Greene, ME. [His Lordship stated the facts and continued] : Pausing there for a moment and eliminating, for the purpose of simplicity, the changes in the partnership agreement, it is of the utmost importance in this case to appreciate the real nature of what was being done. I say that for this reason, that in the arguments addressed to us on behalf of the Crown various metaphorical expressions were used, such as " holding a sum ", "changing the capacity in which a sum is held", "turning a sum into an asset", and so forth, expressions which, to my mind, are both inaccurate and misleading. What happened was this, the partnership being indebted to outside persons in respect of sums which it had received and which had passed into the general mass of its assets and having carried in its balance-sheet a proper liability item to express that liability, decided at a certain point and upon certain principles laid down that that liability item should be written down and diminished. I have pointed out that that is what happened in 1921. It is what happened in 1936, and it is what happened year by year when the provisions of the new partnership agreement came into operation, merely the alteration of a debit item in the balance-sheet by eliminating from it certain liabilities which bad previously gone to make it up. If that matter had stayed there, the only result upon the balance-sheet would, of course, have been to increase the credit balance. It would have shown a greater surplus of assets over liabilities than it had shown previously to that writing down. It so happened that for domestic reasons of their own the partners, instead of leaving the matter in that way, with an increased credit balance, decided that that increase in the credit balance should be carried in the balance-sheet to the partners' accounts. That does not alter the reality of the position one jot. The true position is— and I repeat it because it is only when that is appreciated that what 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.
2. 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 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 judgment, entirely improper to have brought those receipts into the account at all for the purpose of ascertaining the balance of profits and gains. Indeed, as I have said, the Crown did not suggest that that would have been proper. But what was said was this: The junior counsel's arguments was to the effect that although they were not trading receipts at the moment of receipt, they had at that moment the potentiality of becoming trading receipts. That proposition involves a view of income-tax law in which I can discover no merit except that of novelty. I invited the junior counsel to point to any authority which in any way supported the proposition that a receipt which at the time of its receipt was not a trading receipt could by some subsequent operation, ex post facto be turned into a trading receipt, not, be it observed, as at the date of receipt, but as at the date of the subsequent operation. It seems to me, with all respect to that argument, that it is based on a complete misapprehension of what is meant by a trading receipt in income-tax law. No case has been cited to us in which anything like that proposition appears. It seems to me that the quality and nature of a receipt for income-tax purposes is fixed once and for all when it is received. What the partners did in this case, as I have said, was to decide among themselves that what they had previously regarded as a liability of the firm they would not, for practical reasons, regard as a liability; but that does not mean that at that moment they received something, nor does it mean that at that moment they imprinted upon some existing asset a quality different from what it had possessed before. There was no existing asset at all at that time. All that they did, as I have already pointed out, was to write down a liability item in their balance-sheet, and how in the world by effecting that operation you can be said to have converted a sum received years and years ago into something which it never was, is a thing which, with all respect, passes my comprehension.
3. 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 resiled 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 important to note the facts found by the Commissioners with regard to that, and they appear on page 1057 of the report in para. 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 the finding of fact that it was impossible to determine how that surplus arose. After negotiations with the Government, an arrangement was come to under which the coal merchants Were entitled to retain. for their own benefit part of the sums received—I forget what the actual proportion was, but it does not matter—on the sales of that surplus, and the Revenue claimed income-tax in respect of those receipts. It is to be remembered that those receipts were receipts from the sale of coal by coal merchants. The Commissioners took the view that although the settlement effected by the Government did not purport to increase the permitted scale of profit under the agreement between the merchants and the Government, "the effect of granting to the members of the pool half of the surplus account and address commission"— that was another matter that came into the case —"had the effect of increasing the profits arising to them from the trade of the pool period.'' That, as a proposition of fact, when the facts of the case are realised, would appear to be incontestable, and the effect of that finding, and, indeed, the effect of the facts set out in the case upon which that finding is based, is that this money was a trading receipt from the moment it was received. That was its quality and it never became anything else. In my judgment, and with all respect to the argument addressed to us, that case appears to me to be as far from the present case as any case can possibly be. A trading receipt, in its nature a trading receipt at the moment of receipt, naturally fell to be brought into the accounts for tax purposes. How that can lend any support to the proposition that a receipt which in its nature never was a trading receipt can, years after, by some alteration in the accounts of people who received it, become a trading receipt, I am quite unable to follow.
4. The real fact of the matter is (if I may say so with great respect to the argument addressed to us) that it is based, as I indicated earlier in this judgment, upon the misleading 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 they had re-cast the method of entering liabilities in their accounts, once that is understood and appreciated, the whole basis of the argument appears to me completely to disappear.
5. The result of the junior counsel's argument is a very curious one, and I must just add this word about it: In effect he was saying—.and here again reappears the metaphorical use of language— "Here was an asset subject to a clog, and the clog was the right of the creditor to demand payment." I do not pause to examine that metaphor, because, in my opinion, there is no warranty whatever for its use; but having asserted that, he then said that this asset became a trading receipt as soon as the partners treated it as a free asset, that is to say, as soon as they decided that they could disregard that clog, it became a free asset, and therefore became at that moment a trading receipt. It has been settled by authority that binds us that where a liability which has properly entered into accounts in a previous year is released by the creditor in a subsequent year, that does not justify either re-opening the accounts for the previous year or treating that release as creating a trading receipt in the year in which it took place. That was settled quite clearly in the case of British Mexican Petroleum Co. v. Jackson.
6. Observe what the result of the argument is, and I can put it in two sentences: The junior counsel's proposition is that when the partners treat it as free, although it is not free because the liability to the creditors still remains, it becomes a trading receipt; if the creditor had released the debt so that it was in fact free, it would not become a trading receipt. In other words, when partners treat as free a thing which is not free, it is a trading receipt; when they treat as free a thing which is free, it is not a trading receipt. It seems to me that that brings out very clearly the inadmissible nature of the argument that has been addressed to us by the junior counsel.
7. I now turn to the different 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, not by any extinction of the liability, but by the act of the partners in deciding that they can disregard the possibility of claim in respect of the amount "X" which by this time they have quantified, so many pounds— we have, of course, the figures here—and he says that that act of the partners is evidence of the value "X". That proposition appears to me again to be completely devoid of foundation. The real fact of the matter is that "X" is a figment of the imagination. At the moment of receipt it is quite impossible to say, of any sum received—and you must look at each sum received as it comes in—that when Messrs. Tattersall receive from the purchaser of a particular horse £500, a proportion of that "X" must be treated as something that will not be claimed. Each sum as it comes in is received, and when that sum is received, it is perfectly impossible to say of that sum, either the whole of it or some proportion of it, that it never will be claimed. Similarly, to treat the aggregate of receipts over the year as a thing which contains this unascertained "X" within itself appears to me to be quite inadmissible.
8. Another difficulty of course, inherent in that proposition is this, that if it were the true view, then the year in which "X" was received was the year in which the global sum in which "X" is wrapped up was received, and that would be the year of receipt, and the subsequent quantification could not constitute a receipt in the year of quantification. That, of course, would be a result that would not suit the Crown at all, because it could never hold these assessments.
9. One answer to that which the leading counsel put forward, if I understand him rightly, was that, of course, in the year of receipt quantification is impossible. Just see what that means : It means that a trader in a particular year has received a trade receipt. "X". He, I should have thought, was entitled to say : "That trade receipt 'X' must be brought into 'the year in which the sum in which 'X' is wrapped up was received, and I will now proceed to value it, and that is the value which must be carried in for income-tax purposes." It would not be permissible, it seems to me, for the Crown to say : "Oh no, we are not going to do that now; we are going to wait until some future date, the date when you choose to quantify ' X ' by treating certain sums as not recoverable, which may be one year, six years, or twenty years, according to your state, and then, when you 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.
10. 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.
11. 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 assessable to income-tax under Case I of the Schedule D to the Income-Tax Act, 1918". That finding may involve a mere finding of fact, because it may merely be based on what I may call the real scope of the trade. On the other hand, it is a finding which may contain in it a finding of law. I am not prepared to assent to the view that the finding is one behind which this Court is not entitled to go. It seems to me—to put it at the lowest—a mixed finding, and we are accordingly entitled to examine it in the light of the facts stated in the case, but, in my judgment, in so far as it is a finding of fact, there is ample evidence in the case to support it, and, in so far as it is a finding of law, there is no misdirection of themselves by the Special Commissioners on any point of law.
12. The learned Judge took a different view, as I have said; he took the view that the balances when distributed to the partners were trading receipts. The distribution to which I imagine he is referring is the allocation of sums to the partners' account in the balance sheet : but what was distributed to the partners was not an asset item, but a liability item. As I have pointed out, this liability was cut down by a certain sum. That sum was then used to feed the partners' account, but it was a liability not an asset; it is on the left-hand side of the balance-sheet, not on the right, and there was no dealing with any balance in the sense of an asset at all. It seems to me quite impossible, with the greatest deference to the learned Judge's view, to treat that accountancy transaction inter socies, by which they effected the rearrangement of the liabilities side of their balance-sheet as a distribution of trading profits. It was not.
13. The learned Judge further treated the liability as a merely contingent liability which could be disregarded, I have difficulty in accepting that view, at any rate in the sense in which the learned Judge appears to have used it. The money, of course—using a colloquial and business expression rather than a legal expression—was never Messrs. Tattersall's money; it was the customer's money; it remains the customer's money; the customer can call for it at any moment, and the fact that a demand in writing has to be made before the liability to pay accrues, so as to make the Statute of Limitations run, does not make the liability a mere 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.
14. I think it sufficiently appears from the jugdment 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 1 decline to make. There is no particle of loundation for it in the facts as found. It was a matter of fact which was proper to be found by the Commissioners if they had been minded to find it. If it had been relevant, and they had formed that view, they no doubt would have stated it in their conclusions, but nowhere is any such conclusion to be found, and it is, in my judgment, quite illegitimate, on a matter which the junior counsel for the Crown, for the purposes of his argument treated (as indeed it was) as a crucial matter, for this Court to assume that matter of fact in this favour, and, as I say, I must decline to do so.
15. That leaves only one matter to which I must refer, which is the case to which the learned Judge referred of Commissioners of Taxes v. Melbourne Trust, Ltd. That was a case in which an assets realisation company had been formed to take over, nurse, develop, and realise the asset of three other companies. That was its business. Every sum that that company received when it sold an asset was a receipt in the matter of its trade; it was a company which was trading in those assets; the assets were its stock-in-trade, and when it sold an asset, the sum it received in respect of the asset was, at the moment of receipt, a trading receipt, without any possibility of question. The only difficulty that occurred in that case was a difficulty which to a certain extent arose through the fact that the company had assets in various parts of the Commonwealth of Australia, and this arose under the Taxing Act of one particular State in which some of the assets were situated. The company had sold an asset situated in that State and the question was, what was the profit in respect of which they were assessable under the State income-tax law? It was impossible to say that the company had made a profit merely by selling one asset unless a valuation of the other assets was made. It is quite obvious that, in a case of that kind, to treat the proceeds of one sale as a profit, without taking into account the value of the other assets, would have been wrong, but what the company had done was that it had in point of fact decided that it could make a dividend distribution, and by reason of that circumstance it became possible to say, without the necessity of a valuation, that the company had, by its own actions, made it clear that, according to its judgment, it had made a profit, because it was distributing a profit to the shareholders, and accordingly, up to the amount of that profit, it was treated as having made a profit in that State for that year; but that merely means, not that a receipt which in the first instance was not a trading receipt had become a trading receipt by some subsequent process; it simply means that what was a gross trading receipt at the first had been examined by the company in reference to the rest of its trading, and the company, as a result of that examination, had decided that part of that receipt could be treated as a profit. It seems to me, with great respect, that that case affords no assistance in the present case, once the facts of that case and of this case are properly appreciated.
16. The result is that the appeal must be allowed, with costs here and below, and the decision of the Special Commissioners restored.
Scott, LJ.—I agree with the whole of the judgment delivered by the Master of the Rolls, and only wish to emphasise one point; that is, that the assessment in question purported to be made under Schedule D, Case I.
Clauson, LJ.—I agree.