Birch, Inspector of Taxes v Delaney

• Jurisdiction: Ireland
• Judgment Date: 14 July 1936
• Date: 14 July 1936
• Court: Supreme Court (Irish Free State)

Birch v. Delaney

A. G. BIRCH, Inspector of Taxes

Appellant

and

DENIS DELANEY, Respondent (1)

High Court.

Supreme Court.

Revenue - Income tax - Profits - Builder leasing land with a view to the erection and sale of dwelling-houses - Houses sold subject to ground rents created by the builder and payment of fines - Ground rents retained by the builder - Whether fines to be treated as trading receipts in computing his profit as builder - Whether part of ground rents created by builder which exceeded the amount of ground rent payable by him could be capitalised and such capitalised value treated as a trading receipt in computing his profits as builder - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. A. and Sch. D.

A builder took on lease a plot of ground for a term of years subject to a ground rent. On this plot he built several houses which he sold. The sale of these houses was effected by way of sub-demise for a term of years subject to a certain ground rent in each case. He also received a certain sum of money in each case by way of fine.

For the purpose of his assessment to income tax under Schedule D of the Income Tax Act, 1918, the total amount of the fines were treated as receipts and a further amount was included in respect of the ground rents reserved by him, so far as they exceeded the ground rent payable by him, this amount being arrived at by estimating the capital value of such excess ground rents.

Held by the Supreme Court, reversing the High Court (Hanna and O'Byrne JJ., Sullivan P. dissenting), that the builder was not liable to be assessed under Schedule D in respect of the amount of the fines or of a capitalised value of the ground rents received by him in respect of the houses.

Case Stated under the Income Tax Act, 1918, sect. 149, and sect. 10 of the Finance Act, 1924, by the Circuit Court Judge of the County of the City of Dublin (Judge Davitt).

The Case Stated was as follows:—

"1. At the hearing of an appeal under sect. 196 of the Income Tax Act, 1918, held by me at Dublin on the 5th and 30th June, 1934, Mr. Denis Delaney (hereinafter referred to as 'the respondent') appealed against a determination of the Special Commissioners of Income Tax upon assessments to income tax made upon him under Schedule D of the Income Tax Acts for the years of assessment 1929-30, 1930-31, 1931-32 and 1932-33 in respect of profits of his trade as builder.

2. The following facts were proved or admitted at the re-hearing of the appeal before me.

3. The respondent commenced trading operations as a speculative builder on the 19th November, 1929.

4. For the purpose of carrying on his building operations the respondent acquired a plot of ground at Sion Hill, Drumcondra, in the City of Dublin, under a lease, dated 10th September, 1930, for the term of 500 years,

subject to a ground rent of £13 4s. 0d. per annum. On that plot he built two houses, sold them for a sum of £920 each, subject to apportioned parts of the said ground rent and thus disposed of the whole of his interest under the said lease. No profit ground rent was created by the respondent in this transaction. It is not disputed that the net profits realised by the sale of the two houses were properly taken into computation for the purposes of his assessment to income tax under Schedule D in respect of his trade as a builder.

5. By a lease, dated 1st November, 1930, the respondent acquired a plot of land at Grace Park Road, Drumcondra, in the City of Dublin, for a term of 500 years, subject to a ground rent of £26 8s. 0d. Upon this plot he built four houses which he sold between August and November, 1931. The sale of these four houses was effected by way of sub-demise for a period of 450 years, subject to a ground rent of £9 per annum in each of the four cases. The respondent received a sum amounting to £1,000 by way of fine in the case of each of the houses built at Grace Park Road. For the purpose of his assessments to income tax under Schedule D the total amount of the said fines were treated as receipts and a further amount was included in respect of the ground rents reserved by him, so far as they exceeded the ground rent payable by him. This amount was arrived at by estimating the capital value of such excess ground rents.

6. The respondent, by a lease, dated 21st October, 1931, acquired a further plot of land at Ballymun Road, Dublin, for a term of 500 years, subject to a ground rent of £70 0s. 0d. By that lease the respondent covenanted to build twenty-one houses. Up to the 31st March, 1932 (the date up to which the accounts were made upon which the assessments were based), three of the twenty-one houses covenanted to be built had been erected. He had disposed of these three houses also by way of sub-demise and the terms to be granted varied from 450 to 495 years, subject to a ground rent of £10 per annum in each of the three cases. For each of these three houses he obtained a sum by way of fine for the sub-lease, such sums being respectively £1,050, £1,050 and £1,070. [Copies of the leases referred to at paragraphs 4, 5 and 6 were exhibited and formed part of the Case.]

7. The questions in dispute are whether, in the circumstances hereinbefore set forth, (a) the whole or any part of the fines, which were taken by the respondent upon the lettings of the houses built by him, should be treated as trading receipts in computing his profits as a builder for the purpose of assessment to income tax, and (b) that part of the ground rents created by him upon such lettings, which exceeded the amount of ground rent payable by him, could be capitalised, and such capitalised value treated as a trading receipt in computing his profits as aforesaid.

8. In the course of his evidence before me the respondent admitted that he could have sold the ground rents created by him by way of sub-demises at any time immediately after such sub-leases had been executed.

9. It was contended on behalf of the respondent: (a) that the operation of acquiring land, erecting houses thereon, and subsequently sub-demising the houses with the creation of an increased ground rent appropriate to the site of the house, did not amount to the carrying on of a trade of creating ground rents, nor did such operations constitute the buying or selling of land, so as to attract liability to income tax; (b) that the fines taken on the granting of the sub-lease in each case were not receipts in the course of the respondent's trade as a builder; (c) that the capitalised value of the increased ground rents created by such sub-leases, represented rents appropriate to the land itself, and could not be said to be receipts of such trade; and (d) such capitalised value not having been realised could not be said to be the profits of any particular year.

10. It was contended on behalf of the Inspector of Taxes:—(a) that the respondent, carrying on his operation as a speculative builder, was liable to bring in the total of the fines as representing the price of the work done by him in his trade; and (b) that all ground rents have a commercial value; (c) that money's worth is taxable if it can be valued at a certain sum and that the respondent had created a right to receive annual sums for a period which, if taken at a capital value for a number of years, say 13¹/₂, and added to the fine paid represented his total selling price of the house to which it related, and was a receipt in the course of his trade.

11. In my determination I stated that though the respondent would be liable to income tax as carrying on a trade in respect of the houses which he sells and the profit to him from such sale, I was of opinion that in respect of houses which he builds and lets on long term leases, subject to a fine and ground rent, he is not so liable and could not be regarded as carrying on a trade. I consider that there is a distinction to be observed in the Income Tax Acts between the rights of ownership as exemplified by the letting of house property and the dealing with house property by way of sale, which latter method might in certain circumstances constitute a trade. In my view, if houses, when erected, are let to tenants at a rack rent, the profits, if any, other than measured by Schedule A of the Income Tax Act, would not be assessable to income tax under Schedule D as a trading receipt. I can find no material distinction for income tax purposes between leasing such houses on long term leases in consideration of a fine and ground rent, and letting them at a rack rent. I hold, therefore, that the respondent was not liable to be assessed under Schedule D of the Income Tax Act in respect of the amount of the fines or of a capitalised value of the ground rents received by him in respect of the houses constructed in the course of his building operations.

12. And the question on which the opinion of the Court is desired is whether, in so holding, I am correct in law.

(Signed): Cahir Davitt.

17th July, 1935."

Cur. adv. vult.

Sullivan P. :—

This is a Case Stated by the Circuit Judge of Dublin upon the hearing of an appeal, by the respondent, Denis Delaney, against a determination of the Special Commissioners of Income Tax assessing him to income tax under Schedule D in respect of the profits of his trade as a builder, during the years 1929-30, 1930-31, 1931-32 and 1932-33. The material facts proved or admitted on the hearing of the appeal are stated as follows:—[States the facts.]

On these facts the Circuit Judge was asked to determine the question whether the Special Commissioners were right in treating as part of the respondent's trading receipts as a builder: (1) the whole or any part of the fines so received by him, and (2) the capitalised values of the amount by which the ground rents received by him exceeded the ground rent payable by him. The Circuit Judge answered that question in the negative, and asks us to say whether in so doing he was correct in...