TMI Blog1955 (11) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... some fees for stud services to outsiders. It is not permissible to writ in the highest figure which could have been obtained for the transferred horses in the open market. One must not impute to the taxpayer profits which he might have made but has not in fact made. That is a matter of general principle: see Laycock v. Freeman, Hardy Willis Ltd. [1939] 2 K.B. 1; 7 I.T.R. 237 and Briton Ferry Steel Co. Ltd. v. Barry [1940] 1 K.B. 463; 9 I.T.R. Suppl. 122. There must be two parties if there is to be a sale, and until goods are sold no profit arises. One does not make or earn profits merely by producing an article. It is not until the stock in trade is actually disposed of that a profit is made. If a man eats grapes which he has grown himself he does not make a profit. He is not to be taken to have been dealing with himself in another capacity and earning his grapes at the full market value. These horses were withdrawn from the stud farm just as a farmer may withdraw a hundred geese from his farm at Christmas to give away as presents. No income tax significance can be attached to a trader taking stock out of his trade for his personal use. Land may have a mixed use, partly to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activitives. But that case was wrongly decided and, in any event, did not go so far as to affect the withdrawal of an asset to a recreational activity.. Accordingly, even if it was rightly decided it does not affect this case. If no horses had been sold or stud services rendered to outsiders there would have been no husbandry made taxable under Schedule D by section 10 of the Finance Act, 1941. [Section 26 of the Finance Act, 1938, was also referred to.] Sir Reginald Manningham-Buller Q.C., A.G., in reply. This problem only arose since farming was to be assessed under Case I of Schedule D instead of under Schedule B by virtue of section 10(1) of the Finance Act, 1941. Farming must now be dealt with as a trade, even if one would not so consider it apart from statutory provision. Even if the stud had been kept solely for the purposes of Lady Zia's racing, the activity would still have been farming within that sub-section and taxable accordingly. The definition of husbandry in dictionaries such as Murray's and Webster's are unrelated to the question whether there have been sales of produce. In this it is different from market gardening under section 10. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or their market value at the date of transfer. The court 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 Vaisey J., and on July 24, 1953, that learned judge gave judgment allowing the appeal. In his opinion the case was indistinguishable in principle from Watson Brothers v. Hornby [1942] 168 L.T. 109; [1942] 2 All E.R. 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 Vaisey J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 no understand how her taxable profits in respect of the stud farm can be principle be the greater or the less because the profits of the racing establishment are or are not taxable. The problems, 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 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 paragraph 2 of 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 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account which in effect adds to a fictional receipt a false attribution of expenditure. This is, however, the position with which we are faced. Your Lordships may not think it necessary to express any opinion on the question whether, if the Crown is not right in requiring market value to be brought into account in the present case, it is nevertheless entitled to require the cost of production to be brought in. This is said to be of no importance in this case, though it might well be of great importance in other cases. Yet I cannot refrain from calling attention of what must be fundamental to the solution of the question. For I cannot escape from the obvious fact that it must be determined whether and why a trader, who elects to throw his stock in trade into the sea or dispose of it in any other way than by way of sale in the course of trade, is chargeable with any notional receipt in respect of it, before it is asked with how much he should be charged. It is, as I have said, a surprising thing that this question should remain in doubt. For unless, indeed, farming is a trade which in this respect differs from other trades, the same problem arises whether the owner of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls at market price. It is a decision upon which the appellant relies in the present case, and which, as I have said, Vaisey J. regarded as an authority binding him. The learned Judge also derived some assistance from Inland Revenue Commissioners v. William Ranson Sons Ltd. [1918] 2 K.B. 709; 34 T.L.R. 533, in which it was at last recognized that for tax purposes two parts of an enterprise carried on by a taxpayer should be treated as distinct. But it was not, I think, an issue in that case at what price goods should be deemed to be transferred from one part to the enterprise to the other. In the Court of Appeal two cases were relied on which appear not to have been cited to Macnaghten J., in Watson Brother v. Hornby. They were Laycock v. Freeman, Hardy and Willis Ltd. [1939] 2 K.B. 1; 55 T.L.R. 218; [1938] 4 All E.R. 609; 7 I.T.R. 237, and Briton Ferry Steel Co. Ltd. v. Barry [1940] 1 K.B. 463; 9 I.T.R. Suppl. 122. The value of these cases lies less in their direct bearing upon the present case than in the observations of the late Lord Greene, which must always have great weight with any court. In the former case the primary question was whether there had been a succession fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same way, it would, I suppose, be claimed that, if Lady Zia were to transfer or re-transfer a horse from her racing establishment to her stud farm, some figure would have to appear in the stud farm accounts in respect of that horse, though it cost her nothing to make the transfer: if it were not so and she subsequently sold the transferred horse and the proceeds of sale were treated as receipts of the stud farm, she could justly complain that she had been charged with a fictitious profit. My Lords, how far is this principle, which is implicate in the judgments that I have cited and in the admission upon which this case has proceeded supportable in law? That it conflicts with the proposition taken in its broadest sense, that a man cannot trade with himself is, I think, obvious. Yet it seems to me that it is a necessary qualification of the broad proposition. For, if there are commodities which are the subject of a man's trade but may also be the subject of this use and enjoyment, I do not know how his account as a trader can properly be made up so as to ascertain his annual profits and gains unless his trading account is credited with a receipt in respect of those goods wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a farmer or market gardner is liable, under section 10 of the Finance Act, 1941, to pay income tax under Schedule D, Case I, on the market values of goods which he does not sell but takes or uses for his own purposes. The respondent's wife, Lady Zia Wernher, owns two studs of horses at which she breeds racehorses, some of which she sells and some of which she puts into training. It is common ground that stud farms are trades for the purposes of income tax and that a racing stable is not. The Inland Revenue contend that the respondent is liable under section 10 of the Act of 1941 for income-tax on the market value of the horses his wife puts into training as well as on the prices she obtains for the horses she sells. The words of section 10 of the Act of 1941 are, so far as material, as follows: (1) Subject, as respects farming and farm land, to the provisions of the next succeeding section, farming and market gardening shall be treated as trades for the purposes of income tax and accordingly-(a) the profits or gains thereof shall be charged under Case I of Schedule D; and (b) income-tax shall not be charged under Schedule B in respect of the occupation of any farm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.B. was right and no authority inconsistent with his view was cited to your Lordships. The idea of a person trading with himself is inconsistent with the idea of ownership. An owner can do as he likes with his own property to himself either at the market or any other value apart from legislation to that effect. Any sale so called which a trader makes to himself must be notional and not actual . He cannot make a commercial profit or loss by transferring an asset from himself to himself or by a gift to someone else on matter what price he notionally ascribes to the transaction. It may be said that such things rarely happen, and that the maxim de minimis is applicable, but it is impossible to answer the difficulty in that way because a trader's assets may be of great value, e.g., a diamond tiara or, for that matter, a thoroughbred two-year-old. It follows from this that an owner in trade can withdraw any asset he chooses from his trade for his own use provided, of course, that he does so bona fide and not with the intention of selling it outside his trade to someone else. But the it is argued that, even if Palles C.B. was right that a trader cannot trade with himself an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done in accordance with accounting practice by crediting the amount of the expenses. For these reasons I am of opinion of the findings of the commissioners and the judgment of the Court of Appeal were right. LORD RADCLIFFE . My Lords, this is a short, but very difficult, point. I believe that the most convenient way of expressing my opinion is to discuss in order some of the lines of argument that seem to have been most dwelt upon during the course of the case. First there is the point that the respondent's wife carries on a stud farm and the activities of the stud constitute farming within the meaning of section 10 of the Finance Act, 1941. This much is common ground and it is given to us by paragraph 2 of the case stated. It is worth observing that what is common ground is that is that the activities themselves constitute farming, not that only such of them constitute farming as can be seen ex post facto to have been devoted to the production and rearing of foals subsequently sold or to the obtaining of stallion fees. What follows, according to the appellant, is all quite simple. The Act has declared that farming is to be treated as a trade for the purposes of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did, the imputed income so assessed was reduced to the actual amount of the profit and any tax paid adjusted accordingly. What happened when an occupier came forward and showed little or no actual profit in the year because he had taken most of the produce at cost price? I do not know the answers to these questions. But I think that they are relevant enough to make me feel rather suspicious of the respondent's tempting scheme of marking everything out to the owner at cost. On the other hand, I think that it throws too much weight on the bare enactment that farming is to be treated as a trade for income-tax purposes to deduce from it that all disposals are to be assumed to have been made in the course of trading and that consequently a receipt must be entered equivalent to the market value of the stock disposed of. That may, indeed, be the right result: but, if there is any general principle of income tax law with which it conflicts, as the respondent says that there is, then I would not say that the mere wording of the statute stands in his way. What, then, is the importance to this case of a general proposition such as that of Palles C.B.: No man, in my opinion, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o us is a different one. For we are required to assume, what those decisions in effect denied, that the activities to which the accounts relate do constitute a trade for income-tax purpose; and our problem is to determine what upon that basis are the proper entries to make in those trading accounts in relation to certain transactions with trade stock. I doubt very much whether the result of those decisions could have been what it was if the income-tax statute had declared that the operations in question were to be regarded as a trade and, as such, a source of taxable profit. So, all things considered, I do not think that we ought to treat the respondent's general proposition as precluding the possibility that the income-tax scheme may be found to require that in certain situations a taxpayer should be treated as if he had dealt with himself on commercial terms. To begin with, I am not prepared to forget that the tax code already achieves this fictitious separation in various ways. The owner-occupier of business premises charges against his trade receipts the annual value of those premises for the purposes of his Case I Schedule D assessment (Income-tax Act, 1918, rules appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven in 1942: it laid down a principle that must continually affect a great many taxpayers: and only now is it said that the case was wrongly decided. I find another instance in Back v. Denials [1924] 2 K.B. 432; 40 T.L.R. 811 (C.A.); [1925] 1 K.B. 526; 41 T.L.R. 162, which raised again the difficult problem of taxing part of a taxpayer's activities under Schedule B and another part under Schedule D. The taxpayers in that case were a firm of wholesale potato merchants who carried on business in London, where they sold all the potatoes raised by them on land in the Fen district. The effect of the decision was that the Schedule B assessment on the profits of occupation prevented any assessment under Schedule D in respect of the profit the firm made when they sold the potatoes as wholesale merchants in London. But the interesting point is that the taxpayers did not dispute that in addition to their liability to income-tax under Schedule B they may be liable to income tax on a sum in the nature of a commission to themselves for selling their own potatoes (in the same way as they sell other people's potatoes in London on the market (per Roulette J.) [1924] 2 K.B. 432, 449. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur lordships on the present appeal is the place that we should assign to the two decisions: Laycock v. Freeman, Hardy Willis Ltd. [1939] 2 K.B. 1; 7 I.T.R. 237 and Briton Ferry Steel Co. Ltd. v. Berry [1940] 1 K.B. 463; 9 I.T.R. Suppl. 122. To the Court of Appeal they have seemed to have so direct a bearing upon the present question as to leave them no option but to decide the appeal in favour of the respondent. I am bound to say, with sincere respect for their point of view, that I cannot follow that. I do not regard those decisions as having any true bearing at all upon this appeal. As decisions, obviously, they have not. They are decisions upon the difficult and, often, unsatisfactory question of what constitutes succession to a trade for the purpose of the relevant section of the income-tax code. That is a long way from the question now before us. But even the expository passages upon which reliance was placed appear to me to fall short of suggesting any general principle that should guide us, unless it be that if interdepartmental transfers of stock are made at cost that, Somehow, represents a real figure, whereas a transfer at cost plus a figure of conventional profit rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other hand, it was not argued before us by the respondent that this method would be the right one to apply: and a tax system which allows business losses to be set off against taxable income from other sources is in my opinion bound to reject such a method because of the absurd anomalies that it would produce as between one taxpayer and another, it would give the self-supplier a quite unfair tax advantage. Secondly, the figure brought in as a receipt might be cost. That is what the respondent contends for. It is not altogether clear what is to be the basis of such an entry. No sale in the legal sense has taken place nor has there been any actual receipt: the cost basis, therefore, treats the matter as though there had been some sort of deal between the taxpayer and himself but maintains that in principle he can only break even on such a deal. I do not understand why, if he can be supposed to deal at all, he must necessarily deal on such self-denying terms. But then the respondent argues that the cost figure entered as a receipt is to be understood as a mere cancellation of the cost incurred to date. The item of stock transferred to the owner's private account is shown by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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