Chancery Division
28 March 1972 [1972] 1 W.L.R. 1556, 48 T.C. 370Ungoed-Thomas J.
1972 March 27, 28Revenue?Capital gains tax?Disposal of asset?Sale of land?Contract providing that on completion vendor would advance to purchaser money on mortgage of land sold?Whether single or two transactions?Whether consideration for sale payable by instalments? Finance Act 1965 (c.
25), ss. 19 (1) (3), 22 (9), Sch. 6, para 14 (1) (5)1
In 1969 the taxpayer entered into an agreement for the sale of property for £3,750. The contract provided that the taxpayer would on completion advance to the purchaser the sum of £2,250 at 92 per cent. per annum payable over 10 years. By a transfer dated March 27, the property was transferred to the purchaser, and by a charge of the same date, registered in the Land Registry, the purchasers as borrowers acknowledged receipt of the £2,250 from the taxpayer as lender, the property being charged with the payment of that sum with interest. An account sent by the taxpayer's solicitor to the taxpayer stated that the former had received the sale price of £3,750 ?less advance by vendor £2,250.? The taxpayer was assessed to capital gains tax for the year 1968?69 on a chargeable gain of £890. He appealed, on the ground that the sale was for a consideration payable in instalments, and taxable in each year as a capital gain arose, under the provisions of paragraph 14 of Schedule 6 to the Finance Act 1965 . The general commissioners dismissed the appeal on the ground that there was no evidence that the consideration for the sale was to be paid by instalments.
On appeal by the taxpayer:?
Held, dismissing the appeal, (1) that on completion of the sale the relationship of vendor and purchaser had been extinguished and replaced by that of lender and borrower.
Inland Revenue Commissioners v. Wesleyan & General Assurance Society [1948] 1 All E.R. 555; 30 T.C. 11, H.L.(E.) and Inland Revenue Commissioners v. Ramsay (1935) 20 T.C. 79 applied .
(2) That capital gains tax falls to be computed as laid down in the Act, and not according to principles of commercial accountancy and ?consideration taken into account? in paragraph 14 of Schedule 6 meant the consideration for the sale of £3,750 and, accordingly, the taxpayer had been correctly assessed for capital gains tax on the sale of the property.
John Cronk & Sons Ltd. v. Harrison [1937] A.C. 185; 20 T.C. 612, H.L. (E.) and Absalom v. Talbot [1944] A.C. 204; 26 T.C. 166, H.L.(E.) considered . The following cases are referred to in the judgment:
- Absalom v. Talbot [1944] A.C. 204; [1944] 1 All E.R. 642; 26 T.C. 166, H.L.(E.) . * Bolland, Ex parte (1882) 21 Ch.D. 543, C.A. * Cronk (John) & Sons Ltd. v. Harrison [1937] A.C. 185; [1936] 3 All E.R. 747; 20 T.C. 612, H.L.(E.) . *1557 * Harmony and Montague Tin and Copper Mining Co., In re (Spargo's Case) (1873) 8 Ch.App. 407 . * Inland Revenue Commissioners v. Ramsay (1935) 20 T.C. 79 . * Inland Revenue Commissioners v. Wesleyan & General Assurance Society [1948] 1 All E.R. 555; 30 T.C. 11, H.L.(E.) . * Pen'Allt Silver Lead Mining Co., In re (Fothergill's Case) (1873) 8 Ch.App. 270 . * Ramsden v. Inland Revenue Commissioners (1957) 37 T.C. 619 .
The following additional cases were cited in argument:
- Ball v. National and Grindlay's Bank Ltd. [1971] 2 W.L.R. 1129; [1971] 3 All E.R. 485, C.A. * Cross v. London & Provincial Trust Ltd. [1938] 1 K.B. 792, [1938] 1 All E.R. 428; 21 T.C. 705, C.A. * Shop & Store Developments Ltd. v. Inland Revenue Commissioners [1967] A.C. 472; [1967] 2 W.L.R. 35; [1967] 1 All E.R. 42, H.L.(E.) .
CASE STATED by the Commissioners for the General purposes of the Income Tax Acts.
By an agreement dated March 11, 1969, the taxpayer, Israel Coren, agreed to sell the freehold of 24, Canning Road, Islington, London, to the purchasers, Flaminio Giovanni Pinto and Mario Mola Pinto, for £3,750 and a deposit of £375 was paid. The agreement also provided that the taxpayer would on completion advance to the purchasers the sum of £2,250 at an interest rate of 9½ per cent. payable over a period of 10 years. By a transfer of March 27, 1969, the taxpayer acknowledged receipt of the purchase price and transferred the property to the purchasers and, by a charge of the same date, the purchasers acknowledged receipt of £2,250 from the taxpayer as lender and charged the property with the payment of that sum and interest: the charge was duly registered upon the land register.
The taxpayer was assessed to capital gains tax of £890 on the sale of the property for the year 1968?69. He appealed to the general commissioners contending that neither the sum of £3,750 nor the sum of £2,250 were ever paid or received and that the purported receipts in the transfer and mortgage were a nullity and that the conclusion of the contract by the execution of the transfer and the mortgage were separate parts of a single transaction the terms of which were such that the purchase money was to remain unpaid otherwise than by the periodic payments particularised in the mortgage; therefore, the profit element in each periodic payment accrued to the taxpayer for the purposes of section 19 of the Finance Act 1965 and/or paragraph 14 of Schedule 6 to the Finance Act 1965 as and when each periodic payment became due. It was contended by the revenue that the sale of the property and the loan by the taxpayer were two transactions and under the former the title of the property passed to the purchasers; that the consideration received from the disposal of the property was not payable by instalments since it was and had to be paid in full in order that the loan could be made in accordance with the terms of the legal charge; accordingly, paragraph 14 of Schedule 6 to the Finance Act 1965 did not apply and the assessment was correct.
The general commissioners found that there was no intention on the part of the taxpayer to dispose of the property on the basis of a sale by instalments or on any basis other than the sale and mortgage arrangements under which he ceased to be the owner of the property and they upheld the assessment.
The taxpayer appealed.
*1558 Representation- Marcus Jones and John Gardiner for the taxpayer. *
UNGOED THOMAS J.
This appeal raises the question whether the consideration to be taken into account for the purposes of computing capital gains tax for the year 1968?69 on the disposal of land, 24 Canning Road N.5, by the taxpayer by transfer is the £3,750 price appearing as the purchase price in the transfer (whose receipt was thereby acknowledged), or £1,500 and the right to £2,250 payable by instalments. The £2,250 was the amount comprised in a legal charge by the purchasers (therein described as ?the borrowers?) in favour of the taxpayer (therein described as ?the lender?) and whose receipt was therein acknowledged, such amount being repayable with interest by instalments (with a proviso that if all the borrower's obligations thereunder were performed, the lender would not enforce the security).
I had some difficulty in appreciating what the taxpayer's submissions precisely were, but I believe them to be covered by the following propositions. 1. That the terms of the transaction between vendor and purchasers were, in the words of the taxpayer's contention stated in paragraph 4 of the case stated, that ?the purchase money was to remain unpaid otherwise than by the periodic payments particularised in the mortgage,? and that ?the purported receipts in the transfer and mortgage were a nullity?; and, in the words of the taxpayer's counsel before me, that ?the documents are wrong.? 2. That the consideration to be taken into account has to be ascertained as if it were a trading receipt under Case I of Schedule and to which John Cronk & Sons Ltd. v. Harrison [1937] A.C. 185; 20 T.C. 612 and Absalom v. Talbot [1944] A.C. 204; 26 T.C. 166 apply.
Documents exhibited to the case stated were referred to, of which all, except the transfer, were stated to be relied on in support of the first proposition. The documents were as follows:
1 A letter dated January 28, 1969, from the taxpayer's auctioneers to his solicitors, stating that, on behalf of the taxpayer:?We have sold the above freehold property? ? i.e. 24 Canning Road-"for the sum of £3,750 subject to contract and to vacant possession on completion,? and adding: ?The sale is proceeding on the understanding that our client will grant the purchaser a mortgage of £2,250 at an interest rate of 92 per cent. payable over 10 years. The payments of principal will be £19 per month therefore, and the interest will be calculated at half yearly rests on two of the usual quarter days and payable separately.?
2 An agreement dated March 11, 1969, between the taxpayer as ?vendor? and others as ?purchaser? for the sale by the vendor as beneficial owner of 24 Canning Road for the price of £3,750 (of which £375 was stated to have been paid by way of deposit) with completion on April 11, 1969, and with vacant possession on completion, and incorporating the national conditions of sale. Clause 8 provided:?The vendor will on completion advance to the purchaser the sum of £2,250 at an interest rate of 92 per cent. payable over 10 years. The form of mortgage in respect of the advance will be prepared by the vendor's solicitors at the cost of the purchaser in the form agreed on or before the signing hereof.?
3 A transfer dated March 27, 1969, of the property, in common form *1559 applicable to registered land, by the taxpayer as beneficial owner to the purchasers, ?in consideration of? £3,750 the receipt whereof is hereby acknowledged.?4 A charge dated March 27, 1969, in common form with special provisions whereby
?in consideration of £2,250 (the reciept wherof is hereby acknowledged) we? ? i.e. the purchasers ? ?(hereinafter called ?t he borrowers?) as beneficial owner hereby charge the land comprised in the title above mentioned with the payment to [the taxpayer] (hereinafter called ?the lender?) on June 27, 1969, of the principal sum of £2,250 with interest thereon at the rate of 9 per cent. per annum.?
The document then provided:
?And it is hereby agreed as follows: (a) If the borrowers shall pay to the lender the said sum of £2,250 by equal monthly payments of £19 each the first to be paid on April 27 next and subsequent payments on the 27th day of [and there is a blank] in each succeeding month together with interest? as therein provided, and omitting some words, ?then, and if and so long as the borrowers shall perform all their obligations hereunder expressed or implied (other than those relating to payment of principal on June 27 aforesaid) the lender will accept payment of the said monthly sums and will not enforce the security hereby constituted.?
Then there was a provision that, so long as any money remained owing on the security, the borrowers would keep the building in good and substantial e repair and insured: and there were other common provisions which I need not mention.
Section 28 (1) of the Land Registration Act 1925 imports a personal obligation to pay the money secured so that the obligation to pay the instalments relied on by the taxpayer as part of the consideration for the sale is an obligation which arises under the mortgage by reason of its being a mortgage and not under the contract for sale.
5 A document called a completion statement but, in fact, an account sent by the taxpayer's solicitors to the taxpayer of the £3,750. The only material words are: ?Sale price £3,750,? and ?Less advance by vendor £2,250,? which was deducted in the account from the £3,750.6 A letter dated March 28, 1969, from the taxpayer's solicitors to the taxpayer's auctioneers said, inter alia, that the sale was completed on March 27 (and not on April 11 as provided in the contract), and that ?the sale was for the price of £3,750 and the vendor on completion advanced to the purchaser the sum of £2,250.?
Two of these documents were particularly relied on by the taxpayer. The first was the letter of January 28, 1969, which states that the sale was subject to contract: so that, therefore, it was superseded by the contract, except regarding the understanding that the vendor would grant the purchaser a mortgage of £2,250 at interest. But the understanding itself contemplates two separate operations, viz: a sale and a mortgage. The second document particularly relied on was the taxpayer's solicitors' account sent to the taxpayer. It refers to the sale price of £3,750 and to the £2,250 as ?advanced by the vendor.? This again contemplates two separate operations, namely, a sale and an advance and the deduction of the advance from the sale price is merely in this account a method whereby the vendor's solicitor accounts to his client for the proceeds of sale. These *1560 appear to me to be the only items in the documents that might, perhaps, require individual comment.
All these documents relied on by the taxpayer, including the items commented on, are, if taken on their own, consistent, in my view, and consistent only, with the transactions between taxpayer and purchasers being transactions of sale in which part of the price was payable by instalments.
It is immaterial that the £2,250 was not handed over by the taxpayer to the vendor on completion and then handed back again. As was established in In re Pen'Allt Silver Lead Mining Co. (Fothergill's Case) (1873) 8 Ch.App. 270 and In re Harmony and Montague in and Copper Mining Co. (Spargo's Case) (1873) 8 Ch.App. 407 , 412, if two cross-demands for money immediately payable are honestly set off against each other without the formality of handing the money over and handing it back again, each such set off would substantiate a plea of payment in cash and a set off would constitute such payment. The principle was applied in Ex parte Bolland (1879) 21 Ch.D. 543 to the case of a transfer by A to B followed immediately by a mortgage by B to A.
It is well recognised that different legal obligations, resulting in the same financial result as between the parties to the operations, may yet result in different incidence of taxation. In Inland Revenue Commissioners v. Ramsay (1935) 20 T.C. 79 , 98, Romer L.J. postulated a sale of property designed by a vendor to produce £500 a year for 20 years. He pointed out that it might be made in consideration of an annuity of £500 a year for 20 years, which would be subject to tax, or alternatively for £10,000 payable by equal yearly instalments, which would not be subject to tax. He observed:
?The vendor? (of course, with the concurrence of the purchaser) has the power of choosing which of the two methods he will adopt? The question which method has been adopted must be a question of the proper construction to be placed upon the documents by which the transfer is carried out.?
Reference was made to Ramsden v. Inland Revenue Commissioners (1957)
37 T.C. 619 . As appears clearly from p. 625 in that case, the relationship of vendor and purchaser with regard to a certain sum was not to be treated as converted into the relationship of lender and borrower with regard to it, as it was held that there was nothing in the circumstances of that case (as there is here) to extinguish the relationship of vendor and purchaser and replace it by the relationship of lender and borrower.In Inland Revenue Commissioners v. Wesleyan & General Assurance Society (1948) 30 T.C. 11 , Lord Uthwatt observed, at p. 26:
?There is no exceptional rule of construction applicable to the case. Here, as in all other cases of construction, mere nomenclature descriptive of an operation provided for by the bond may be disregarded as of no weight, if it mis-describes the operation. But under cover of that rule it is not right to attribute to words appearing in the bond a sense they do not naturally bear by reason of the odd legal or practical position that results.?
These observations were in line with those of Lord Simon, and the other Lords agreed. And contemporaneous transfer and mortgage to the transferor are not even odd, but, of course, of most common occurrence and of a well recognised nature with well established and widely known
*1561 consequences, at any rate outside revenue law: and as we have seen from Romer L.J.'s observations, the incidence of revenue law does not alter the true nature of the transaction.Further, the case stated in paragraph 3 states that a partner in the firm of the taxpayer's auctioneers ?stated? that the transactions evidenced by the documents were the transaction which it had been intended should be carried out,? and the case stated in paragraph 7 records the commissioners' decision in these words:
?On the evidence presented to us, there was no intention on the part of the vendor to dispose of the property on the basis of a sale by instalments or indeed on any basis other than the sale and mortgage arrangement under which he, the vendor, ceased to be the owner of the property and the purchasers became such.?
So, the taxpayer's first main proposition, in my view, fails.
I come then to the taxpayer's second main proposition. First, I will refer to the relevant statutory provisions relied on. The Finance Act
1965 , so far as relevant, provides as follows. Section 19 :?(1) Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets?
(3) Subject to the said provisions, a tax, to be called capital gains tax, shall be assessed and charged for the year 1965?66 and for subsequent years of assessment in respect of chargeable gains accruing in those years, and shall be so charged in accordance with the following provisions of this Part of this Act.?
Section 22 :
?(1) All forms of property shall be assets for the purposes of this Part of this Act, whether situated in the United Kingdom or not, including? ? and there are included various forms of property which need not specify.
?(3) Subject to subsection (6) of this section? there is for the purposes of this Part of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to??
and various items are particularised. Subsection (6) provides that the conveyance or transfer by way of security of an asset shall not be treated as involving any acquisition or disposal of the assets. Subsection (9) provides:
?The amount of the gains accruing on the disposal of assets shall be computed in accordance with Part I of Schedule 6 to this Act? and in this section ?capital sum? means any money or money's worth which is not excluded from the consideration taken into account in the computation under the said Part I of 6 to this Act.?
Section 23 (1) provides for the computing of losses in the same way as gains. Part I of Schedule 6 to the Act referred to in section 22 (9) provides:
- ?The provisions of this Schedule shall have effect for computing for the purposes of this Part of this Act the amount of a gain accruing on the disposal of an asset.
- ?
(1) There shall be excluded from the consideration for a disposal of assets taken into account in the computation under this Schedule of the gain accruing on that disposal *1562 any money or money's worth charged to income tax as income of, or taken into account as a receipt in computing income or profits or gains or losses of, the person making the disposal for the purposes of the Income Tax Acts?
(3) This paragraph shall not preclude the taking into account in a computation under this Schedule, as consideration for the disposal of an asset, of the capitalised value of a rentcharge (as in a ease where a rentcharge is exchanged for some other asset) or of the capitalised value of a ground annual or feu duty, or of a right of any other description to income or to payments in the nature of income over a period, or to a series of payments in the nature of income:
By paragraph 4 :
?(1) Subject to the following provisions of this Schedule, the sums allowable as a deduction from the consideration in the computation under this Schedule of the gain accruing to a person on the disposal of an asset shall be restricted to?
and then there are set out the descriptions which, under (a) are the amount or value of the consideration, in money or money's worth for the acquisition of the asset together with incidental costs; under (b) the amount incurred on the asset ?for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal,? and any expenditure in establishing the taxpayer's title to or a right over the asset; and under (c) ?the incidental costs to him of making the disposal.? Paragraph14 so far as relevant reads:
?(1) If the consideration, or part of the consideration, taken into account in the computation under this Schedule is payable by instalments over a period beginning not earlier than the time when the disposal is made, being a period exceeding 18 months, the chargeable gain (or allowable loss) accruing on the disposal shall be regarded for all the purposes of this Part of this Act as accruing in proportionate parts in the year of assessment in which the disposal is made and in each of the subsequent years of assessment down to and including the year of assessment in which the last instalment is payable??
(5) In the computation under this Schedule consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent; and if any part of the consideration so brought into account is subsequently shown to the satisfaction of the inspector to be irrecoverable, such adjustment, whether by way of discharge or repayment of tax or otherwise, shall be made as is required inconsequence.?
I will deal first with the most material of these provisions as a matter of construction ex facie and then I will come to the more recondite considerations that have been submitted. Section 19 (1) provides that capital gains tax shall be charged on ?capital gains computed in accordance with this Act and accruing to a person on the disposal of assets.? Section 22 (3) provides that there is ?a disposal of assets by their owner where any capital sum is derived from assets,? i.e. in view of subsection (9) where ?any money or money's worth which is not excluded from the consideration taken into account in the computation under? Schedule 6, Part I . This is the first reference to ?consideration taken into account.? *1563 To ascertain what is ?not excluded from the consideration taken into account,? section 22 (9) (and, therefore, section 22 (3) ) refers to Schedule 6, Part I. Paragraph 2 of the Schedule 6 , in the very words of section
22 (9) incorporated in section 22 (3), shows what is ?excluded from the consideration for a disposal of assets taken into account in the computation under? Schedule 6 , viz.: roughly speaking, so far as relevant, what is taken into account as a receipt for the purposes of the Income Tax Acts.So, roughly and generally speaking, section 22 (3) and (9) identify disposal of assets by providing that there is a disposal of assets where any money or money's worth is derived from them and is not taken into account as a receipt for income tax purposes. In accordance with this analysis and the conclusion on the first main question, money or money's worth was derived from the disposal of assets in this case, namely, £3,750 on the transfer.
The first half of section 22 (9), which I have quoted, provides for computing the gains accruing on such a disposal by directing their computation in accordance with Schedule 6, Part I; and paragraph of the Schedule 6 is to the same effect. Then, as just stated, paragraph
2 excludes from the consideration, so far as relevant, what is taken into account for income tax purposes, and paragraph 4 makes certain sums of expenditure allowable as a deduction from the consideration taken into account in the computation of the capital gain.Paragraph 14 refers to ?consideration? taken into account? when payable by instalments. This, to my mind, clearly refers to the consideration being taken into account as ascertained above, i.e. consideration to the exclusion of what is excluded under paragraph 2 from being taken 13 into account at all (but taken into account subject, of course, to, e.g., sums allowable as a deduction in paragraph4). As the provisions for exclusion and deduction from the consideration have no application in our case, the ?consideration taken into account? in the computation of the capital gains under Schedule 6 is, ex facie, the relevant statutory provisions and in accordance with the answer on the first main issue, £3,750.
The word ?accruing? in the references to ?gains accruing? on the disposal of assets, whether in section 19 (1), section 22 (9) or paragraph 1 of Schedule 6 (or in any other provision which I mentioned as relevant) are paralleled by the references, e.g. in section 23 (1) , to a loss ?accruing? on the disposal of assets. Ex facie ?accruing? here simply refers, soit seems to me, to the event of a capital gain or loss being made in accordance with the statute. The gain or loss is what ?accrued? at the end of the computation.
But do the conclusions, so made ex facie the statute and in the light of the conclusion on the first main issue, stand, in view of the more recondite considerations which I mentioned and to which I will now come?
The taxpayer's counsel formulated his submission for me to record as follows, so far as material for present purposes: ?The accrued capital gain is to be computed in accordance with what has accrued in paragraph 1 of Schedule 6 , which is inseparable from what has accrued in accordance with commercial principles, except in so far as modified by the legislature. ?Consideration to be taken into account? is not defined by the legislature. One starts by identifying the consideration and then ascertaining how far one should take it into account for the purposes of paragraph 1 , and one goes to John Cronk & Sons Ltd. v. Harrison [1937] A.C. 185; 20 T.C. 612 *1564 and Absalom v. Talbot [1944] A.C. 204; 26 T.C. 166 to carry out that exercise.?
I confess to the difficulty in appreciating this submission with precision. As I understand it, it is founded on the conception that ?the consideration to be taken into account? is a consideration which yields gains which accrue in accordance with commercial principles as established in the Cronk and Absalom cases. Counsel submits that, consequently, ?consideration? mentioned in paragraph 14 (1) means the money or money's worth ultimately derived from the complex of transactions in which the disposal of assets occurs. He accordingly submits that the consideration here is (1) the £1,500; (2) the right to receive £2,250 by equal instalments of £19 each (to which paragraph14 (1) and (5) apply) and (3) the right to receive interest on £2,250 at 92 per cent. (which is brought into account at its capitalised value under paragraph 2 (3)).
There is, thus, no dispute about the £1,500 being part of the consideration. But paragraph 2 (3) would not apply to the interest because (1) the interest was not consideration for the disposal but for the loan, which I have already concluded was in reality made, and (2) even if the interest were paid on deferred payments of purchase money, it would be consideration for the deferment and not for the disposal. This leaves the £2,250 for consideration.
The Cronk and Absalom cases appear to be at the root of the taxpayer's second main proposition, so I will immediately come to them. In John Cronk & Sons Ltd. v. Harrison, 20 T.C. 612 , a speculative builder arranged to sell a house for a sum which appeared on the conveyance and in the usual incorporated receipt as £625. But the builder arranged that only £35 of this should be paid by the purchaser out of his own pocket to the builder on completion. He arranged that a loan of £590, secured by mortgage on the property sold, should be made by a building society to the purchaser, but that it should not be paid to the purchaser but should, as to £558 6s 8d be paid on the purchaser's behalf to the builder as part of the purchase price, and as to £31 13s
4d should be retained by the society as security for a guarantee given by the builder to the society for £95 of the amount lent. Lord Thankerton (who made a speech in which the other Lords concurred) concluded that all this was a tripartite arrangement. The whole arrangement, to which the builder was a party, resulted in the builder not receiving £31 13s 4d of the £625 either in cash or in the equivalent of cash, such as the set-off in In re Harmony and Montague Tin and Copper Mining Co. (Spargo's Case) (1873) 8 Ch.App. 407 . So, the £31 13s 4d was not on completion a trading receipt of the builder for the purposes of computing tax under Schedule D or, in the very words of Lord Thankerton, ?a trading receipt at the time of sale.? His only trading receipts were the £35 paid by the purchaser and £558 6s 8d paid by the building society on the purchaser's behalf.It is in the light of these circumstances that Lord Thankerton made the observation on which the taxpayer heavily relied and which, for that reason, I will quote, at p. 641:
?In my opinion, the whole arrangement was a tripartite one, which should not be separated up. It never was part of the arrangement that the company were to be entitled to payment of the whole price at the time of sale, and that the company were to hand over to the society the amount of the deposit. It is enough to say that the purchaser was never entitled to get the whole amount advanced paid over *1565 to him or paid over to the company by the society as the purchaser's agents. It was clearly a condition of the advance to the purchaser by the society that the latter should retain the amount of the deposit. The acknowledgement of receipt of the whole price in the deed of transfer, which is conclusive in favour of a purchaser for value without notice, was necessary to give a good title, but cannot prevent the true facts being regarded in such a question as the present one.
?I am, therefore, unable to agree with the view of the commissioners and of Finlay J., that the whole of the purchase price should be brought into the account as a trading receipt at the time of sale.
?In my opinion, it would be more correct to treat the retention of the deposit as a retention of part of the nominal purchase price with the consent of the company, such sum to be applicable to reduction of the advance made by the society to the purchaser in the event of the latter's default, any surplus going eventually to the company. In other words, in the example referred to, the true purchase price was not £625, but two sums of £35 and £558 6s 8d, payable at the time of the sale, with a further addition of any balance eventually available from the deposit.?
None of these observations, properly understood in their context, appears to me to support the taxpayer's submission.
In Absalom v. Talbot, 26 T.C. 166 , a speculative builder sold houses under an arrangement under which, on completion, the purchaser paid him a small sum in cash and a substantial sum lent by a building society to the purchaser on the security of the purchased property, the purchaser agreeing to pay to the builder and securing by second mortgage to the builder the balance of the purchase price by instalments with interest over years (subject to the whole amount outstanding being payable if any instalment was not duly paid). Thus, in this case, as in Ramsden v. Commissioners of Inland Revenue (1957)
37 T.C. 619 , the relationship of builder and purchaser remained that of vendor and purchaser throughout, the money secured by the second mortgage being payment of the purchase price itself and not money lent. The only issue in that case was how the balance of the purchase price payable by instalments ought to be brought into account for assessment of profits of the builder's trade for the purpose of income tax. It is established that, as there is no express statutory provision governing the computation of such profits, they are to be computed on principles of commercial accountancy, subject only to statutory modification. It was to the choice between different methods of commercial accounting that the judgments were directed: see particularly the judgment of Lord Atkin, at pp. 190 to 193 and Lord Russell of Killowen, at p. 195.Such methods are inappropriate to our case and, even if they were appropriate, the method of computation in our case is provided by the statute and starts from the consideration. Paragraph 14 (5) of Schedule 6 is inconsistent with the commercial accounting principles contemplated in John Cronk & Sons Ltd. v. Harrison, 20 T.C. 612 and Absalom v. Talbot, 26 T.C. 166 . They were cases directed to ascertaining receipts of a trade in a yearly assessment for the purposes of Schedule D.
I come now to a number of supplementary considerations first raised for the taxpayer in reply.
1 Reference was made to paragraph 10 (1) of Schedule 10 to the Finance Act 1971 , which provided that the time of disposal of an asset *1566 for capital gains tax purposes was the time of the contract; and counsel relied on this being declaratory in form. But, in our case the contract itself, as already indicated, is a contract for sale and for loan on mortgage and not for sale with payment of the purchase price being payable by instalments.2 Counsel suggested that £3,750 exceeded the realisable value and that, therefore, if capital gains tax had to be paid on £3,750 and the purchaser defaulted on an instalment, there might in the absence of provision for adjustment of capital gains tax liability be ?receivability without receipt.? He based this suggestion primarily on the evidence accepted by the commissioners in paragraph 3 of the case stated:
?The premises were in a dilapidated condition and were not saleable for a realistic consideration, that mortgages were hard to get so that he? ? ?he? being the estate agent whose evidence was accepted ? ?and the taxpayer envisaged that some of the purchase money would have to be left on mortgage.?
Though the reference to ?realistic consideration? may be ambiguous, the passage makes it clear, not that the £3,750 was not the then ?realistic? value in this sale, but that part of it would have to be lent to the purchaser on mortgage because mortgages were hard to get. But there was a sale and there was a loan repayable with interest by instalments, and it was not suggested that the interest rate or any of the mortgage provisions was not normal for loans on mortgage. The transfer and the mortgage each provided its own proper consideration in money or money's worth.
3 The taxpayer submitted that unless his interpretation of ?consideration? is adopted, then there would be scope, in such a case as ours, for avoiding capital gains tax by making the consideration for the transfer small and compensating for it by making interest under the mortgage high. But evasion by sham transactions can be otherwise dealt with and their possibility here cannot govern the construction of this statute.4 It may be that if a speculative builder sold a house for £3,750 in the circumstances of John Cronk & Sons Ltd. v. Harrison, 20 T.C 612 , then the trade receipt brought into account for income tax purposes in respect of the sale would be less than £3,750 in the year of sale, and that Schedule 6, on the Crown's construction, would then operate to bring the difference into charge for capital gains tax on the ground that such a liability is not excluded under paragraph 2 of Schedule
6 . Even though this be a consequence of the construction, it does not appear to me to be a decisive consideration establishing, in place of the ex facie construction, such a conclusion as urged by the taxpayer.5 Short terms capital gains charged under case VII of Schedule are computed on Case I of Schedule D principles, but the taxpayer's suggestion that it follows that the computation of fixed percentage capital gains tax should be so treated was not substantiated and does not accord with what appears to me to be the ex facie construction of the provisions specifically applicable to the fixed percentage capital gains tax.
So, my conclusion is that the appeal fails. Representation
- Solicitors: Baden, Barnes & Co.: Solicitor of Inland Revenue.
Appeal dismissed with costs.