the board that he was adopting where possible the policy of selling the company's stock of wagons on simple hire in preference to renewing the contracts.

12th July 1920 :

The chairman laid before the board the balance-sheet. It was pointed out that there was a surplus of 146,9291. 2s. 3d. on the sale of a portion of the company's capital account, viz. wagons on hire.

8th Nov. 1920:

With reference to the minutes of the board meeting of the 12th Jan. 1920, the managing director stated that in disposing of the company's wagons on simple hire he had deemed it advisable to dispose not only of the wagons but of the agreements for tenancy, and that these had been sold in different batches and that he had now completed the matter, thus having disposed of the whole of the company's wagon-hiring business. There would be a considerable surplus over the amount at which the assets stood in the company's books, and that surplus would be used for the further development of the company's capital accounts, which had already to some extent been anticipated, and which was the reason for the present considerable overdraft with the company's bankers. All the wagons had been sold by the end of the year before the 1st Nov. 1920 including idle wagons and wagons unfit for use. The wagons were sold not only to users of wagons, but also to other traders who made a practice of letting out wagons on hire. Letters produced at the hearing of the appeal showed that the company referred persons applying to it for wagons to be let on hire to other traders-the company itself no longer having wagons available to let out.

The policy of selling the wagons and any tenancy agreements relating thereto had not been fully carried out at the 31st May 1920, when the company's accounts for its trading year ended on that date had been made up, but considerable blocks of wagons, totalling 1622, had already been sold resulting in a surplus of 148,6517. 10s. 9d. beyond the figures at which they were then valued in the books of the company, and this surplus was credited in the revenue account of the company. directors, however, charged the revenue account with 100,000l. for " "" reserve in arriving at the profits of the year as disclosed in the accounts. The chairman, in referring to the matter at the company's annual general

The

66

100,000l. was part of the sur the sale of a portion of the as pany, viz., wagons let on hir directors thinking the amou longed to the capital account rather than to the revenue decided to place it to In these circumstances it wa behalf of the company that wagons and tenancy agreeme were sales of capital assets o and were not made in the cou or business carried on by the

reserv

The Inspector of Taxes co the profit realised from the sal in question was a receipt of the of the company (which was and dispose of wagons and ro the accounting period in quest receipt should be included in profits of the company assessabl profits tax.

The commissioners who hea held that as the main object was to make a profit in one out of making wagons and ro sharp line could be drawn b sold, wagons let on hire purcha let on simple hire; and that t long as the wagons were let, th as plant and machinery 39 S and tear, did not prevent their trade when sold, even though let agreements; for they seemed t or other aspect according as they from the point of view of th company.

66

The special commissioners, b cision upon the nature of t business, held that the wagons be treated as stock in trade for the assessment, and that the not carry on a separate busi exclusively with the letting on 1 therefore the profits in questio arising or accruing in the trade assessable to corporation profits decision was affirmed by Rowlat Rep. 691). It was held on ap rington, L.J. and Eve, J. that whether the appellants carried business of hiring out wagons, letting-out of the wagons wa means of earning profits in the b on by them was a question of adversely to the appellants b commissioners, and in that deci no room for a misdirection in and as there was evidence to finding it was not open to revie Master of the Rolls, dissenti decision of the commissioners review, and must be considered of law in the light afforded by t and the documents and materia and the Crown had failed to s

money

[H.L.

alised by the comthat the perly becompany unt, had

ended on le of the ferred to company, any trade

ay.

d: That e wagons r business nufacture stock) for that such ng at the orporation

e appeal, company r another stock, no n wagons id wagons et that so re treated to wear g stock in r tenancy e the one : regarded rs or the their deppellants' ought to irposes of lants did concerned f wagons, re profits therefore and their 129 L. T. by Warquestion separate ether the rely one ss carried : decided e special here was t of law, 'port the d by the that the open to question rts found

Sir Douglas Hogg, K.C. (A.-G.) and R. P. Hills for the respondents.

The House took time for consideration.

Lord DUNEDIN. This is an appeal against an assessment for income tax confirmed by the commissioners, whose opinion has upon a case stated been confirmed by Rowlatt, J. and the Court of Appeal.

The appellants are a company who dealt in wagons. It acquired wagons generally by construction in its own works, but also on many occasions by purchase. The wagons so acquired it dealt with in two ways. Either it sold— whether for cash down or on a deferred payment system matters not-or it hired them out. The hired wagons remained the property of the company, and when the hiring was over the wagon was either worn out or was sold. The hiring accounts were kept separate, but it was all one business. In the case of the wagons used in the hiring business which had been made in the workshops, the method of book-keeping employed was to charge the wagon so used as if it had been sold to the hiring business at a price including a calculated sum added as profit on manufacture. Year by year as the hiring went on the sum so charged was written down in respect of depreciation.

The appellants, finding that after the War (during the continuance of which wagon making had been prohibited) there was a great scarcity of wagons, came to the conclusion that it would be more profitable to sell all the wagons which they were using for hiring; and in the result they received sums larger than the sums at which the wagons written down as aforesaid stood in the books. It is these sums on which as profit income tax has been charged.

Now as regards the original profit, when the wagon was entered with a calculated sum added to its cost, on it income tax would automatically be charged in the year's accounts, as it would enter in the revenue account as kept as profit on work done. But when in the long run on a sale a wagon which had been charged at a fictitious price-for it being all one business no money really passed-realised more than that price as it stood after depreciation had been subtracted, then I think it is evident that the sum being the difference between the sum realised and the sum so entered minus depreciation, is just extra profit on which so far no income tax has been levied.

The appellants argue that this is really a capital increment; and to say so they call these wagons plant of the hiring business. I am of opinion that in calling them plant they really beg the whole question. The commissioners

have found. and I think it is the fact. that

[H. OF L.

buying and selling because in the meantim before sold it has been utilised by being hire out. There is no similarity whatever betwee these wagons and plant in the proper sense e.g., machinery, or between them and invest ments the sale of which plant or investmen at a price greater than that at which they ha been acquired would be a capital incremen and not an item of income. I think that th appeal fails.

Lords CAVE, L.C., ATKINSON, SUMNER, an BUCKMASTER concurred.

Appeal dismissed.

Solicitors for the appellants, Willis and Willis, agents for Taynton and Son, Gloucester Solicitor for the repondents, Solicitor o Inland Revenue.

Jan. 20, 22, 23, and Feb. 19. (Before Lords CAVE, L.C., DUNEDIN, ATKINSON SUMNER, and BUCKMASTER.) FOULSHAM U. PICKLES. (a)

ON APPEAL FROM THE COURT OF APPEAL IN ENGLAND.

Revenue-Income tax-Residence-Employmen abroad-Residence abroad during year o assessment-Wife and children resident in England-Assessment under Sched. D., case V -Employment abroad not a foreign possession -Assessment cannot be amended by the court P., the respondent, had, in England, entered int a contract to serve, during the whole of his tim for a period of years, a company carrying on business on the West Coast of Africa, wher P. was bound to reside. The agreement pro vided that the company should provide the re spondent with a lodging and certain expenses and he was to be entitled to come home t England on leave for certain stated periods The respondent maintained a house in England where his wife and children lived. He appeale against an assessment to income tax made upo him under Sched. D., case V., in respect of hi salary and commission under the agreement as foreign possession, upon the grounds (1) tho he was not resident in the United Kingdom, an (2) that his employment in Africa was not foreign possession.

Held, that while the burdens incidental to th respondent's employment were to be born wholly or mainly abroad, the principal benef which he was to derive from it could only b claimed in the United Kingdom. In thes circumstances it could not be said that his sourd of income was wholly outside this country, so a to bring him within case V. Held, further, that the time for assessing th respondent under case II. having expired, would not be right now to require the com missioners to make an assessment under the

Decision of the Court of Appeal (130 L. T. Rep.
492; (1924) 1 K. B. 323) affirmed.
Colquhoun v. Brooks (61 L. T. Rep. 518; 14
App. Cas. 493) followed.

APPEAL by the Crown from the decision of the Court of Appeal, reported 130 L. T. Rep. 492 ; (1924) 1 K. B. 323, in respect of an assessment to income tax in the sum of 500l. made upon the respondent for the year ended the 5th April 1920 by the General Commissioners under case V. of Sched. D. of the Income Tax Act 1918, in respect of the respondent's earnings outside the United Kingdom under an agreement made between the respondent and his employers in the following circumstances.

The assessment was made upon the respondent as a resident in the United Kingdom in respect of a possession abroad, and the two points raised by the appeal were, first, whether the respondent was in the circumstances properly held to be resident in the United Kingdom, and, secondly, whether if so the respondent's earnings under the agreement were a foreign possession under case V.

By an agreement made between the responIdent and the African and Eastern Trade Corporation Limited (hereinafter called the company) the respondent, who had for a number of years been in the employment of the company upon duties which required him to live abroad for the greater part of his time, agreed to serve the company for a period of two years in West Africa as their representative there. He was to spend nine months of each year in Africa, and to have three months' leave to be taken at the end of the first nine months' service, and a further three months' leave at the beginning of the second year, so that a period of six months was to be allowed for the respondent's journey to England on leave and his return to Africa for the second period of nine months. The respondent was receive a salary at the rate of 500l. a year while he was in Africa and travelling, and 7507. a year while at home, and he was also to receive a commission, which was to be paid to him through the company's offices in Liverpool. It was expressly declared by the agreement that the relation between the parties was not that of partners, but that of master and servant.

to

During the whole period of assessment the respondent was the tenant of a house in Blackpool, in which his wife and family resided during his absence in Africa. During the year of assessment the respondent was absent from England for all but the last few days of the period. The respondent's salary and commission were paid by the company into a banking account in England, on which the respondent's wife had the power of drawing.

The respondent contended that the assessment was bad on the following grounds: (1) that he was not resident in the United Kinodom : (2) that his salary and commission

assessment was rightly made, a was covered by Thomson v. or Bensted (1918) 56 Sc. L. R. 137).

The Court of Appeal held ( 492; (1924) 1 K. B. 323), affirm of Rowlatt, J. (129 L. T. Re 2 K. B. 413), that residence wa fact upon which there was evid the finding that the responder in the United Kingdom, but th from his employment abroad foreign possession, and the ass case V. was bad, and that as th power to assess the responde against the assessment must be The Crown appealed.

Sir Douglas Hogg, K.C. (A.-C Inskip K.C. (S.-G.), and R. P appellant.

A. M. Latter, K.C. and G. R for the respondent.

The House took time for cons

Lord CAVE, L.C.-The questi mined on this appeal is whether was correctly assessed to income of the earnings received from h in the financial year 1919-20.

During the period of assessm dent was employed by the Afric Limited (an English company) supervising agent in the colony the terms contained in two which the more important was May 1919. Under this agreem serve the company for a period and was to spend nine months the execution of his duties in. remaining six months' interva two periods of nine months w time occupied in voyaging to a and on furlough. The compa the respondent a salary of 50 while in Africa and voyaging, & pay for his board and other recog While at home the company v salary at the rate of 750l. per a fulfilment by him of his of company also agreed to pay to a commission on the net pro certain of their factories, the mission being 500l. It was p agreement that the respondent or claim payment in the color commission earned by him, b respect thereof was only to b through the office of the compa

Throughout the year of a respondent rented a house at Lancashire, and was rated as the house. His wife and famil but he was not himself in the U except for a few days towards year. The whole of his salary

employment out of the United Kingdom whic (like a trade) is a source of income; and I d not doubt that (to take two simple instances a doctor residing in England and practising i France only, or a mining engineer having residence here and wholly employed by Spanish mining company in Spain, might b held to have a foreign possession and to b assessable under case V.

But assuming this to be so, it does not follo that the appellant is entitled to succeed in h appeal. For that purpose it is necessary fo him to show that the respondent's employmen was wholly out of the United Kingdom, an that (to use Lord Macnaghten's expression the whole source of his income was overseas and this, in my opinion, he has not shown. will assume although I feel some doubt o the point-that the respondent's services t the company were to be rendered in Wes Africa only, and that he had no duties to h employers while he was in England; but remains true that the commission, which wa the principal remuneration for his service was, under the terms of his employment, pay able in England only, and that he was preclude by the express terms of his agreement from drawing or claiming payment of that con mission in the colony. In other words, whi the burdens incidental to his employmen were to be borne wholly or mainly abroad, th principal benefit which he was to derive fro it could only be claimed in the United Kingdor In these circumstances I do not think it can said that his source of income was wholly ou side this country, so as to bring him with case V.

There is a further difficulty which stands the appellant's way, namely, that the whole the respondent's remuneration was in fa paid to him here and not in Nigeria. The secon of the rules applicable to case V. is as follows "2. The tax in respect of income arising fro possessions out of the United Kingdom, oth than stocks, shares or rents, shall be comput on the full amount of the actual sums annual received in the United Kingdom from rem tances payable in the United Kingdom or fro property imported, or from money or val arising from property not imported, or fro money or value so received on credit or account in respect of any such remittanc property, money, or value brought or to brought into the United Kingdom, on average of the three preceeding years as direct in case I., without any deduction or abateme other than is therein allowed."

From this rule it follows that, in order to taxable under case V., an income arising fr possessions out of the United Kingdom m be received in the United Kingdom either from remittances payable in the United Ki dom, or (b) from property imported into United Kingdom, or (c) from money or va arising from property not imported, or (d) fr

H. OF L.]

66

Kingdom. The word remittances (which recalls the expression "remittances from thence " in the corresponding rule contained in the Act of 1842) clearly refers to money remitted into the United Kingdom from outside. The other branches of the rule all refer to property, money, or value imported or brought into the United Kingdom, and there are no words in the rule which can comprise money arising and payable here. If so, the inference is that money so arising and payable is outside the rule, and so is not taxable under case V. at all.

In my opinion, therefore, the appeal fails on the main point.

Your Lordships were asked, in the event of your holding that the respondent was not taxable under case V., to send the matter back to the Special Commissioners with a view to their now assessing the respondent in respect if the same income under case II. of Sched. D. I am far from saying that the respondent could not have been assessed under that case, or that the court has no jurisdiction when commissioners have proceeded under the wrong case to remit the matter to them under sect. 149 (2) of the Income Tax Act with a view to their making a proper assessment; but I do not think that such a course should be taken in the present instance. The revenue authorities have chosen deliberately to assess the respondent under case V. as on income arising from a possession out of the United Kingdom, and have persisted in that course notwithstanding the respondent's objections. The time for assessing him under case II. has now expired and I do not think that it would be right now to require the commissioners to make an assessment under that case. In my opinion, this appeal should be dismissed with costs.

Lord DUNEDIN. However much it may have been open, either in the original assessment or before the commissioners, to rest the liability on alternative cases under Sched. D, it is distinctly stated in this case that the present demand was based on case V. alone. It is not, therefore, I think, possible for your Lordships to consider whether, upon the facts as set forth an assessment might not be based on some other case.

The question for decision is accordingly whether the sum of 22451. received by the respondent in respect of his salary and commission is, to quote the wording of sect. 2 of Sched. D of the Income Tax Act, liable to be charged with a tax in respect of income arising from possessions out of the United Kingdom. Two propositions are here involved income must be income from a possession; and the possession must be out of the United Kingdom.

this

I think it is not doubtful that in the ordinary use of language one would not be apt to describe a man who gets a salary and commission on sales as enjoying a possession. But I think none the less that the case of Colquhoun v.

doubt what was then being c business or trade. But the groups employment along witl arguments which prevailed in to determine that the business are equally applicable to an en

Upon this point, therefore, 1 of Warrington, L.J. to that e other learned judges of the When, however, I come to the tion, I find myself unable to a income arising from a posses United Kingdom. This inco the contract of employment United Kingdom. When I sa United Kingdom" I am not refe where the signing of the cont I am referring to the source of is the payment which the emplo to make. This was payable and

I am fortified in this view by of the terms of rule 2 of the is the rule which would apply possession out of the United tax is to be computed "on th the actual sums annually United Kingdom from remitta the United Kingdom, or from arising from property not im money or value so received account in respect of any su property, money, or value b brought into the United K average of three years, &c." at once how entirely inappro expressions are to the case of salary and commission paid as therefore of opinion that on t stated and argued as to t liability the Crown fails.

As to the application to re order that the assessment m an assessment founded on so have nothing to add to what the Lord Chancellor.

Lord ATKINSON.-I concur. Lord SUMNER.-I concur. Lord BUCKMASTER.-Mr. Pickles, the respondent in thi found to be a person residin Kingdom. He was engaged Association Limited, to serv Africa as district supervising & of 500l. and commission, and his employment it was provide not draw nor claim payment respect of commission, but should only be made to him t of the company in Liverpool. as a fact by the Special Comm whole of his salary was also pa account in England upon wh the right to draw. He was as tax in the sum of 500l., for the 5th April 1990 the basis