“It cannot, of course, be denied,” says Lord Herschell, “that, as a matter of business, profits are ascertained by setting against the income earned, the cost of earning it, nor that, as a general rule, for the purpose of assessment to the income tax, profits are to be ascertained in the same way.”
It is on this principle that the assessment in question purports to proceed. It is set forth in the case that “The assessment of £746 made for the year ending the 5th April 1905 consists of the price of the feu-duties amounting to £3135, less the estimated cost to the company of the ground on which the houses are built, as set forth in the company's report and accounts for year ended 31st October 1903, £898, £2237, one-third of which is £746.”
This method of stating the account would answer exactly to Lord Herschell's definition if the company had bought land for £898, and without laying out money for making it more productive had sold it in the same condition for £3135. But it does not follow that it is the correct method for ascertaining the profit of a totally different kind of transaction. I am unable to see any intelligible relation between the two sides of the account as stated by the Surveyor of Taxes. If the cost of the subjects burdened with feu-duties is to be taken into account in ascertaining the profit earned by the sale of the feu-duties, it must be the cost of these subjects in the condition which makes them capable of yielding the feu-duties. It is certain that feu-duties amounting to £114 a-year charged upon a piece of vacant ground yielding—so far as appears from the case—no rental whatever, could never have been sold for £3135. It was only by building houses yielding an annual rental to the owners of the land that the property as they held it was made capable of yielding a marketable feu-duty. The answer for the Crown is that the houses cannot be taken into account, because they still remain the property of the respondents, But the land is still the property of the respondents also, and in exactly the same sense, and the answer only shows that the assessment rests on an entirely false basis. There is no distinction between the property of the land and the property of the houses built upon it. The whole subject, land and houses, is the property of the respondents, and the whole subject so occupied is charged with the feu-duty. I agree that to set the entire cost of land and houses together on the one side, and the purchase-money obtained for the feu-duties on the other. would be just as false a method as that adopted by the Surveyor. But it is no part of the respondents' argument that anything of the kind should be done. On the contrary, they say that no profit can be ascertained until the land is sold. I do not think it necessary to, consider whether this is a sound position or whether on the other hand a profit may not have been earned on the transaction in so far as the respondents have already turned a portion of the right they acquired in this land into money. What they have given to the purchaser of the feu-duties in return for the sum of £3135 is neither the land apart from the houses, nor the land and houses together, but a feudal right which will enable him to recover from both a perpetual annuity of £114. The payment of this duty remains as a permanent burden upon the respondents property which will diminish their income from the rental so long as they retain the property, and will proportionably diminish the price when they come to sell. They may still have earned a profit by the sale they have already made, but if that is to be ascertained by reference to the expenditure they require to make in order to create the subject sold, the cost of putting the land into a condition to produce marketable feu-duties must be taken into account as well as the cost of the land itself. It is said correctly that these sums taken together represent more than the cost of creating the feu-duties, because the respondents are still looking for a large part of their return to the sale of the lands and houses. But if the Crown maintains that profit has been already earned, they must in some way distinguish
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Lord Pearson —It is of course well settled that when once money has been received as profits it becomes taxable subject to certain deductions, and it is immaterial to what purposes the profits are thereafter applied. The question is whether the sum sought to be charged with tax is profit, or includes profit. Here £3135 was realised by selling feu-duties; and it is said that this sum includes the profit arising from the trade of buying land and creating and selling feu-duties, which is within the scope of the company's business. But the Crown authorities do not say that this is all profit. They admit, and they cannot but admit, that the original cost of the ground feued is a proper deduction for the purpose of income tax, and on this head they deduct £898. But if the cost of the land is a proper deduction, I am unable to find any reason why the cost of the houses built on it should not also be deductible in whole or in part. It is said that the two sets of transactions must be kept separate, and that the erecting and selling of houses is to run its own course as a profit-earning branch of the company's business; but that in the meantime the trade or adventure of buying land and creating and selling feu-duties has earned this profit, which is separately taxable. One can easily imagine a case in which that would be so; but in my opinion it is not so as regards this transaction. I think it is impossible to separate this land from the houses built on it in dealing with what is called the price of the feu-duties; for that price would never have been realised but for the houses. This being so, one of two things must follow. On the case as argued to us I should say either the whole question of profits earned must stand over until the complex transaction is worked out by the sale of the houses, which is the Commissioners' view, or, at the least, the cost to the company of the houses must be deducted in whole or in part from the price of the feu-duties, just as much as the cost of the ground. I do not express any opinion as to whether either of these would be a sound rule of charge, but in either view the assessment as made cannot be maintained.
Lord Kinnear stated that Lord M'Laren , who was absent, concurred in this judgment.
The Lord President was not present.
The Court dismissed the appeal, and affirmed the decision of the Commissioners.
Counsel for the Appellant—The Solicitor-General ( Ure, K.C.)— A. J. Young. Agent — The Solicitor of Inland Revenue.
Counsel for the Respondents— Scott Dickson, K.C.— J. A. T. Robertson. Agents— Laing & Motherwell, W.S.