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TMI Blog1957 (3) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... the English Bar) and W. Grieve (of the Scottish Bar) for the Crown. The following authorities, besides those referred to in their Lordships' opinions, were cited in argument: Vallambrosa Rubber Co. Ltd. v. Farmer 1910 S.C. 519 ; 5 T.C. 529 ; Mohanlal Hargovind of Jubbulpore v. Commissioner of Income Tax for Central Provinces and Berart Nagpur [1949] A.C. 521 ; 65 T.L.R. 518 ; [1949] 2 All E.R. 652 ; 17 I.T.R. 473 ; Inland Revenue Commissioners v. Pilcher [i949] 2 All E.R. 1097 ; 31 T.C. 314 ; Murray v. Inland Revenue Commissioners [1951]32 T.C .238 Macklow Brothers v. Frear (1914) 33 N.Z.L.R. 264 ; James Jones & Sons Ltd. v. Earl of Tanker- Ville [1909] 2 Ch. 440 ; 25 T.L.R. 714 ; Kursell v. Timber Operators & Contractors Ltd [1927] 1 KB. 298 ; 42 T.L.R. 435-U) (1950 32 T.C. 238. Their Lordships took time for consideration. Mar. 14. Viscount Simonds. My Lords, the facts of this case are fully stated in the opinion of my noble and learned friend, Lord Keith of Avonholm, which I have had the privilege of reading and I will not occupy time by stating them at length myself. Apart from some confusion which has arisen from the manner in which the Commissioners for the General Purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken into account for the purpose of computing his trading profits for the years in question. The appellant alleged that they could, as representing the purchase price of stock in trade; the respondent denied it, saying that these were capital sums paid for an enduring right to cut timber. The commissioners held that the payments were in the nature of capital expenditure and this was the question submitted for the opinion of the court. The proceedings before the court, the remit to the Commissioners and their further findings are fully stated in the opinion of my noble and learned friend and I refer to what he will say. It appears that when the matter came before the Commissioners, whether originally or at a later stage, they had no other accounts of the trade than a profit and loss account and a balance sheet for the year ended March 31, 1948, together with a stock valuation as at the same date. It is worth while to glance at these documents, for it is possible that the Commissioners may have been misled by them into making a statement much relied on by the appellant for which there was no possible justification, that the payments in question "constituted the purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioners, and their somewhat contradictory conclusions, I do not doubt that the sums payable under the agreements were (to answer the question of law as put in the case) of the nature of capital expenditure, and the Court of Session was right in so holding. My Lords, I think it right to add, in view of the argument at the Bar, that, in my opinion, this appeal does not raise any broad question of principle nor do I think it relevant to discuss the impact of the Sale of Goods Act upon a purchase of an ascertained tree or trees. Though the agreements are in certain respects unusual and though the manner in which the case has been presented to the court is probably unprecedented, in essence this case raises once more the familiar question which from Alianza Co. Ltd. v. Bell [1904] 2 K.B. 666, 673; 20 T.L.R. 634; (C.A.) [1905] 1 K.B. 184; 21 T.L.R. 134; H.L. [1906] A.C. 18; 22 T.L.R. 94 onwards has been the subject of so many judicial decisions. But, unlike many cases where it is difficult to say on which side of the line the case falls, here I can find no factor which does not lead inescapably to the conclusion that the payments were in the nature of capital expenditure. I wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in any event they were not satisfied that the sums were proper commercial prices for the timber in question. On appeal on July 2, 1954, the Court of Session remitted the case to the Commissioners to amplify and amend the case and if so moved by either party to take further evidence. The Commissioners, on May 26, 1955, without further hearing made the following further findings: "(1) The words 'capital payments' were used by us to denote payments made from the capital of the business and were intended so to indicate that the payments under the contracts referred to were substantial sums and therefore represented capital in the ordinary meaning of the word. But as these payments did not purchase what can be regarded as fixed capital assets we must regard them as having been made from the circulating capital of the business. We further find in fact that the payments in question referred to in our previous decision constituted the purchase of stock in trade of the business of timber merchants and that this stock is represented in the sales of the business. (2) In our decision we said that we 'were not satisfied that the said sums were proper commercial prices.&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary for the cutting of any timber. The individual trees were not specified but were to be selected by the appellant and were to be cut down to the soil but not the roots or other parts which should be within or below the surface of the soil. The trees were 70 to 80 years old and were ripe for cutting. The respondent's contention is that the trees were parties soli and that there is no distinction between the present case and the cases of mines such as Alianza Co. Ltd. v. Bell [1906] A.C. 18 and Kauri Timber Co. Ltd. v. Commissioner of Taxes [1913] A.C. 771; 29 T.L.R. 671, in which it was held that no allowance could be made for exhaustion of the mines and that payments for the timber there in question were capital which could not be deducted in arriving at the balance of profits and gains of the mine or timber owner. In my opinion, these cases do not govern the present case. Mines are specifically dealt with in the Income Tax Act: standing timber is not. In the Kauri case [1913] A.C. 771; 29 T.L.R. 671 the Privy Council was dealing with a New Zealand statute, which is not the same as the British statute, and the observations of the Board [1913] A.C. 771, 779 show that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve a benefit from further growth of the timber, and it is therefore to be regarded as goods, and the rights acquired by the appellant do not constitute an interest in land. If I am right in thinking that the appellant acquired no interest in the land on which the trees stood, the distinction between the two classes of cases is that in the case of mines the purchaser purchases the land of which the mine forms the integral part, and although he makes use of the products of the land as his stock in trade, yet he has the land when that stock in trade has been exhausted and his purchase is therefore regarded as the purchase of a capital asset and not as a forward purchase of stock in trade. But, as Lord Sorn said in the present case 1956 S.L.T. 259, 264: "My reason for this is that under the ordinary contracts for purchases of standing timber which a regular timber merchant makes to supply himself with his current requirements, the merchant has to go and win the material for himself, and yet I have never heard it suggested that, by entering such a contract, he is acquiring a capital asset and cannot debit the cost in his annual accounts." It appears to me that if the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nza case [1904] 2 K.B. 666, 673.: "The legislature might if it chose say that the gross receipts of a business should be treated as profits for the purpose of income tax without any allowance for current expenses, and, if it did say so, the rule would have to be followed. But it has not gone quite so far as that. I find nothing in the rules to say that if the business to be assessed is that of manufacturing an article and selling it, and nothing more, the cost price of the material consumed in the manufacture is not to be taken into account in assessing the profits. In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years. I do not think it would be necessary that the payment for the raw material should be in the year of assessment, or even in the three years over which the average extends. It is not necessary to deal with that point at present, and I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1944] 1 All E.R. 566; 27 T.C. 267, 279; (H.L.) [1946] 1 All E.R. 523n. Inland Revenue Commissioners v. Williamson Brothers 1950 S.C. 391; 31 T.C. 370., and Sharkey v. Wernher [1956] A.C. 58, 73, 83-84; 29 I.T.R. 962. I am of opinion that this question did not arise under the case stated, as any sums so claimed to be deducted would not be a part of the two sums of ? 24,275 and ? 24,900 paid by the appellant under the two agreements in question and, indeed, would bear no relationship to either of these sums. Consequently, I express no opinion upon it. I would dismiss the appeal. LORD COHEN. My Lords, this an appeal from an interlocutor of the Court of Session dated December 21, 1955, finding that the sums of ? 24,275 and ? 24,900, payable by the appellant under two agreements dated respectively September 30, 1947, and September 30, 1948, both relating to the purchase of standing timber, did not fall to be taken into account in computing the trading profit of the business of the appellant as a timber merchant, sawmiller and joiner for the years under appeal. The appellant based his appeal on two main grounds--I. he said that the matter was concluded in his favour by findings of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the contract in question in a particular case and the surrounding circumstances may be so special that the proper conclusion may be that under the contract the trader acquired a capital asset from which he intended to get and win his stock-in-trade. In each case in must be, as counsel for the appellant admitted, a question of degree and for the reasons given by their Lordships in the Court of Session and about to be given by the noble and learned Lord, Lord Keith, I have no doubt but that in this case, as in Kauri's case [1913] A.C. 771, what the appellant, under the agreements in question, acquired was not goods or stock-in-trade but an enduring interest in the land and the natural increment of the trees of the nature of a capital asset. I therefore agree that the appeal should be dismissed. LORD KEITH of AVONHOLM. My Lords, this is an appeal from a judgment of the First Division of the Court of Session, sitting as Court of Evchequer, making a finding on a case stated by the Commissioners for the General Purposes of the Income Tax for the Division of Mull. The case arose out of assessments made on the appellant under Case I of Schedule D of the Income Tax Act, 1918 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk thereof and also to place and dry the bark of the said trees on convenient parts of the said premises to be appointed by the vendors or their agents for that purpose and also for any of the purposes aforesaid to employ horses wagons motor traction and other mechanical contrivances which may be necessary or convenient and also to dig and use sawpits and stages and erect and construct sawmills and other erections and to break and saw up the said timber and stack up the same upon proper and convenient parts of the ground. "2. The purchase price shall be the sum of ? 24,275: 0:0 (twentyfour thousand two hundred and seventy-five pounds). "3. The purchase may mark fell and carry away all the said trees and complete all the operations authorized at such times as he the purchaser shall consider convenient. "4. The cutting of the trees and all the operations hereby authorized shall be done in a proper customary and workman-like manner and so as to cause as little injury or damage as possible to the standing timber underwood grass crops and other property of the vendors or its tenants and the purchaser shall make compensation for all injury or damage which he shall co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such figures appear in the schedule to the first agreement. It is stated in the case that "it was estimated before us that the trees in question were some seventy to eighty years old and were therefore ripe for cutting but we were not in a position finally to determine the age or quality of the trees in question." For the purposes of this appeal I shall accept it that the trees were ripe for cutting. The only other material fact found in the case is that after the appellant entered into the agreements he acted as contractor to the company and supplied some of the fencing stobs in respect of a hill farming scheme put into operation by the company under the Hill Farming Act, 1946. From a subsequent finding of the Commissioners made in circumstances which I shall refer to in a moment it would appear that some at least of these fencing stobs were supplied from timber procured under the agreements in question. In view of what subsequently happened, I should here quote in full the original finding of the Commissioners: "We, the Commissioners, who heard the appeal after consideration of the foregoing facts and the contentions of the appellant and respondent decided to up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, and if so to what extent the appellant has availed himself of the right he enjoys under certain agreements to enter upon the lands of somebody else and to fell and remove the trees growing on that land, nor whether timber so acquired was utilized in earning the receipts of his business in any of the years covered by the assessments. It seems me that, until the case is presented to us in such a form as to clarify these matters and to provide us not with detailed figures (which can be left for later adjustment), but at least with pro forma computations and an indication of the basis on which the appellant on the one hand and the Inland Revenue on the other maintain that the liability of the appellant should be determined, it is not feasible for us to appreciate or to decide the question in controversy." Proceeding upon this remit the Commissioners, after an interval of almost a year, issued two documents which had no recognizable relationship to the points on which the First Division wished to be enlightened. It is necessary to quote these in full. The first runs: "We, the General Commissioners for Income Tax for the Mull Division for the County of Argyll, have give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the appeal de novo. This was opposed by counsel for the appellant and the motion was refused, the Lord President (Lord Clyde) saying [1956] S.L.T. 259, 262. : "There is no precedent for such a course, which, in any event, I do not consider in the light of history of the case would serve any useful purpose." The additional findings were incorporated as part of the case. The view taken by the First Division on the merits of the appeal is summarized in the following passage from the opinion of the Lord President [1956] S.L.T. 259, 262 : "In my opinion, in the case of contracts so unusual as these, and covering, as they do, an indefinite track of time, it is not possible in the circumstances to conclude that the prices paid for the selective right conferred by them represents a payment for the raw material of the business. The decision of the Commissioners, therefore, that these were capital payments, and that the contention of the Inland Revenue on principle should be sustained, appears to me to be well founded." Lord Carmont and Lord Russell concurred and Lord Sorn on an independent consideration of the facts of the case reached the conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as he the purchaser shall consider convenient." As was observed in the Court of Session, this absence of any time limit presents an unusual feature. It gives the appellant a right to defer the cutting of the trees for a very long period, if not indefinitely, though practical considerations and the ripe condition of the trees might well stimulate the appellant to exercise his rights with such promptitude as was consistent was his capacity and opportunity to do so. The fact, however, remains that when the agreements were completed he had no right of property in a single tree. He had merely a right to select and thereafter to cut. Even by selection he acquired no property in the trees. He could obtain no property in any part of a tree till he had felled it to the ground. I find it impossible to hold that this very peculiar right is capable of being treated as stock-in-trade of the appellant. The nature of the right, the indefiniteness of the period for its exercise, and the lack of identification of the trees on which the right was to be exercised, to which may be added the size of the transaction and the absence of any evidence of intention or means to complete it within any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in Scotland all corporeal moveables except money. The term includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale." Forest trees some 70 years old are not industrial growing crops, and it was the last part of the definition that was prayed in aid. As between parties to a contract the definition may, in cases to which it applies, be important as affecting their rights and duties under the contract, but it may be doubted whether in a case with third parties, in this case the Revenue, it can have the effect of making something stock-in-trade which would not properly be so regarded until reduced into possession. But, in any event, the considerations already referred to would preclude an appeal to this definition. There are no trees ascertained as the subject-matter of the contract, and therefore no one can say what are the trees attached to and forming part of the land that are said to be "goods." Further, there is no obligation on either vendor or purchaser to sever the trees. At best the appellant has only a licence to sever trees at such times as he s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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