Mara (Inspector of Taxes) v GG Ltd

• Judge: McWilliam J.
• Judgment Date: 07 March 1977
• Court: High Court

Income tax - Sch D Case I - whether the surplus arising to the company from the sale of certain property was profit of a trade of dealing in or developing land, or the profit of a business which was deemed by F(MP)A 1968 s 17, to be such a trade.

GG Ltd, a member of a group of British and Irish companies, was incorporated in August 1965, but had not been active prior to becoming involved in the events with which the appeal was concerned. In December 1967, the company purchased property which it intended to redevelop as an office block. Prior to the conclusion of the purchase arrangements planning permission for an office block had been obtained, construction plans had been drawn up and agents had been appointed to deal with the lettings and with the collection of rents, site development work commenced in January 1968.

In March 1968, another company not connected with the group, expressed an interest in acquiring the property for use as office premises and an offer to purchase was subsequently made. A formal contract of sale was signed in May 1968.

GG Ltd was subsequently assessed to income tax under Sch D Case I in respect of the surplus arising on the transaction.

At the hearing before the Appeal Commissioner the inspector of taxes submitted that, as the company had enabling power under its memorandum to deal in and develop land, it should be regarded as having carried on a trade within Sch D Case I, by virtue of its involvement with the relevant property, notwithstanding that the property had been purchased for letting purposes and that, having regard to the size of the enterprise involved, the transaction should properly be regarded as constituting a trade under Sch D Case I. Alternatively, it was submitted that the activities of the company should be deemed to be a trade within Sch D Case I by reference to the provisions of F(MP)A 1968 s 17 on the basis that the property had been acquired by GG Ltd with the intention of carrying out the operations which it did, in fact, carry out ie partial development and sale of the land at a profit.

The company’s case was that the property had been bought as a permanent investment and as part of an intended portfolio of property investments and that the surplus on the sale was a capital receipt to which the provisions of F(MP)A 1968 s 17, had no relevance since the section only applied to transactions in which there was a disposal of less than the full interest in the land and where a business of dealing in or developing land had been established.

The Appeal Commissioner found in favour of the company and the inspector demanded a case for the opinion of the High Court.

The High Court upheld the Appeal Commissioner’s findings.

Held, in the Supreme Court, dismissing the inspector’s appeal from the decision of the High Court, that the transaction was not an adventure in the nature of a trade and that F(MP)A 1968 s 17 did not apply where there was a disposal of the full interest in the land.

Legislation

F(MP)A 1968 s 17.

Cases referred to in judgment

Agriculture Credit Corporation Ltd v Vale 2 ITC 46, [1935] IR 681.

CIR v Reinhold 34 TC 389.

CIR v Toll Property Co Ltd 34 TC 13.

Edwards v Bairstow and Harrison 36 TC 207, [1956] AC 14.

Granville Building Co Ltd v Oxby 35 TC 245.

Rellim Ltd v Vise 32 TC 254.

Cases cited

Balgownie Land Trust Ltd v CIR 14 TC 684.

Birch v Delaney 2 ITC 127, [1936] IR 517.

CIR v Hyndland Investment Co Ltd 14 TC 694.

CIR v Livingston and Ors 11 TC 538.

Gray and Gillet v Tiley 26 TC 80.

Harvey v Caulcott 33 TC 159.

McLellan Rawson and Co Ltd v Newall 36 TC 117.

Shadford v H. Fairweather and Co Ltd 43 TC 291.

Swaine v “C” 3 ITC 389, [1964] IR 423.

Turner v Last 42 TC 517.

West v Phillips 38 TC 203.

Wilson Box (Foreign Rights) Ltd v Brice 20 TC 736.

XX Ltd v O hArgain, Judgment of Kenny J, 20/6/75.

Case stated

1. On 25, 26, and 29 March 1971, at No 73 Harcourt Street, Dublin, I heard an appeal by GG Ltd against an estimated assessment to income tax in the sum of £550,000, made upon it for the year 1968/69 under Sch D Case I for profits arising from “dealing in or developing land”.

2. The question at issue was whether the surplus arising to GG Ltd from the sale of certain premises fell to be regarded as the profit of a trade, or a venture in the nature of a trade or was, as contended by GG Ltd a gain on capital account.

The following facts were either proved or admitted:

• (i) GG Ltd is a private limited company which was incorporated on 25 August 1965, under the provisions of the Companies Act, 1963. It had an authorised capital of £100 divided into shares of one pound each, of which only two shares were issued. A copy of the memorandum and articles of association is annexed hereto and forms part of the this case [Not included in this print].
• (ii) GG Ltd forms part of a group of English and Irish companies known as the S Group
• The parent company of that group is S Ltd incorporated in England which has a wholly owned subsidiary company, C Ltd (hereinafter referred to as the “London Co”) also incorporated in England and which carries on a finance business. The London Co has a wholly owned subsidiary, N Ltd (hereinafter called N) which is incorporated in Ireland and it too carries on a finance business.
• N has a wholly owned subsidiary company, Y Ltd which is incorporated in Ireland and which is an investment holding company which owns the premises in which the Dublin Co carries on business and which has acted occasionally as nominee company. GG Ltd, formed in connection with a project which was abandoned, is a wholly owned subsidiary of Y Ltd Prior to becoming involved in the events with which this appeal is concerned GG Ltd was dormant.
• (iii) At all times material to the facts of this case Mr A and Mr B were directors of:
• Mr A was also a director of L during the year 1968. Mr C entered the services of N on or about 15 August 1967 and became a director thereof on 12 April 1968. He had also been appointed a director of the London company on 1 March 1971.
• (iv) In the Spring of 1965 the directors of N became aware that the premises in question which were owned and occupied by a company called O Ltd were about to come on the market and would be suitable for redevelopment by the erection of an office block thereon.
• (v) On 13 December 1965, Mr A wrote a letter to the managing director of O Ltd making an offer on behalf of GG Ltd to purchase the premises for the sum of £210,000, subject to a formal contract being drawn up and subject other-wise as therein appears. That offer was accepted on behalf of O Ltd by letter dated 17 December 1965. Copies of the letters dated 13 December 1965 and the reply dated 17 December 1965 are annexed hereto and form part of this case. [Not included in this print]
• (vi) On 3 October 1966, a formal contract was entered into between GG Ltd and O Ltd whereby GG Ltd secured an option to purchase the premises on 31 December 1967, on the terms and conditions therein contained. A copy of the contract is annexed hereto and forms part of this case. [Not included in this print]
• (vii) The said option was duly exercised and by deed of assignment dated 31 1967, the premises were conveyed to GG Ltd.
• (viii) Prior to the exercise of the said option, it had been decided to proceed with the re-development of the premises as an office block. Planning permission had been obtained, architects and engineers had been consulted and had drawn up the necessary plans, Messrs P, a Dublin firm of estate and property agents had advised and had been appointed to act as agents in connection with the making of lettings and collection of rents. The type of lettings envisaged were for terms of 35 years with provision for reviewing rent at intervals during the term. An English firm of builders, Q Ltd, who were expert in this type of development had been engaged to carry out the work, in association with R Ltd of Dublin on a fixed contract price of £1,200,000 and everything was so arranged that work on the site was able to, and did commence, early in January 1968.
• (ix) In the month of March 1968, an exploratory meeting took place between directors of GG Ltd and representatives of LT concerning the office block which was being erected by GG Ltd as possible accommodation for LT. That meeting arose out of a conversation which Mr A had in L’s premises in February 1968 and which is referred to in the note of his evidence hereinafter.
• (x) Subsequent to that meeting a letter (dated 4 April 1968) was received by GG Ltd from LT offering to purchase the premises, as they then stood, for the sum of one third of a million pounds over and above the outlay of GG Ltd to date, provided that the outlay did not exceed £400,000. By letter dated the 9 April 1968, LT’s offer was refused by GG Ltd but it was intimated that if LT were prepared to make an offer related to the value of the property as mentioned at the meeting in March GG Ltd would be prepared to continue negotiations.
• Copies of the two letters dated 4 April 1968, and 9 April 1968, respectively are annexed hereto and form part of this case. [Not included in this print]
• (xi) At the request of LT contained in a letter dated 11 April 1968, a further meeting took place later in April 1968, between its representatives and Mr U, Secretary of the London parent company. At the meeting agreement was reached for the sale of the premises to LT for the sum of £1,000,000. A copy of the letter dated 11 April 1968, is annexed hereto and forms part of this case. [Not included in this print]
• (xii) On 17 May 1968, a formal contact for sale was signed between GG Ltd and V Ltd (a holding company for LT) and the premises were assigned to that company on 22 May 1968.
• (xiii) Subsequently, Messrs P claimed to be entitled to be compensated for the prospective loss that they would suffer in respect of agency fees and commissions on rents by reason of the sale and they were paid a sum of money in settlement of their claim.
• (xiv) The money...