Swaine (Inspector of Taxes) v VE

• Judge: Kenny J.
• Judgment Date: 21 May 1962
• Court: High Court

Income tax - Schedule D - builder’s profits - whether fines and capitalised value of ground rents are assessable to tax.

The respondent, a builder, purchased certain lands. At the time of the purchase (in 1937) he had formed the intention to retire from building and he did not purchase the lands with the intention of selling or demising them or with the intention of developing them by the erection or reconstruction of buildings. When he had taken up possession of the lands, he retired from building and carried on farming on the lands. In 1948, having decided to develop the lands and to resume building, he built a number of houses and shops on the lands and sold the same by way of sub-demise for a long term in consideration of a fine and ground rent. The fines and the capitalised value of the ground rents were brought into computation for the purposes of his Schedule D assessments for the years 1951/52, 1952/53 and 1953/54 on the grounds that, inter alia, both the fines and the capitalised value of the ground rents were profits arising from the building operation carried on by a person trading as a builder and thus came within the ambit of the first part of FA 1935 s 6(1).

The Special Commissioner upon appeal against the inclusion of the capitalised value of the ground rents only (at that stage, respondent having admitted that the fines were assessable to income tax) decided in favour of the Revenue. Upon rehearing pursuant to ITA 1918 s 196 the Circuit Court Judge allowed the respondent’s appeal.

Held, by the Supreme Court, affirming the decision of the High Court, that the respondent was not liable to be assessed under Schedule D in respect of the capitalised value of the ground rents because he did not acquire the lands with the necessary intention referred to in FA 1935 s 6(1). and further by the Supreme Court that he was not liable to be so assessed in respect of the fines.

Legislation

FA 1935 s 6(1).

Cases referred to in judgment

Birch v Connolly 2 ITC 201, [1939] IR 534.

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

Cayzer Irvine & Co Ltd v CIR 24 TC 491.

Harvey v Caulcott 33 TC 159.

Hughes v Utting and Co Ltd 23 TC 174, [1940] AC 463.

John Emery and Sons v CIR 20 TC 213, [1935] SC 802, [1937] AC 91.

Case stated

Case stated for the opinion of the High Court pursuant to ITA 1918 s 149 and FA 1924 s 10 by a Circuit Court Judge assigned to the Dublin Circuit.

1. The appeal of VE (hereinafter called the respondent) against the following assessments to income tax under ITA 1918 Sch D Case I was reheard by me as Circuit Court Judge under the provisions of ITA 1918 s 196, at Dublin, on 18 July 1956, 12 February 1957, 26 February 1957, 15 May 1958 and 9 July 1958.

Year of assessment	Description of trade or profession	Amount of assessment
£
1951/52	profits as builder	500
wife’s profits from rest home	200
1952/53	profits as builder	1800
wife’s profits from rest home	200
1953/54	profits as builder	4000
wife’s profits from rest home	200
1954/55	profits as builder	4000
wife’s profits from rest home	200
1955/56	profits as builder	4000
wife’s profits from rest home	200
garage proprietor	500

2. There is no dispute as to my determination of the assessments on:

• (a) Profits as builder for years 1954/55 and 1955/56.
• (b) Wife’s profits from rest home for years 1951/52 to 1955/56 (inclusive).
• (c) Garage proprietor.

3. The following facts have been proved or admitted:

• (a) The respondent commenced the trade of builder in 1933 and between then and 1937 he built and sold 19 houses in the .... area, taking sites and building on speculation. In the same period he built, by contract, schools at .... and ....
• (b) In 1937 when the last of the houses were being completed respondent purchased for £1,150, the tenant’s interest in .... House, which included 37 statute acres, 32 of which were arable. Here he carried on mixed farming, and his wife, a nurse by profession, used portion of the house, a large Georgian structure, as a rest home for elderly people.
• (c) The lands acquired by respondent at .... formed part of the .... Estate to which a lease rent of £149 per annum was payable. At time of purchase the lease had still about 40 years to run and it contained a covenant against building. Following the completion of the schools, respondent retired from building and settled down to farm his lands. In 1942 the lands became vested under the Land Acts, the annual rent was reduced to £58 and the covenant against building ceased to operate. respondent had obtained expert advice about 1939 on long-term agricultural projects, such as the preparation of a six-year rotational tillage scheme. In 1944, when the Department of Industry and Commerce wrote to respondent about his intentions as regards building, he replied that he was doing no more building.
• (d) In 1947 respondent learned that the .... Corporation had come to a decision to develop the area and in consequence of learning of this decision he thereupon decided to develop the lands himself and began development operations in January 1948.
• (e) In the period from 1 January 1948 to 31 January 1952 respondent built on the lands at .... 6 houses and 6 shops and developed 51 sites. In the same period he sold the 6 houses, 5 of the shops and 39 of the sites, the sales in each case being effected by way of subdemise for a long term in consideration of the payment of a fine and ground rent.

4. The respondent’s trading accounts for the period 1 January 1948 to 31 January 1952 show a profit (adjusted for income tax purposes) of £5,356. This amount includes fines from the sale of the houses, shops and sites referred to in (3)(e) above, but does not include the capitalised value of the rents reserved on such sales. It is not disputed that the said sum of £5,356 is an accurate computation of the profits (exclusive of the capitalised values of the said ground rents) derived during the said period from the sales of the said houses, shops and sites, but the inspector claimed that there should be added thereto the capitalised values of the respective ground rents created on the sale of the said houses, shops and sites. Without prejudice to any decision I might make as to whether such capitalised value should be included in the assessments, it was agreed on behalf of the respondent that the capitalised value of the ground rents created in the period from 1 January 1948 to 31 January 1952 was £10,972, as follows:

£
6 houses at £12 each	72
5 shops at £25 each	125
39 sites at £12 each	468
665
Capitalised at 161/2 years’ purchase 161/2 x £665	10,972

5. Respondent’s trading accounts for each of the two years ending 31 January 1954 shows losses of £2,087 and £1,122 respectively. In this period of two years the remaining shop and the remaining 12 sites were sold, the sales in each case being effected by way of sub-demise for a long term in consideration of the payment of a fine and a ground rent. The above-mentioned figures of losses are exclusive of the capitalised value of ground rents created in these two years but are inclusive of all fines received therein. The building business was discontinued in March 1954, but the accounts, described as “for the year to 31 January 1954” include operations from 1 February 1953 to the date of discontinuance.

6. It was contended on behalf of the respondent:

• (a) That it was his intention at the time he acquired the lands at .... to retire from building,
• (b) that he bought the lands...