LORD EVERSHED M.R. - I have asked Pearce L.J. to deliver the first judgment.
PEARCE L.J. - This case concerns the assessment of certain royalties received by the taxpayers in respect of sand-pits let by them. These royalties are admittedly covered by section 175 of the Income-tax Act, 1952, and fall to be taxed an excess rent Under Case VI of Schedule D. The Crown contend that the assessment should be made year by year on the basis of the actual receipts, subject to certain deductions. The General Commissioners adopted that view. On an appeal by the tax-payers, who contended that there must be an assessment on Schedule A principles with evidence as to value, the judge accepted their contention and remitted the case to the commissioners.
The material part of section 175 reads as follows : '(1) If, as respects any year of assessment, the immediate lessor of a unit of assessment is entitled in respect of the unit to any rent payable under a lease or leases to which this section applies, he shall be chargeable to tax under Case VI Schedule D in respect of the excess, if any, of the amount which would have been the amount of the assessment of the unit for the purposes of Schedule A, as reduced for the purposes of collection, if the annual value of the unit had been determined (in accordance, in whatever part of the United Kingdom the unit is situated, with the provisions of Part III of this Act) by reference to that rent and the other terms of the lease or leases, over whichever is the greater of - (a) the actual amount of the assessment of the unit for the purposes of Schedule A, as reduced for the purposes of collection or (b) the amount of any rent payable by the immediate lessor in respect of the unit under any short lease or short leases.'
The problem here is to find what is the amount which would have been the amount of the assessment for the purposes of Schedule a, as reduced for the purpose of collection; or (b) the amount of any rent payable by the immediate lessor in respect of the unit under any short lease or short leases.'
The problem here is to find what is the amount which would have been the amount of the assessment for the purposes of Schedule A if the annual value had been determined 'by reference to that rent and the other terms of the lease.' 'That rent' is the rent to which the lessor is entitled in the year in question, the rent whose excess over the Schedule A assessment has provoked the incidence of section 175-namely, in this case, 681. The opening words, 'if, as respects any year of assessment,' indicate that the section envisages a yearly operation. The fact that the charge is under Case VI of Schedule D makes it clear that the assessment is aimed at a year profit or gain
According to the taxpayers, the section really does no more than provide for a revaluation of Schedule A assessments, and the resulting excess liability is only into Case VI, Schedule D, because that is a receptacle for oddments. It is said further that the resulting assessment would invoke an inquiry on Schedule A principles; namely, what the unit is worth to be let by the year, having regard not only to the rent of 681 received this year, but also 'to the other terms of the lease,' including the fact that there are several years of the lease to run. It is not disputed that this procedure will produce a different and practically always a lower figure than that produced by an assessment on the actual figure of the excess rent. In spite of Mr. Menroes forceful argument, I cannot accept this view of the section.
The Schedule A assessment under section 82 is an attempt to find the annual value. If a rack rent has been fixed within the preceding seven years value. If a rack rent has been fixed within the preceding seven years, then that is the annual value : if such a useful guide cannot be found, and the premises are not let at a rack rent so fixed, the inquiry is to ascertain the rack rent which the premises are worth to be let by the year. From the practical point a view, section 175 comes into play because, during the year in question, there is an extra profit to be taxed, and the rent to which the lessor has become entitled has shown the inadequacy of the Schedule A assessment; it has shown that either the actual fact rent or the estimate of the rack rent at which the premises are worth to be let by the produced an annual value that is incorrect for the year in question. The section directs that the lessor shall be chargeable on the amount which would have been Schedule A assessment if the annual value of the unit had been determined by reference to 'that rent' - namely, a rent of 681; that is, if the actual rack rent or the rack rent at which it is worth to be let had been 681. There is no need for further valuations or for calculations under section 82(2)(a) or (b). The words 'by reference to that rent' provide an ad hoc formula for the ascertainment of the annual value; a formula which excludes further estimation. The figure of 681 is, as it were, written into section 82, or is a tritium quid to (2)(a) and (b). The case has to be considered as a Schedule A case only for the purpose of deductions and allowances. When section 175 refers to the annual value being determined by reference to 'that rent and the other terms of the lease,' the 'other terms' mean those which are relevant to allowances, such as liability for rates and maintenance.
The Master of the Rolls in argument pointed out that, if the excess rent is lower than the rent at which they are worth to be let (as it well might be), the computation could not be made under section 82(2)(b), as Mr. Monroe contends should be done in each case. For the computation has to be done by reference to 'that rent' - that is, the actual rent for the year - while section 82(2)(b) demands the computation of there rack rent of which they are worth to be let. In such a case, a tritium quid the necessary in Section 82(2), and the tertium quid must surely be the actual rack rent for th eyear in question, which is the objective of section 175. It would be thus more analogous to subsection (2)(a), which uses a recent actual rack rent where it can be found.
It would be contrary to good sense that the section, whose object was to ensure that certain actual profits did not go untaxed, should throw the assessment a way from the realm of actual and exact figures, and back into the realm of estimation, in which the profit had once already been allowed to escape. Seeing that the assessment under section 175 is a yearly one, intended to catch a particular years profit, It is hard to believe that it intended to send each case back to section 82 for valuation focused not on the particular year but on a period of years, and calculated to assess 'what a tenant taking one year with another may fairly and reasonably to expected and required to pay' (per Swinfen Eady L.J., in A.P. Gundry v. D. Dunham (Surveyor of Taxes). Had such an odd result been intended it would have been very easy to say so.
The normal case of excess rents is dealt with by direct calculation without a further assessment on Schedule A principles. For instance, in the case of Strick (Inspector of Taxes) v. Longsdon the direct figures of the excess rents were used without embarking on further computation (except as to deductions). I see not reason why this case should differ from it. This view accords with that expressed by Lord Reid in a somewhat different context in Barron v. Littman, where he said : 'The calculation which section 15,' now section 175, 'directs is simply the method by which profits from the transaction are to be measured for income-tax purposes and the assessment and charge to tax under the section are in respect of the profits so measured.'
The point is not an easy one, but for these reasons I would allow the appeal.
HARMAN L.J. I agree. Section 175 is designed to deal with the injustice caused by the delay in reassessing free holds under Schedule A. These assessments were intended to represent rack rents, but first they we allowed as a matter of convenience to run for a quinquennium, and then, owing to the war, even these reassessments were pretermitted. Meanwhile, in a period of inflation, values were continually going up, and landowners were more and more escaping from making a fair contribution to taxation. Hence section 175, the object of which was to tax 'excess rents' : excess over what - over the out-of-date Schedule A values. It follows that one expects to find in the section provisions designed to tax the difference between the existing Schedule A assessment and the rent actually being received. And this is what you do find, the words 'that rent', meaning the actual rent receivable by the landlord in the year of assessment. The words are, slightly rearranging them : He shall be chargeable to tax under Case VI of Schedule D in respect of the excess over the actual Schedule A assessment of the amount which would have been the Schedule A assessment, if the annual value of the unit had been determined by reference to that rent and the other terms of the lease. Note that this is a Schedule D assessment, and, therefore, not concerned with any but the one year in respect of which it is made. The reference to the 'other terms of the lease,' in my judgment, points to such things as covenants to repair, to pay rates, and so forth, not to the 'term' of the lease.
If this were all, there would be an injustice to the landlord, who would be unable to deduct from the actually receivable rent those allowances which Schedule A provides. Hence the reference to the hypothetical Schedule A assessment. This does not entail a new valuation : that a precluded by laying down 'that rent' as the gross figure. The net figure is to be arrived at on Schedule A principles - that is, with the deduction sand allowances which that Schedule prescribes - and will thus be truly comparable with the actual Schedule A figure which has undergone the same process. To postulate a new valuation -which ought, I should have thought, is properly done, to make no difference - is, to my mind, to reject the words 'that rent,' and unjustified. If Mr. Monroe were right, the section should simply have provided that wherever the receivable rent is in excess of the actual Schedule A assessment, there shall be a new Schedule A assessment, and that it did not do.
LORD EVERSHED M. R. It has been agreed on both sides that the case before the court falls within, and is governed by, section 175 of the Income-tax Act, 1952. The question, therefore, is one of the interpretation, as applied to the facts of the case, of section 175.
The taxpayers here are 'entitled...... to....... rent payable under a lease.... to which this section applies.' They are, therefore, chargeable to tax under Case VI of Schedule D in respect of 'the excess.... of the amount which would have been the amount of the assessment of the unit for the purposes of Schedule A, as reduced for the purposes of collection, if the annual value of the unit had been determined (in accordance.... with the provisions of Part III of this Act) by reference to that rent and the other' (relevant) 'terms of the lease..... over,' in this case, 'the actual amount of the assessment of the unit for the purpose of Schedule A' (viz., Pounds 10.15s.) 'as reduced for the purpose of collection.' I have set out the material language, with the insertion of the word 'relevant' before the phrase 'terms of the lease' and of the figure of the actual amount of the Schedule A assessment; and I have emphasised what appear to me to be the most important words.
It was conceded clearly (as I understood) by Mr. Monroe that the necessary calculation or reassessment has to be made every year-not, that is to say, nationally in 1946 or at the begining or end of the tax year in question (1953-54), and so as to persist for the whole period of the lease, or for the period for which the actual assessment of Pounds 10.15s. lasts, or for any other indefinite period. It also seems to me clear that what I will call the Schedule A reassessment (which the section postulates as the 'top figure' for the purposes of arriving at the subject-matter to be taxed) is to be based on the actual rent and other relevant terms of the lease -which I take to mean, in this case, the royalty provisions. You are therefore, in my view, not required in accordance with section 82 of the Act to look for or discover a rack rent properly so called. For the purpose of the calculation which section 175 requires, the rent plus royalty (in the present case) actually paid or assumed or contemplated as payable takes the place of the rack rent. If the present lease provided for a rent (in the ordinary way) greater than the actual Schedule A assessment but less than the true rack rent, the lease rent would clearly, in my view, form the basis of the Schedule A reassessment and not the true rack rent. The result, in my view, is that, in spite of the reference in section 175 to Part III of the Act, the case is outside the strict language of section 82, paragraph (2). In other words it is neither a (2)(a) nor a (2) (b) case-and in this respect, like my brethren, I have ventured to differ from Upjohn J., as he then was.
So far, as it seems tome, and as result of the discussion before us, there is no real dispute between he parties. The sole issue appears to be this : the Crown say : 'You arrive each year at the top figure by reference solely to the actual rent and royalty figures for that year'; the taxpayers say, 'No; you arrive each year at the valuers figure of annual value at the date of the valuation, based on the in known facts as to rent and royalty but not arithmetically limited to the figures of rent and royalty for the year in question.'
Common sense at any rate seems to point to the two figures being the same. But there appears to be no doubt from the fact that the case has come before us, and form what Mr. Monroe has said, (and I therefore assume) that the taxpayers figure will in practice be found to be somewhat less than that based on the Crowns view. Which, then, is right It is upon this matter that I confess to having felt greater difficulty than my brethren, and so have doubted whether we should not prefer, as I understand the judge did, the taxpayers method of assessment.
The reasons for my doubt are as follows : true the relevant premises for the reassessment are the rent and royalty figures and not a rack rent, so that the case is neither a (2)(a) nor a (2)(b) case; still, apart from the substitution of these rent and royalty figures for the rack rent you are directed by section 176 to make your assessment in accordance with Pare 3 of the Act. What is more you are directed by section 175 to arrive at your reassessment by determining the annual value of the unit : and this conception of 'annual value' is according to section 82, inherent in all Schedule A assessments. If the rent under the present lease were a flat rent of Pounds 681 per annum there being no royalties there would of course, be nothing in it; but if the rent were a flat rent but increasing say every three or five years then I am not satisfied that you would not in any year work on the bases of an average for the term rather than upon the actual rent payable in any particular year (see the case of Inalan Revenue Commissioners v. Dicksons Executors). If this is right then it may be said that a similar principle of valuation should apply in the present case. I have also felt the force of the argument that the contrary view involves the result that you are construing section 175 as though it had said that the 'top figure' in any year was the actual sum received in that year for rent including royalty subject to the deduction appropriate to a Schedule A assessment : and the section does not in terms so provide. You find instead the express reference to 'annual value', which is of the essence of the Schedule A code. If this view were right then the question that in respect of the year 1952-53, the assessors would have to answer is : 'What is the annual value this year, of this unit (according to Schedule A principles) on the basis that the rent it commands is the fixed rent and royalties payable now and henceforth according to the subsisting lease In other words, the 'top figure' would be arrived at by the taxpayers method of assessment.
This difficult and somewhat artificial case has required section 175 of the Act to be applies to circumstances to which I cannot think it was ever intended to be applicable. I have therefore and in deference to the view taken by the judge thought it right to express my doubt and my reason for it. But I have in the end thought that the claims of simplicity and common sense should prevail and I am not therefore prepared to dissent from the clear conclusion to which my brethren have arrived. I agree with them that the appeal should be allowed.
LORD EVERSHED M.R. I should like to register my own disapproval of the form of order made below. 'It is ordered that the case be remitted for them (the commissioners) to adjust the assessments in accordance with the judgment of the court.' It is not right. The order must be self-contained. These things are so much a mystery that it should be but you must try.
Alan Orr. I appreciate what your Lordships are saying. I can only say that this form of order so far as I can discover has been used for a long time. I do not Know of any case in which it has produced any difficulty.
LORD EVERSHED M. R. It is not right; and what your have just said I confess, sounds very likely to be true : just because this has gone on in Revenue cases for the last century and a half so it goes on. It is time it was stopped. We also ask you to consider-this is another matter-that to entitle an action. 'The trustees of the (blank) Settled Estates,' if they are not a corporation sole or something of the sort, again is wrong.
Alan Orr. I find it impossible to say anything about that my Lord.
LORD EVERSHED M.R. Would you please see that these things are not repeated out of sheer adherence to tradition ?
Appeal allowed with costs.
Leave to appeal to the House of Lords.