LORD DENNING M. R. Mr. Hammond Innes is a writer of distinction who has for many years carried on the profession of an author. He has written many novel and travel books. He has kept his accounts on a cash basis and has submitted these to the revenue for tax purposes. On the one side, he has included his receipts from royalties and so forth. On the other side, he has included the expenses of his travels overseas to gather material; the expenses of his study at home and a small salary to his wife for her work for him.
In this case we are concerned with one particular novel which he wrote called The Doomed Oasis. It was based on material which he gathered in the Persian Gulf in 1953. He started to write it in September, 1958, and worked on it up till 1959. He charged all the expenses in his accounts for those years. In 1960 he was about to publish it. But he felt he would like to do something to support his father, who had retired on modest resources. So Mr. Hammond Innes decided to transfer the copyright in the book. The Doomed Oasis to his father as a gift. By an assignment made on April 4, 1960, he assigned to his father, 'in consideration of natural love and affection,' the copyright, performing rights and all other rights in The Doomed Oasis.
The question arises whether he is liable to tax on the value of those rights in The Doomed Oasis. If he had sold the right at that time in 1960 their market value would have been pound 15,425. The Crown say that that sum ought to the brought into his accounts and that he should be taxed on it, although he did not receive a penny for the rights because he had given them away. I may add that Mr. Hammond Innes had also before publication assigned right in two others of his novels, one to his mother and the other to his mother-n-law. So a like question may arise there.
I start with the elementary principle of income-tax law that a man cannot be taxed on profits that he might have, but has not, made : Sharkey v. Wernher. At first sight that elementary principle seems to cover this case. Mr. Hammond Innes did not receive anything from The Doomed Oasis.
But in the case of a trader there in an exception to that principle. I take for simplicity the trade of a grocer. He makes out his accounts on an 'earning basis'. He brings in the value of his stock-in-trade at the beginning and end of the year : he brings in his purchases and sales; the debts owned by him and to him; and so arrives at his profits or loss. If such a trader appropriates to himself part of his stock-in-trade, such as tins of beans, and uses them for his own purposes, he must bring them into his accounts at their market value. A trader who supplies himself is accountable for the market value. That is established by Sharkey v. Wernher itself. Now, suppose that such a trader does not supply himself with tins of beans, but gives them away to a friend or relative. Again he has to bring them in at their market value. That was established by Petrotim Securities Ltd. v. Ayres.
Mr. Monroe, on behalf of the Revenue, contends that the exception is not confined to traders. It extends, he says, to professional men, such as authors, artists, barrister, and many others. These professional men do not keep accounts on an 'earning basis'. They keep them on a 'cash basis', by which I mean that on one side of the account they enter the actual money they expend and on the other side the actual money they receive. They have no stock-in-trade to bring into the accounts. They do not bring in debts owing by or to them, nor work in progress. They enter only expenses on the one side and receipts on the other. Mr. Monroe contended that liability to tax does not depend on the way in which a man keeps his accounts. There is no difference in principle, he says, between a trader and a professional man. And hesitated his proposition quite generally in his way : The appropriation of an asset, which has been produced in this ordinary course of a trade or profession, to the traders or professional mans own purpose, amounts to a realisation of that asset or the receipt of its value, and he must bring it into account.
I cannot accept Mr. Monroes proposition. Suppose an artist paints a picture of his mother and gives it to her. He does not receive a penny for it. Is he to pay tax on the value of it It is unthinkable. Suppose be paints a picture which be does not like when he has finished it and destroys it. Is he liable to pay tax on the value of it Clearly not. These instances - and they could be extended endlessly - show that the proposition in Sharkey v. Wernher does not apply to professional men. It is confined to the case to traders who keep stick-in-trade and whose accounts are, or should be, kept on an earnings basis, whereas a professional man comes within the general principle that, when nothing is received, there is nothing to be brought into account.
I would only add that the legislature seems to have to have acted on this footing. Section 471 of the Income Tax Act, 1952, applies where an author has spent more than 12 months in writing a book and sell it for a lump sum. He can 'spread' the lump sum over two or three years so that his tax on it does not fall all in one year. That provision only applies to lump sums received by him If the legislature had thought he was liable for market value of books given away, surely they would have extended the 'spread' to those cases also.
Take next Carson v. Cheyneys Executor. The House of Lords held that when an author dies or discontinues his profession, he is not taxable on moneys received after the dated of discontinuance. That was lathered by section 32 of the Finance Act, 1960. He becomes chargeable on sums arising from his profession, even though he receives them after he had discontinued it. This provision does not apply when he gives a book away. If the legislature had though he was chargeable on its value, I should have thought it would have covered that the cases too.
I hold that Mr. Hammond Innes is not chargeable with tax on gifts which he makes of copyright in hid books. I think that Goff J. and the commissioners came to a right decision. I would dismiss this appeal.
DAVIES L. J. agree. It is not in dispute that there is no specific provision in tax legislation to cover the present case. What is sought by the Revenue in this case is to extent what is said to have been the principle in Sharkey v. Wernher to what I, like my lord, regard as being an entirely different set of circumstances. I, too, think that it is very remarkable that if the Crown were right in the present case, the result would inevitably follow that there could be no spread-over over period of two or, as the case may be, three years under the provisions of section 471 of the Act of 1952. If Mr. Innes is assessable on the sum of pound 15,000-odd (which is the agreed figure for the value of the copyright in this work), then, as I understand it, he would have to pay income-tax, and of course surtax, on the whole of that sum on the basis of its having been earned in one year. That strikes one as being a very remarkable state of affairs.
The position of a novelist was adverted to in the speech of Lord Keith of Avonholm in the Cheyney case :
'I turn accordingly to consider what is involved in the professional activities of an author during his lief. An author writes books generally for profit or in the hope of profit. It is only when they make a profit that any question of assessing him on the profits of a profession can arise. It is only by exploiting the work of his brain and his pen that he can make any professional income.'
The contention on behalf of the Revenue in this case is that although Mr. Innes has not made, and will not in the present state of affairs ever make, any profit out of the copyright in this work, he must be deemed to have made the profit of pound 15,000 because he could have made that profit if he had not given the rights away to his father. That seems to me to be an extraordinary extension of anything that was said in Sharkey v. Wernher.
I should refer (and this is the last quotation I shall make) to the words of Lord Radcliffe in Sharkey v. Wernher, on which great reliance was placed by the Crown. In this passage of his speech Lord Radcliffe was dealing with the difference on the facts of that case between a cost of production valuation and a market valuation, and he said :
'It seems to me better economics to credit the trading owner with the current releasable value of any stock which he has chosen to dispose of without commercial disposal than to credit him with an amount equivalent to the accumulated expenses in respect of that stock. In that sense, the traders choice is itself the receipt, in that the appropriates value to himself or is doing the direct instead of adopting the alternative method of commercial sale and subsequent appropriation of the proceeds.'
I agree with my lord that that principle which was enunciated on the facts of that case, which was really concerned with the method of valuation rather than with anything else, can only be applied to a trader or to a person whose accounts are made up on an earnings basis and who has stock-in-trade which he may other than in a commercial manner transfer to himself or for no consideration to a third party. If the position contended for by the Crown in this case ought to be the law, it seems to me that in the years which have elapsed since 1954, when Sharkey v. Wernher was decided provision should have been made to that effect by legislation in the various Acts that have been passed by Parliament.
For those reasons, in addition to what has been said by my lord, I agree that this appeal should be dismissed.
RUSSELL L. J. The Crown accepts that it is a general principle of income tax law that a man is taxed on the basis of what he receives and not on what he might have received. But the Crown says that the principles which led to the decision in Sharkey v. Wernher lead inevitably to a decision in favour of the Crown also in the present case. I cannot accept that Sharkey v. Wernher was dealing with a despoil of stock-in-trade by a trader whose annual profits were computed on an earnings basis, the stock-in-trader being a necessary part of the computation. The copyright and other rights in the book now in question in no sense formed stock-in-trade of Mr. Innes, and before the assignment to his father they had no part in any computation of profits an gains. For tax purposes his annual profits were computed on a cash basis. It seems to me that the Crown is trying to impose tax, on the one hand, by computation on a cash basis and, on the other hand, by computation on an earnings basis, thus seeking to mix oil and water. But in the end I am entirely unable to see that the see decision in Sharkey v. Wernher pushes us to the length suggested and I decline to travel that length without being forced to.
Appeal dismissed with costs.
Leave to appeal to House of Lords, on condition that the Crown pay both sides costs in the House of Lords and leave the orders as to costs in the courts below undisturbed.