TMI Blog1938 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... med balances. In order to understand exactly what that means it is necessary to refer shortly to the nature of the business carried on by Messrs. Tattersall. They are auctioneers who carry on business at London, Newmarket and Doncaster. They also have a training establishment, but that does not come into this picture because the profits of that business are separately assessed. We are only concerned with the auctioneers' business. The main income of the auctioneers' business consisted, of course, of commissions, but they received on behalf of clients who sold their animals through them the purchase price paid by the purchasers, and Before February 23, 1922, the business was carried on by Mr. E.S. Tattersall alone. By a deed of partnership of that date he took into partnership Mr. G.H. Deane and by a later deed of March 23, 1936, those two partners took into partnership Mr. Needham. When Mr. Deane, was taken into partnership an arrangement was made under the deed of partnership in relation to certain amounts standing in the accounts of the business in respect of unclaimed balances for the years prior to 1908. I should say, before I come to look a little m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that whereas, previouly to that alteration in the method of keeping the accounts, the business had been carrying as a liability on the face of its accounts the entire amount which it had received but had not yet paid over, it now determined to treat some portion of that liability as not being an effective liability. Of course, a transaction of that kind could have no effect whatsoever upon the right of the client to call for his money if he were minded so to do. It was merely a private arrangement between the partners as to the way in which their assets and liability should be dealt with in the accounts and had no effect on the legal position at all vis-a-vis the clients. When Mr. Needham was taken into partnership an arrangement of a similar character was made and appears in the articles of partnership. In substance it was this: The date December 31, 1934, was taken and the amount standing as at that date in the partnership accounts in respect of unclaimed balances arising in the period 1908 to 1928 inclusive, amounting in all to 10,406 10s. 1d., was transferred as to 9,088 2s 1d. to Mr. E.S. Tattersall's current account as on the December 31, 1934 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es existing on December 31, in the year of account as first arose not less six years previously to that day and should not already have been transferred should be transferred to the credit of the partners in the proportion in which on December 31 in the year of account they were entitled to share in the profits of the business. Sums so transferred were to be placed to the credit of the capital account of the several partners up to a certain extent and thereafter to be placed to the credit of their current account. There again, of course, that arrangement had no effect whatsoever on the customers and did not diminish their legal rights, and it was provided that the liability should continue to be borne by the partnership. But that liability they agreed should not be entered in the accounts, notwithstanding the fact that the partners still bore it. The Special Commissioners held that the unclaimed balances were not trading receipts in respect of which the firm was assessable to income-tax. Lawrence, J., reversing the decision of the Commissioners, held that the balance when distributed to the partners were trading receipts, even though a contingent liability attached to them, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t I, with respect, conceive to be the fallacies underlying the Crown's argument are perceived-that the only thing which was done on these occasions was the elimination from the liabilities side of the balance-sheet something which had previously appeared as a liability therein. The Crown put forward two arguments. The leading counsel for the Crown put forward one argument and adumbrated another argument which he only sketched and did not develop. The junior counsel would have none of the leading counsel's argument, and developed at considerable length the argument which the learned leading counsel had only adumbrated. Both arguments proceeded on the footing that it was impossible to say that the sums when received were trade receipts. That was subject to a qualification, I think, in the leading counsel's argument, as will appear when I come to describe it. It might, I think, be more convenient to deal with the junior counsel's argument first, because that is the one which starts off with this perfectly clear admission, that the money when received from the purchasers was not a trade receipt. That proposition, I should have thought, in any case, was quite incontes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted a sum received years and years ago into something which it never was, is a thing which, with all respect, passes my comprehension. The junior counsel for the Crown, when challenged for an authority, committed himself to the proposition that Lambert Brothers, Ltd. v. Inland Revenue Commissioners was a clear authority in his support. When pressed a little bit about that, I think he realised slightly from it, but he still nailed Lambert's Case to his mast and, therefore, I must examine Lambert's Case. It is a case which arose out of the Government arrangements made during the War in respect of the bunkering of merchant vessels at Gibralter. For that purpose a pool was set up under a committee of the Gibralter coal merchants, and arrangements were made under which they were provided with supplies of coal which they were to sell to the vessels requiring bunkers at prices agreed, with a provision for the profit which they were entitled to make, a profit which the Government was entitled, if it were so minded, to increase. It so happened that at the conclusion of hostilities, when stock was taken, there was a very large surplus stock of coal left in the pool. It is importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isleading metaphors that were employed to describe the transactions carried out between the partners. The object of that metaphorical language quite clearly was to give to the transaction the quality of a receipt of something at the moment the transaction was effected. It was essential, of course, for the argument, to discover some act of receipt within the income tax year for which the assessment was made, and, in order to get an act of receipt, the metaphorical expressions were used such as I have described, the holding in a new capacity, of something which the partners had previously held in a different capacity, the turning into a trading asset of something which had previously not been a trading asset, and things of that kind, which, if they accurately represented the facts, might form some basis for an argument that, at the moment when they took place, a receipt had taken place; but once it is realised that this money was received years and years and years before, and had merely remained where it stood, remained among the assets of the firm, and that all the firm had done was a domestic act inter socios, by which Greene, M.R. [His Lordship stated the facts and continued]: Pau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have none of the leading counsel's argument, and developed at considerable length the argument which the learned leading counsel had only adumbrated. Both arguments proceeded on the footing that it was impossible to say that the sums when received were trade receipts. That was subject to a qualification, I think, in the leading counsel's argument, as will appear when I come to describe it. It might, I think, be more convenient to deal with the junior counsel's argument first, because that is the one which starts off with this perfectly clear admission, that the money when received from the purchasers was not a trade receipt. That proposition, I should have thought, in any case, was quite incontestable. The money which was received was money which had not got any profit-making quality about it; it was money which in a business sense was the client's money and nobody else's. It was money for which they were liable to account to the client, and the fact that they paid it into their own account, as they clearly did, and the fact that it remained among their assets until paid out, do not alter that circumstance. It would have been for income-tax purposes in my judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , I must examine Lambert's Case. It is a case which arose out of the Government arrangements made during the War in respect of the bunkering of merchant vessels at Gibralter. For that purpose a pool was set up under a committee of the Gibralter coal merchants, and arrangements were made under which they were provided with supplies of coal which they were to sell to the vessels requiring bunkers at prices agreed, with a provision for the profit which they were entitled to make, a profit which the Government was entitled, if it were so minded, to increase. It so happened that at the conclusion of hostilities, when stock was taken, there was a very large surplus stock of coal left in the pool. It is important to note the facts found by the Commissioners with regard to that, and they appear on page 1057 of the report in par. 14 of the case. They say this: It was impossible to determine how the surplus arose, but three causes were suggested-under-estimate of the existing stocks, over-shipments to the pool, or short deliveries out of the pool . Therefore, there was finding of fact that it was impossible to determine how that surplus arose. After negotiations with the Government, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent argument which was advanced by the leading counsel for the Crown. He, again, was not prepared to suggest-and, indeed, he could not have suggested-that the sums on their receipt were trading receipts, but he said that in respect of each year's receipts from purchasers there was always present an unascertained proportion, which I may call X , which ultimately would never be claimed, and that, therefore, it was permissible to treat the partners, in each year in which they received (let me say) ? 10,000, as having received as a trading receipt X . He says, of course, you cannot at the moment of receipt say what X is, because non constat in any particular year that there will be any customer who fails to call for his money, and you cannot say of any customer that a proportion of his money will ultimately not be claimed, nor can you say of the aggregate of the whole that any definite proportion will not be claimed, but from business experience he says it is possible to estimate each year that X will not be claimed. Then he says that ultimately X becomes quantified, and it becomes quantified, not by any extinction of the liability, but by the act of the partners in decidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u have finally decided, we are going to say the value of this 'X' is now ascertained. I apprehend that if there were any foundation for the argument, the valuation must take place in the year of receipt, and if (which is admitted, and is clearly the case) X is a thing which cannot be valued at that time, the answer to it is that X equals nought, and that I should have thought, was the end of that matter. But quite apart from that, it appears, to me really, with greatest respect to the argument that was addressed to us, a fantastic idea that each year's receipts are to be treated as having this mysterious element wrapped up in them. Various authorities were referred to. I do not think it necessary to refer to any of them except the one to which I have referred, Lambert Brothers, Ltd., v. Inland Revenue Commissioners. There is one other which I shall mention in a moment, which is the case referred to by the learned judge. I have not yet said that the Special Commissioners' finding was as follows: Having considered the evidence and arguments adduced before us we held that the said unclaimed balances were not trading receipts in respect of which the firm was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere contingent liability in the sense in which the learned judge appears to regard it. It is an existing liability which can only be enforced when the creditor has made a demand. But treating it as a contingent liability, he says: Here is a receipt-receipt, be it observed, at the date of the alteration in the accounts, not at the date when the money was originally received, but a receipt at that date-with (tied to it, so to speak) a mere contingent liability which may never become effective, and, for income-tax purposes, that contingent liability can be disregarded. I think it sufficiently appears from the judgment which I have delivered why it is that I take a different view from that taken by the learned Judge, but I should add one thing that I should have added earlier, and it may conveniently be added here: the junior counsel for the Crown suggested that we could proceed upon the footing that these balances-the unclaimed balances, as they are called-in fact never would be claimed. I wish to say quite clearly and emphatically that such an assumption I decline to make. There is no particle of foundation for it in the facts as found. It was a matter of fact which was proper to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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