Full Judgment Text & Judicial Ruling

1960 P T D 455

1960 P T D 455

[House of Lords]

Present : Viscount Simonds, Lord Morton of Henryton, Lord Reid, Lord Tucker and Lord Keith of Avonholm

CARSON (INSPECTOR OF TAXES)

Versus

CHEYNEY'S EXECUTOR

Appeal from the Court of Appeal, decided on 27th, 28th October ; 25th November, 1958.

Income‑Tax‑Discontinuance of trade or profession‑Author- Death‑Royalties arising from author's contracts‑Payment after death‑Whether assessable‑Income‑tax Act, 1918 (8 & 9 Geo. 5. C. 40), Sch. D, Cases II, Iii, VI‑Income‑tax Act, 1952 (15 & 16 Geo. 6 & I Eliz. 2, C. 10) Sch. D, Cases II, III, VI‑[Income-'tax Act (XI of 1922), S. 44].

After the death in 1951 of C., an author, certain sums due as royalties under agreements made by him were paid to his executor. There were produced four representative examples of these agreements, three dealing with works which at the dates of the agreements were not yet written and in which, therefore, there was not copyright or property, and the fourth dealing with the publication in French of an extant work already the subject of copyright. During his life C. had been assessed to Income‑tax (properly, as the Crown admitted) in respect of royalties received under the agreements as profits arising from the carrying on of his profession as an author under Case II of Schedule D :

Held, that the payments were the fruit or aftermath of pro fessional activity, whatever the mechanism through which they were paid, and did not change their character when the profession was discontinued. This was equally true of all the contracts here in question and, accordingly, the executor was not liable to be assessed to Income‑tax on sums received under them.

Stainer's Executors v. Purchase 1952 A C 280 applied and 1958 Ch. 345 affirmed.

JUDGMENT

This was an appeal from an order dated 21st October, 1957, of the Court of Appeal, dismissing an appeal by the appellant, Gilbert Carson (Inspector of Taxes), from an order dated 6th June, 1957, of the Chancery Division of the High Court of Justice (Queen's Remembrancer) (Harman, J.) whereby an appeal by the appellant on a case stated by the Commissioners for the General Purposes of 'the Income‑tax for the Division of Bromley in the County of Kent was dismissed and the determination of the General Commissioners was affirmed. The respondent, William Alexander Roy Collins, the sole surviving executor of the late Reginald Evelyn Peter Southouse Cheyne (known as "Peter Cheyney"), a well‑known writer of detective, fiction, was throughout the proceedings referred to as "Peter Cheyney's executor." The question at issue was whether he was assessable to Income‑tax under Schedule D in respect of royalties received by him as such executor under contracts with publishers entered into by Peter Cheyney during his lifetime with a view to the publication of books written or to be written by him.

The determination of the General Commissioners was made for of on appeal to them by the respondent against first and additional assessments to Income‑tax made on him under Schedule D for the years 1951‑52 and 1952‑53 and totalling 10,000 for the first and 18,000 for the second of those years. The assessments for 1951‑52 were governed by the Income‑tax Act, 1918, and those for 1952‑53 by the Income‑tax Act, 1952, but it was common ground between the parties that there was no material difference between the relevant provisions of the two Acts. By section 123 of the Act of 1952 Income‑tax was chargeable under Case III of Schedule D in respect of (inter alia) "any interest of money, whether yearly or otherwise, or any annuity, or other annual payment," under Case V of the same Schedule in respect of "income arising from professions out of the, United Kingdom," and under Case VI of the same Schedule in respect of "any annual profits or gains" not falling under any of Cases I to V and not charged by virtue of Schedule A, B or C.

The facts are fully stated in the opinion of Viscount Simonds. Sir Reginald Manningham‑Butler Q. C., A.‑G., Hilary Magnus Q.C. and Alan Orr for the appellant. The deceased had 50 or 60 agreements with publishers for books written or to be written by him. He was assessed in respect of his receipts under Case II of Schedule D‑"tax in respect of any profession or vocation not contained in any other Schedule." The receipts were treated as part of the profits of his profession and all allowable expenses ere deducted. No question arises as to the assessments made in his lifetime. This case concerns receipts by the executor after his death under contracts made by the deceased. The question is whether they were solely remuneration for the professional activities of the deceased in writing books. If so, the case is governed by Stainer's Executors v. Purchase (1952 A C 280). But the sums were not so paid. The sums received, which were expressed in the agreements to be payable as royalties, were paid in consideration of licences to use the copywright. They were mere income from property, and that character was always the same and did not change because of the death of the deceased. Though they were treated in his lifetime as part of the receipts of his profession, they still retained their character of income from property after his death, so that some of it was taxable under Case III or Case V, so far as it was not taxed under Case VI. This income is received from a piece of property created by the deceased. It is not said that the payments altered in character ; by reason of the death of the deceased the payments were no longer taxable in respect of a profession under Case II.

If these royalties were simply remuneration for writing books, a successful author could so arrange his affairs as to retain and enjoy for years, and perhaps for the rest of his life, a tax‑free income depending on the sales of his books.

Until the decision in the present case Stainer's case was generally thought not to apply to royalties paid in respect of the copyright of a book, and the practice of the Revenue has been based on that assumption.

The respondent had admitted liability in respect of sums received under contracts made by him, but says that the agreements relating to the sums now in question were mere machinery for securing the remuneration. If that be right it is hard to see why the tax liability was admitted in the case of the other contracts. No distinction can be drawn. By writing books the deceased created property, and income was derived from dealings with that property, just as much as was the income received by the respon dent under contracts made by him. The contracts were the means adopted by the deceased to exploit property created by him, his copyrights. The distinguishing feature between this case and Stainers case is that the latter was clearly a case of remuneration for services.

The agreement in respect of the work to be written by the deceased and called "Making Crime Pay" is not an agreement to pay him for writing a book, but to pay him for the right to publish it. On the terms of the agreements he was never under contract to 'write a book. A similar agreement could have been made in respect of a manuscript already written by the author or even bought from someone else. This agreement and others were provid ing for what was to happen when the books came into existence.

The agreements in Stainer's case ((1950) 32 T C 367, 396, 399-400) were materially different from those here ; there were no payments in respect of copyright. That case is not, of course, challenged, but the facts, although possessing certain similarities, are so essentially dissimilar as to produce a different result. Lord Aiquith's distinction ((1930) 15 T C 374) between "income bearing assets" and the contracts in question does not provide a good basis for future decisions see Bennett v. Ogston ((1929) 14 T C 744, 749‑750, 751). Interest on a promissory note has a real taxable character. Even if the recipient did not trade as a moneylender, and it was a case of an individual advance, the interest paid would be taxable. If he developed a trade as a moneylender, the interest would be taxable as a receipt of the business. ' If the trade ceased, it would remain taxable under Case III. It is fundamental that, as in Bennett v. Ogston the executor's receipts here did not change in character from the receipts of the deceased. All through there was here a dealing with property, so that all the time there was a receipt from property. After the trade or profession, ceased, it simply fell into another compartment. These were always receipts from property, but during the life of the deceased they were also receipts of his profession and were brought into account as such. The licence to publish the book might be granted 10 or 20 years after it was written and it would be ridiculous to treat it as remuneration earned in the writing of the book.

Copyright is property ; see Curtis Brown Ltd. v. Jarvis ((1929) 14 T C 744, 749-750 751). Copyright royalties may be merged in the receipts of a trade. See also Beare v. Carter ((1940) 2 K B 187, 189, 193) and Inland Revenue Commissioners v. Sangster ((1920) 1 K B 587, 590, 594).

The contracts here are clearly not a reward for services. In the case of the memoirs of a famous person who was reluctant to write, the contract might be so framed as to secure the actual writing, the services, but that would be different from the present case, where the contract is not mere machinery to pay for the services of writing the book. This is particularly clear in the case of the contract relating to translation rights.

As income from property, royalties paid in respect of the publication of copyright works fall within section 122 of the Income‑tax Act, 1952. All the agreements here entered into by the deceased were dealing with the disposition of the assets represented by the books which he had written. On the wording of the con tracts, what he was receiving was not remuneration for writing but receipts of his profession: see the definition of "earned income" in section 525 of the Act of 1952. If these receipts were always income from property within section 122, they do not cease to be taxable because for a time they have been brought into account under Case II. There can be a merger and the Cases can overlap.

This case can be compared with the insurance company cases. Where a particular receipt is covered by more than one Case the Crown has an option under which to proceed. Here, because of this dual character, the receipts do not cease to be taxable when the profession or trade ceases to be carried on : see Revell v. Edinburgh Life Insurance Co. ((1906) 5 T C 221) and Liverpool and London and .Globe Insurance Co. v. Bennett ((1912) 2 K B 41, 56).

As to the nature of royalties, see also‑Lawrence v. Inland Revenue Commissioners ((1940) 23 T C 333).

The decision in Stainers case ((1952) A C 280) does not apply here, although it is a correct decision on its own facts. That case was one of remuneration for services and the present case is remuneration in relation to dealings with copyrights. There is no dispute .that the deceased was correctly assessed in his lifetime. It may be that he might have been taxed under Case III, but, however that may be, his receipts, bath before and after his death, were always of an income character within section 122. Since Case II cannot apply after his death or retirement, they are taxable under Case III, V or VI. The payments have not altered their character by his death ; all that has changed is that they can now be taxed under another Case. They constituted a substantive subject‑matter of taxation under Schedule D. Suppose a man wrote one book in his lifetime ; that would not be carrying on a profession, but it would not be disputed that the receipts were nevertheless taxable. It cannot, of course, be maintained that anything which is not pure income profit can be taxed under Case III : see Asher v. London Film Productions Ltd. ((1944) K B 133) and Davis v. Braithwaite ((1931) 2 K B 628).

Hailary Magnus Q.C. following point. The fact that a particular category of payment is capable of being entered in a profit and loss account does not exhaustively define its character in the taxpayer's hands.

On the assumption that there was no option during the continuance of the profession, then if the House is satisfied that this income always had a dual character, there is no reason in principle why the Case of Schedule D under which it falls to be taxed should not change with the circumstances. This may be illustrated from the type of income which falls within Case VI. If a boat builder let out boats on hire, the profits would be charged to tax as profits of his trade and the Crown would have no option. But if the boat builder died and one boat remained available for letting, being let out under the terms of a contract, the profits would then be charged under Case VI instead, since, if the executor did nothing but collect the receipts, he would not be carrying on a business.

These royalties were capable of entering into a Case II com putation because their source was a professional asset ; they merged in the profession. But, once the royalties are divorced from the profession, they can be pure income profits.

Viscount Bledisole Q.C. and C. N. Beattie for the respondent. The deceased was a writer. Leslie Howard was an actor. The work of the deceased is recorded in books. The work of Leslie Howard is recorded in films. Neither the writing nor the acting had any monetary value until they were exploited. Both cases were fundamentally the same. Both men were assessed during their lifetime under Case II of Schedule D. This case is, accordingly, completely covered by Stainers case ((1952) AC 280).

The copyright point is a "red herring." It is a right to prevent others from reproducing a particular literary or artistic work. The existence of that right merely enhances the value of an author's professional activities. It affects "quantum" and nothing else. As to this point, see what Jenkins L.J. said in the‑Court of Appeal in the present case ((1958) Ch. 345, 372). As to the contracts in Stainer's case ((1949) 32 T C 367, 372, 379), the report of the decision at first instance shows that copyright was being dealt with there also. As to copyright in films, see Copinger on Copyright, 8th ed., p. 221. In a sense the exploitation of copyright produced the royalties paid to Leslie Howard. The mere fact that the law gives an author a right of copyright does not alter the fact that the royalties paid to him are earnings of his profession under Case II.

The deceased here was under contract to write books. His professional activities were writing books and were nothing else.

To succeed, the Crown must show a change in the nature of the payments after the death of the deceased: see Stainer's case ((1952) A C 280, 288‑289). If the character did not change, the Income‑tax compartment of the payments cannot change. See what Jenkins L J. said in the present case in the Court of Appeal ((1958) Ch. 345, 362, 370‑371). The question whether or not the Crown had an option to proceed under one Case of Schedule D or another was argued in Stainer's case (32 T C 367, 402), but the point is not really open here. From a practical point of view, a man making a film or writing a book incurs expenses, and if he were taxed under Case III he would not be able to deduct them.

The Crown must show a change in the nature of the payments. By their nature they are either the fruits of professional activities or pure income profits. In the lifetime of the deceased they could not‑ have been charged on the latter basis. If the deceased had bought someone else's copyrights, no doubt the proceeds would have been taxable under Case III : see Asher's case ((1944) K B 133) and Stainer's case ((1952) A C 280, 289). A man cannot carry on a profession merely by producing something. These contracts were necessary machinery for exploiting the work of the deceased, but they were mere machinery. If he had retired, the position as regards the payments would have been just the same as on his death.

The Case II assessments during the lifetime of the deceased exhausted his liability to pay tax under Schedule D. These contracts were not income bearing assets in his hands : see Stainer's case (32 T C 367, 404). Both that case and the present case are limited in their application to funds coming to executors under such contracts.

As to the agreement relating to the intended translation into French, the deceased was rightly taxed in respect

of the payments thereunder under Case II because the translation would be a new work in French with its own copyright.

The case of an artist commissioned to paint a picture is not different from that of another who paints a picture, exhibits it and sells it. The receipts of the first are clearly from a professional activity. Those of the second are not from an exploitation of property. There is no distinction. Both are professional earnings.

Bennett v. Ogston (15 T C 374, 378) correctly states the principle involved here see Stainer's case ((1952) A C 280, 291), though the Judge did not rightly apply the principle to the case before him.

It is true that the deceased was being paid for the right to publish, but the manuscripts had only a potential value, and before he could get professional remuneration he had to exploit them by granting the right to publish. The mere production of a manuscript does not produce professional remuneration.

Although the executor did not dispute liability in respect of receipt under contracts made since the death of the deceased, that should not be used in argument against him, because he maybe mistaken.

Curtis Brown Ltd. v. Jarvis (14 T C 744) and Beare v. Carter ((1940) 2 K B 187) have no relevance here. The statements made in Inland Revenue Commissioners v. Sangster ((1920) 1 K B 587) are right in the context of that case but can only be read in that context‑that Sangster was not carrying on business, as Rowlatt, J. emphasised ((1920) 1 K B 587, 595).

Sir Reginalled Manningham Butler Q.C. A.‑G in reply. It is conceded that during the lifetime of the deceased there was no, option to assess these items under Case III. The insurance cases were cited, not in relation' to option, but to show that receipts can at one time be taxed under one Case and at another time be taxed under another Case.

Stainer's case ((1952) A C 280) was not dealing with the exploitation of copyright. The facts were quite different from those of the present case : see per Jenkins L. J., (32 T C 367, 406) Viscounts Simonds ((1952) A C 280, 289) and Lord Asquith (Ibid. 290).

On the respondent's argument the deceased could have retired and enjoyed a tax‑free income. These were not agreements to secure the writing of a book ; they were not so expressed. It is not contended that there was a change in the nature of the payments. While the profession was being carried on they had superimposed on them the character of professional earnings, but when that character was removed they did not escape the Income‑tax Acts. There can be fruits of activities which bring rewards in different ways; Though there is no change in the nature of the payments, there may be a change in their income‑tax compartment. These payments were always royalties arising from copy‑right but they were also professional earnings. After the death they fell into Case III and Case VI. If there had been no profession they would always have been taxable.

The key to Bennett v. Ogston (15 T C 374, 379) is at the end of the judgment.

Their Lordships took time for consideration.

VISCOUNT SIMONDS (November 25).‑My Lords, the question for your Lordships' determination is whether the Commissioners for the General purposes of the Income tax, Harman, J. and the Court of Appeal were all wrong in holding that the respondent, who is the executor of a well‑known writer of detective fiction, known as Peter Cheyney, is not assessable to Income‑tax under Schedule D in respect of royalties which were received by him as such executor under contracts made by Peter Cheyney during his lifetime.

I will summarise the facts as they appear in the case stated by the General Commissioners and the annexed documents.

Peter Cheyney was a writer by profession and he carried on his profession, as writers, often do, by entering into contracts with publishers under which, in return for royalties of varying amounts, the copyright in his works became vested in them. These contracts, which were numerous, took various forms. In some cases, notably in a contract made with Faber & Faber Ltd. relating to a work described as "provisionally entitled `Making Crime pay,' " the work in question had not yet been written or at any rate not completed at the date of the contract. In others the work had been completed and there was therefore an existing copyright in it. In one case, which has been regarded as demanding special consideration, the contract took the form of a licence to translate an existing work into French. Subject to what may be said about the last mentioned contract, I do not think that any distinction can validly be made between any of the contracts. In all of them the author carried on his profession by exploiting his work in the usual way. A writer might, I suppose, carry on his profession without doing so, but the Income-tax Acts contemplate the carrying on of a profession for gain, and that is what Peter Cheyney did. He was accordingly assessed during his lifetime under Case II of Schedule D in respect of the royalties so received by him after deducting therefrom all proper and allowable expenses of carrying on his professional. There is no doubt that he was rightly so assessed, and the learned Attorney‑General very properly admitted that he could not lawfully have been assessed under any other Case of any other Schedule. It must be recorded also that he was consistently assessed upon a form of receipts basis, being credited with royalties upon the day when they fell due for payment and no account being taken of the present value of royalties due at a future date.

Peter Cheyney died on June 26, 1951. Royalties falling due under the several contracts after his death were received by his executor, and upon him first and additional assessments were made under Schedule D for the years 1951‑52 and 1952‑53 in the sum of 10,000 and 18,000 respectively. The question is whether they were rightly made. The executor also received sums in respect of contracts made by him with publishers after Peter Cheyney's death and admitted his liability to assessment in such sums. He may have been right or wrong in doing so That question has not been in dispute nor have their Lordships seen the contracts. The matter is irrelevant to the present issue.

The assessments for 1951‑52 are governed by the Income‑tax Act, 1918 and those for 1952‑53 by the Act of 1952, but there is no material difference between the relevant provisions of the two Acts. It is enough, therefore, to refer to section 123 of the 1952 Act under which income tax is chargeable under Case III of Schedule D in respect of "any interest of money, whether yearly or otherwise, or any annuity, or other annual payment," under Case V "in respect of income arising from possessions out of the United Kingdom" and under Case VI "in respect of any annual profits or gains not falling under any of the [Cases I to VI and not charged by virtue of Schedule A, Schedule B, Schedule C or Schedule E."

It was not stated in the assessments under which of the Cases of Schedule D they were made, and I understand that it is not considered necessary to do so. Before the Commissioners and before the Courts below it was contended that they were properly made under Case III or, alternatively, under Case VI. Before this House Case V was also invoked, but in the view which I take nothing turns on this.

My Lords, it was inevitable that a large part of the argument should turn on a recent decision of the House in which two of your Lordships and I took part, the respondent contending that it governed the present case, the appellant that it was distinguish able. I refer to Stainer's Executors v. Purchase (1952 A C 280). In that' case I said that I agreed with and adopted every word of the judgment of Jenkins L. J., in the Court of Appeal, and I repeat what I then said in regard to the judgment of the Court of Appeal delivered by the same Lord Justice in the present case. I therefore absolve myself from the need to compare at length the facts of the two cases and will state as shortly as I can the facts and the principles which appear to emerge from the earlier decision.

Stainer's case' as I will call it, was concerned with assessments made upon the executors of Stainer, a professional film actor and producer (who went by the…

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