TMI Blog2004 (9) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on section 130(2). The assessments were out of time. - - - - - Dated:- 28-9-2004 - Judge(s) : R. K. AGRAWAL., PRAKASH KRISHNA. R v. Downes [1875] 1 QBD 25, CCR and National Assistance Board v. Prisk [1954] 1 WLR 443, DC applied. Decision of the Supreme Court of Mauritius reversed. The following cases are referred to in the judgment of their Lordships: Hillenbrand v. Inland Revenue Comrs [1966] 42 TC 617 McClelland v. Taxation Comr [1971] 1 WLR 191; [1971] 1 All ER 969, PC National Assistance Board v. Prisk [1954] 1 WLR 443; [1954] 1 All ER 400, DC R v. Downes [1875] 1 QBD 25, CCR The following additional cases were cited in argument: Beetham v. Comr of Inland Revenue [1972] 72 ATC 6042 Californian Copper Syndicate (Ltd and Reduced) v. Harris [1904] 5 TC 159 City Equitable Fire Insurance Co. Ltd., In re [1925] Ch 407, CA Clark v. British Telecom Pension Scheme Trustees [2000] STC 222, CA Clixby v. Pountney [1968] Ch 719; [1968] 2 WLR 865; [1968] 1 All ER 802; 44 TC 515 Comr of Inland Revenue v. Walker [1963] NZLR 339 Duval v. Comr of Income Tax 1983 MR 67 Edwards v. Bairstow [1956] AC 14; [1955] 3 WLR 410; [1955] 3 All ER 48, HL(E) Eunson v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of any undertaking or scheme entered into or devised for the purpose of making a profit, irrespective of the time at which the undertaking or scheme was entered into or devised ..." The short question on this appeal is whether, and if so how, paragraph (h) applies to a landowner who enters into a scheme with a developer under which the developer expends money so as to bring the development land into a state in which building plots can be sold off to individual purchasers and under which the landowner takes a proportion of the sum for which each plot is sold with the developer taking the balance. The taxpayer contends that the whole of his receipts under such a scheme constitute capital and should not be brought into account under paragraph (h) as "gross income". The Commissioner, on the other hand, seeks to uphold assessments under which the whole of the receipts are treated as taxable income and no deductions representing the capital value of the development land before the implementation of the scheme are made. There is also a second question, namely, whether two of the assessments made against the taxpayer, those relating to the years 1989/90 and 1990/91, were out of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearings of the taxpayer's appeals against the six 1989 to 1994 assessments. Later in 1988 the prospect of the sale for the purpose of residential development of a further 75 arpents of the land arose. The 75 arpents had a frontage to the beach and included the disused sand quarry. It was proposed that the 75 arpents be subdivided into 456 building plots and that the building plots be sold off to individual purchasers. Before, however, that could be done the consent of the Ministry of Works to the proposed subdivision of the land (the "morcellement" of the land) was necessary. The implementation of the development proposal involved three parties: first, the developer, Societe Roger de Chazal ("the Societe") whose responsibility it would be to undertake all measuring and surveying of the 75 arpents, the demarcation of the 456 building plots, the in-filling of the disused quarry so as to render the area suitable for the building of houses, the construction of estate roads and drainage and, generally, the management of the project; secondly, Medine, the landowner; and, thirdly, the taxpayer, who would have to permit the Societe to have access to the site in order to carry out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the compulsorily acquired land. In the event, this was 50.04% to the taxpayer and 49.96% to Medine. By a letter dated 17 November 1988, addressed to Medine c/o the Societe, the Ministry of Works consented to the morcellement application that had been made. The consent was expressed to be subject to a number of conditions. These included: "1. The access roads be constructed and tarred to the satisfaction of the highway authority; "2. Drains, kerbs and pipe culverts be provided to the satisfaction of the highway authority ... "4. Necessary back filling of the land with proper materials to be done and compacted to the satisfaction of the district council ... "5. Electricity and street lighting conductors to be provided to the satisfaction of the Central Electricity Board ..." These conditions demonstrate that substantial expense had to be incurred before the sale-off of any building plots could take place, all of which expense was to be met from the Societe's half share of the prices paid for the plots. Medine and the taxpayer had to do nothing but make available the development land, i.e., the 75 arpents. The development of the 75 arpents into building plots and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to a request from the Commissioner in a letter to the Societe dated 4 November 1994. It is safe, therefore, to conclude that by November 1994 at latest the Commissioner was aware that the taxpayer had been receiving substantial payments arising from the morcellement of the 75 arpents. There is no finding that justifies placing the Commissioner's awareness of this at any earlier date. The assessment for the tax year 1991/92 was issued by the Commissioner in June 1995. The assessments for the tax years 1989/90, 1990/91, 1992/93, 1993/94 and 1994/95 were not issued until June 1997. No explanation has been given for the two-year period between the issue of the 1991/92 assessment and the issue of the other assessments. Each of the assessments includes, as an ingredient of "Total gross income", an amount attributed to "Trade, business, profession". This amount represents the taxpayer's morcellement receipts for the income year to which the assessment relates. For example, the assessment for the year of assessment 1989/90, based on the taxpayer's income in the year 1988/89, includes the sum of Rs. 7,217,142. This represents the total of morcellement payments received by the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference has already been made (paras 1 and 2 above). It has not been suggested that any other provision in Part III has any relevance to this case. Section 11(1) says that "the gross income" of a person includes, among other types of receipt, "(a)(i) the gross income derived from a business. ... (g) any sum or benefit, in money or money's worth, derived from the sale of any property or interest in property, where the property was acquired in the course of a business the main purpose of which is the acquisition and sale of immovable property; (h). . . (j) any other income derived from any other source." In their Lordships' opinion if the taxpayer's morcellement receipts are to be taxable the case must be brought under paragraph (h). Paragraph (a) is not applicable. The taxpayer was not carrying on a business. Paragraph (g) is not applicable. He did not acquire the 75 arpents in the course of a land-dealing business. And paragraph (j) cannot apply unless the capital content of the morcellement receipts is deducted so as to leave an element that might be capable of being described as "income". So the case must be brought under paragraph (h). But the content of the other paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 129 in respect of a period beyond four years of assessment preceding that year of assessment. "(2) The Commissioner may, in case of fraud or wilful neglect, at any time make an assessment under section 129." The assessments made by the Commissioner in June 1997 in respect of the years of assessment 1992/93,1993/94 and 1994/95 were made within the four years prescribed by section 130(1). But the assessments in respect of the years of assessment 1989/90 and 1990/91 were made outside that four-year period. Those assessments can only stand, therefore, if the failure of the taxpayer to include his morcellement receipts in his returns for the two years in question was attributable to "fraud or wilful neglect". The Tax Appeal Tribunal In its determination of 20 October 2000 the tribunal found against the taxpayer both on the substantive issue and on the time bar issue. As to the time bar issue, the tribunal referred to the provisional and incomplete character of the 1988/89 return, incorrectly noted that a receipt of Rs 9,499,815 had been declared by the taxpayer in his 1990/91 return, referred to the information received by the Commissioner in 1994 and continued: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid: "The tribunal found that there had been wilful neglect on the part of the [taxpayer] in that, first, his tax return for the year of assessment 1989-1990 was only a provisional and incomplete one and, secondly, he failed to provide additional information as requested when the respondent came to know in 1994 of the sources of the various sums he had received in the year of assessment 1990-1991. We hold there was sufficient evidence before the tribunal to base a finding that there had been wilful neglect ..." So the taxpayer's appeal was dismissed. Their Lordships regret to have to say that they are in disagreement with the tribunal and the Supreme Court on both points. It is convenient to take the substantive point first. The substantive point Their Lordships were told that there was no local case law regarding the meaning and effect of section 11(1)(h) of the 1974 Act. But the comparison drawn by the Supreme Court between section 11(1)(h) and the 1936 Australian statute is instructive. The Australian Act requires that "profit arising from the sale" (emphasis added) be brought into account. Section 11(1)(h) may be compared also with section 65(2)(e) of New Zealand's In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as subjecting to tax the whole of the sale price of a property acquired in the course of a land dealing business. Second, the "undertaking or scheme" has to be an undertaking or scheme "entered into ... for the purpose of making a profit". Suppose a case where the landowner agreed with the developer to accept such portion of the sale price of each building as represented the market value of the plot prior to the commencement of the development. How could it be contended that the landowner had entered into his agreement with the developer "for the purpose of making a profit"? Their Lordships have no difficulty, on the facts of this case, in agreeing with the Supreme Court that the taxpayer was party to an "undertaking or scheme entered into or devised for the purpose of making a profit". But the only profit the landowners, Medine and the taxpayer, stood to make was their respective share of the value added to the land by the work to be done by the Societe in implementing the morcellement scheme. In their Lordships' opinion, paragraph (h) should be construed so as to equate the "sum or benefit" which is subjected to tax with the profit or gain derived by the taxpayer from the undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bide by the 50.04 : 49.96 split fixed by the arbitral proceedings instituted in relation to the compensation to be paid by the Government for the land compulsorily acquired. It is clear from the correspondence that this agreement, too, was reached by parties negotiating at arm's length. The combination of the written agreements between the Societe and Medine and the agreement by correspondence between Medine and the taxpayer show that the taxpayer's leasehold interest in the 75 arpents had a real market value, including a ransom value, prior to the implementation of the morcellement scheme and, therefore, not derived from the scheme. The defect in each of the six assessments is, in their Lordships' view, a matter of principle. The assessments were made and have been defended on the basis that the totality of the morcellement receipts represent taxable income in the hands of the taxpayer whether or not there is any profit element included in them. This basis is, in a case where it is clear that the 75 arpents did have a substantial market value prior to the implementation of the morcellement scheme, wrong in law. Section 129(1) requires the Commissioner to make an assessment "ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing of information" entitled the Commissioner to raise assessments under section 130(2). There was no reasoning that explained the leap from a finding of a failure to disclose to the conclusion that there had been a deliberate concealing of the information. There was no express finding by the Tribunal that the taxpayer's failure to disclose had been intentional or purposive nor that the taxpayer must have known that he had a duty to disclose in his tax returns the morcellement payments he had received. It may be said that the tribunal's expressed view that there had been a "concealing" of this information represents an implied finding that the taxpayer knew he had a duty to disclose and had intentionally failed to do so. In their Lordships' opinion that is not good enough. A taxpayer who is to be found guilty of "wilful neglect" is entitled to express findings of the primary facts that, in the tribunal's view, justify the "wilful neglect" conclusion. A finding of no more than a "failure" is not enough. The Supreme Court upheld the tribunal's finding of wilful neglect. They did so on the footing that the finding was justified by the provisional and incomplete 1989/90 return a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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