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Petitioner: HOME (INSPECTOR OF TAXES) VS Respondent: ASQUITHHonorable Justice Pennycuick
1973 P T D 333
1973 P T D 333
[Chancery Division]
Before Pennycuick, J
HOME (INSPECTOR OF TAXES)
Versus
ASQUITH
[1969] 2 W. L. R. 225, decided on 21st November 1968.
(a) Income‑tax‑Discontinuance of trade or profession‑Author Copyright‑Royalty contracts made before discontinuance‑Whether contracts bequeathed on death and assigned subsequently‑Royalties taxable in hands of assignee‑Income‑tax Act, 1952 (13 & 16 Geo. 6 & 1 Eliz. 2 c, 10), Sch. D, Case III, S. 169.
(b) Income‑tax‑--"Annual payment"‑Royally contracts made by author before discontinuance‑Bequeathed on death and assigned subsequently‑Whether annual payments of assignee‑Income‑tax Act, 1952, Sch. D, Case III, S. 169.
(c) Income‑tax-----`Annual payment"‑Deduction of tax‑No deduction made‑ Whether payment made out of taxable profits or gains or out of capital‑Income‑tax Act, 1952. Ss. 169 & 170.
(d) Income‑tax‑---Assessment ‑Additional‑Discovery‑Income tax Act, 1952, S. 41.
An author bequeathed curtain interests in the copyright of his works to Lady C. Before his death in 1937, he had entered into contracts with H. & S. Ltd. under which he was entitled to royalties (Type A royalties). In 1944, Lady C entered into certain agreements with S. F. Ltd., an English company under which she was entitled to royalties (Type B). In 1949, Lady C made an agreement with an American company under which she was entitled to further royalties (Type C). By deeds in 1953 Lady C assigned copyright interests to the tax‑payer and he duly received royalties of the three types. There was no evidence that any of the payments were made subject to the deduction of income‑tax. The tax‑payer was assessed to tax for the years 1953‑54 to 1959‑60 on the footing that the Type A royalties fell within Case III of Schedule D ; that the Type B royalties fell within section 170 and were assessable under Case III ; and the Type C royalties were assessable under Case III or Case V. The general commissioners held that the Type A royalties were not taxable at all in the tax‑payer's hands ; that the profits of S. F. Ltd. assessed to Income‑tax each year substantially exceeded the payments to the tax‑payer (the Type 8 royalties) and that those royalties were paid under section 169 and were thus not assessable on the tax‑payer; sue that the Type C royalties were assessable under Case III or Case V. The Crown appealed and the tax‑payer cross appealed.
Held, that where an author, during the carrying on of his profession, entered into a contract to exploit his copyright, the royalties payable under that contract were outside the scope of taxation in his or his executors' hands once he had died or had ceased to carry on his profession ; that there was no change in the character of the contract, or the royalties flowing therefrom, when it passed to a beneficiary or an assignee ; the royalty contract was merely machinery for the collection of payments due to the author and did not become an Independent source giving rise to annual payments within the Income‑tax Acts.
Staines's Executors v. Purchase 1952 A C 280 and Corson v. Cheyney's Executor (1959) A C 412 applied.
Semble. The position would be the same if an author assigned the benefit of royalty contracts while still carrying on his profession.
(2) That since the assessed profits of S. F. Ltd. were sufficient to support the royalty payments and there was no evidence on which the Court could impute to S. F. Ltd. a positive decision to make the payments out of capital, the payments fell within section 169.
Chancery Lane Safe Deposit Offices Co. Ltd. v. Inland Revenue Commissioners (1966) A C 85 distinguished.
(3) That once the inspector had satisfied the additional commissioners that he had made a discovery, which was necessary on the facts of this case for the earlier years, in the hearing before the general commissioners the burden was on the tax‑payer to displace the assessment.
Jonee v. Mason Investments (Luton) Ltd. (1966) 43 T C 570 fol.
(4) That there being no material to justify an inference that the Type C royalties were paid under section 170 but after deduction of tax, and the tax‑payer having failed to adduce any such evidence or to establish that the payments were made under section 169 out of profits brought into charge to United Kingdom income‑tax, the Type C royalties fell to be assessed on the tax‑payer under section 170.
Stokes v. Bennett (1953) 34 T C 331 distinguished.
[Case‑Law referred.]
STATEMENT OF CASE
Case stated by the Commissioners for the general purposes of the Income‑tax Acts.
1. At meetings of the commissioners held on February 27, 1964, and July 15, 1965, Mr. Simon Anthony Roland Asquith (hereinafter referred to as Mr. Asquith) appealed against assessments to income‑tax for the years 1953‑54 to 1959‑60 inclusive made on him under Schedule D !n respect of certain sums received by him from copyright interests in the circum, stances hereinafter appearing. The appeals were adjourned on February 27, 1964, to enable both parties to collect further facts about the circumstances in which the payments were received, under agreements dated August 4, 19442 and July 19, 1949.
2. The following summary of the facts set out in the case stated and of the material documents annexed to it, together with judicial comments and explanations thereon, are taken from the judgment of Pennycuick, J.
The relevant facts are as follows : (i) Under his will, the late Sir James Barrie, O. M., bequeathed certain interests in the copyright of his works (except for "Peter Pan") to Lady Cynthia Asquith, Mr. Asquith's mother.
Clause 7 of the will, which was annexed to the case, provided;
"I bequeath to the said Lady Cynthia Asquith all rights (except as hereinafter in clause‑ 8 mentioned) in my plays and books including all amateur rights in plays other than my Play 'Peter Pan' by which I mean all such rights as I can dispose of giving or licensing amateur and professional performances and rights thereof in any country."
Pennycuick, J., commented : It should be mentioned at this stage that Sir James Barrie himself had entered into contracts with the firm of Hodder & Stoughton under which he was entitled to certain royalty payments. He also possessed at his death certain interests in the nature of copyright which he bad not exploited during his lifetime.
(ii) On August 4, 1944, Lady Asquith and Samuel French Ltd. entered into an agreement, in relation to certain of the said rights.
Pennycuick, J., commented that although it was not in terms so stated in the agreement, it appears that at some time before the date of the agreement Samuel French Ltd. had acquired a one‑ third share in the particular rights in respect of the plays mentioned in the agreement. The agree ment recited that Lady Cynthia, described as "the licenser," was:
"The sole and beneficial owner of a two‑thirds share of the rights of representation by amateur performers in the English speaking world excluding the United States of America and the Dominion of Canada of and in the plays entitled" they include "Quality Street" and "she Admirable Crichton" "written by the late Sir James Barrio." [It then recites that
"The rights of publication in book form as plays of and in the plays are vested in Hodder & Stoughton of Warwick Square, London, subject to the payment of certain royalties to the licensor."
"The operative part, in clause 2, reads:
"In consideration of the covenants of the licensees herein‑after contained the licensor hereby assigns and releases to the licensees the sole and exclusive right of representation by amateur performers in the English speaking world excluding the United States of America and the Dominion of Canada."
Clause 4 :
"The licensees hereby covenant with the licensor that they will account and pay over to her sixty‑six and two‑thirds per cent. of all fees which are received by them in respect of performances of the said plays by amateur performers without deduction excepting state taxes or other Government obligations over which they have no control."
(iii) On July 19,1949, Lady Asquith entered Into an agree ment in relation to certain of the said rights, with Samuel French of New York.
PENNYCUICIK, J.‑----That agreement was in American form relating to amateur rights in a number of plays, including, again "Quality Street" and "The Admirable Crichton." The effect of that agreement was that Lady Cynthia Asquith was entitled to a percentage of all sums received by the American company in respect of the rights rented to the American company.
(iv) By a deed dated June 25, 1953, between Lady Asquith and Mr. Asquith, lady Asquith assigned to Mr. Asquith the copy right interest therein specified in the late Sir James Barrie play "The Admirable Company".
PENNYCUICK, J.‑-That deed was a straightforward assignment of Lady Cynthia's interest in "The Admirable Crichton" subject to and with the benefit of the agreements with Samuel French Ltd, and the American company respectively.
(v) Under a deed also dated June 25, 1953, between Lady Asquith, Mr. Asquith, and his brother, Mr. M. H. Asquith. in similar terms to the previous exhibit Lady Asquith assigned to Mr. Asquith and to his brother in equal shares the interests therein stated in the late Sir James Barrie's play "Quality Street."
PENNYCUICK, J‑That deed is in similar terms to the deed in favour of Mr. Asquith alone of the rights in "The Admirable Crichton."
(vi) The sums forming the subject‑matter of the presents appeal were the payments made to Mr. Asquith in tee relevant years under the following agreements or groups of agreements : A. Agreements made by the late Sir James Barrie with certain publishers (Hodder & Stoughton) relating to the copyright fn the said two plays "The Admirable Crichton " and "Quality Street"; B. Under exhibit B hereto (the agreement of August 4, 1944, with Samuel French Ltd.) and C. Under Exh. C hereto (the agreement dated July 19, 1949, with the American company). The above payments are hereinafter referred to as "Type A Royalties;" "Type B Royalties" and "Type C Royalties" respectively.
(vii) There was no evidence that any of the said payments bad been made subject to deduction of income‑tax.
4. The following witnesses gave evidence before the commis sioners which was unchallenged : (a) Mr. P. R. M. Bond who was a partner in the firm of Taylor and Humbert, solicitors, gave evidence on behalf of Mr. Asquith. He had been instructed by Mr: Asquith to make inquiries into the amounts of the royalties received during the material period. The witness furnished details of the amounts of Type B royalties which had been received. He stated that Samuel French of New York was a company outside the jurisdiction. The relationship between the American company and its agents and Mr. Asquith was one of mutual trust and every effort had been made on behalf of Mr. Asquith (without success) to ascertain the amount of the Income of Samuel French of New York (N. Y.), which was assessed to United Kingdom tax and to ascertain whether the royalties payable to Mr. Asquith through this company and through its paying agent had been paid gross of under deduc tion of tax or whether any of the persons respansible for the payment of the royalties had been assesssed to tax thereon. There were no facts within the knowledge of Mr. Asquith or his agents which enabled Mr. Asquith to furnish any material evidence about these matters.
(b) Mr. G. Parker who was a professional accountant employed by Messrs Barnes, Dunn and Boughton and who was responsible for the tax affairs of Samuel French Ltd. gave evidence on behalf of the tax‑payer. He stated that : (i) the profits of Samuel French Ltd. assessed to income‑tax each year substantially exceeded the figures of royalties paid to Mr. Asquith ; (ii) any copyright acquired by Samuel French Ltd. were shown in the balance‑sheet of that company as fixed assets. The agreement of August 4, 1944, had not been acquired for a capital sum and was not reflected in the balance -sheet. If the agreement had been acquired for a capital sum (as opposed to royalty payments) it would in the view of the witness have been reflected as a capital asset because it had yielded income to tie /company since August 4, 1944, and was still yielding income to the company and was likely to continue to do so; (iii) one‑third of the payments received by Samuel French Ltd. under the agreement of August 4, 1944, had been credited to its profit and loss account and brought into charge to tax under Case I of Schedule D ; the other two‑thirds had been paid direct to Curtis Brown Ltd., agents for Mr. Asquith and had not appeared in the company's accounts.
5. It was contended on behalf of Mr. Asquith : (a) that as regards the royalties of Type A, the decision in Carson v. Cheyney's Executors (1959) A C 412 applied, and the fact that the right to receive royalties had been bequeathed to Lady Asquith and assigned by her to Mr. Asquith did not alter the nature of the royalties which were receipts of the profession carried on by Sir James Barrie and formed an element in the profits and ,gains of that profession which had already been assessed to tax.
(b) that as regards the royalties of Type B : (1) the payments made by Samuel French Ltd. under clause II of the agreement of August 4, 1944. were annual payments in consideration for an asset of enduring benefit to Samuel French Ltd. ; (ii) the payments were not trading expenses of that company because it had acquired beneficial title to the proprietary rights assigned to it (iii) the evidence established that these rights were not part of the circulating capital of the company and that the company had a sufficiency of profits and gains out of which to make the payments ; (iv) the payments, therefore, fell within the ambit of section 169 of the Income‑tax Act, 1952, and this section prohibited any assessment being raised upon Mr. Asquith.
(c) that as regards the royalties of Type C : (i) it was conceivable that tax had been deducted from these royalties and that until the contrary was shown it should be assumed that this was the case ; (ii) that such royalties might have been payable wholly out of profits and gains brought into charge to United Kingdom income tax, in which event any assessment upon the tax‑payers would be bad ; (ii) that in the absence of any evidence to the contrary assessments might have been raised upon the persons making such payments pursuant to section 170 of the Income‑tax Act, 1952, and that the material facts were not within the knowledge of the tax payer although they were within the knowledge of the inspector; (iv) that the onus was accordingly upon the inspector to satisfy the commissioners of the validity of the assessments and the inspector having elected to call no evidence had failed to discharge this onus : (v) that no assessment could be sustained upon Mr. Asquith in respect of these royalties.
6. It was contended on behalf of the Crown t (a) that, following the assignment of June 25, 1953, the Type A royalties ceased to be income of the profession carried on by Sir James Barrie and represented income in the hands of the receipt assessable under Case III.
(b) that the Type B royalties were trading expenses of the payer, Samuel French Ltd. ; consequently being payments made in earning the profits of that company, they were not payable out of profits or gains brought Into charge to tax. Such royalties fell within the ambit of section 170 of the Income‑tax Act, 1952, and there was no reason why the recipient should not be assessed under Case III of Schedule D.
(c) that the Type C royalties were received under an agency agreement under which Samuel French of New York handled Lady Asquith's rights, with an entitlement to some commission ; there could be no question of tax being deducted or retainable by the American company and that the taxpayer was assessable in respect of such royalties under Case III or Case V of Schedule D.
(d) that the appeal should be dismissed.
3. The commissioners decided : (a) that the Type A royalties did not change their character, and franking did not cease, by reason of the agreement of June 25, 1953. No new income bearing asset was acquired as a result thereof, and such royalties Included in the assessments for the years 1953‑54 to 1959‑60 were not liable to tax,
(b) that, as regards the Type B royalties, the agreement of August 4, 1944, was an assignment of rights to Samuel French Ltd. and consequently section 169 applied to these royalties.
(c) that the amounts paid by Samuel French Ltd. of New York as agents under the agreement of July 19, 1949, were payments assessable on the tax‑payer under Case III or Case V of Schedule D.
The Crown appealed on the Type A and B royalties. The tax‑payer cross‑appealed on Type C royalties.
W. A. Bagnall Q. C., J. Raymond Philips Q. C. and Patrick Medd for the Crown.
M. Jones for the Tax‑payer.
Solicitors: Solicitors of Inland Revenue: Taylor and Humbert.
JUDGMENT
PENNYCUICK, J.‑I have before me an appeal and cross appeal against a decision of the General Commissioners for the Division of West Brixton. The appeals relate to certain assessments made upon Mr. Simon Anthony Roland Asquith in respect of royalties derived in a manner which I shall mention from the late Sir James Barrie.
It will be convenient, in the first place, to read or summarise the Case Stated, supplementing it by reference to the documents which are referred to in it.
[His Lordship then read the relevant parts of the Case Stated and the documents set out above, made the comments and explanations there set out and continued :]
As regards the Type A royalties and the Type B royalties, the decision was in favour of the tax‑payer; as regards the Type C royalties, the decision was in favour of the Crown. Each party has appealed. I will endeavour to deal with the three types of royalty in the same order.
The Type A royalties, it will be remembered, were royalties under agreements which had been entered into by Sir James Barrie during his own lifetime ; so what passed to Lady Cynthia under the gift in his will in respect of those royalties was the right to receive the royalties from Hodder and Stoughton, and that right was in turn passed by assignment to the present tax‑payer, her son, Mr. Asquith.
The issue as regards these royalties turns in great measure upon the effect of the decisions of the House of Lords in the two cases, Stainer's Executors v. Purchase ((1952) 32 T C 367) and Carson v. Cheyney's Executors ((1958) A C 412). In each of those the Crown sought to charge the executors of a deceased professional man with annual sums for royalties falling into his estate after his death under contracts made by him while he was carrying on his profession. The House of Lords rejected the claim on the part of the Crown and held that, in the hands of the professional man himself or his executors, those payments did not represent income under any source of income which could give rise to taxation ; they represented mealy receipts from the profession formerly carried on by him which remand uncollected at the date of his death. It was common ground that for that purpose the position would have been the same if he had retired from his profession and received the payments in question after his retirement.
In the present case, the Crown seeks to distinguish those decisions on the ground that they are applicable only to royalties received by the professional man himself or by his personal representatives, who stand in the same position as himself, and that they have no application to persons claiming under, him apart from his personal representatives. It is said that in the hands of persons claiming under him, including legatees under his will, the royalty contract does represent a source of taxable income.
In order to reach a conclusion upon this point, it is essential to look with some care at the decisions in the two cases. Stainer's Executors v. Purchase came before the Court of Appeal, where the Crown was successful. Jenkins L. J. gave a dissenting judgment which was unanimously affirmed in the House of Lords, who thus reversed the decision of the Court of Appeal. The members of the House of Lords approved the reasoning of Jenkins L. J. in terms, and it is, therefore, necessary to look at a number of passages in his judgment. I should mention that Stainer's Executors v. Purchase was concerned with the case of an actor.
At p. 401, Jenkins L. J. said :
"It is I think reasonably plain that periodical payments in respect of a contractual right to a share in the receipts or profits of the distribution of a film acquired otherwise than in the course of a trade, profession or vocation falling within Cases I or II of Schedule D would be taxable under Case III, Rule 1(a), as falling within the words 'Any . . . . . . annual payment . . . . . payable either as a charge on any property of the person paying the same . . . . . or as a personal debt or obligation by virtue of any contract . . . . . . : ‑see Asher v. London Film Productions Ltd. ((1944) 1 K B 133)."
I shall come back to that passage on which counsel for the Crown relied in the present case.
"This does not however take the case for the Crown the whole of the way. It may well be that if Mr. Howard had not been carrying on the
profession of a film actor and producer or any' other relevant profession, but had (for example) acquired by gift or purchase the copyright in certain films and sold those films to a distributor for a lump sum plus a share in the profits to arise from their distribution, the share in the profits as and when it accrued to him or, after his death, to his executors would have been taxable under Case III of Schedule D. I apprehend that in these hypothetical circumstances the share of profits as and when it accrued would have been what Lord Greene M. R. described as 'pure income profit' in Asher v. London Film Productions Ltd., while the lump sum would have been capital. But the actual state of the case here is that under contracts A, B and C Mr. Howard in the course of his profession rendered profes sional services for remuneration consisting of the prescribed lump sums and shares of receipts or profits. This meant that for income‑tax purposes there was no distinction between the lump sums and the shares of receipts or profits. The former were not pure capital, the latter were not pure income ; they were all in one and the same category as professional remuneration liable to be brought into account for the purpose of ascertaining the taxable profit of the profession. This would, I think, be accepted on the part of the Crown as sufficiently accurate statement of the position as it stood so long as the profession was carried on. But it is claimed that on discontinuance of the profession a new liability arose with respect to the shares of receipts or profits remaining to be paid, which thereupon assumed the character of annual payments in the nature of pure income profit taxable in the hands of the executors under Case III of Schedule D. The Solicitor‑General put it that the Crown bad an option to tax either under Case II or under Case III, and it is no doubt true that in general, where income of a given description is such as to fall within the terms of two heads of charge, the Crown has an option to tax under whichever of the relevant heads it may select. But, it seems to me, that is not his case. So long as the profession was carried on these shares of receipts or profits could not be taxed under Case III of Schedule D because they were earnings of a profession and not pure income profit. There was thus no option. It was Case II of the schedule or nothing. After the discontinuance of the profession they could not be taxed under Case if of Schedule D as profits of any subsequent period for the very reason that they were earnings of a profession, which had been discontinued, received after such discontinuance. There was thus again no option. It was Case III or Case VI of Schedule D or nothing. It appears to me that the argument for the Crown involves not merely the exercise of an opinion but the assertion of a new and distinct liability to tax arising upon the discontinuance of the profession with respect to payments on account of the shares of receipts or profits received after such discontinuance. Perhaps the best way of putting the point is to describe the shares of receipts or profits as possessing the dual character of (a) professional earnings and (6) annual payments, the argument being in effect that so long as the profession was carried on their character as earnings precluded their assessment as annual payments under Case III of Schedule D, but that on the discontinuance of the profession. this obstacle was removed and the sums in question became thenceforth simply annual payments to…
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